CS FOR SENATE JOINT RESOLUTION NO. 24(JUD) Proposing amendments to the Constitution of the State of Alaska to guarantee the permanent fund dividend, establishing the earnings reserve account, and relating to the Alaska permanent fund; and providing for an effective date. This was the first hearing for this resolution in the Senate Finance Committee. Co-Chair Wilken stated this resolution "requires income earned from the Permanent Fund to be deposited into a constitutionally created earnings reserve account. Fifty-percent of the income available for distribution shall be transferred from the earnings reserve account and used as payments to State residents as a dividend. This Senate joint resolution takes effect only if voters approve a spending limit amendment." SENATOR SCOTT OGAN, sponsor, proposed this resolution to "enshrine" the existing Permanent Fund dividend program into the Alaska Constitution, as it has been successful for many years. He opined, "Nothing [is] broke[n]; we don't need to fix it." and that usually government "fixes things until they are broken." He stressed that the legislature has exercised discipline in depositing significant portions of the earnings of the Permanent Fund into the corpus of the Fund. He predicted that Alaskans would have no confidence in the legislature until the dividend program is protected in the Constitution. Senator Ogan shared the impetus of this proposal resulted from discussions in the Mat-Su Valley relating to subsurface rights. He remarked that the State of Alaska has those rights, that the "people" own those resources and as trustees, the legislature has the obligation to manage those resources to the benefit of all Alaskans. He stated the Permanent Fund operates with the same philosophy. He expounded further on subsurface rights and landowners before Statehood. Senator Ogan then spoke to a spending limit, which he opined should be carefully considered. He suggested that making adoption of a constitutional amendment contingent upon passage of another amendment could be considered a revision to the Constitution. He recommended obtaining a legal opinion on the matter. Senator Ogan referenced an article published in the Anchorage Daily News related to operating the State government like a business. He asserted this could be done. He noted that oil companies decide to reduce operations when prices fluctuate, making these decisions "behind closed doors," and that "unfortunately" the legislature does not have this "luxury". Therefore, he stressed a constitutional spending limit must be enacted, the dividend program must be enshrined in the Constitution, and the State government should be "run like a business". Only then, he surmised, would people be willing to consider using excess earnings of the Permanent Fund for government services. Senator Bunde understood the sponsor's comment that subsurface rights are held in trust for all residents of Alaska, regardless of the location of the resource. Senator Ogan affirmed and cited Alaska Constitution Article 8 Section 3, regarding common use. Senator Bunde also understood the sponsor supported a change of the "purpose of the dividend" to provide compensation for loss of subsurface rights. Senator Bunde had understood the dividend was originally instituted to provide ownership of the corpus of the Fund so residents would support the continuation of the Fund in exchange for receipt of a portion of the interest earned. Senator Ogan countered that the purpose has not changed. He stated that 25 percent of the royalties generated from subsurface rights are deposited into the Permanent Fund, which is a reflection that the money "comes from a commonly owned resource". He shared that he has become aware that as the reality for some property owners that they do not own subsurface rights is understood, the necessity to ensure that all residents receive a portion of subsurface royalty is heightened. Senator Bunde concluded that the sponsor attests that the dividend would constitute compensation for lack of personal ownership of subsurface rights. Senator Bunde next referred to the sponsor's testimony that the legislature has been "good stewards" of the Permanent Fund by not appropriating significant amounts of the earnings and instead depositing it into the corpus of the Fund. However, Senator Bunde pointed out that currently $35 million is expended annually for hold harmless provisions and other purposes. Senator Bunde remarked that the dividend amount could have been "zero" in 2003 and "lower this year." He recalled testimony attesting that the dividend comprises up to 30 percent of household income for some residents and that loss of dividends could result in 30 percent lower income in some regions of the State. He predicted this would have a significant impact on the State's welfare system. He remarked that some residents indicate understanding of this possibility, but continue to support the current system of managing the Fund. He warned of serious consequences that could occur in years of low or no dividends. Senator Ogan responded that the public accepts that dividend amounts increase and decrease depending upon the performance of the Fund. He noted that the Permanent Fund Corporation has advocated for a POMV management method for several years and that such a system could be implemented at a later date. However, he stressed that the existing system is sufficient at this time. Senator Ogan continued commenting about government spending and of the difficulties in reducing the budget. He concluded the only way to "get rid of cancer is to cut off the blood supply" and asserted this must be done with government as well. Senator Bunde commented recalled that funding was added to the dividend program due to public demand. He predicted that if the existing system continues, areas of the State that rely on dividends would suffer and subsequently the burden would be placed on the State. He warned that this could result in substantial increase in State spending. Senator Olson addressed Senator Ogan's assertion that the State government should be operated like a business. SFC 04 # 41, Side A 10:42 AM Senator Olson cautioned against operating the State in the same manner as the now bankrupt Enron Corporation was operated, in which management is suspected of illegal activities that defrauded shareholders and employees. Senator Bunde restated his concern about the impact sanctifying dividends in the Constitution would have on other states and their congressional delegations in appropriating federal funding for Alaska if the State reserves its earnings for individuals and not for government services. Senator Ogan pointed out that the resolution was amended by the Senate Judiciary Committee to add a provision to repeal the Constitutional amendment if a final determination is made by the U.S. Internal Revenue Service that utilizing the Permanent Fund in this manner would cause the Fund to be taxable. Co-Chair Wilken ordered the resolution HELD in Committee.