CS FOR SENATE JOINT RESOLUTION NO. 32(JUD) Proposing amendments to the Constitution of the State of Alaska relating to appropriations from the Alaska permanent fund to be used for a program of dividends for all state residents and providing a conditional effect and effective date for the amendment. This was the first hearing for this resolution in the Senate Finance Committee. Co-Chair Wilken stated this resolution, "constitutionally guarantees that 80 percent of the revenue stream from the Permanent Fund under a percent of market value approach would go to the Permanent Fund Dividend. This constitutional amendment will take place only if the POMV amendment passes the legislature and is approved by the voters. This constitutional amendment must be placed before the voters November of 2004." SENATOR KIM ELTON characterized himself as not a sponsor of this resolution as much as he is a carrier. He then characterized this resolution as an "if 'a' then 'b'" stipulation. He explained that if a constitutional amendment were adopted to implement a Percent of Market Value (POMV) procedure, this resolution would provide for a division of the revenue from the POMV approach. Senator Elton relayed this resolution is a nexus of the Conference of Alaskans' recommendation that if POMV were adopted in the Alaska Constitution, the Constitution should also be amended to guarantee Permanent Fund dividends. He stated this resolution is one method to accomplish this. He detailed that POMV would provide a "revenue stream" of approximately five-percent the amount of the corpus of the Fund. Of that amount, he stated 80 percent would be appropriated to the dividend and 20 percent for government operations. He calculated that the current market value of the Fund would provide approximately $280 million for government services of the approximate $1.4 million POMV. He cited observations from Permanent Fund Corporation representatives that reviewing past performance provides insight into predicting future performance. He listed various other divisions between 65 percent for dividends and 35 percent for government services, and 76 percent for dividends and 24 percent for government services. He acknowledged the difficulty in accurately predicting the future in that the certain market performances and asset allocation decisions must be assumed. He predicated this resolution based on calculations how a POMV would have affected the Permanent Fund if implemented since 1990. Senator Elton also pointed out this approach would not prioritize dividend payments above inflation proofing, explaining the assumption that POMV provides inflation proofing because only five- percent is withdrawn from the Fund. Senator Elton agreed with Senator Hoffman's comments that also reflect the "notion" of the Conference of Alaskans that the State has transformed a "pool of natural resources" into a "pool of money" that continues to grow. Senator Elton asserted that a significant portion of the corpus of the Permanent Fund is a direct result of prudent actions of past legislatures in inflation- proofing the Fund. Senator Elton opposed the committee substitute adopted by the Senate Judiciary Committee because it was contingent upon legislative and voter approval of a constitutional spending limit, which he stated has not been finalized. He recommended against including a spending limit in a proposal to constitutionally guarantee the Permanent Fund Dividend program, as such action could be considered a revision rather than an amendment to the Constitution. Senator Elton then addressed the matter of whether this resolution would be a revision of the Constitution. He surmised that making such a determination is inappropriate at the committee level. Senator Bunde was pleased to note that the sponsor pointed out the income from the Permanent Fund, which he calculated has "outdistanced the income to the State" generated from development of oil resources. Senator Bunde remarked that a POMV is intended to stabilize the earnings of the Permanent Fund and the method in which those earnings are calculated. He understood the amounts of the dividend would subsequently become stable rather than fluctuate as it has in the past. By extension, he stated that the 20 percent used to fund State services would also be stabilized. He listed the budget deficit for the current year at $500 million, of which approximately one half could be offset with the aforementioned 20- percent. However he warned that the deficit would continue to increase and that this scenario would not adjust for inflation. SFC 04 # 40, Side B 09:55 AM Senator Bunde asked whether the sponsor had considered how the remaining government expenses in excess of those covered by the 20 percent of POMV funds would be addressed. Senator Elton qualified that the State is fortunate this year because the price of oil is currently over $36 per barrel, and the $500 million deficit amount is a conservative estimate. In the future, he expected the gap between revenues and expenditures would be significantly higher. He did not consider this resolution to be a complete fiscal solution, but rather as a component of a broader fiscal plan. He clarified he did not intend to suggest that additional efforts to address government funding should be ignored. Senator Bunde agreed that depending on the price of oil, the deficit could be approximately $1 billion and that "draconian" taxes and budget