[The following is a verbatim transcript.] SJR 19-CONST. AM: PERMANENT FUND INCOME  MR. MARK STOPHA: Good morning. For the record, my name's Mark Stopha, staff for Senator Georgiana Lincoln. She's not able to be here today. She's attending a funeral for Chief John in Copper Center and for approval of the committee chair, Representative Croft will present SJR 19 and answer any questions. REPRESENTATIVE ERIC CROFT: And this is Representative Eric Croft from Spenard and I'm the author of the House companion of this measure, so Senator Lincoln asked me to be here to answer any questions. I've learned enough from observing the Senate over the last 8 years that sometimes the Senate wants to act and sometimes it wants to talk and I'll do whichever the Chairman wants this morning. CHAIR SEEKINS: Mr. Croft, why don't you do what you think is best for your position at the moment and we'll hear and then we'll ask questions. REPRESENTATIVE CROFT: Okay. The bill before you, SJR 19, protects the permanent fund dividend. It protects the inflation proofing of the fund and it provides that the earnings may not be used. It's hard to talk about this in a vacuum and particularly in light of the discussion we've just had about percent of market value. We introduced it - the House bill over on my side and Senator Lincoln, the Senate bill, as an effort to reassure Alaskans that their dividend would always be there, and, in particular that the current fiscal structure - the current dividend structure that reflects the market performance of the fund in the dividend, we thought then and continue to think is appropriate. In addition, I think inflation proofing, and possibly we just disagree Mr. Chairman, is the most important aspect of the fund, that it provides that my children have the same buying power of the fund, have the same choices available to them that we have today. To inflation proof at less than the actual rate of inflation I believe steals from my children those very choices. I want this debate to be happening 10 years and 50 years from now on what's the proper use for the permanent fund earnings and have them have that same debate with the same effective real buying power. So, possibly we're at a situation of sort of core fundamental disagreement. This would protect a structure that has served well to provide dividends for Alaskan citizens and protect an inflation proofing that protects the actual real value of the fund and protects it by inflation proofing at the real observed actual inflation rate, not a rate we can assume. Percent of market value, while it has certain aspects that are in its favor, certain aspects that are positive, assumes that we can guess what is going to happen over the next 100 years, assumes from the last 100 years of market performance and inflation performance, that over the average it has been 3 percent inflation over the last long extended period of time. And over that same period of time, the market has been able to perform at about 8 percent, that therefore we can, over the next 100 years, take the difference, take 5 percent. I don't know that. I think if I knew what the market performance would be over the next 100 years and knew what inflation would be over the next 100 years, that I'd be making a lot more money than I am today. I think there are a lot of people who, if I could say I know absolutely what that will be, who'd be very interested in that number. We don't know. We're talking about a period of time that was the Dow Jones Industrial Average where it was largely an American phenomenon in a pre-industrial and industrial setting. I don't know what a global DOW - as the stock markets, ours and the worlds, become more global as the economy becomes more global and becomes more high technology, I don't know whether those 8 percent returns are going to continue to exist - be lower or higher. I don't want to bet the real earning power of the fund on that experience. I don't think we know enough to do that. I'm much more comfortable inflation proofing every year by the actual inflation that we saw. Mr. Storer, when he was up, talked about we hope we don't see the '70s again. I hope we don't either but if we take - I mean if we're going to take the percent of market value construction, that we can look back over the last 100, 80, 50 years, and say that is going to repeat itself, then we have to assume that things like the Great Depression and the '70s recession are going to happen. And when those things do happen, and you have 8 or 10 percent inflation, you continue under percent of market value to pretend that inflation was 3 percent. We have had those periods before. I think we have to assume that we will again and under a percent of market value formulation, we would be eating into the principal. I listened to the discussion up here. I looked at yesterday the earnings reserve balance of the permanent fund. It's around $900 million. The great $4.5 