HOUSE JUDICIARY STANDING COMMITTEE March 1, 2000 1:40 p.m. MEMBERS PRESENT Representative Pete Kott, Chairman Representative Joe Green Representative Norman Rokeberg Representative Jeannette James Representative Lisa Murkowski Representative Eric Croft MEMBERS ABSENT Representative Beth Kerttula OTHER HOUSE MEMBERS PRESENT Representative Eldon Mulder COMMITTEE CALENDAR HOUSE JOINT RESOLUTION NO. 52 Proposing an amendment to the Constitution of the State of Alaska relating to certain public corporations. - MOVED CSHJR 52(JUD) OUT OF COMMITTEE SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 42 "An Act relating to civil liability for certain false or improper allegations in a civil pleading or for certain improper acts relating to a civil action; amending Rule 82(b), Alaska Rules of Civil Procedure; and providing for an effective date." - HEARD AND HELD HOUSE BILL NO. 385 "An Act relating to search warrants." - MOVED HB 385 OUT OF COMMITTEE HOUSE JOINT RESOLUTION NO. 47 Proposing amendments to the Constitution of the State of Alaska relating to the permanent fund and to payments to certain state residents from the permanent fund. - HEARD AND HELD HOUSE JOINT RESOLUTION NO. 18 Proposing an amendment to the Constitution of the State of Alaska relating to an office of administrative hearings. - SCHEDULED BUT NOT HEARD HOUSE BILL NO. 337 "An Act relating to claims against permanent fund dividends to pay certain amounts owed to state agencies and to fees for processing claims against and assignments of permanent fund dividends; and providing for an effective date." - SCHEDULED BUT NOT HEARD PREVIOUS ACTION BILL: HJR 52 SHORT TITLE: CONFIRM PUBLIC CORP BD MANAGING ASSETS Jrn-Date Jrn-Page Action 2/02/00 2059 (H) READ THE FIRST TIME - REFERRALS 2/02/00 2060 (H) STA, JUD, FIN 2/17/00 (H) STA AT 8:00 AM CAPITOL 102 2/17/00 (H) Moved Out of Committee 2/17/00 (H) MINUTE(STA) 2/18/00 2234 (H) STA RPT 3DP 3NR 2/18/00 2234 (H) DP: JAMES, WHITAKER, OGAN; 2/18/00 2234 (H) NR: SMALLEY, KERTTULA, GREEN 2/18/00 2234 (H) FISCAL NOTE (GOV) 2/28/00 (H) JUD AT 1:00 PM CAPITOL 120 2/28/00 (H) Heard & Held 2/28/00 (H) MINUTE(JUD) 3/01/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HB 42 SHORT TITLE: CIVIL LIABILITY FOR IMPROPER LITIGATION Jrn-Date Jrn-Page Action 1/19/99 29 (H) PREFILE RELEASED 1/15/99 1/19/99 29 (H) READ THE FIRST TIME - REFERRAL(S) 1/19/99 29 (H) JUD, FIN 2/16/00 2206 (H) SPONSOR SUBSTITUTE INTRODUCED 2/16/00 2206 (H) READ THE FIRST TIME - REFERRALS 2/16/00 2206 (H) JUD, FIN 2/16/00 2206 (H) REFERRED TO JUDICIARY 2/28/00 (H) JUD AT 1:00 PM CAPITOL 120 2/28/00 (H) Heard & Held 2/28/00 (H) MINUTE(JUD) 3/01/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HB 385 SHORT TITLE: ISSUANCE OF SEARCH WARRANTS Jrn-Date Jrn-Page Action 2/16/00 2215 (H) READ THE FIRST TIME - REFERRALS 2/16/00 2215 (H) JUD 2/28/00 (H) JUD AT 1:00 PM CAPITOL 120 2/28/00 (H) Heard & Held 3/01/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HJR 47 SHORT TITLE: CONST AM: PERMANENT FUND Jrn-Date Jrn-Page Action 1/24/00 1986 (H) READ THE FIRST TIME - REFERRALS 1/24/00 1986 (H) JUD, FIN 1/24/00 1986 (H) REFERRED TO JUDICIARY 3/01/00 (H) JUD AT 1:00 PM CAPITOL 120 WITNESS REGISTER SUSAN COX, Assistant Attorney General Special Litigation Section Civil Division (Juneau) Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Testified on fiscal impacts of SSHB 42 and the department's concerns with substantive issues. ROBERT A. MINTZ, Attorney at Law 550 West 7th Avenue, Suite 1540 Anchorage, Alaska 99501 POSITION STATEMENT: Testified on SSHB 42. DAVID HUDSON, Lieutenant Division of Alaska State Troopers Department of Public Safety 5700 East Tudor Road Anchorage, Alaska 99507-1225 POSITION STATEMENT: Testified in support of HB 385, citing the change from "crime" to "offense" as a primary reason. ANNE CARPENETI, Assistant Attorney General Legal Services Section-Juneau Criminal Division Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Testified in support of HB 385; believes that listing all possible offenses would be impractical and that the bill would not open a Pandora's box. REPRESENTATIVE ANDREW HALCRO Alaska State Legislature Capitol Building, Room 418 Juneau, Alaska 99801 POSITION STATEMENT: As sponsor of HB 385, provided closing remarks and answered questions. REPRESENTATIVE GARY DAVIS Alaska State Legislature Capitol Building, Room 513 Juneau, Alaska 99801 POSITION STATEMENT: Sponsor of HJR 47. SENATOR JERRY MACKIE Alaska State Legislature Capitol Building, Room 427 Juneau, Alaska 99801 POSITION STATEMENT: As sponsor of SJR 33, companion resolution, testified on HJR 47 and answered questions. KATHLEEN BALLENGER P.O. Box 126 Kodiak, Alaska 99615-0186 POSITION STATEMENT: Testified in support of HJR 47. ACTION NARRATIVE TAPE 00-24, SIDE A Number 0001 CHAIRMAN PETE KOTT called the House Judiciary Standing Committee meeting [which was recessed on 2/28/00] back to order at 1:40 p.m. in order to make an announcement to listeners on teleconference; no other members were present at the time. He called an at-ease, then brought the meeting back to order again at 2:12 p.m., at which time taping of the meeting began. Members present at 2:12 p.m. were Representatives Kott, Green, Rokeberg, James and Murkowski; Representative Croft arrived as the meeting was in progress. HJR 52 - CONFIRM PUBLIC CORP BD MANAGING ASSETS CHAIRMAN KOTT announced that the first order of business would be HOUSE JOINT RESOLUTION NO. 52, proposing an amendment to the Constitution of the State of Alaska relating to certain public corporations. He indicated a new proposed committee substitute (CS) had been provided to Representative James, the sponsor, and to the other members. Number 0089 REPRESENTATIVE ROKEBERG made a motion to adopt the proposed CS, Version D [1-LS1387\D]. There being no objection, it was so ordered. CHAIRMAN KOTT specified that he believes that Version D, page 1, lines 6-8 and 12-13, gets to the committee's intent as discussed at the previous hearing. He asked whether there was further debate on the resolution; none was offered. Number 0183 REPRESENTATIVE GREEN made a motion to move the proposed CS for HJR 52, Version D, out of committee with individual recommendations and the attached fiscal note. There being no objection, CSHJR 52(JUD) was moved from the House Judiciary Standing Committee. HB 42 - CIVIL LIABILITY FOR IMPROPER LITIGATION Number 0257 CHAIRMAN KOTT announced that the next order of business would be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 42, "An Act relating to civil liability for certain false or improper allegations in a civil pleading or for certain improper acts relating to a civil action; amending Rule 82(b), Alaska Rules of Civil Procedure; and providing for an effective date." CHAIRMAN KOTT informed members that the public testimony begun at the previous hearing would continue. He asked whether anyone on teleconference wished to testify, but there was no response. He called an at-ease at 2:17 p.m. and called the meeting back to order at 2:19 p.m., noting that Representative Mulder, the sponsor of SSHB 42, was present. He called on Susan Cox to testify. Number 0517 SUSAN COX, Assistant Attorney General, Special Litigation Section, Civil Division (Juneau), Department of Law (DOL), came forward to testify. She informed members that the Special Litigation Section does personal injury defense for the State of Alaska if state employees are sued regarding events in the course and scope of their employment. The state deals with a high volume of pro se litigation, which is litigation brought by people who are unrepresented by counsel. In many cases, the lack of counsel may indicate a lack of merit to the claims. Therefore, the DOL frequently faces marginal cases where a person is unable to retain counsel and where the cases should not have been brought because those being sued have immunity or the substance of the claim has no merit; the DOL finds itself defending against those. Furthermore, pro se cases are often costly to defend because the opponents don't know what they are doing in a court of law. MS. COX told members that while appreciating the goals of this legislation, unfortunately the department believes this bill would likely encourage people to file additional claims where those people think they can recover something that they were unable to get in their original lawsuits with the state, but perhaps with different targets in the follow-up litigation. Ms. Cox mentioned examples where attorneys in her office are defending cases in which they have won summary judgment and yet, if given the chance, the judgment-proof opponent who has nothing to lose would be more than happy to file a claim against the attorney who had prevailed on the merits in the case. Therefore, the DOL has submitted a fiscal note; they expect that this will be an attraction, and certainly, by its own terms, the bill does create causes of action that don't currently exist. Number 0728 MS. COX addressed substantive issues in the bill. She noted that subsection (f) states that a person may not bring a civil action to recover damages under subsections (c) or (d) unless a final judgment has been entered. Pointing out that this bill has been through two version this legislative session and was introduced in a different form in past years, Ms. Cox suggested some of the internal references are confusing and perhaps are holdovers from previous versions. MS. COX specified that in subsection (f), the reference to bringing an action to recover damages under subsection (c) is misleading or perhaps not intended; subsection (c) does not create a cause of action but merely prohibits certain