GENERAL SUBJECT(S): Commonwealth North Alaska's Asset Portfolio Permanent Fund Earnings The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 21st Legislative Session, contact 465- 2156. After the 21st Legislative Session they will be available through the Legislative Library at 465-3808. Time Meeting Convened: 1:40 p.m. Tape(s): PRESENT: X Representative G. Davis X Co-Chair Therriault X Representative Foster X Co-Chair Mulder X Representative Grussendorf X Vice Chair Bunde X Representative Moses Absent Representative Austerman X Representative Phillips X Representative J. Davies Absent Representative Williams ALSO PRESENT: Duane Heyman, Executive Director, Commonwealth North; Nancy Bear Usera, Vice President and Co-Chair, Managing for Maximum Return Study Group, Commonwealth North; Joe Griffith, Co-Chair, Permanent Fund Earnings Phase II Study Group, Commonwealth North LOG SPEAKER DISCUSSION TAPE HFC 00 - 31 SIDE 1 031 Co-Chair Mulder Convened the meeting at 3:40 p.m. 121 Nancy Bear Usera, Co-Chair, Managing for Maximum Return Study Group, Commonwealth North Observed that Commonwealth North's mission is to educate its members and all Alaskans on relevant public policy issues and to assist in their resolution. 248 Ms. Usera Noted that she co-chaired a study group, Managing for Maximum Return and provided members with handout #1, Managing for Maximum Return (copy on file). Observed that the Alaska Housing Finance Corporation (AHFC) and the Alaska Industrial Development and Export Authority (AIDEA) were set up to assist in economic development. The group looked at the broad range of state assets to determine if there were additional ways that they could be used to generate revenues. 421 Ms. Usera Noted that the study group based their work on a series of assumptions. The first assumption was that the assets, which are derived from Alaska's land grant, should be managed consistent with the constitutional mandate to maximize their use and benefit to the people of Alaska. 438 Ms. Usera The second assumption was that the constitutional prohibition against dedicated funds is recognized as a policy principle, which provides that the public interest is served when all state revenues, regardless of source, are available for appropriation by the legislature to meet Alaska's total needs. 550 Ms. Usera The third assumption was that there are two types of returns derived from an asset's management: financial and beneficial, and each must directly or indirectly benefit all the people by serving a public purpose. 578 Ms. Usera Observed that corporations for specific purpose pay dividends, but that the Permanent Fund itself makes no contribution back to the state of Alaska. 672 Ms. Usera The fourth assumption was that asset management is most effective within a structure, which provides flexibility for maximizing returns while assuring accountability to the state and its people. 690 Ms. Usera Observed that there is a tendency for the legislature to micro manage. 720 Ms. Usera The fifth assumption was that performance measures for determining efficiency, results and returns are essential for public accountability. Noted that more is better tends to be the measurement. Recommended that similar benchmarks be established. 826 Ms. Usera The sixth assumption was that private enterprise should be the first option for obtaining expertise, goods and services to develop public assets. To the extent that public sector programs compete with the private sector, their activities should proceed in a manner, which minimizes adverse effects on private sector competition. Pointed out that the Department of Corrections sells furniture at the market rate. 876 Ms. Usera The last assumption was that maximizing returns for all assets will enhance revenue to the state as well as provide greater diversity and stability of state revenues. Examples can be found to better manage the state's real estate. Many attempts to establish a better management are dealt with individually without cross communication. Noted that there are a dozen bills before the legislature dealing with management of state assets. None deal with the whole picture. 1028 Ms. Usera Discussed the study group's findings in relationship to missions and goals. Observed that vague mission statements leave activities and management of assets subject to individual interpretation. 1068 Ms. Usera Observed that activity rather than returns frequently defines goals. She maintained that there is a tendency to shift funding and responsibilities off budget. 1090 Ms. Usera Noted efforts to have AHFC be responsible for deferred maintenance at the university. She questioned if this is central to their mission. 1150 Ms. Usera Cautioned that assets are not loaded up with things that are convenient. 1173 Ms. Usera Reviewed the study group's findings regarding performance standards and accountability. There is no monetary value assigned to or reported on beneficial returns. 1211 Ms. Usera Questioned how subsidy programs, such as the railroad, can be tracked. Concluded that the public's interests are not defined or reported. Part of the railroad's purpose is to provide a transportation corridor. Pointed out that the dividend is a great example of a subsidy program. She questioned what is the overall benefit of the dividend. 