billion you're talking about is in unrealized gains. According to the most recent AG opinion from Attorney General Renkes, that should be put into the principal. I'm not sure whether that's the right legal opinion but it is the legal opinion that the permanent fund is operating on. CHAIR SEEKINS: I don't agree with your interpretation but we'll put it on the record for you. REPRESENTATIVE CROFT: Okay. Individuals, I guess, can disagree on that. I've read that opinion a number of times. I disagree with whether the opinion is right legally but I believe that's what it says. CHAIR SEEKINS: I think it's counted into principal but it doesn't require that it be deposited into principal. I mean it's counted in terms of the calculation, that's how I would portray it. REPRESENTATIVE CROFT: You might have a brilliant career forward in the legal profession, Mr. Chairman, because that distinction evades even me. CHAIR SEEKINS: Well, I can understand how. Please, I'm being facetious, just having some fun there. REPRESENTATIVE CROFT: The fundamental aspect of the percent of market value that disturbs me is that presupposing what we know what inflation will be and pretending that it's that and, frankly, the portion, and you've referred to it in some of the testimony before, that deletes the word 'principal' from our Constitution. We put it in there in the '70s. We're going to take it out. I think it would be better and a sounder fiscal policy to start by reassuring people that their dividend won't be touched, reassuring people that real inflation proofing, inflation proofing at the rate that actually occurred, will happen and that's what the bill before you does. I can see that the.... CHAIR SEEKINS: Senator Therriault has a question and if you don't object, as we go along, we like to ask questions while they're fresh in the minds of our members. Senator Therriault. SENATOR THERRIAULT: I don't think you can guarantee those two things that you just said you want to guarantee. I believe that I tend to agree probably more - fall on the side of the spectrum with - that you're on, as far as the importance of inflation proofing. But we've just heard from Mr. Storer that we can have a situation in a down equity market but continue real estate earnings that come in that have to be paid out as a dividend that could in fact erode the principal of the permanent fund if we didn't have that buffer that we talked about. So you're desiring to have absolutely guaranteed two things that under the current situation, I don't think you can. CHAIR SEEKINS: Please go right ahead. REPRESENTATIVE CROFT: I listened to the entire testimony for that reason. What Mr. Storer said was that you could reach a situation where you couldn't pay out dividends and you couldn't inflation proof because you'd gotten to the bottom of the barrel. At that point, and because of market performance after that, you could have a book value of less than principal - it could be negative for a while. All that is true and what you do in that situation is you stop spending. That's the appropriate response when you've hit the bottom of your savings account and that's not what happens in percent of market value - you keep spending, in fact you keep spending at 5 percent assuming that things are happening that are not happening in the real world. CHAIR SEEKINS: You mean the bottom of your savings account or this line below, which you should not participate. The bottom of the savings account means it's all gone to me. How did you mean that? REPRESENTATIVE CROFT: The bottom of the checking account and maybe you still have savings that you declared you're not going to get into yet. SENATOR THERRIAULT: It seems to me if you get down to a poor market situation, in fact we almost got to a point where we didn't have money to pay a dividend within the last year and there were bills that were introduced to pay it out of the regular state treasury because it got so close. But I think that one of the things that Mr. Storer was alluding to is you still would have real estate earnings coming in so you have income that goes into the calculation of your dividend but you have no money. The first money to go is the inflation proofing. The very thing that you said should be paramount. I agree if the permanent fund is the mechanism is to be a mechanism of taking a one-time revenue stream and making it truly multi-generational, you should put inflation proofing as your number one goal. It should be paramount to everything else but with what you're proposing here when you get into a bad situation, the first thing to go is the inflation proofing. REPRESENTATIVE CROFT: This constitutional amendment protects inflation proofing and.... SENATOR THERRIAULT: I don't see inflation proofing in here. REPRESENTATIVE CROFT: The statutes that we put into the Constitution that we say - AS 37.13.140, .145, and 23.025 - 13.145 is the inflation proofing statute and then when