conduct, whereas subsection (d) actually makes a cause of action for the various violations of those prohibitions in subsections (a) and (c). Ms. Cox said she is thinking that the reference to subsection (c) in line 30 [page 2] is not necessarily intended. Furthermore, page 3, line 1, again refers to a civil action to recover damages under subsection (c); Ms. Cox said she is assuming that reference is meant to be subsection (d), or at least it is ambiguous. MS. COX brought attention to the prohibitions in subsection (c) [page 2], which read: (c) A person may not, on the person's own behalf or as a representative of a party, take part in the initiation, defense, continuation or procurement of a civil action against another person if the person acts (1) without probable cause on a claim or defense; or (2) primarily for a purpose other than that of securing the proper adjudication of a claim or defense involved in the civil action. MS. COX suggested the person referenced here could possibly be a target in a second lawsuit if that person lacked probable cause for a claim or defense or had an improper purpose for involvement in that. She said the phrase beginning with "take part in the initiation" is somewhat ambiguous, and it may be difficult to determine the parameters. For example, in her own office people are directly involved in litigation of a case, and there may be superiors who are aware of and who may actually approve certain decisions made in a case; there would be a variety of levels of people called to account for how a case was defended and/or brought, and the reasons for that. Number 0898 MS. COX said she may have misunderstood Mr. Mintz the other day when he testified that subsection (c) is a codification of the standard for a malicious prosecution action under current common law. If that is what he said, Ms. Cox told the committee, she would have to disagree. The standard for a malicious prosecution action in this state would require that the party bringing it, first and foremost, has prevailed on the merits in the underlying case; then that party would have to establish the elements that are there in subsection (c) - both of them, not one or the other. Number 0940 REPRESENTATIVE GREEN referred to Ms. Cox's testimony regarding a judgment-proof litigant who could come back with a second frivolous lawsuit. He asked whether she believes this [bill] is meritorious in concept but could actually result in that happening. MS. COX answered that she is concerned about that when it comes to people who are unrepresented by counsel. This provision says actual reasonable fees can be awarded against a person who fails in a subsequent action brought under this bill; however, a judgment-proof person who lacks assets won't necessarily be deterred. From her perspective, the DOL has more trouble dealing with frivolous cases brought by people who aren't represented by lawyers than those brought by people who are represented. MS. COX noted that she had reviewed the canons of professional responsibility before the hearing that day; she pointed out that some of what is in this bill is already, of course, required of people who practice law in Alaska. She said she sees this as opening a possibility for what may seem to the department like never-ending frivolous litigation. MS. COX informed the committee about a current situation in which [the state] has a $34,000 judgment for attorney fees in a case it won, but the person involved is writing letters complaining about the conduct of the DOL attorney; if that person had the opportunity, Ms. Cox has no doubt he would file suit under this, and then another attorney in her office would be representing that first attorney. She concluded that they would be relitigating that case except where collateral estoppel might bar relitigation of the claims already determined. Number 1067 REPRESENTATIVE JAMES voiced her understanding that the legislation eliminates false claims from being part of the issue. She asked whether Ms. Cox was saying that a person who had lost [a case] would come back and claim that it wasn't fair, and would do so without an attorney. MS. COX explained that it is conceivable that someone who lost in the original case could come back and sue, claiming that one reason for losing was that the other side had made a false statement or was somehow engaged in an improperly motivated litigation. Ms. Cox said she isn't conceding in any way that the follow-up litigation would be meritorious, but she foresees cases in which people that [the department] has litigated against and won against could try again. She believes that this is more likely to happen with people who are unrepresented throughout. REPRESENTATIVE JAMES said she certainly understands the problems relating to lack of legal representation, and the law protects people for being able to do that. Her concern, however, is that if someone who loses a case has evidence that there was some untruth presented, that door isn't necessarily open, which this bill would do. She suggested that [with the bill] more care may be taken by people to ensure that those statements are true. She added: I don't necessarily mean that they did it on purpose. But if there is some untruth or some piece of the evidence that has been depended upon for the outcoming of the case that wasn't true, and that the person who was the subject of the challenge wasn't able to present their case because of that untrue statement in any way, I don't think you would want to deny them this opportunity, would you, of presenting it again? Number 1227 MS. COX replied: There are several answers to your question. One is, of course, you're assuming that the person who lost actually has a meritorious claim that someone actually lied or presented a falsehood in the original action. In that circumstance, they do have a couple of things available to them. One would be to file a bar complaint, ... if it involved the unethical conduct of an attorney. The other would be if it ... materially affected the outcome of their case, of course, they can ... file a motion to ... have the judgment vacated and submit their new evidence revealing that, in fact, something material had been misstated in the earlier case. They wouldn't, ... as you recognize, have at this point a separate cause of action for civil liability against their opposing lawyer and the opposing party necessarily. What I'm speaking to, however, and in terms of the fiscal impact, is the situation in which we expect unmeritorious claims to be brought under this litigation to further litigate what were unmeritorious claims to begin with. And we will have a cost in dealing with those. Number 1306 REPRESENTATIVE CROFT referred to malicious lawsuits and the way subsection (c) of the bill works versus the current law. He agreed with Ms. Cox that this [subsection (c)] is an "either/or": one can sue saying that somebody either didn't have probable cause or did it for another purpose. Under the current malicious lawsuit law, however, one would have to show both of those. MS. COX clarified that the person who would be bringing a malicious prosecution claim would have had to have won in the original lawsuit. REPRESENTATIVE CROFT suggested under the old law, then, a person couldn't sue another for malicious prosecution if that other person had won the case; that isn't a requirement in this bill, however. MS. COX affirmed that. REPRESENTATIVE CROFT said it opens it up for people who have lost a lawsuit to claim some motivation in the lawsuit and to sue on that basis. He asked whether, if he could prove that another's motivation were primarily for a purpose other than that of securing the proper adjudication, he could get full attorney fees and costs or compensatory damages. He clarified that he was referring to paragraph (c)(2). MS. COX specified that paragraph (d)(3) speaks to that and says compensatory and punitive damages. REPRESENTATIVE CROFT indicated the law had developed to be "and" in order to make these tough to do. He suggested it was really a "three-step deal": lack of probable cause, some ulterior motive, and the requirement of having prevailed in the litigation. If those three were met, the law said it was worth it to have an entirely new lawsuit. But under this bill, one gets a new lawsuit every time, just based on people guessing what the real purpose of the original lawsuit was, even if the case was lost on the merits. REPRESENTATIVE CROFT said the above is subsection (c), the main part that troubles him. However, it also had troubled him when the representation was made that this is about the same as the current malicious lawsuit [common law]. "It just isn't, and there are important distinctions why widening that up hurts," he added. Number 1558 REPRESENTATIVE CROFT noted that he was having an amendment drawn up [1-LS0264\D.2, Ford, 3/1/00, which had not yet arrived via fax]. He pointed out that there are two ways to lie: to assert something that isn't true or to say something is not true when it is; these are opposite sides of the same coin. He said plaintiffs make factual allegations because they have the burden of proof, whereas defendants make denials. He asked Ms. Cox her opinion as to whether this bill adequately addresses both sides of the equation [allegations and denials] in paragraphs [(a)](1) and (2) and subsection (b). MS. COX responded that she hadn't really thought of that. Her feeling is that there is a distinction here, of course, between the first section in subsection (a), especially paragraph (a)(1), because it says a person may not sign a complaint, answer or other civil pleading; she said the definition of "pleading" includes affidavits, so that coverage is not limited to lawyers, and of course it includes pro se litigants who sign their own complaints and answers, as well as witnesses who may sign affidavits. She added, "And so in that section we're talking about false allegations material to claims that may arise -- could be answers to interrogatories." REPRESENTATIVE CROFT specified that he wanted to add the word "denial" there, so it would say "claim, defense, denial or allegation." He then said he didn't know whether it would be "and" or "or." He explained that he wanted to make it more clear that it is both a factual positive allegation and a denial. MS. COX answered that certainly an argument could be made that, as drafted, that covers a denial. For example, when she files an answer to a complaint, which is contemplated in that first section, she is making a positive statement that what is being said is not true, and she assumes that if that is a false statement, she could be held responsible under this. She agreed that adding "denial" would make that clear. She emphasized that there is a difference between paragraph (a)(1) and subsection (b); paragraph (a)(1) on page 1, line 10, says "with the intention of asserting allegations that are false," whereas subsection (b) at the top of page 2 refers to "knowingly [made] a false statement." She said she doesn't know whether that is intentional or is the result of this bill being changed, with parts of it coming from different sources. REPRESENTATIVE CROFT responded that he thought that was intentional. He said paragraph (a)(1) is the one that he has the least problem with, if "denial" is added; that is a pretty high, almost criminal standard, the intention of asserting facts that are false. In contrast, subsection (b) is just "knowingly." Furthermore, the punishments are different: for (a)(1), compensatory and punitive [damages], whereas for subsection (b), "you just sort of freeze the lawsuit and have a mini-trial on the issue of who lied." MS. COX replied, "Or ... , as I believe Mr. Lessmeier testified the other day, give the jury a jury instruction about it, ... and it would probably be the first instruction they'd have to consider: 'If you find that either one of these parties made a knowing false statement, you stop there, you enter judgment for the other side.'" Number 1801 REPRESENTATIVE CROFT commented that sometimes in trials, particularly where there have been discovery violations, the judge rules on certain issues. He indicated this [provision] goes three or four steps further than that, however, because that judgment will be entered regardless of what else remains in the case. He asked Ms. Cox whether that is the way she reads it. MS. COX replied that it is hard to know exactly how this would be applied. It does say the court will enter judgment against the party who makes the false statement on the issue to which the false statement relates; the breadth or scope of that judgment would certainly be a disputed issue, especially if both parties disagreed about a seminal issue in the case such as whether one or the other had run a red light. Both parties could be firm in their convictions that they are right, and yet, in the end, the jury has to decide that they believe one more than the other. However, here the jury may be asked first to decide which side is telling the truth and to evaluate credibility before even looking at the elements of the cause of action. REPRESENTATIVE CROFT said that is a good point about [the judgment] applying only to the claims. However, the bill says "enter judgment" instead of "establish the issue," for example. As he reads it, it is a full judgment regardless of defenses or causation or other issues. Number 1911 REPRESENTATIVE GREEN posed a situation involving a misdemeanor and lying in court. MS. COX clarified that this only applies to civil liability. REPRESENTATIVE GREEN asked whether lying in court isn't a felony, however. MS. COX agreed that perjury is definitely a crime. REPRESENTATIVE GREEN expressed concern that if both parties accuse each other of lying, one is probably correct. REPRESENTATIVE CROFT pointed out that trials are made of factual disagreements. It could be that one side is lying and one side is telling the truth. However, it could be that both sides just disagree and one is mistaken. What one really wants is for the jury to decide who was at fault. He suggested that the bill, however, would result in overlaid allegations and "must finds." He expressed concern about changing the focus into a search for perjury. Number 2096 REPRESENTATIVE GREEN asked, in essence, what happens if someone has made a statement but then becomes uncertain as to its veracity. MS. COX deferred to Representative Croft. REPRESENTATIVE CROFT said paragraph (a)(2) essentially [replaces] Rule 11, which is used to sanction an attorney. Noting that Mr. Lessmeier had said [at the previous hearing] that he didn't recall having seen Rule 11 used in 20 years, Representative Croft pointed out that he himself, in two years in practice, had seen two potential issues regarding it; therefore, in his limited experience, there are some teeth to it. REPRESENTATIVE CROFT posed a situation where an attorney drafts a complaint without checking out all the facts, and it turns out that the allegations made without reasonable inquiry were correct. As it is now, the attorney could be sanctioned. Under this bill, however, there could be a whole new lawsuit, even though the allegations turned out to be correct. Representative Croft suggested this would at least double the amount of litigation and perhaps the person who was factually in the wrong would get the benefit. Number 2240 ROBERT A. MINTZ, Attorney at Law, testified via teleconference from Anchorage. He responded to Representative Croft's last scenario by saying the action could not be brought under subsection (a) for failure to make a reasonable inquiry unless, after the carelessly drafted complaint were filed, the offended party wrote a letter saying that the allegations weren't correct. If those allegations were not well founded, there would be an opportunity to change them; if they were checked and found to be true, the attorney would be insulated from liability. REPRESENTATIVE CROFT asked, "Where?" He pointed out that on page 1, line 11, it says "sign a civil pleading before making reasonable inquiry"; he would have violated (a)(2), even though the allegations turned out to be true. This doesn't say anything about the ultimate disposition of the case that he could find. MR. MINTZ referred to paragraph (f)(2) and said one cannot bring an action under subsection (a) unless a notice of the specific conduct alleged to violate (a) is served under the rules of civil procedure. Using Representative Croft's example, if he didn't receive a notice under (f), he would be okay; however, if he got a letter in the mail under (f) that says the allegations are untrue and there wasn't reasonable inquiry, then he would be at risk. REPRESENTATIVE CROFT said that in the first instance, the challenged conduct wouldn't be corrected because there is no correction to be made. MR. MINTZ said the point is well taken. The intent of (a)(2) is to require attorneys to actually do up-front research and to determine whether there is a basis for bringing people to court. REPRESENTATIVE CROFT suggested under his scenario, however, a new lawsuit could develop, even if he proceeded and won. MR. MINTZ agreed, but said that would only be if the failure to do so were brought to his attention and ignored. He restated his belief that if the allegations were checked out and the attorney decided to go forward, under (f) the attorney would be insulated. REPRESENTATIVE CROFT disagreed that it accurately says that, however, and mentioned sanctions. TAPE 00-24, SIDE B Number 0001 REPRESENTATIVE CROFT suggested that remedies under Rule 11 and the bill are similar except that they are in two different legal contexts. MR. MINTZ agreed, saying that in one legal context, the judge had discretion, whereas in the other, the person is entitled to be made whole through compensatory and appropriate punitive damages. He emphasized that this only applies in civil suits. He also pointed out that in order for this to be triggered, it requires more than a simple disagreement or a mistake. Rather, it requires an intentional act, an intentional lie, or a knowing misstatement of fac;, or it requires somebody to not correct a mistake after it has been brought to that person's attention. It is not something that happens easily or by mistake. Number 0096 REPRESENTATIVE MURKOWSKI referred to the 21 days after a person has been served notice. She recalled that if she had been served a notice by another attorney or a pro se litigant saying that she hadn't "done her homework," she would be obligated to notify her own malpractice carrier; it isn't just whether there is a claim out there, but it is the probability of the claim that the carrier must be notified about. She asked how this would affect an attorney's malpractice coverage and whether there have been any discussions with ELPS [Educational Leadership and Policy Studies] about what this legislation would do regarding malpractice carriers in the state. MR. MINTZ answered that there has been no discussion with the malpractice insurers that he is aware of. REPRESENTATIVE MURKOWSKI asked Mr. Mintz whether he agrees that it might be problematic. MR. MINTZ said he didn't know how they would respond to it. Number 0172 REPRESENTATIVE GREEN referred to his own concept of filing a felony [for perjury] in a civil action and to the indication