LONG RANGE FINANCIAL PLANNING COMMISSION September 30, 1995 9:00 a.m. Legislative Information Office Anchorage, Alaska TAPE 1, SIDE A BRIAN ROGERS, CHAIRMAN: ....depends on what we try to do between now and 11:00. We've got four people lined up to speak here and then I'd like us to move to the issue of do we present one plan or two and if we know -- if the answer to that is two plans, I think we know what they are and we need to work on both. If it's one, we would need to vote on which -- whether to take the endowment or the SB 51 type approach. But before we get to that issue, I have Annalee, Lee, Pat and Bruce lined up. Annalee is finished. ANNALEE MCCONNELL: (Indisc.) 45 minutes.... MARY NORDALE: Who's lined up to speak? CHAIRMAN ROGERS: I've got Annalee, Lee, Pat and Bruce. MS. NORDALE: No, no, I mean, public testimony. CHAIRMAN ROGERS: Public testimony -- we've got one person signed up so -- Jerome Komisar. And at 11 o'clock we've proceed to public testimony, for as long as that takes. Annalee. MS. MCCONNELL: Three quick things. One is under the endowment plan, ANWR bonus payments or any -- any lump sum kinds of payments would be going where, as you see it now? CHAIRMAN ROGERS: Under -- under -- as it's written now, an ANWR bonus - 50 percent would go in the permanent fund and 50 percent would be available.... MS. NORDALE: To the general. CHAIRMAN ROGERS: To the general fund. The legislature could choose then, to deposit more if they wish. I would like to go with a -- personally -- with a situation like we have now where the Constitution says at least 25 and legislation says 50. I would like to have the Constitution say 50 and legislation say 100 or 75, but give the legislature some choice to address -- pent up capital demand or something else -- if there were such a bonus. Gas line revenues from production - 50 percent will go in the fund; from property taxes it would go to the general fund. MS. MCCONNELL: Okay. And is there no one -- on the gasline, there's no sort of one time type thing equivalent to a bonus payment from ANWR? CHAIRMAN ROGERS: No. MS. MCCONNELL: I kind of like the approach of in any year when we're getting something that's above and beyond the typical royalty kind of flow, to have at least the encouragement through statute to do more. I agree on that. The other thing is, I think it would be good to put into the reserves aspect some repayment mechanism -- I think that at least the carry forward from the undesignated general fund should go if the reserves fall below a certain level, so we maintain a perhaps equivalent to next year's estimate. That we say that -- that if it falls below next year's estimated endowment payment or next year's estimated typical oil revenues or something like that, that we have a provision for them to be paid back. The third thing is I think.... MS. NORDALE: What would you pay back? MS. MCCONNELL: Carry forward. MS. NORDALE: From? MS. MCCONNELL: ....general fund carry forward -- any surplus year end balances. I would get out of all the other stuff that (indisc.) up the CBR or the repayment provision. But that I think would address your concern about the reserves. MS. NORDALE: Somewhat. MS. MCCONNELL: Somewhat, ya. I don't mean that it addresses it fully, but it -- it (indisc.) deal with an aspect of your concern there. And the last thing is, I think it's important that people have the sense that this plan is achievable within a pretty short time frame and so I would prefer to see if we could bring this up to balance in the year 2000. I think it does a couple of things; one, psychologically I think there's sort of a clean slate feeling. I think stretching it out over -- over six budget years diminishes some of the immediacy of it and I think -- so I think it would be beneficial -- we're not having to tune up all that much. It could be done perhaps by instead of going from 3.5 and then kicking it up to 4 percent in year 05, you could maybe take it in two steps and go 3.5, 3.75 and then 4 or something like that. We'll make some other adjustment, but I think that would go a long way toward not only helping to sell it, but also keeping the legislature and the Governor's feet to the fire (indisc.). CHAIRMAN ROGERS: Lee. LEE GORSUCH: I want to come back to Mike's point on the issue of the deferred maintenance. This is a huge accumulated problem throughout the state and I think there is a way in which the legislature could put together some kind of bond package that would over a three to four year period of time, clear out the high priority deferred maintenance and simultaneously require that the state budgets bring themselves up to the formula that required maintenance - whatever that particular facility or building might be. But I think that's something that is going to have a down stream impact if we don't address the issue of funds. And it goes into the -- it can stay within our budget limit in terms that belongs sort of a debt service obligation over a spread period of time and it requires the agencies to get themselves to reallocate within their budgets to bring up to essentially where it should be in terms of deferred maintenance percentage. But I think we've got a huge accumulated backlog that needs to be cleared if -- again, this is going to be in that scenario of reality. I don't see it as a budget buster, but I do see it as a