we add Section 2 that says that you can't amend them as they were effective on 2002, that says dividend.... SENATOR THERRIAULT: What happens when we get into a situation where we don't have the money under the current system to pay them both. Which one gets paid? REPRESENTATIVE CROFT: What you should do when you reach the end of your principal and you get down - and principal just means a number below which we don't want to fall, below which we want to stop doing business as usual, and in this system you do stop. I mean I can't protect.... CHAIR SEEKINS: In which system - the 19? REPRESENTATIVE CROFT: The current system protected constitutionally as SJR 19 would do. I can't guarantee you market performance that will always allow us a dividend and inflation proofing. Nobody can. I can, though, write a system that says we will do that each year and when we hit the principal number that we don't want to fall below, we've got to stop. You have no question in my opinion, and you wait for the markets to rebound. And then when you do, you pay those back. You start paying dividends again and you pay back the inflation at the real amount. Percent of market value would continue through that entire time, pretending we could pay out 5 percent, eroding principal and continuing to operate as though there was something normal about that. CHAIR SEEKINS: Percent of market value does not mandate a 5 percent payout. It limits it to 5 percent based on the fiscal responsibility of the legislature. Senator Therriault? SENATOR THERRIAULT: Thank you Mr. Chairman and I think language can be, as we discussed earlier, developed that would prevent that from happening. But you say we've got the current dividend payout system and we've got inflation proofing. When money gets tight, which one gets paid? Is it prorated between the two? If you only got enough money to pay a portion, which one gets paid - inflation proofing or a dividend under this language? Which one takes precedent? REPRESENTATIVE CROFT: Right. Under the current structure and under the structure we incorporate here in SJR 19, if you get down to that point, you keep dividends. It's a calculation that you and I have been through. SENATOR THERRIAULT: Right - you keep dividends. So inflation proofing, the very thing that you said to be paramount, is now secondary. REPRESENTATIVE CROFT: It's secondary to dividends and superior to everything else. SENATOR THERRIAULT: It's secondary to dividends and, for myself, that's a problem. Another question. In addition, Section 2 on page 2, lines 5 through 8, you talk about an allowance for an appropriation, above and beyond B and C sections, that I guess would just be a majority vote of the legislature and then ratification of the state voters and that would come out of the earnings reserve. So you are allowing for spending here in addition to the dividends and the inflation proofing. REPRESENTATIVE CROFT: Well, through the chair, Senator Therriault, we saw that as a protection. Of course they could spend now but this would require that the people approve any spending out of the earnings reserve. SENATOR THERRIAULT: The people that year. So with pressure on the budget, and the public demand for dividends, where do you think the dollars are going to go? Is it going to go to inflation proofing? REPRESENTATIVE CROFT: Well, and that became the final sort of point in the discussion here before, the idea that we, the people or we, the legislature, would fail in our commitment on inflation proofing. I happen to think inflation proofing is very popular publicly and I think it should be. I hope it still is in this legislature. I think keeping the earning power for our future generations will win politically but the provision you're talking about doesn't have to do with either. It has to do with putting another protection against getting into the earnings reserve and that government use of the earnings reserve is, in the long run, as big a threat to inflation proofing as dividends as the market - government getting in and taking substantial amounts of the earnings reserve is what drives you to the very situations you were talking about, of having no money and how do we choose between dividend and inflation proofing. We wanted to set one more protection to make sure that earnings reserve stayed healthy and it wasn't used for government. If the people say that they want to, that's their choice but we not do it ourselves. CHAIR SEEKINS: Go ahead, Senator Therriault. SENATOR THERRIAULT: Mr. Chairman, this mechanism by just enshrining the statutes, which we've also had testimony that says we're 27 years down the track. We've changed our investment strategy and now we're trying to freeze these statutes that haven't kept pace with the means by which we generate revenue. It just seems that to suggest that this is a better way, when clearly you get into a situation where you don't have enough money so you're going to