SJR 18 - CONST AM: PERM. FUND INCOME & DIVIDEND MS. RENEE HOWELL, staff to Senator Lyda Green, presented SJR 18, which would require a vote of the people to spend any of the earnings reserve of the Permanent Fund. The measure would also inflation-proof the Permanent Fund. MS. HOWELL explained that the bill would require voters' approval to cap or lower dividends from the permanent fund or change the fund in any way. Number 082 MR. JIM KELLEY, Director of Communications for the Alaska Permanent Fund Corporation (APFC), reported that their attorney has advised APFC that the adoption of this amendment may weaken the state's position that the income of the fund is not subject to taxation. MR. KELLEY also commented on the letter submitted from Mr. Michael O'Leary that talked about the volatility of the stock market. MR. KELLEY said that Alaska has enjoyed the upside of this volatility in recent years but may also sometime face the downside and the legislature may decide they want to change the distribution of funds, even put them into an endowment or another type of structure. He said if a change is put into the Constitution, it will be difficult to change again in the future. SENATOR PARNELL asked if the inflation proofing calculation on page two was related to the Consumer Price Index (CPI), and, if so if MR. KELLEY thinks the CPI could overstate or understate inflation. MR. KELLEY agreed this was possible and said the CPI lags one year behind as well. SENATOR PARNELL asked if MR. KELLEY believes inflation proofing should be included in the Constitution and, if so, how should it be calculated? MR. KELLEY said this is how the law is written, with the inflation rate calculated relative to the CPI. SENATOR PARNELL asked if the language in this bill reflects how the dividend is currently calculated and MS. HOWELL agreed it is the same. CHAIRMAN TAYLOR asked if making a deposit from the undistributed income account to the corpus of the fund could adversely impact future dividends? CHAIRMAN TAYLOR then asked what amount should be left in the undistributed income so dividends would not be adversely impacted. MR. KELLEY replied $625 million provided that the fund realizes the anticipated median expected return for next year. CHAIRMAN TAYLOR questioned why there was no reduction in the dividend amount as a result of previous deposits, he asked MR. KELLEY if the fund had always surpassed its median estimates. MR. KELLEY replied it had in the past couple of years. CHAIRMAN TAYLOR asked if he had recommended a change to the manner in which the income of the fund is calculated. MR. KELLEY replied that the Trustees has set up a committee on investment policy options to look at other possible distribution policies for the fund, but have as of yet come forward with no specific recommendations. CHAIRMAN TAYLOR asked if that change would be appropriately added as an amendment to this bill. MR. KELLEY said he was not sure the board was ready to do that, but he would find out. CHAIRMAN TAYLOR commented that he found it ludicrous that someone was waging a campaign to convince people that this bill will result in lower dividends. MR. KELLEY responded that any change to the fund generates a financial projection which explains all the possible consequences of the change. MR. KELLEY said he has distributed this paper to members of the Legislature. He stated that the Legislature makes the policy regarding the fund, but the fact is that they will not continue to get the high rate of return on the fund they have gotten over the past few years. Consequently, a future liability is being created which may necessitate use of the earnings reserve, or the reduction of the dividend. CHAIRMAN TAYLOR asked if they should amend the formula so the undistributed income can just spill over into the fund unless the people vote to spend it on something else. MR. KELLEY said the formula specifically says the income available for distribution is the income of five years times 21 percent, but may not exceed the amount of money earned in a given year plus the earnings reserve account. He believes this formula was written to keep the fund from paying out more than it takes in during any given year. CHAIRMAN TAYLOR asked if the board was scheduled to meet soon. MR. KELLY indicated the board would meet on April 22nd. CHAIRMAN TAYLOR asked MR. KELLEY to bring this issue up to them so any concern could be addressed before the passage of this bill. MR. KELLEY agreed to do so. SENATOR ELLIS asked if the sponsor was available to speak to her legislation. CHAIRMAN TAYLOR said she was not. SENATOR ELLIS asked about the language in section one, questioning if that language was what was intended to appear on the ballot or to be included as the title of the ballot initiative. MS. HOWELL was unable to respond to this question and SENATOR ELLIS asked generally if it was routine to for this to occur. CHAIRMAN TAYLOR said he was not certain but he believed the language does not bind the Lt. Governor to describe the initiative in that manner. CHAIRMAN TAYLOR then took testimony from MR. TERBECK, who testified via teleconference from Anchorage. MR. TERBECK said 25 percent of Alaska Natives have no other income and he does not believe the Legislature should touch the permanent fund. He stated that if they need money they should bring back a state income tax. MR. TERBECK suggested the permanent fund dividend might be better distributed over a twelve month period. CHAIRMAN TAYLOR assured MR. TERBECK that there is nothing before either body of the Legislature that will invade the permanent fund. SENATOR MILLER moved SJR 18 from committee with individual recommendations. Without objection, it was so ordered.