1271 Ms. Usera Performance measures, where they exist, are often tied to activities rather than to mission or returns. 1294 Ms. Usera Discussed the study group's findings regarding structure. Regulatory and asset management functions within a single agency are often incompatible for achieving optimum results. She noted that it is hard to develop something while being the gatekeeper. Public corporations are "halfway houses to privatization". Lines between development and regulatory responsibility are clearer. 1331 Ms. Usera Operational mandates created in statute and regulation do not allow for the flexibility necessary to efficiently adapt to evolving missions and priorities. She questioned if we are managing assets well when managers' hands are tied. Policy makers should focus on policy. 1379 Ms. Usera Independent agencies have greater flexibility than executive branch departments in operations and funding. 1406 Ms. Usera Assets are managed independently, with no portfolio integration that would ensure diversification of risk and return, compatibility in objectives, performance standards and measures, and coordination of activities and reporting. Pointed out that the Alaska Marine Highway System is not necessarily considered in the greater context of being part of the transportation infrastructure. 1442 Ms. Usera Discussed the study group's findings. Noted that the state's annual budget process does not provide effective integrated review of asset management, does not promote a long-term view of returns, and instead focuses on operational activity as opposed to results. 1451 Ms. Usera The vagaries of the annual appropriation process and the volatility of state general fund revenues influence asset development potential. Noted that schools are being funded this year, while waterwater systems were funded in the previous year. Political priority determines investment dollars. 1462 Ms. Usera Availability of, and access to, alternative funding sources influence operational activity. 1471 Ms. Usera Politicization of management appointments creates personnel turnover, which impairs continuity and returns. Stable management increases efficient operations. 1512 Ms. Usera There are few management or budgetary incentives for maximizing returns. Stressed the need to create incentives for other corporations. 1583 Ms. Usera Long-term plans, and the accumulation of capital to meet long-term needs, may be used for political purposes, which creates a disincentive for strategic asset management. Pointed out that it is the nature of beast to be subject to political influence. 1615 Ms. Usera Observed that special interests significantly influence returns and allocation of returns. 1652 Ms. Usera Reviewed recommendations of the study group. Noted that roles and responsibilities need to be clarified. 1672 Ms. Usera Noted that management performance and agency operations should be measured. Acknowledged that AHFC should not be measured in the same manner or have the same standards as ASTF. 1703 Ms. Usera Stated that the dilemma is, what is the right amount. What are the expectations of Wall Street in regards to bonds? She stressed that the same measures as for other bonds should be used. 1743 Ms. Usera Concluded that assets should be managed as a portfolio. Recommended that assets should be viewed in light of their total potential and risk and reward be weighed. 1774 Ms. Usera Recommended that returns be paid to the general fund. Emphasized that subsidizes are wonderful, but that the general welfare should be served. 1807 Ms. Usera Concluded that a system needs to be created to achieve the recommendations, using the best pieces of the existing model. 1853 Vice Chair Bunde Acknowledged the need for help to translate Alaska's budget situation to the public. Pointed out that the permanent fund dividend comes from the general fund. Noted that ASTF doesn't give the state a dividend. Maintained that the permanent fund dividend encourages growth through the demand for public services. Questioned if income tax is part of the equation. 2026 Ms. Usera Agreed that the permanent fund dividend comes from the general fund. Acknowledged that ASTF investments provide no return. Suggested that grants could bring ownership interest of patents to the state of Alaska. 2092 Ms. Usera Observed that Commonwealth North has serious concern about the lack of growth in the state's economy. Pointed out that $800 million dollars of the state's cash economy comes from a dividend program. Pointed out that withdrawal of the permanent fund dividend could create a problem. Emphasized the need for increased state productivity. 2146 Representative Foster Pointed out that there is a paradox in that there is a large constituency that works for government. 2243 Ms. Usera Observed that some things have to be run as a public service. Stressed that maximizing federal returns does not necessarily help build a credible economy. 2333 Representative Foster Another paradox is that a healthy economy hurts the state's budget. The healthier the economy, the more people and the more services are needed; while no one pays for any thing. TAPE CHANGE, HFC 00 - 31, SIDE 2 31 Ms. Usera Responded that the state needs to look at jobs that will be productive and create wealth for the state and for individuals. 