have to pick between dividends and inflation proofing, you could have an appropriation because of budgetary pressure that could also take precedence over inflation proofing, leaving nothing for inflation proofing. I think with a segment of the state population, the inflation proofing is very important, but we've also got a transient section of the state population that carrying forward the purchasing value for the next generation, they don't care a bit. I've heard from - I have one constituent that I just had to agree to disagree with and he said you know nobody looked out for my generation so let the next generation look out for themselves. I completely disagree with that and I think that truly we should go toward something that really does guarantee that we preserve the purchasing power. And although POMV might not be 100 percent, it sure seems like it's a whole lot better than what we've currently got. CHAIR SEEKINS: And we'll go to Senator French next but purchasing power that doesn't meet needs is useless. REPRESENTATIVE CROFT: Doesn't meet? Sorry Mr. Chairman? CHAIR SEEKINS: Purchasing power that doesn't meet any need is useless. What are we trying to preserve purchasing power for future generations if we can't feed our kids today and that's where you and I probably basically philosophically disagree. I'd feed my kids before I'd inflation proof my savings account. So that's not a hard decision for me in that case. When I look at projected shortfalls in general fund versus expenditures, you know, we're shooting for a number around $400 million and we're going to put $500 million first into inflation proofing. How do people want to spend their money? Do they want to spend it to inflation proof and then we tax them and take it away from them? There are a lot of questions there that become very debatable when the reality hits the pocketbook and so I'm not so sure how people would react. I know how my wife would react if I said baby, we're going to put the money in our savings account and you don't have anything to go buy groceries to feed the kids and grandkids. There'd be a revolution in the house. So, sometimes the legislature has to live up to its fiscal responsibility without undue restraint and I think they've got a good track record of doing that. I haven't been here as long as you, but the track record has been good. It's been admirable and I think to some respect anything that we do that unduly limits the ability for the legislature to act in a fiscally responsible manner in the face of uncertainties, as you mentioned are surely going to come, puts us in a position where if we don't know, why do we want to eliminate the ability for the legislature to respond appropriately? That's where I get into problems. Senator French? 9:37 a.m. SENATOR FRENCH: I think one of the remarkable things about the current set of statutes is the degree to which the public kind of gets how the system works. When the dividend went from $1,900 just a few years ago down to $1,000 this year, none of my constituents were squealing about, you know, some kind of terrible inequity in the system. They understood that it was just a down market year and I think that's one of the difficulties with POMV that proponents haven't quite come to grips with that somehow POMV implies stability, that you will have this money paid out every year irrespective of the market's performance and yet there's sort of that little language that says you can go up to 5 percent as if there were going to be years when we wouldn't do that. CHAIR SEEKINS: Well we did that in 1996, Senator French. SENATOR FRENCH: I was almost finished. CHAIR SEEKINS: Go ahead. SENATOR FRENCH: So I guess the point I was trying to make was that there's some real good value in maintaining something very much like the current statutes because of the degree to which the public understands that sometimes there [are] going to be years when you just don't get a dividend because the market just didn't provide one. So I think that's - I just think that's worthy of making note of. CHAIR SEEKINS: I have no problem with that but we did - in our current system, we did, I would call it, hyper-inflate the dividend in 1996. The decision was made by the Board of Trustees that the current generation should, this was the rationale, the current generation needed to get more from the permanent fund than it was getting through the regular distribution system, the dividend system. So, investment management companies were told to go sell stocks to bring in realized income to be able to put more cash into the dividend for the current generation. Now whether that was the real reason or not is debatable, but that was the rationale that was used. It was done. We had additional income that came in that peaked and then went right back in terms of realized income and so, sometimes, it isn't just market variability that affects the dividend under the current