by Mr. Mintz that that wouldn't be appropriate. He asked whether there is immunity in a civil action against criminal prosecution if some fact comes out during the former. MR. MINTZ clarified that all he was saying is that SSHB 42 doesn't impose any consequences or provide the basis for any claims in the context of a criminal case. Whatever the law is, with regard to the criminal law implications of something said in the context of a civil trial, isn't changed by this bill. REPRESENTATIVE GREEN restated concern that something could come out of the "he said/she said" among attorneys which wouldn't otherwise come out in the normal course of things; the way things are now, that dialogue back and forth probably wouldn't occur. He said this [bill] doesn't address that, but it doesn't prevent it. MR. MINTZ said he doesn't think it affects it. Number 0282 REPRESENTATIVE ROKEBERG asked Mr. Mintz whether he had seen the fiscal note from the Department [of Law]. MR. MINTZ said he hadn't had a chance to look at it. His feeling is that there are a couple of ways to look at it. Philosophically, the standard of truth ought to apply to everybody. Practically, however, the largest evil that he had contemplated when he first became involved in being an advocate of this type of legislation is from cases where civil litigants bulk up complaints with specious charges in order to give them more settlement value. Where to draw the line, in terms of having it apply to cases, is really a judgment call, he added. REPRESENTATIVE ROKEBERG requested that Mr. Mintz be provided a copy of the fiscal note so that he could make recommendations. Number 0354 REPRESENTATIVE CROFT asked Mr. Mintz why subsection (g) exempts divorce and issues involving children - child custody, support and visitation. MR. MINTZ replied that it was a compromise reached with the Department of Law in the version of this bill that was introduced about three years ago. Number 0380 CHAIRMAN KOTT asked whether there were additional testifiers. He closed the public testimony, then announced that SSHB 42 would be held over. HB 385 - ISSUANCE OF SEARCH WARRANTS CHAIRMAN KOTT announced that the next item of business would be HOUSE BILL NO. 385, "An Act relating to search warrants." [At the previous hearing, the sponsor's representative had explained the bill and answered questions.] Chairman Kott called an at- ease at 3:10 p.m., then called the meeting back to order at 3:16 p.m. Number 0432 DAVID HUDSON, Lieutenant, Division of Alaska State Troopers, Department of Public Safety (DPS), came forward. He informed members that the DPS supports HB 385 primarily because the change from "crime" to "offense" allows the opportunity to seek search warrants from the court for various violations. Some primary issues that the DPS is looking at are in Title 16, regarding certain commercial fishing penalties. In addition, some regulatory crimes are violations; this will allow search warrants for those, whether they involve the Department of Labor and Workforce Development, the Department of Environment Conservation (DEC) or other entities. Number 0477 REPRESENTATIVE CROFT requested an explanation of the situations regarding fishing violations that compel a search warrant. LIEUTENANT HUDSON explained that the commercial fishing violations have a very high standard of dollar amounts. The state may seize thousands of dollars' worth of fish or crab. The DPS already gets search warrants for those, as it has in the past and will continue to do. The bill, however, guarantees that continuity. REPRESENTATIVE CROFT asked, "You're afraid, if you didn't do it with a search warrant, that it'd be thrown out?" LIEUTENANT HUDSON agreed that is a potential issue. He pointed out, however, that the nice thing about a search warrant, in terms of law enforcement, is the ability to have oversight by a magistrate or a judge. Police officers try to do their best under the circumstances at the scene, but stepping back and allowing overview by an uninterested third party allows them to make sure they are doing the right thing. It also gives them credibility in court later, in case it is needed. Number 0539 REPRESENTATIVE MURKOWSKI referred to testimony at the previous hearing indicating law enforcement personnel seeking a search warrant for underage drinking, for example, may indicate they are looking for other things that would elevate it from "violation" status. She asked whether the DPS has to do that regarding fishing, for instance. LIEUTENANT HUDSON acknowledged that he had never actually applied for a search warrant under the fish and wildlife procedure statutes. However, to his understanding, those been successfully obtained in the past; they involve a potential jail term and fines that range from a maximum of $3,000 on a first offense to $9,000 on a third offense. Without clarification under HB 385, this issue might be raised in the future, he added, although it never has been raised in the past. Number 0590 REPRESENTATIVE GREEN mentioned concern, expressed by himself and others at the previous hearing, that going to "offense" rather than "crime" may open up other areas where search warrants could be issued, far beyond what is desired. Noting that the sponsor's representative had been asked to provide the committee a list of offenses, he asked Lieutenant Hudson whether he sees any possibility of DPS "going in" on the myriad of offenses that might fall within the purview of some sort of warrant. LIEUTENANT HUDSON replied that he doesn't see that as an issue because, first, there isn't a tremendous change that will occur here. When reviewing this, he indicated, the DPS had tried to determine what offenses might be affected, but he cannot provide an exhaustive list and isn't sure anyone could. He suggested these will be rare. The idea behind this, and what benefits the DPS, is the opportunity if they need it. He believes Alaskans are still protected, maybe even more so because of the third- party oversight and determination of whether there is enough probable cause to move forward. Returning to the inability to provide a list, he noted that there are regulations that other agencies might use, need or try to get information on; furthermore, those often change, and it would require legislative time to try to add to, or delete from, the list. Number 0688 REPRESENTATIVE GREEN asked what would happen if a warrant were obtained, for example, after a young person below smoking age were seen going into a house with a carton of cigarettes, and then the law enforcement officer saw, in the house, "grow lights" and marijuana plants. He asked whether this opens such a door that sight is lost of the real reason for search warrants. LIEUTENANT HUDSON characterized that as a "fishing expedition," where one method is utilized while expecting to possibly find something else. He would be remiss to say that there have never been abuses of the system, he said. However, he believes that common sense would dictate that it wouldn't be taken that far. Furthermore, with the opportunity to look at an offense, he indicated his belief that the overall good for the community would override the remote chance of that happening. Number 0795 ANNE CARPENETI, Assistant Attorney General, Legal Services Section-Juneau, Criminal Division, Department of Law, came forward to express support for HB 385. She advised members that one concern after listening to testimony at the previous hearing was the possibility of listing violations for which one could request a search warrant. She believes that would be impractical for a number of reasons. Also expressing concern with the characterization that this may be opening a Pandora's box, she explained: We have been applying for search warrants to neutral judges for a long time for violations, and that's why we do it, so we can have a neutral third party review it, make sure it's reasonable. And this decision by the magistrate in Juneau we think was mistaken, and we are appealing it - actually, we're petitioning the Court of Appeals, and we think we have a pretty good chance of prevailing at that point. But in the meantime, it would be nice to have this clarification in legislation. So we are in support of the bill. CHAIRMAN KOTT asked whether anyone else wished to testify; there was no response. Noting the arrival of Representative Halcro, he invited him to make closing remarks. Number 0857 REPRESENTATIVE ANDREW HALCRO, Alaska State Legislature, sponsor of HB 385, said he would offer anecdotal observations. He told members that unless law enforcement and the Department of Law are given the ability to go after these types of offenses or crimes, society will pay a heavy price. He emphasized that the bill doesn't give additional power to anybody but simply clarifies the law; there was no question about it until the magistrate threw out the "underage drinking." He suggested this legislation is needed in the interest of fulfilling promises to constituents about being tough on crime. The fear is that without the bill, other magistrates may interpret the law in the same way, and the state won't have the needed system of enforcement. REPRESENTATIVE CROFT asked whether there is any crime so petty that police shouldn't be allowed to search a home because of it, and for which a search warrant would be denied if it had been proven that the offense was occurring. Number 1064 REPRESENTATIVE HALCRO said he believes that is a call for the judge. There has never been a problem in the past, and this clarification was never necessary until a couple of months ago. He doesn't believe it opens up any opportunities for abuse that don't already exist. Far