HOUSE FINANCE COMMITTEE SPECIAL SESSION May 23, 1999 12:40 P.M. TAPE HFC SS 99 - 3, Side 1. CALL TO ORDER Co-Chair Mulder called the House Finance Committee meeting to order at 12:40 P.M. PRESENT Co-Chair Mulder Representative Foster Co-Chair Therriault Representative Grussendorf Representative Austerman Representative Kohring Representative Bunde Representative G. Davis Representative J. Davies Representative Williams Representative Moses was not present for the meeting. ALSO PRESENT Phillip Okeson, Budget Analyst, Division of Legislative Finance; Representative Harold Smalley; Representative Reggie Joule; Representative Ethan Berkowitz; Representative Bill Hudson; Representative Jim Whitaker; Representative John Cowdery; Representative Beth Kerttula; Senator John Torgerson. SUMMARY HB 1001 An Act authorizing an advisory vote on a long-term financial plan for the state; and providing for an effective date. HB 1001 was HELD in Committee for further consideration. HOUSE BILL NO. 1001 "An Act authorizing an advisory vote on a long term financial plan for the state; and providing for an effective date." Co-Chair Mulder highlighted the changes to the workdraft CS HB 1001(FIN), 1-LS1022\G, Cook, 5/23/99. He pointed out that the proposed bill was similar to HB 231. Section (1) Contained in HB 231 Section (2) Contained in HB 231 with the exception of the 5.88% payout. Subsection (B) indicates that 50% was transferred from the Income Account. Section (3) Contained in HB 231 Section (4) Contained in HB 231 Section (5) Contained in HB 231 Section (6) Places the dividend for 1999 at $1540 (same as last year) Section (7) Contained in HB 231 REPRESENTATIVE JOHN COWDERY explained that the Permanent Fund currently relies on a "float" system, predicated on a five-year balance. Co-Chair Mulder explained that the major difference between the proposed approach and the status quo approach is that the payout is based on earnings, whereas in the proposed approach, the payout would be based on percentage of market value. He believed that would be a more stable base. Representative Cowdery questioned if last year's payout equaled $940 million dollars. Co-Chair Mulder stated it was approximately that amount. Representative Bunde advised that on the Page 3 reference for FY2000, FY2001 and FY2002, the percentage of payout was not beyond the amount indicated in Section 6. Co-Chair Mulder explained that allowed for a "rolling average" procedure to be used. Co-Chair Mulder overviewed the composition of the proposed bill: Section (8) Speaks to the one-question advisory vote language Representative J. Davies asked if consideration had been made for the vote to be mailed-in. Co-Chair Mulder replied it had been discussed, however, given the importance of the response, the accuracy is extremely important. Preference is that it be an in-person vote. Co-Chair Mulder continued: Section (9) The effective date was changed to July 2, 1999. Section (10) The effective date of Sections 6 & 8 will take effect immediately. Representative Austerman pointed out that the proposed bill does not have the mineral rental lease language from HB 231. Co-Chair Mulder noted that he had made a judgement call regarding that because he thought including those provisions would require an expanded title. Representative Bunde asked further discussion regarding the earliest date which an in-person vote could occur before the effective date be established. Co-Chair Mulder pointed out that there had been concern voiced by the Division of Elections and agreed that it is important to establish a date for the election in order to establish the amount of the dividend. Representative Bunde added that it would be an illusive target and perhaps a repealler should be added. Representative Cowdery read a passage from the Alaska State Constitution regarding public concern with the Legislature spending the Permanent Fund. He read: "All income from the Permanent Fund shall be deposited in the general fund unless otherwise provided by law." Co-Chair Mulder inquired if Mr. Okeson had created a chart illustrating the difference of the two approaches and how they would affect the dividend. PHIL OKESON, BUDGET ANALYST, DIVISION OF LEGISLATIVE FINANCE, offered to provide such a chart. Representative Bunde commented that the discussed plans do not spend any earnings of the Permanent Fund, currently placed into dividends. The Legislature proposes that a portion of the earnings, which traditionally have gone to dividends, now be reinvested into an income account that would provide dividends and funding for State government. In response to concerns voiced by Representative Williams, Co-Chair Mulder indicated that it was his intent to discuss only the work draft before the Committee. REPRESENTATIVE BILL HUDSON acknowledged that he had found the proposed work draft to be quite inclusive. He referenced Page 5, Line 2, which would establish the balanced budget task force. He supported that they be responsible for exploring and further reducing options to limiting State spending as well as identifying appropriate future revenue sources. He requested that the Committee consider adding the language after "sources", "specific programming deficiencies". He believed that language would provide a broader voice to the public. Co-Chair Mulder voiced concern with how much work a task force could complete in one year. Representative Grussendorf commented that "flat funding" will not always work. He recommended that other options be explored. Co-Chair Therriault asked why Sections 1-7 would take place on July 7th and not after the vote of the people. Co-Chair Mulder commented that was an oversight and that the draft should state September 30th as the effective date. Co-Chair Therriault asked if Section 6 would become effective on September 30th. Co-Chair Mulder replied it would and that Section 8 would take effect immediately. Co- Chair Therriault questioned if a repealler section had been considered. He noted that if the public voted "no", the changes would be made automatically, and if they voted "yes", the public would most likely support the Legislature meeting. Co-Chair Therriault believed that it would cause suspicion and criticism without addition of that language. Co-Chair Mulder listed the issues which need to be considered: * Amount * Timing * Effective date Co-Chair Mulder acknowledged that the public does not understand the full ramifications of this legislation. Representative Cowdery asked if the issues were realistic, questioning if the assumption of oil cost return was reliable enough to base the legislation on. Co-Chair Mulder replied that the assumptions from which the model was built largely reflect those assumptions brought forward by the Office of the Governor. It has been calculated that the State will receive a return of approximately 8.13%. He acknowledged assumption to be conservative, however, it mirrors what the Department of Revenue sees as realistic. Representative J. Davies pointed out that any allowances made for inflation or population growth had been done at 1/2 the estimate provided by the Department of Labor. Co-Chair Mulder agreed that the proposal before the Committee was conservative. He added that the "blue print" would be a model for the future and not "set in stone". There will be an annual pressure of necessary growth in some areas and potential reductions in others. Representative J. Davies reminded members that both estimates are historically low numbers. Co-Chair Mulder reiterated that these numbers are realistic. Co-Chair Therriault questioned the language contained in the deposit mechanism for the Alaska Income Account when that value becomes more than 1/3 of total State savings. Co- Chair Mulder acknowledged that language was not included that he was working with Legislative Legal on the issue to guarantee that was the correct number. The intention is to provide features not outlined in the bill. * Pro-rated growth in both the Permanent Fund and the Income Account * That one does not grow at a rate much larger than the other does * Sweep language Representative J. Davies counseled "caution" in drafting that language. He recommended that it be offered as legislative intent, stating that it is not critical it be included. He re-emphasized the importance that wording be correct. Co-Chair Mulder agreed. Representative Bunde added that legislative history should be instructive. He understood the only use for the Earnings Reserve Account was to be deposited back into the corpus of the Permanent Fund. Constitutionally, that money is available to be deposited into the general fund. The Legislature chose to put it into the corpus of the Permanent Fund. Representative Grussendorf addressed the sweep provision. Co-Chair Mulder responded that Legal Counsel has indicated that language would only work if it were changed constitutionally. HB 1001 was HELD in Committee for further discussion. ADJOURNMENT The meeting adjourned at 1:15 P.M. H.F.C. Special Session 5 5/23/99