CS FOR HOUSE JOINT RESOLUTION NO. 28(FIN) Proposing amendments to the Constitution of the State of Alaska relating to the budget reserve fund, and to appropriations to and transfers from the fund; and dedicating a portion of the petroleum production tax to the fund. Co-Chair Hoffman MOVED to ADOPT Senate Committee Substitute for CS HJR 28, work draft 25-LS1217\N as the working document before this Committee. There being NO OBJECTION, work draft 25-LS1217\N was adopted. REPRESENTATIVE RALPH SAMUELS presented the bill history. He reported that the original bill introduced the creation of a separate funding account apart from any other current account. This account would take the progressivity money from the petroleum tax and for five years force it constitutionally into this new account to provide an endowment style payout between 4.5 and 5 percent. This account would consist of money from today's oil and would not allow this or the next generation of legislators to spend it. Representative Samuels declared that as oil production declines in the future, this account would help share the wealth for future generations. 9:18:07 AM Representative Samuels continued that the bill evolved by taking more of the today's money and incorporating it into the Constitutional Budget Reserve to also share the wealth generationally. He stressed that as production continues to decline and the budget continues to rise, the easiest way out is to take the Constitutional Budget Reserve money and not make any fundamental changes. He warned that the longer the state waits to discuss fiscal responsibility the harder the choices will be. He noted that the House took the entire Constitutional Budget Reserve and put it into an endowment program. A solution arrived at between the House and the Senate is reflected in the new Committee Substitute. This would split the Constitutional Budget Reserve where half would be remaining with the three-quarter vote money and the other half would be the endowment money concept of this bill. The payout of the endowment money would still be at five percent with a five year rolling average that would not start until the three-quarter money was spent down to $1 billion. He reiterated that the point was to make sure the endowment keeps gaining as much money as possible before the five percent is taken. 9:21:25 AM Representative Samuels defended the idea of saving as much money as possible to let the interest accrue. The point of having a trigger at $1 billion is that the Legislature will spend the money down in the three-quarter vote money before the payout starts at the five percent of whatever is in the endowment. The Legislature would have the prerogative to add money to either account each year. He noted that another part of the Committee Substitute changes the vote from three-quarter to two-thirds. Also there is no longer any constitutionally forced progressivity money into the account; it would be Legislative prerogative. Every future Legislature and Administration would determine what would be done with the surplus funds. 9:24:48 AM Representative Samuels referred to Tam Cook online to review the sectionals. 9:25:32 AM Co-Chair Stedman reviewed the fiscal notes. AT EASE: 9:26:01 AM RECONVENED: 9:26:15 AM Co-Chair Stedman expressed his concern running with a $4 billion general fund operation which has been growing at an unsustainable rate of about ten percent which they are trying to rein back to three or four percent. He stressed that the state's operating expenses will continue to grow with time and it is unrealistic to think it will be cut back. Co-Chair Stedman believed that by tying up all the savings would put the state in the position, should there be a volume disruption or price decline, of having to go to the earning reserves of the Permanent Fund to make a substantial withdrawal for the operating side of the state. He cautioned that keeping some liquidity in the money was necessary for the Legislature to address these concerns. 9:29:18 AM Senator Elton questioned if Section 1 states that all money received by the state after July 1, 1990, not already deposited in the Permanent Fund, would go into the endowment account of the Constitutional Budget Reserve. Representative Samuels replied that this provision or litigation money was put into the Constitutional Budget Reserve. Co-Chair Stedman requested a breakdown of the Constitutional Budget Reserve. 9:30:54 AM Senator Thomas asked for an explanation of the language on page 2, line 7 "except as invested for." 9:31:32 AM TAM COOK, DIRECTOR, LEGISLATIVE LEGAL SERVICES, LEGISLATIVE AFFAIRS AGENCY testified via teleconference and responded that the language is intended to say that money can not be transferred from the primary account except to the extent that money is transferred for investment in that account. They would pay money to buy investments such as mutual funds. 9:33:06 AM Senator Dyson remarked that part of his enthusiasm for the bill concerned a forced discussion of what to do about more revenues. He assumed that part of the discussion should or could be if they were going to use part of the earnings reserve account for the purpose it was originally created to produce income that could be used to sustain some level of government after the oil revenues were gone or greatly diminished. 9:34:16 AM Representative Samuels remarked that many groups have worked on this discussion including himself, Representative Mike Doogan and Representative Harry Crawford. They all agree that the longer the Legislature waits to have this discussion the higher the budget and the deeper the debt. He believed that saving the money now will benefit the state in the long run. He noted that debates on income tax and sales tax are frequent, but unpopular discussions. He believed budget cuts would affect rural community more than a broad- based tax. 9:38:15 AM Representative Samuels stressed again that the longer the Legislature waits to make a decision with what to do with the oil reserve money, the worse the economic reality becomes. 9:38:49 AM Senator Dyson agreed that Alaska needs to have a "rainy day" account accessible without the politics but is now in favor of the previous version of the bill because it would force the government to have the discussions. Representative Samuels concluded that money could also be taken off the table by having a spending limit. 9:40:52 AM JERRY BURNETT, DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES, DEPARTMENT OF REVENUE talked with the Commissioner and agrees that this Committee Substitute takes care of most concerns and the lack of liquidity in managing the money. Co-Chair Stedman inquired if the Department has any dollar estimates of what they would like set aside in cash. 9:42:23 AM Mr. Burnett remarked that the department manages currently to have an average of $1 billion in the Constitutional Budget Reserve for cash flow purposes. This amount will grow and is reasonable. He believed that setting the $4 billion in each account would provide a lot of comfort. 9:43:35 AM Senator Elton wondered what other concerns the department might have. Mr. Burnett remarked that they would return to the Committee if they see any new concerns. 9:44:03 AM Mr. Burnett reported that the new spring forecasts should be out soon. 9:45:02 AM CS HJR 28 (FIN) was HEARD and HELD in Committee for further consideration. AT EASE: 9:45:35 AM RECONVENED: 9:57:32 AM