very realistic way to get a handle on some downstream impacts by investing in this up-front with the caveat that those budgets have to be adjusted to make sure it doesn't begin to reopen again in the outlying years. CHAIRMAN ROGERS: Pat. MR. GORSUCH: Oh, and I -- one other -- point out of Annalee's. And that is that I do think we do need to pay a little more attention to the repayment for those reserves if they're going to be maintained. And I have some thoughts on the subject, but I would defer that conversation to later. But there's got to be a way to build those reserves back up -- they're just depleted and they're never replenished. PAT POURCHOT: I didn't want to let go by any concerns about the change or proposed change in this from 25 to 50 percent mineral leases and bonuses. I guess I have concerns with that and there lies my concern about flexibility, I think, is that by just flat out reducing the amount of anticipated revenues - general fund revenues - and I recognize that that's part of the front loading permanent fund tool. The current system of statutorily taking new -- 50 percent of new - newer stuff, I think has worked well. I guess I don't see quite the tradeoff for the point of going back in and taking Prudhoe Bay revenues up to the 50 percent and depositing them in the permanent fund. I just don't -- I think that is yet one more -- (indisc.-coughing) thin line between kind of what Sean was mentioning -- I didn't quite understand if Sean wanted more binding on the legislature or if that's kind of a contradictory feeling within the legislature is how much straitjacketing do -- does the body do to itself for one, but I think to me -- I think it crosses the line for me. To go back in and put Prudhoe Bay - increase Prudhoe Bay monies in the permanent fund, I think that that magnitude that you're looking at there - that $250 million range - probably exactly is the kind of - size of the figure that can buy you the flexibility on either increased debt service for GO bonding or periodic capital expenditures. CHAIRMAN ROGERS: Certainly, if we wanted to go to 50 that could be done statutorily instead of constitutionally. MR. POURCHOT: Right. CHAIRMAN ROGERS: Bruce. BRUCE LUDWIG: I had a couple things. I did feel comfortable with the endowment scenario that you passed out today. Maybe even guardedly happy with it. I think it addresses a lot of things that a lot people (indisc.). I think it's the best compromise we've seen so far. Mike had raised some time ago and I'm surprised I can still remember, about the permanent fund dividend and the 700 cap, and we talked about whether to let the legislature increase that (indisc.) discretion, and I can't argue against that for a couple reasons. One is -- and I mean, I'm not that familiar with it -- but I know that there's been a lot of mergers and takeovers where - - where -- for profit motive, where the investors want immediate returns and it's done things - it's had a different effect on other people besides the investors - you know it's - it has a real bad effect on families and workers and stuff like that. (Indisc.- cough) be also seen, at least in Southeast, and I think it's true pretty much throughout the state with Native corporations, where there's been a large outcry on boards to - to put the big dividends back in the people's individual pockets. And I think you're going to hear the same thing with the legislature. And I just -- if it's a fixed payout, whether it's a quarter or 30 percent or whatever it is, and nondiscretionary, it's not subject to that kind of pressure. CHAIRMAN ROGERS: I had earlier intended to move to voting here, but I got three more people signed up -- Georgianna, Judy, Sean. SENATOR GEORGIANNA LINCOLN: Mine will be quick. While I have no argument that we have an unmet need there on deferred maintenance throughout the state, I would argue against putting it up front, because we will individually then place our own priority issue in the scenario; such as village safe water. I don't think anybody can argue the unmet need out there in Alaska when people are still carrying, including myself, honey buckets, slop buckets, outhouses, frozen human waste, human waste that is unfortunately spilled as they're carrying it to the honey bucket hole, lagoon, in the streets -- children having hepatitis B, -- the cost that is then derived to the state, I would argue against putting deferred maintenance on there, because then I'm going to argue for village safe water. CHAIRMAN ROGERS: Judy. JUDY BRADY: First of all I had a question. If we -- does this endowment scenario that you -- the latest one -- does that show 50 percent going into the permanent fund? CHAIRMAN ROGERS: Yes. MS. BRADY: And -- but the top line doesn't change -- the general.... CHAIRMAN ROGERS: What -- look at -- the second line is an offset to the first line. MS. BRADY: Oh, that's what you were (indisc.). I wasn't following what -- what was happening there. Okay, so that's the money that - - okay. So, in some sense, it becomes something of a wash. CHAIRMAN ROGERS: The -- so the -- the existing general fund sources instead of a million, nine, ninety seven and ninety eight, would move to a million, seven fifty three. MS. BRADY: So, actually we'd only be putting in the difference between 244 and 667 into the earnings stream. CHAIRMAN ROGERS: Effectively, yes. MS. BRADY: So, we're only putting like 300 million more into the earnings stream then that first year. CHAIRMAN ROGERS: But it -- it grows because the permanent fund net earnings grow and the PF deposit declines based on production declines in fact it grows more substantially. MS. BRADY: Then I wanted to respond to one comment and it's the comment about being in a straitjacket -- you know, not having very -- very -- very much room to move. As a matter of fact, if your -- if your budget is $2.5 billion and we have no dedicated funds, you have a lot of room to move. The question is - you know - if you want to take that burden on. So, if we -- you're in nobody's straitjacket -- the legislature has total ability to move that $2.5 billion. And it's just easier -- in the way we're set up, it's just easier to add money to each little pot rather than to have to structurally move so you can -- so you can move money to where you need it. But that's what we're trying -- that's what's going to happen one way or the other and we're trying to make it happen in a way that's more -- you know, smoother for everybody. So, that would be my comment there. I like this endowment scenario. The thing I would ask us to take a look at -- and it's not a big deal - - but as we again, as we look at what we're going to use for the... the devil's in the details, and Georgianna has pointed out that the legislature is probably going to change some of this anyway -- but again, and I know we talked about it last night, what kind of general fund (indisc.) increases, fishery tax increases, tourism increases, and other resource taxes -- everything else we could stand up and say, ya this is what everybody says we'll get and we can argue that this other stuff is so general that it may take away from (indisc.). I mean everything else is pretty nailed down and this is kind of like - figure it out for yourself. So, I don't mind leaving it in there, I just -- but I -- if I were gonna -- want us to look real, real legitimate, either tag it the way we've tagged other things or take it out and make it up -- do something else -- just so we look real tight, you know. But I like this a lot. CHAIRMAN ROGERS: Sean. REPRESENTATIVE PARNELL: I guess I want to clarify my earlier comments based on (indisc.). I probably didn't articulate it well enough. I just think if we're going to basically crack the permanent fund open and use its earnings, I think the public is going to want some kind restraint on spending. I think that's what's happening here is that we're sending in a bigger stream of revenues from the permanent fund into the mix plus we've got some pretty significant reserves in the budgeted balance. There's no restraint (indisc.) depending upon faith of the legislature and the Governor. That's -- I mean that's just a fundamental difference in philosophy. It's part of this scenario. So that was -- that kind of goes to the straitjacket issue that if we're going to spend permanent fund monies on general fund spending then there ought to be some mechanism of restraint. And I don't see any built in. And I -- I just -- Mary and I agree, I guess, on concern over a steady stream of revenues coming in, only for different reasons. CHAIRMAN ROGERS: Mike O'Connor. MIKE O'CONNOR: I have just a couple questions on this thing. The 1.7 billion that's been discussed on unrealized gain -- it's no where to be found on this endowment scenario, right? CHAIRMAN ROGERS: That's correct. MR. O'CONNOR: So, none of the potential interest or anything else from that unrealized gain is in this picture? CHAIRMAN ROGERS: No, that's not - that's incorrect. And the reason that's incorrect is that in the upper left-hand corner, we're using permanent fund earnings at 7.94 percent average. That 7.94 -- Brad, correct me if I'm wrong on this -- that 7.94 is the average return on book value. So, if we were to put the 2 billion unrealized gains in, we would have to change that 7.94 percent number to the average return on market value, which would be lower than 7.94 percent, so the earnings number should be the same. The big difference is -- and I think a defect in this version of the spreadsheet is that if we were doing an endowment pay out of 3.5 percent of market, that the permanent fund net earnings line would be slightly higher. Want me to run through it again? MR. O'CONNOR: I think I got it. You're saying you're not.... MR. GORSUCH: The counter argument would be then, how is it we're getting that low a rate of return on our portfolio? CHAIRMAN ROGERS: Is that a low rate of return? MR. GORSUCH: Well, I don't know what it is, we haven't calculated.... If you dropped it down from.... MR. O'CONNOR: 7.94 (indisc.) lower than that, is pretty low. CHAIRMAN ROGERS: Well, you'd be at about 7.4, or something like that I would guess. MR. O'CONNOR: Compared to any other 10 or 15 year average of Standard and Poor's or any other, I'd say it's low. But anyway, that's one question. The other one -- on the revenue -- AHFC -- there was a document, I thought, laying around a long time ago, saying that they could probably provide $70 million worth of revenue annually without affecting their -- is that in or out of this.... CHAIRMAN ROGERS: There was an agreement of 70 million in 96 and 50 million in 97, 98 and 99. This extends that 50 million per year from -- all the way out, basically. So there's.... MR. O'CONNOR: Fifty million dollars a year.... CHAIRMAN ROGERS: Fifty million dollars a year. MR. O'CONNOR: That's in there? CHAIRMAN ROGERS: It's in existing general fund sources.... MR. O'CONNOR: Ya, okay. CHAIRMAN ROGERS: And it's from our base case scenario. If you look at -- if you go back to the interim report, that's where that line shows. UNIDENTIFIED SPEAKER (male): It's not adjusted (indisc.)