reductions could be necessary to offset the balance. He asked whether, in the current year, the entire deficit would be equal to fifty-percent of the five percent earnings available for appropriation under the POMV method. Senator Elton replied that an equal division of the total POMV earnings of $1.4 billion would provide approximately $700 million, an amount that would be adequate to cover the projected deficit. However, he cautioned that if the deficit increased to $1 billion, the earnings would not be sufficient. SENATOR GARY STEVENS expressed he is a "great fan" of the Alaska Constitution and was "loathe" to amend it too readily. He asked how the sponsor determined this issue merits such an amendment, given that the framers at the Constitutional Convention determined to leave the details to the Legislature to resolve. Senator Elton replied that the Constitution has provided Alaskans with significant latitude. He stated this resolution would provide further definition as to how the Permanent Fund would be managed. He reiterated it would not be implemented unless a constitutional amendment relating to POMV was approved. Senator Hoffman commented that the Constitution was very general; however specific changes have been made to benefit few people, such as the limited entry provision that benefited few fishers. He asserted this resolution would benefit every Alaskan. Senator Seekins asked if the sponsor had obtained a legal opinion advising whether this resolution conforms to the ruling in Bess versus Ulmer. Senator Elton informed he had and described the opinion from Tam Cook of the Division of Legal and Research Services advising that the matter is "indeterminate" and could be determined by a court to be a constitutional revision or amendment. Senator Seekins clarified that currently all income generated from the Permanent Fund is deposited into the State general fund, and subject to discretionary appropriation by the legislature. He understood this resolution would provide that appropriation would no longer be discretionary and instead 80 percent would be distributed as dividends and only the remaining funds would be discretionary. Senator Elton affirmed, noting these provisions are currently statutory and this resolution would codify them in the Constitution. He encouraged the Committee, as it considers all approaches, to consider that all Alaskans must endorse this constitutional amendment. Senator Seekins asked if the sponsor would therefore not "have any problem that the first dollar that would have to be spent for any reason in any particular year regardless of the financial condition of the state of Alaska would be to pay the dividend." Senator Elton corrected that the "first dollar" would be appropriated to inflation proof the Permanent Fund. The reminder, he affirmed would be allocated 20 percent for government services and 80 percent for the dividend. Senator Seekins clarified, "we would inflation proof our savings account no matter what our other requirements were for State income to meet the needs of the State of Alaska. The second dollar then would be for a dividend. Then we could worry about the rest of State needs after that." Senator Elton countered he would not characterize the process in this way. I saw no "difference" between the funding available for the dividend and that for State services; both would be guaranteed in the Constitution. Senator Hoffman stated the Fund would first be inflation-proofed, "then government gets a crack at it and then the people get a crack at it." He noted the ratio of funds allocated for dividends and for government services could be changed. Senator Bunde asserted that the "ultimate recipient" of government spending is the people, that government services are provided for the people, and therefore 100 percent of the earnings would benefit the people. Senator Bunde asked Senator Seekins as Chair of the Senate Judiciary Committee, if the issue of whether these proposals are amendments or revisions to the Constitution could be resolved before the process of an election and court challenges. Senator Seekins shared his research into the matter of dedicating income in the Constitution from the Permanent Fund to the dividend program. He learned that if the legislature were to pass a resolution to amend the Constitution in this manner, the issue would be challenged in court before the election was held on the subsequent ballot initiative. He knew of no other method to obtain a court ruling on whether such a change would be deemed an amendment or a revision. Senator Seekins warned that such change to the Constitution would be the first instance in which funds were allocated directly to individuals. He explained that historically, revenues from the Permanent Fund have been deposited into the State general fund then appropriated for dividends. He remarked this change would subvert the legislative appropriation authority and would therefore likely be considered a revision to the Constitution. He noted the State Supreme Court would make the ultimate decision on the matter. Senator Elton relayed his understanding that a court decision would not be rendered until after a ballot initiative passed in a statewide election. Co-Chair Green studied the calculations of the dividend payments provided in a POMV process and the impact on the dividends if a percentage of the available amount were appropriated for government services. She