70 Representative Phillips Referred to pages 6 and 7 of handout #1. Noted the difference between financial returns and beneficial returns. Pointed out that mission creep is important to consider. 212 Ms. Usera Discussed the difference between financial returns and beneficial returns. Beneficial returns benefit individuals directly through program subsidies. Beneficial returns serve a public purpose and individuals benefit from using the service. The holder of an AHFC mortgage receives beneficial returns. Financial returns are paid to the state and are available for appropriation for the general welfare. Stressed that it is difficult to measure specific returns. 347 Representative J. Davies Quoted Albert Einstein "Everything that counts can't be counted and everything that can be counted doesn't necessarily count." 461 Representative J. Davies Pointed out that basic resource industries don't benefit the state in relationship to the cost to the state. Used the example of mining as an industry that is disconnected from the state economy, which could be connected with an income tax. 569 Representative J. Davies Spoke in support of ASTF. Emphasized that ASTF tries to diversify the economy. There is a payback requirement with every grant. 652 Representative J. Davies Disagreed that AHFC does not pay a dividend. 689 Ms. Usera Emphasized that activities are sometimes measured instead of output. Need to do a better job raising money. Pointed out that the issue with an income tax is which pocket it will come out of and what mechanisms will be used. 813 Representative Moses Emphasized that a large dividend would attract people to the state and create further demand for services. 861 Ms. Usera Maintained that one of the unfortunate aspects of dividend program is that so many children's dividends are being wasted. Suggested children's permanent fund dividends should be held in trust to the age of majority. 938 JOE GRIFFITH, CO- CHAIR, PERMANENT FUND EARNINGS PHASE II STUDY GROUP, COMMONWEALTH NORTH Noted that he co-chaired a study group considering the Permanent Fund Earnings. He provided members with handout #2, Commonwealth North - Permanent Fund Earnings Phase II - A cornerstone for fiscal certainty (copy on file). 1004 Mr. Griffith Maintained that the disconnect between the health of the state of Alaska's economy and the funding of needed services is the most difficult thing faced by legislators. 1067 Mr. Griffith Noted importance of an education package. Summarized proposals and recommendations of the study group. Concluded that permanent fund earnings must be considered as part of a total state fiscal package that includes getting the most from money spent for state government. 1121 Mr. Griffith The corpus of the Permanent Fund should be fully protected by preservation of the principal. 1141 Mr. Griffith The current individual Permanent Fund Dividend Program should continue, using a portion of the Permanent Fund's earnings, although not necessarily on the same scale. 1175 Mr. Griffith The biggest single departure from current practice is that Commonwealth North recommends using 30% of Permanent Fund earnings derived from an endowment concept to support state government and for additional purposes as outlined below. This 30% should be funneled through the Constitutional Budget Reserve account. 1221 Mr. Griffith Twenty percent of the Permanent Fund's earnings should be used to provide a means for local communities to meet capital needs. The closer that decisions can be brought to the people involved, the more efficient and responsive those decisions will be. Creation of a Community Dividend Program would meet this policy objective. Ten percent of the Permanent Fund's earnings should be used to fund statewide capital needs and deferred maintenance that provide and maintain infrastructure to support economic sustainability and growth. 1266 Mr. Griffith Start state taxes at some point when necessary. 1274 Mr. Griffith Observed that calculations were based on an oil price that is $7 to $8 dollars a barrel lower than currently exists. 1309 Mr. Griffith Noted that under their recommendations the personal dividend stays about $1,000. 1330 Mr. Griffith Recommended that a community dividend program be created and that 20% of the Permanent Fund's earnings be used by local communities to meet their capital needs. 1365 Mr. Griffith Proposed support for a statewide capital program using 10% of the Permanent Fund's earnings. 1430 Mr. Griffith Maintained that the plan would not bankrupt the dividend. Acknowledged that the dividend would be smaller. 1458 Representative Grussendorf Questioned why the Constitutional Budget Reserve would be used. 1494 Mr. Griffith Explained that the Constitutional Budget Reserve is a handy place for working capital. Pointed out that their working capital is needed to take up variations in the price of oil. 1546 Representative Grussendorf Expressed concern that the Constitutional Budget Reserve would be used as an easy out to avoid difficult questions. 