system, Senator French, it's also political variability. Senator Therriault? SENATOR THERRIAULT: Mr. Chairman, I need to disagree with earlier comments here about people understanding the current system and the value of that. Certainly last year when there was the real potential that there would be no dividend, there was enough of a concern in this building of, number one, the shock to the citizen, the shock to the economy that there were proposals to pay it out of the general state treasury. So I don't think the general public has any level of understanding that really, in the current system, that there's the chance that there is a zero dividend year. And certainly for those of us that know the potential impact to the state treasury, that's not something that we would invite so I'm not going to - I guess I can't agree with that line of thinking when there are other alternatives that make sure that that stream of cash that goes out into the Alaska economy is smooth and you get the by-product of guaranteeing that inflation proofing of some degree is made automatically independent of action of the legislature. I don't think that the general public understands that they can get a zero dividend year in the current system. CHAIR SEEKINS: Right. I think that's true, too. When I was on the Board of Trustees it didn't take me very long to figure out that the Board of Trustees can play God with the permanent fund and what the dividend's going to be. And in a year where the earnings reserve was very low and you're faced with the possibility of not having the cash to inflation proof or pay a dividend, there will certainly be a tremendous amount of political pressure to maybe pick some fruit that isn't quite ripe yet in order to get the cash from realized earnings to put into the earnings reserve account when a more disciplined investment strategy would say it's not time to pick this fruit yet but we need the money. So, you know, I can see how the current system lends itself to all kinds of abuse. Senator Therriault? SENATOR THERRIAULT: The section, for either one of the gentlemen, that allows for an appropriation for other than inflation proofing and dividends - was that language specifically left or put in here so that you could answer the legal question of whether you've still got a public purpose? REPRESENTATIVE CROFT: Through the Chair, Senator Therriault, no, my purpose for putting it in, and I believe Senator Lincoln's was to provide another check on government getting into the earnings reserve. I think that the legal matter of whether we're a tax free status has been at least in my mind fairly well settled. The recent opinion by Attorney General Renkes that constitutionally protecting the dividend didn't threaten the tax-exempt status of the fund - in effect, if it was a public purpose when you did it statutorily, it's a public purpose when you do it constitutionally. And a lot of the case law that has come down over the last five years that buttresses that agreement or that understanding, particularly in the areas of educational trusts, where private money comes in and the state holds it and gives it out to go to the state university, those sorts of cases have really taken that from what was a question mark and a worry for a long time - nothing is certain in life but much more of a certainty that that's not a serious question. SENATOR THERRIAULT: Okay, well I just know from the debate over the years, it seems like if you can still point to something where there is a general public access, you have some protection from the federal court because they can say well, you're not using the money for that purpose right now but there's that possibility so it gives you a little bit of extra protection so I just wondered if that was part of the reason that you put that in there because you've got this whole Section 3 here that talks about oops, if there's an adverse tax consequence, we want this whole thing to go away. So you must feel like there is some possibility of that, otherwise you wouldn't have Section 3. REPRESENTATIVE CROFT: True enough. And through the Chair, Senator Therriault, the House version we took it out over the last couple of months, after those opinions came down. When I talked to Senator Lincoln about it, she said that that would be a perfect question for the Judiciary Committee and up to you guys to decide. I do think the case law has come down much cleaner on the point that it is not needed. If the Judiciary Committee felt like that was their opinion, they could take it out. If they still wanted the protection, they could leave it in. SENATOR THERRIAULT: Do you yourself think that would be prudent? I mean with the uncertainty of getting a tax ruling out of the federal courts and then us being stuck with language in the Constitution and we know it's a high hurdle to change it, would it be prudent not - to go without this protection? REPRESENTATIVE CROFT: I was convinced