more would be lost by not clarifying the intent of the statute. REPRESENTATIVE MURKOWSKI alluded to page 1, line 4. She pointed out that it says a search warrant "may" be issued if the judicial officer reasonably believes the following .... It doesn't appear that there is an obligation. It is discretionary to a judge, who hopefully will use reasonable discretion in issuing these. CHAIRMAN KOTT remarked that he isn't sure how it is done now and whether that discretion currently exists for issuing a search warrant under the probable cause standard. He asked whether there was further testimony, then closed public testimony on HB 385. He also asked whether there was further committee discussion; none was offered. Number 1186 REPRESENTATIVE CROFT made a motion to move HB 385 from the committee with individual recommendations and the attached zero fiscal note. There being no objection, HB 385 was moved from the House Judiciary Standing Committee. HJR 47 - CONST AM: PERMANENT FUND [Discussion also relates to SJR 33, the companion resolution in the Senate.] CHAIRMAN KOTT announced that the final order of business would be HOUSE JOINT RESOLUTION NO. 47, proposing amendments to the Constitution of the State of Alaska relating to the permanent fund and to payments to certain state residents from the permanent fund. He indicated testimony via teleconference would be taken following opening remarks. Number 1260 REPRESENTATIVE GARY DAVIS, Alaska State Legislature, sponsor of HJR 47, came forward to explain the resolution, accompanied by Senator Jerry Mackie, sponsor of companion resolution SJR 33. Representative Davis told members he had submitted this resolution because of the need for discussion on the status of the permanent fund dividend (PFD) and what should be done with that, if anything. REPRESENTATIVE DAVIS noted that in 1976 a constitutional amendment created the permanent fund itself; his research shows that eight current legislators were [in the legislature] at that time. Also interesting to him is that four current legislators were not in the state when the dividend program was established, and he believes that number will grow in future elections. He indicated legislators all have their own understandings about the fund, and current legislators are the ones making the decisions, with day-to-day involvement dealing with the budget situation regarding the services that the state is providing. Therefore, it is an issue that the current legislature must deal with. Number 1427 REPRESENTATIVE DAVIS advised members that since the fund began, its earnings have averaged about 10 percent. Deposits required through the constitutional amendment from the oil royalties have amounted to $6,328,000,000; additional appropriations that the legislature has made into the corpus total $6,750,000,000; inflation-proofing added to the corpus amounts to $5,837,000,000; and the earnings total $21,201,000,000. The total paid in dividends has been $8,626,000,000. That is what has been done with the royalties, Representative Davis asked whether that is what was intended from the constitutional amendment, and he said that is every individual's determination. REPRESENTATIVE DAVIS noted the evolution in people's attitudes over the years regarding the PFD, from "That's nice" at the beginning to "This is my right, and I want my check, and when is it gonna be here, and how much is it?" Representative Davis suggested there is something wrong with that scenario and asked what the future will bring. This legislation certainly offers an option regarding how to handle the dividend. Referring to the September 14 [advisory] vote, he indicated he firmly supported that proposition, which he believes was a great long-range plan, but it had failed for a number of reasons. REPRESENTATIVE DAVIS surmised that there won't be $200-300 million in cuts in the next couple of years, nor will there be taxes passed to the $200-300 million level to reduce the budget gap. He also doubts that there will be spending from the earnings reserve account. The legislature is going to be forced, in about ten years, to either cut the budget a billion dollars in one year or use the dividends. Restating that this needs to be addressed now, he suggested that people didn't see the rush about the balanced budget plan put out the previous year, and that $500 million more would be spent this year because that proposal wasn't enacted. REPRESENTATIVE DAVIS restated that the people had voted "no" on September 14 on a long-range financial plan. He concluded, "If they didn't want a long-range plan, do they want a short-range plan? This is a short-range plan. Let's put it to the voters and see if this is what they want." CHAIRMAN KOTT thanked Representative Davis and invited Senator Mackie to speak. Number 1871 SENATOR JERRY MACKIE, Alaska State Legislature, noted that he and Representative Davis would work together throughout hearings in either body on this proposal. He highlighted what the plan does and some of the feedback from the public. First, this constitutional amendment would allow for a one-time final payment of $25,000 to each Alaska resident who would be eligible as of January 1, 2000 for a dividend. Because a person not already in Alaska by January 1 of this last year wouldn't be eligible, the plan won't attract more people to Alaska. SENATOR MACKIE noted that he would use round numbers. Assuming 590,000 eligible recipients of the PFD next year, which is what the Alaska Permanent Fund Corporation (APFC) has estimated, he said roughly $14 billion would be required to pay a $25,000 distribution to everyone who is eligible. That equates to about 13.8 dividends averaging about $1,800 apiece, in advance. Assuming there is $26-27 billion at the time - depending on realized value, as that fluctuates daily - that would leave about $12 billion, which would continue to be managed by the APFC and would be constitutionally protected from the legislature's being able to spend it. The PFD program would go away after the one- time payment. Only the earnings from the remaining $12 billion would be used for two things: as a first priority, to inflation- proof the fund as has always been done, and second, the remaining revenues would go directly to the general fund to be used for paying for essential state services. Number 2071 SENATOR MACKIE drew attention to a memorandum from Jim Kelly, Director of Communications of the APFC, dated January 18, 2000, in response to Senator Mackie's request for a projection based on $12 billion in terms of what it would earn, how much it would cost to inflation-proof the fund and what would be left for general fund expenditures as new revenues. The body of the memorandum read: You have asked the Alaska Permanent Fund Corporation (APFC) to do a financial projection using certain assumptions which you provided. You asked us to draw down all Fund income and as much principal as necessary in order to pay each Alaskan a $25,000 dividend in 2001. You have also asked us to assume that all Fund income in subsequent years would be used first to inflation-proof Fund principal, and then balance then would be transferred to the General Fund. You asked us to assume that the Fund earned a rate of return of 8%, 10% and 12%. Based on these assumptions, the table below indicates the amount of income in millions of dollars that would be transferred to the General Fund each year beginning in 2002: Year 8% 10% 12% 2002 588 884 1,200 2003 615 923 1,252 2004 642 962 1,304 2005 671 1,004 1,360 2006 699 1,046 1,416 2007 729 1,090 1,474 2008 759 1,132 1,530 2009 788 1,176 1,580 2010 817 1,219 1,646 TOTALS 6,308 9,436 12,762 You have also asked our estimate of per capita dividends for the protection period, based on the status quo. These numbers appear in the following table: 2000 1,888.77 2001 1,900.53 2002 1,877.56 2003 1,772.58 2004 1,695.11 2005 1,768.48 2006 1,828.57 2007 1,894.01 2008 1,962.86 2009 2,034.48 2010 2,108.06 TOTALS 20,731.00 Senator, I should point out that the rates of return you have asked us to assume - 8%, 10% and 12% - are in excess of what the APFC expects to earn given Fund asset allocation and capital market assumptions. In addition, these projections represent only our best estimate of the median case; actual performance will vary with market volatility. PLEASE NOTE THAT THE CORPORATION NEITHER SUPPORTS NOR OPPOSES ANY PROPOSED CHANGES TO THE CURRENT USE OF FUND EARNINGS, EXCEPT AS THEY MAY RELATE TO THE PROPER EXERCISE OF THE TRUSTEES' FIDUCIARY RESPONSIBILITIES AS REQUIRED UNDER THE PRUDENT INVESTOR RULE. SENATOR MACKIE used the 10 percent rate in the middle column as reasonable, surmising that the $884 million returned to the general fund in the first year, after inflation-proofing, would balance the budget. That the amount would continue to go up because left in place is the provision that 25 percent of all the oil revenues would continue to be deposited into the corpus of this fund; in addition, the state would continue to inflation- proof the fund. He believes the growth of the fund and the earnings will give the state the opportunity to keep pace with inflationary costs. He suggested that APFC personnel could speak to the rationale for the PFD projections listed for the status quo [in the second table of the memorandum]. Number 2240 SENATOR MACKIE told members the plan balances the budget and requires a vote of the people to make that decision, and there are no new taxes. He highlighted concerns heard from the public, noting that many like it, many don't, and even more people haven't really understood it and have had questions. The intention was to introduce the plan early, he