anticipated a "bidding war" could ensue in effort to establish support for certain percentage amounts. Senator Elton interpreted the graph provided by the Alaska Permanent Fund Corporation, titled "Comparison of dividend payout methods; Historical and forecasted data" [copy on file], to indicate that if this resolution had been enacted between 1990 and the current year, the division would be "about 76 / 24". He qualified that the method of managing and investing the assets of the Fund have changed. He stated that under this approach, any asset allocation decision or market behavior changes could distort future earnings. He cited testimony given by representatives of the Corporation that to replicate future "dividend behavior" under the current method, an allocation of 60 or 65 percent to dividends would be likely. Senator Hoffman suggested that instead of entering a "bidding war", the legislature should present options to voters listing the impacts that allocating different percentages for government services would have on the dividend. He cautioned against practicing "one-ups-man-ship." He asserted that the State has developed its oil reserves, a nonrenewable resource, and allocating the proceeds to all Alaskan residents. He commented that whether or not these residents remain in Alaska in 25 years, they would still receive some benefits of the resources. He doubted any recipients of the dividend were "buying a golden condo", but opined that individuals are better able to spend these funds than the government. Senator Bunde relayed a comment made during the Conference of Alaskans that the U.S. Congress has been "generous" to Alaska and is are "not unaware" of "what we do up here". He noted that over one-half of the State's annual $10 billion budget is comprised of federal funding and that Alaska receives $7 for every $1 paid to the federal government. He hoped this practice would continue, but warned it is contingent upon the perceptions of members of Congress. If Alaskans vote to constitutionally "lock up" money and dedicate its use for personal expenditures, and yet expect the federal government to fund basic services, he predicted Congress could reconsider its appropriations to the State. Senator Stedman calculated that a division of 60 percent and 40 percent of POMV revenue was more realistic. He reiterated his mosaic analogy and the impact of each component on the complete State fiscal situation, specifically the "doors" this proposal could "close" to other funding sources, such as from the federal government. Senator Elton remarked that it is difficult to predict the future. He ascertained Alaskans do not consider the Permanent Fund to be a "shock absorber" for deficit funding. He recalled Governor Murkowski's statement that the "cushion" is the Constitutional Budget Reserve fund and that a balance of at least $1 billion should be retained in that fund. Senator Elton agreed with the Governor on this point and furthered that the Permanent Fund should be managed in the same manner as other State resources. SENATOR HOLLIS FRENCH emphasized the proposed constitutional amendment is the focus and characterized it as "highly principled" and "highly pragmatic". He expounded that the discussion represents a "classic American struggle" between "power and liberty," of whether money should be appropriated to government or individuals. He furthered that the issue is pragmatic in that if a portion of earnings from the Permanent Fund are to be used for government services, a proposal for this must be crafted that would receive public approval. He predicted that a proposal to adopt a POMV method would not receive public approval without this resolution. He remarked upon the Conference of Alaskans conclusion that to receive public approval for POMV, an "iron clad guarantee" of continued dividend payments would be required. Senator Elton appreciated the comments. He agreed the matter is a conflux of policy and philosophy but stressed that politics is also an issue. He surmised that the public needs assurance that dividends would be guaranteed if POMV were enacted and he stated this resolution is the result of this need. Senator Hoffman asked about the division of three to five percent POMV between inflation proofing and allocation for dividends and government. He asked whether the sponsor had considered that five- percent could be too high. Senator Elton stated that in constructing this resolution, he divorced himself from that question and rather addressed allocation of the income "stream". He emphasized that any discussion of POMV must include discussion on the appropriate annual amount to withdraw from the Permanent Fund. He qualified that different entities reached different conclusions of the appropriate amount. Exampled that the withdrawal amount from the Harvard Endowment is decided annually based on the performance of that fund. He pointed out that other endowment funds are managed differently than the Alaska Permanent Fund. He stressed that this Committee as well as the Senate should scrutinize the percentage amount. He relayed a suggestion made at the Conference of Alaskans that five-percent is appropriate and would not impact the corpus of the Fund over time. Whatever decision on the POMV amount, he stressed would not affect this "tag-along" Constitutional amendment, because it is predicated on the annual revenue. Co-Chair Wilken ordered the bill HELD in Committee.