enough that in my version of the bill I was comfortable pulling it out but it is a low risk, but a risk, and I really do feel like you guys can decide. As for me, after reading and re-reading the cases, not just the memo that was sent to Attorney General Renkes, but the underlying cases, I felt very confident that it was a public purpose and would not be taxable. But, we had it in there to fit your comfort level. SENATOR THERRIAULT: Thank you. CHAIR SEEKINS: Other questions? Senator French, did you have anything? Senator Therriault? Thank you gentlemen, if you'll stand by I do have one person who has indicated on-line that he'd like to testify and, if you don't mind, if you can just hang tough where you are so we can go into this. Is Mr. Gay - Roger Gay, at the Mat-Su LIO - Mr. Gay, are you on-line? Do we have him on-line still? MR. ROGER GAY: Hello. Can you hear me? CHAIR SEEKINS: Please, if you'll identify yourself for the record? Welcome to the Judiciary Committee and please proceed with your testimony. MR. GAY: My name is Roger Gay. I live in Big Lake and I'd like to say a little something about inflation proofing. In my opinion, inflation proofing does not protect the value of the fund. It merely subjects more money to the ravages of inflation. Inflation is the result of the devaluation of our money. Every year our money is worth less, and that is why the price of goods goes up. A loaf of bread is a loaf of bread. A gallon of gas is a gallon of gas. We can make bread and gas cheaper now than at any point in history. Only the money has become less valuable. Because of the Federal Reserve System and the way our money is handled, our money has no intrinsic value. When you have a huge permanent fund being subjected to I don't know how much of a loss due to inflation, if you take that amount and dump it back into the fund, that amount then becomes subject to inflation. I'm not suggesting that we spend everything today at today's prices, which would be the best way to get the full value of our money. But the idea of taking money that has been hit by inflation and fooling yourselves into thinking that you can protect it by dumping more money into it to be ravaged by inflation just doesn't make sense. You know we're losing a lot of money to inflation because our money is not stable and if you want to inflation proof, you have to work at stabilizing the value of our money. CHAIR SEEKINS: Senator Therriault? SENATOR THERRIAULT: I understand your point. However, to stabilize the value of our money is a national economic issue that I don't know that the State of Alaska has the power to control. But if that's a given, then that's something that's largely outside of our individual legislative control. [END OF TAPE.] TAPE 04-5, SIDE A  SENATOR THERRIAULT: So should we not do that? MR. GAY: You're not having any effect on inflation by taking more money out of the hands of whoever, whether it's the state or the people. You're not having any affect whatsoever on inflation by throwing more money into the fund under the name of inflation proofing. Inflation proofing is an oxymoron. SENATOR THERRIAULT: Thank you. CHAIR SEEKINS: Other questions? Seeing none, thank you Mr. Gay for being with us this morning and providing your testimony. Is anyone else on line that wishes to testify this morning? No one else? Anyone in the audience that wishes to testify on this matter this morning? MR. GAY: I have a friend of mine that would like to make a brief comment and his name is Gary Hanthorn. CHAIR SEEKINS: Is Gary there? MR. GAY: Yes he is and he has a mental disability but he'd like to say a short word. CHAIR SEEKINS: If he'll identify himself for the record, we'll be pleased to take his testimony and Mr. Hanthorn, welcome to the Judiciary Committee. MR. HANTHORN: I'm Gary. Could you leave my permanent fund alone? It's mine. CHAIR SEEKINS: Thank you very much, Gary. Any questions? MR. HANTHORN: Could you tell Mr. Kohring to give me a letter because [indisc.] and he's supposed to get back to me for something about my permanent fund being left alone. CHAIR SEEKINS: Well we can't answer for Mr. Kohring here, but you're certainly welcome to call his office. They have the number there in the LIO and I would encourage you to do that. MR. HANTHORN: Thank you. CHAIR SEEKINS: Thank you for testifying this morning. With that, hearing no one wishing to testify, we're going to close public testimony on SJR 19. Are there any discussion points with members of the committee? None? Seeing none, we'll hold this over for a time when the entire committee can be here for discussion. I want to thank you gentlemen for being with us this morning. We appreciate your testimony and the lively discussion and look forward to getting in this in the next - sometime soon. With that, we have no other business before the Judiciary Committee this morning and so we'll adjourn the Judiciary Committee at this time [9:51 a.m.].