said, to listen to people and to do research to discover whether concerns are well- founded. SENATOR MACKIE told members that one of the first things heard from the public was a concern about taxes. He said he cannot, at this point, give people a lot of confidence that they won't have to pay taxes like everyone else does when receiving more income, and he personally doesn't have a problem with that. The Alaska Society of Certified Public Accountants has agreed, as a group, to analyze income levels, tax brackets, what types of things people may be able to get tax credits for, and so forth. Senator Mackie indicated that when he and Representative Davis receive that report, they will share it with the legislature. SENATOR MACKIE turned attention to the effects on income-related eligibility for recipients of welfare, Medicaid or low-income housing programs. He reported that in response to a request to the Department of Health and Social Services, Commissioner Perdue and her staff had answered questions and had helped to educate the sponsors about the programs they administer and the possible effects, although the department isn't in a position of advocacy or opposition at this point. He said he would ask the department members present that day to answer any follow-up questions. He noted that he had assumed that a payout like this would have a tremendous effect on a lot of these programs. TAPE 00-25, SIDE A Number 0001 SENATOR MACKIE told members there would be no effect on welfare - the Alaska Temporary Assistance Program (ATAP) - which doesn't use a PFD as criteria to determine eligibility. Nor would there be effects for the most part on family Medicaid or Denali KidCare, with some exceptions dealing with institutional categories, some 19- and 20-year-olds, "and other things which I don't really want to speculate about." Nor would there be any effect on the adult public assistance program, which is generally for elderly and disabled people, because the PFD is not used as a criteria to determine eligibility. SENATOR MACKIE pointed out that there would be effects on two programs: food stamps and supplemental security income (SSI); the PFD is calculated for eligibility requirements for those programs. However, the statutes and a federal waiver allow for the current hold-harmless period of up to four months. He stated, "After four months, I guess, if they've spent their money and they don't have the income, they would continue to qualify for the program. If they've invested it and they have that asset, then they probably wouldn't be eligible for that program." Senator Mackie indicated people don't want to be poor or to be on these programs. He believes that most would like to move on with their lives, and this [$25,000] could create a significant opportunity for them to do so. Number 0182 SENATOR MACKIE reported that current tenants of low-income housing would not be affected by the $25,000 distribution because federal requirements allow for exempting a one-time payment of cash. However, there would be future low-income people who may not qualify if they still had this money. As for education and child care programs, the $25,000 distribution does not affect the following low-income programs: day care assistance, the USDA (United States Department of Agriculture) child and adult care food program, school meals or the Headstart Program. SENATOR MACKIE said Commissioner Perdue has suggested that the number one reason why people are on welfare is because of being owed back child support. Currently, there are 11,000 cases involving back child support; PFDs are garnished for that purpose. It is estimated that garnishing $25,000 PFDs from so- called dead-beat dads, for the most part, would collect $103 million in back child support for children in this state. It would eliminate 7,500 of the 11,000 cases involving $25,000 are less, and it would make a serious dent in the 3,500 cases involving more than $25,000. SENATOR MACKIE told members that similarly, currently there are 10,100 defaulted student loans totaling about $80.9 million owed to the State of Alaska; 8,600 of those are for less than $10,000. It is estimated that garnishment of PFDs would close 9,000 accounts and return $67 million to the state, making the student loan program fairly healthy. Furthermore, right now 3,500 felons will not receive a PFD according to the statutes; garnishing those would collect about $87.5 million, and those funds, by statute, are allocated to domestic violence and sexual abuse programs, Violent Crimes Compensation Board programs, and the Department of Corrections for prisoner rehabilitation programs and the costs of incarceration. Number 0485 SENATOR MACKIE returned to the issue of taxes, saying he doesn't believe they will come up with something magic so that people can avoid paying taxes. However, he isn't afraid to pay income taxes on the $25,000 because if he "front loads" that into a mutual fund and it earns compounded interest over 15 years, it will be worth a lot more than PFDs received over a 15-year period, "providing you can trust that the legislature's even going to give it to you." SENATOR MACKIE said when the permanent fund was created, less than half the people now in the state were here, and there was no mention of a dividend program. It was only six or seven years later that the legislature decided, at the height of oil revenues, to share some of that with the public. Although it has been a great program for people, however, he suggests that the intent of the permanent fund was to provide revenues to the state when oil production and revenues declined. "And we have been ... in that situation for many years now, but we have not had the political will to do anything with the permanent fund about it," he stated, emphasizing that there is now a billion-dollar problem. SENATOR MACKIE referred to Representative Davis's conjecture that there wouldn't be any more PFDs in ten years and suggested that it would be more like four years. He told members that when [the legislature] has spent the constitutional budget reserve fund and is faced with a constitutional mandate to balance the budget, the only pot of money available will be the earnings from the permanent fund, which pay for the dividend program. Legislators will have to spend those permanent fund earnings to balance the budget. SENATOR MACKIE said that even a full-blown income tax, which he doesn't support, would only generates about $300 million, for a "$700 million program." A 5 percent statewide sales tax would generate another $300 million, but he doesn't like that idea because all it does is "suck money out of the communities at a time we're trying to put money back into those communities." He said that should be a local option for the communities to raise funds at a local level, with their own residents, and keep it in their communities for services to their citizens. Number 0688 SENATOR MACKIE suggested the public needs to recognize that it is better to have 15 years' worth of dividends, in advance, than to trust the legislature to provide future PFDs after cutting the budget by a billion dollars. He stated, "It's in people's best interest to take the money now and then receive the benefits of us being able to, as a state, provide decent essential services to our public, and educate our kids, and fix our buildings and our deferred maintenance problems with the university and other kinds of things that we are never [going to] get to do." SENATOR MACKIE again turned attention to the September 14 vote, saying he had supported that proposal and would do so again. He believes the public didn't understand it because what it did wasn't clearly articulated. As a consequence of the "no" vote on that, Senator Mackie told members, he had said, "Okay, complicated is not good. Simple is good. You get $25,000. You don't get another dividend. We balance our budget. We get rid of the politics of the permanent fund around here. And we move on with our state, and we don't have to tax everybody to do it." SENATOR MACKIE noted that polls two days after he introduced the plan were taken before he was able to respond to people and explain things. He surmised that people who have unaddressed concerns will say "no" when asked in a survey, "Yes or no, do you support the plan?" However, he believes that if people were to go to a ballot box and have an opportunity for $25,000 - and if they don't trust that the legislature will allow PFDs to continue - the people would take the money. He also suggested that polling [results] now would be different, and he stated the desire to try to continue to educate the public and to let them decide. Number 0885 CHAIRMAN KOTT referred to Section 1 of HJR 47, which says at least 25 percent of the royalties, rentals and other proceeds from minerals would be placed into a permanent fund. He asked whether continuing to use the name "permanent fund" opens a Pandora's box like when the existing fund was created in the mid- '70s. He asked what the rationale is. REPRESENTATIVE DAVIS indicated having it in the constitution is as permanent as it can be because it takes a vote of the people to change that. CHAIRMAN KOTT asked why not call it a "rainy day fund," for example. He suggested that people in other states hearing about the $25,000 could still recognize that there is a permanent fund and misconstrue it. Number 0991 SENATOR MACKIE explained that having 25 percent of the oil revenues going into the permanent fund is the way it is currently done, which wouldn't change. He said he didn't want to change anything in terms of statutes. Except that the dividend division would go away, he didn't