1573 Mr. Griffith Acknowledged some difficulties with the use of the Constitutional Budget Reserve, but emphasized that it has functioned as it was crafted. 1604 Representative Grussendorf Pointed out that the Constitutional Budget Reserve was created to provide working money. 1619 Mr. Griffith Stressed that the Constitutional Budget Reserve would continue to serve its purpose of allowing state access to funds. 1642 Representative J. Davies Questioned if money placed into the Constitutional Budget Reserve would be treated general funds. 1658 Mr. Griffith Presumed it would be invested. 1671 Representative J. Davies Referred to a market value approach. 1740 Mr. Griffith Noted that the members would be hearing more about market value approach in the future. 1756 Representative G. Davis Stated that he would like to see the Community Dividend Program included. He asked what is the right thing to do versus the correct political thing to do. He thought that state resources should be shared with the municipalities. 1820 Representative Phillips Spoke to inflation proofing and the total earnings and agreed with the market approach. 1837 Representative Foster Stated that he appreciated the testimony. He noted that no one from Bush Alaska was included in the Commonwealth North study group. He asked if there was an attempt to get individuals outside of Anchorage involved. 1892 Mr. Griffith Stated that there was not adequate time last spring to reach that individuals in rural Alaska. He acknowledged that Representative Foster had a valid complaint. He assured members that they were trying their best to represent rural Alaska. 1954 Representative Foster Offered to help find a rural representative. 1963 Vice Chair Bunde Stated that the municipalities have held people immune from the reductions. He stated that there is a disconnect. People have not felt the impact of a reduction in revenue sharing. He stated that he was having a difficult time understanding that complaint. Pointed out that taxes go up and the economy goes down. He asked the impact of any change. 2043 Mr. Griffith Noted that the issue has been debated at length. The general consensus throughout the group was that it was better to take some portion for the local government good than to put in the pocket of the individuals. In the long run the greater good would be served that way. Pointed out that there could be problems because transitions are always difficult. 2106 Representative Moses Noted that the public did not dream up the issue of "no taxes". Maintained that politicians are the ones that have created the situation. Stressed that the damage is done. He spoke to the municipal dividend. It is important to take into consideration that Alaskan wages are being taken out of state without being taxed. 2216 Representative Phillips Agreed with comments by Representative Moses. She noted that a lot of legislators are not interested in a long- range plan. 2240 Vice Chair Bunde Expanded that it is an educational challenge to gain approval for a long- range plan. 2269 Ms. Usera Commonwealth North recognizes the need for a long-range plan. The dilemma is to present it to others. The reports focus on mechanisms that can be used. Commonwealth North recognized the need to talk about the political reality. Pointed out that their plan has something for everyone. Stressed that the public vote was not addressed. TAPE CHANGE, HFC 00 - 32, SIDE 1 65 Ms. Usera As long as the responsibility is deferred to a vote of the people it is unrealistic to find a plan. 107 Representative Phillips Questioned if Commonwealth North has plans to lobby legislators. 130 Ms. Usera Noted that they are encouraging that activity. Pointed out that the political reality is that it is an election year and it is unlikely that there would be action. 178 Representative Grussendorf Pointed out that Alaska Marine Highway System users pay 50 percent of the cost of operation. 308 Representative J. Davies Stressed that the "no" vote by the public came for a variety of reasons. He stressed that there were people that voted no because there were no taxes included or they felt that it adversely affected rural areas. 433 Ms. Usera Noted that a "yes or no" choice is not necessarily a variable option. 598 Representative Moses 626 Vice Chair Bunde Acknowledged that there were lots of reasons for the "no" vote but that in the face of a negative vote that it is difficult to act otherwise. 762 Representative Moses Suggested that legislators allow voters to decide what services should not be provided. 783 Co-Chair Therriault Observed that there are a lot of services that the state provides for local governments without credit. Pointed out that there are things that local municipalities cannot do. He gave examples of state supported services. 926 Representative Moses Agreed, but maintained that there are things that the state can stop doing such as maintaining streets. Maintained that money should be given directly to the municipalities. 1062 Ms. Usera Thanked committee, next report a study of rural/urban issues that will focus on unity issues. 1117 Vice Chair Bunde ADJOURNMENT The meeting adjourned at 3:45 p.m. HOUSE FINANCE COMMITTEE LOG NOTES February 10, 2000 House Finance Committee 1 02/10/00