want to change the APFC, which would continue to exist with a board a trustees and would be managed the same; however, the APFC would have $12 billion to manage instead of $26 billion, and there wouldn't be a dividend program any longer. It would still be the permanent fund, and the 25 percent royalties, as well as the inflation-proofing money, would allow that to grow. Senator Mackie pointed out that the last time the permanent fund contained $12 billion was in 1992, not that long ago. REPRESENTATIVE DAVIS added that he doesn't think anybody is cemented to the term "permanent fund." It could be "constitutional fund," for example. CHAIRMAN KOTT said he understands now that the rationale has been explained. He indicated there is no need to uproot what has already been done and to have the APFC change its stationery and business cards and whatever else it would require. He also indicated a change may present a problem for "our true investors." SENATOR MACKIE specified that this plan doesn't require any statutory changes or name changes, just putting it on the ballot and letting people vote. Part of the thinking was to not have it make statutory changes or be complicated, he indicated. Number 1094 REPRESENTATIVE GREEN mentioned conjecture that a lot of people will grab the $25,000 and head south, which he thinks is great. He also referred to concern that some who stay may blow the money somehow and then complain that there are no more PFDs. He said one big question, however, is whether this will have a tremendous tendency to overheat the economy unless people spend it outside of Alaska or use it wisely, which probably half of the people won't do. SENATOR MACKIE said that is a good question, and he doesn't have a crystal ball nor will claim to be an expert on the economy. He stated, "There's been a lot of discussion about how other people might spend their money, and very little about the fact that this is the only plan that balances our budget without taxes." He has received hundreds of e-mails, telephone calls, faxes and letters, he said, some good, some bad, and some with questions. He has heard from people with three children who rent their home and work from paycheck to paycheck, for example, who say they would pool their money for a first family home. It also may be an opportunity to put money for three children into an education account, because by the time the children are 18 years old, the money would have grown to $100,000. SENATOR MACKIE said he doesn't see how anything is going to get overheated. Although certainly there will be people who others don't believe spent their money wisely, this is a free country, and he trusts that people will do with their money what they believe is in the best interests of themselves and their families. However, it would be incredibly naive to assume that there will be no negative effects, although it is hard to put a finger on those. He concluded that many people will invest their money, and there are great opportunities out there with mutual funds, for example. He restated the desire to leave it up to the people and whatever happens, happens. REPRESENTATIVE DAVIS commented that there may be some overheated mutual funds around the country. Number 1303 REPRESENTATIVE GREEN asked whether there would be, in the plan, a way to try to educate the people who have never invested before. Surmising that there would be scam artists coming up and trying to "bleed" people, he asked whether there would be some way to enlighten residents. REPRESENTATIVE DAVIS answered that he had thought about that a lot, and had wanted to establish an Alaska trust fund, into which the money automatically would go, and then let people draw it out if they wanted to; however, that is unconstitutional, to his understanding. He had also thought about the possibility of putting out a request for proposals (RFP) for investment firms to be "the investment firm as the prime consultant to Alaskans when this distribution happened." He concluded, however: How much babysitting do you want to do to the citizens? If they want to invest it, they can invest it. If they want to invest it ... with a shyster, who are we to say that the guy's even a shyster? So ... I think it's just best left up to the individual .... If they piddle it away, they piddle it away. SENATOR MACKIE added, "We don't tell people how to spend their dividends right now." He then stated: We're trying to keep it real simple and let the people vote on this and decide, and also let the people do what they're going to do with the money. And other than that, I think we start treading into a whole bunch of areas that perhaps we don't have any business being in. But, you know, you pointed out ... some real concerns that ... I guess people are going to have to deal with individually. And I don't know how to respond to some of those, ... on how they might spend their money or shysters or anything else. Number 1442 CHAIRMAN KOTT returned to a point mentioned by Representative Davis, that he had looked into establishing some kind of Alaskan trust fund but had found it to be unconstitutional. He asked whether that is from a state standpoint or a federal standpoint. And if it were unconstitutional from a state standpoint, why couldn't that language be included in this constitutional amendment, to be part of the program? REPRESENTATIVE DAVIS responded that it is from a federal standpoint, as he interprets what he was told. He said perhaps even in the discussion over the dividend itself, there was debate on that. A federal law had opened an opportunity for a short period of time to do that, but that window is closed because that federal law has "sunsetted." He agreed it is a good avenue to discuss if there is an opportunity, but his understanding is that federal law disallows it. SENATOR MACKIE pointed out that the estimated 193,000 Alaskan residents under 18 years of age are probably who they are talking about. A number of people have suggested to him, because they are concerned about children who may never see their money because their parents squander it, for example, that the state establish a trust and hold [the money] in trust for the children. That is something he is willing to consider, depending on the feeling of other legislators and if that is what it takes, through this process, for everyone to come together. However, his reason for not putting it in the plan goes back to his earlier statements about trying to tell families how to manage their affairs or finances or how to raise their children or invest; he has a hard time with that. That area needs some discussion, and they need to involve the public and get their response to some of that. SENATOR MACKIE said furthermore, from a purely economic standpoint, he would rather take his young son's money and invest it for him in an educational mutual fund, because it will be worth so much more when he is 18 years old, than to leave it in a state trust at 3 or 4 or 5 percent interest. There are so many safe, conservative investment mutual fund opportunities out there that yield far greater returns that he would hate to take away that option from parents who will be responsible with their children's money. "That's a tough one," he commented, adding he wants the public to think about what is important and to let legislators know. Number 1604 REPRESENTATIVE GREEN asked about the possibility of having an optional trust for children, even for payouts over a period of years; he suggested perhaps that wouldn't be considered unconstitutional. Noting that the 5 percent [interest] mentioned by Senator Mackie is very modest, he said that if it were 7.2 percent under current economics, a child could almost quadruple the money within ten years on a very conservative investment. REPRESENTATIVE DAVIS pointed out even if it is established in a trust, if this passes, as soon as the state is contractually obligated to distribute $25,000 to a person it would be taxable, to his understanding. SENATOR MACKIE added that it is called constructive receipt of income. Once a person has the benefit of [the money] and could take it all out if so desired, the person has to pay the taxes up-front. That is what the certified public accountants (CPAs) group will provide information on, which is why he hadn't gone into details about the tax consequences. REPRESENTATIVE DAVIS suggested other laws and tax codes might tell a different story, but the foregoing was the initial response they had received. Number 1734 REPRESENTATIVE CROFT suggested the state trust idea is the one that was unconstitutional; he mentioned efforts ten years ago or so to close the pool of PFD recipients. However, nothing prohibits what Representative Green had mentioned, where the form just asks whether a person wants the money in cash or held in trust at bank, for example, or says that for a minor the money can - or will - be held in trust, and asks where. SENATOR MACKIE surmised that there may not be a problem regarding constructive receipt of income if the wording is that the money for all minors would be held in trust. He said those are some of the questions about which information is to be provided. REPRESENTATIVE CROFT said he wouldn't want the state keep the money, however, but suggested a choice of its being disbursed either in trust for a person somewhere or in the form of a check. He agreed that the state wouldn't provide as good an income. He said there might be ways to do tax planning on that election. SENATOR MACKIE said he would be happy to look at that. REPRESENTATIVE DAVIS clarified his earlier statement. He said "illegal under federal law" would probably be more correct than "unconstitutional," from what he was told. REPRESENTATIVE CROFT said he would like to see what Representative Davis had on that. SENATOR MACKIE commented that that is one reason for trying to keep it really simple. "Give everybody a check and let them deal with their own business," he restated. Number 1848 SENATOR MACKIE advised the committee: There's a serious tax question right now, Mr. Chairman, that we didn't talk about, with the IRS [Internal Revenue Service], because the reason we haven't been taxed with the permanent fund is because we've said it's going to be used for a public purpose, not just for personal dividends. So the IRS is waiting and waiting till we're actually going to use it for a public purpose. And I think they are poised to come and nail us big time, right now, because we're not using it for a public purpose. We've never spent a dollar of it. ... I had two choices. One is try to do a plan that gets us out of that situation, along with some of the other things, or participate in the 25 percent bonus for turning in tax [defrauders]. And a 25 percent bonus on $5 billion is substantial, but I decided to go this route instead. Number 1888 CHAIRMAN KOTT thanked the sponsors and announced that he would turn to testifiers on teleconference. He called upon Mr. Noah Bagwill but was told that the Delta Junction Legislative Information Office (LIO) was no longer online. The then called upon Ms. Kathleen Ballenger. Number 1091 KATHLEEN BALLENGER testified via teleconference from Kodiak in support of HJR 47. As a Kodiak resident for more than 32 years, she has seen the state in prosperous times and lean ones; the latter appears to be the case now. She said it is ludicrous that the state has an account with billions of dollars and yet there are problems balancing the state budget. She believes it is time to take a long, hard look at what would be best for the State of Alaska, not just for the individuals who call Alaska home. She said she feels that the proposal made by Senator Mackie, now echoed by Representative Davis, makes total sense. Ms. Ballenger stated: By passing this resolution, we would once again have the opportunity to seriously look at the dilemma we are in and ask the voters to make a choice. I think we need to really concentrate on the state's deficit and not some of the lame concerns I have heard expressed. The comments I have heard from people who are against this proposal range from "I would take the money if the state would pay the income taxes for me" to "It would glut the economy" to "It would shortchange future generations." There is also the notion that some would take the money and leave Alaska. I just don't accept any of these arguments. The first one, about wanting the state to pay the federal income tax, just rings with the title of one of the new TV shows entitled "Greed," and the shortchanging of those unborn assumes that everyone who gets the current PFD for a child holds it for that child. The state, thank goodness, cannot and should not be able to mandate what we do or do not do with our PFD. So whether one wants to take the money and run or use it to pay bills, or for a down payment on part of the American dream, or save it, that would be the individual's choice. The big payout could help many with major purchases, to pay off debts and/or send their child to college. The options are endless. ... If we were to pull ourselves out of this economic mess and inflation-proof the funding of state services, then we could really hold our elected officials to task from this day forward. Many of the financial quagmires we are in now are because of the ups and downs we have had with the state's prosperity and lack thereof. I don't want to see us continue the hassle over funding for the schools and local communities. With this plan, the state could even make a permanent resolution for the PCE [power cost equalization] program, so that everyone in Alaska can be assured they will have affordable electric rates. It is my belief that even those who say they are against the $25,000 distribution and ultimate elimination of the fund might, in fact, vote differently behind a closed curtain. I'm urging that you pass this resolution and give all Alaskan residents that opportunity. Thank you, Representative Davis and Senator Mackie, for introducing this proposal to the legislature. At least everyone is now openly talking about the financial problems that exist. I certainly hope a "resolve" can be found. CHAIRMAN KOTT thanked Ms. Ballenger and called upon Mr. Wayne Weihing in Ketchikan; however, he was informed that all of the LIOs had ended the teleconference. [The people listed above are the only ones who had signed up to actually testify.] Number 2121 REPRESENTATIVE GREEN asked whether an incarcerated person getting out this year might have grounds to litigate because the cutoff date was arbitrary. SENATOR MACKIE requested that Representative Green write that out as a question so he could request a legal opinion. He said he would hate to speculate. However, his understanding is that a lot of those people won't even file for a PFD because they cannot receive one anyway; it goes to the state. "So we file them for them and garnish it and pay off some of the things that I was talking about," he added. He restated that he would find out. REPRESENTATIVE GREEN suggested the amount may be immaterial. REPRESENTATIVE DAVIS voiced his understanding that currently the state takes 100 percent of a PFD for a garnishment. SENATOR MACKIE agreed, saying there is a pecking order. REPRESENTATIVE DAVIS asked who pays the taxes on it if the state takes 100 percent of $25,000. He suggested that should be looked at, surmising that the departments would have the answers. SENATOR MACKIE offered to follow up on that too. REPRESENTATIVE GREEN and CHAIRMAN KOTT said the state doesn't pay federal taxes. REPRESENTATIVE DAVIS replied that they are taking the individual's money, though. REPRESENTATIVE GREEN pointed out that it comes back to the state, however. SENATOR MACKIE suggested that someone who is delinquent on child support payments is probably not paying federal taxes either. Number 2237 REPRESENTATIVE GREEN, alluding to stock market gains over the past few years, asked, in essence, whether severing the fund poses any risk of its not being able to earn what it has previously, if that positive trend doesn't continue. SENATOR MACKIE agreed it is possible that if the market went down over the next five years, the permanent fund wouldn't be worth $26 billion anymore. He said there is always a time to buy and a time to sell, and maybe right now is a good time to cash it out. Number 2315 CHAIRMAN KOTT asked when the payouts would occur [under the plan] and what types of conditions there would be to cash out some of the investments of the fund. He further asked what effect that would have on the state's bond rating, if any. SENATOR MACKIE answered that he doesn't know about the bond rating but would discuss the intention with the plan. First, nothing would be known until the voters of Alaska approve or disapprove it in November of this year. From that point, the APFC would have almost a year because the dividends come out in October. Meantime, the normal process wouldn't be changed, including the PFD application process. The $25,000 would take the place of the normal PFD that a person would have received in October of next year anyway. In terms of what is done legislatively or statutorily or regarding the public's application criteria for eligibility for a PFD, none of that would change. SENATOR MACKIE agreed that the APFC, however, would need a plan. Should this pass the legislature, that would put the APFC on notice that the issue is going on the ballot. Senator Mackie explained that the earnings for that year would be used first, towards the $25,000, then the earnings reserve would be used; he isn't sure how much is in the earnings reserve now but it is "pretty huge." Then whatever principal was required would be used, thus requiring a constitutional amendment to be able to satisfy the $25,000 payouts. That would leave whatever balance of principal and value of the fund remained, which the sponsors estimate at $12 billion, although it could be higher or lower. A new management plan on how to manage that money would take place. Number 2411 REPRESENTATIVE GREEN said there is a restriction on the [APFC] board regarding how they can mix the portfolio. Assuming this gets through the legislature, he suggested there may be a need to look at that and to get expert advice regarding whether to maintain that kind of portfolio mix or modify it. "It could have an effect on how they divest ... enough to make out the $25,000 each," he added. SENATOR MACKIE responded that the asset allocation mix has always been subject to discussion by the legislature. He doesn't want to change anything because [the APFC] has done a good job with the permanent fund; he expects that would continue unless there were an overriding reason why they asked for, and were granted from the legislature, a change to that mix. That is a separate issue from this plan. Senator Mackie closed by saying this is only plan on the table that balances the budget, it gives the people an opportunity to make the decision, and it offers some predictable future for the state and the services it provides. He reiterated the risk that, in four or five years when savings are gone, the state will have to spend the people's PFDs to pay for essential services. [HJR 47 was held over.] TAPE 00-25, SIDE B Number 0001 CHAIRMAN KOTT announced that the House Judiciary Standing Committee was recessed at 4:40 p.m.