? CHAIRMAN ROGERS: It's not adjusted - it's 50 million nominal dollars throughout. UNIDENTIFIED SPEAKER (male): (Indisc.) should be adjusted. CHAIRMAN ROGERS: And that would be another revenue source we could add in. UNIDENTIFIED SPEAKER (male): If we wanted to. CHAIRMAN ROGERS: Before we move to public comment, I'd like to get through as many of the -- a couple key decision points. One is whether we present one plan or two. If it's one plan, is it the endowment plan or the composite plan and the issue of whether we want to make a change in the CBR or not. Depending on the answers to the first two, there will be a subsidiary set of decisions that need to made on the big building blocks. But the first issue is do we present one plan that is the commission's recommended plan or do we present two plans - one using a constitutional route and one using a statutory route. And I'd be interested in discussion on the issue of whether it's one or whether it's two that we present in terms of the strategy of going - going to the legislature, the Governor and the public. Judy, and then Mike, and then Bruce. MS. BRADY: I would argue that we present one plan. The legislature -- we have legislators around the table, we have active citizens around the table -- if somebody wants to throw another one in the hoop later on their own, that's fine, but that we do the one plan. CHAIRMAN ROGERS: Mike O'Connor. MR. O'CONNOR: I think before we decide whether one plan or two, we need to know if we can get to one plan. Because if we can't get there, there's no sense making that decision. CHAIRMAN ROGERS: Bruce. MR. LUDWIG: Mike's got a point, but I'm going to assume we can. If we come to one plan, and if it's the constitutional plan, it's going to take everybody -- I mean it's going to take a real focused effort to get that passed by the legislature and by the public. If there's two plans on the table and one of them is statutory and one of them is constitutional, you're going to have a division right off the bat - you're not going to get the two-thirds and three- quarters that's required, anywhere for it. So, if we're -- if we are able to reach an agreement it's going to take compromise on everybody's part and part of that ought to be buying in to selling it, you know, or having the ability to sell it. So, I'd argue for one plan. CHAIRMAN ROGERS: Annalee, Steve, Mary. MS. MCCONNELL: I would prefer one plan, but that we put in there that we believe very strongly that if the constitutional amendment doesn't pass - assuming that we were to pick the endowment approach - that we say that there should be an immediate (indisc.-coughing) to take the SB 51 approach. The alternative would be to shelve both of them, but (indisc.-coughing) as I did yesterday we had SB 51 passed and then it goes away if the constitutional amendment. I think maybe a stronger case could be made flipping it. But I think we should make it clear to everybody that if there isn't the constitutional change to this, that we still need something pretty significant pretty quickly. CHAIRMAN ROGERS: Steve. SENATOR STEVE RIEGER: I lean toward two plans. I think that first because it's -- as pointed out -- it's hard to have a plan that relies on a two-thirds vote of both houses as being the sole thing, and Annalee's kind of touched on that, too. But I think that the side by side presentation of two which really have many common elements shows what you gain and what you lose in the two approaches and there's some educational value in it, too. So, I think it's a practical approach to show what would happen if you have -- what you could do if you had two-thirds vote and what you could do if you don't, and also it would help in the analysis of really being proposed and what the real common threads are. CHAIRMAN ROGERS: Mary. MS. NORDALE: I opt for two plans. One with the endowment scenario and one composite, because I think resting the integrity of this commission's work on a shaky basis of a constitutional amendment is very dangerous in terms of our ability to persuade the legislature and the people to accept substantial cuts in spending and increases in taxes. I think that if we have two approaches, we can persuade everyone that we're dealing with reality. If we do have only one, and it's an endowment approach, my feeling is that we will not persuade either the legislature or the general public, that the time has come to tighten the belt. And, of course, I don't like the endowment scenario, so -- and I particularly don't like this one -- although I do want to compliment you, Brian, for the thoughtfulness and the effort that went into the preparation for this and my concern is primarily with (indisc.). But I don't think we will have accomplished the goal that the people want if we only come in with something that is going to require such a wrench and cannot be -- and cannot ultimately accommodate growth and demand. CHAIRMAN ROGERS: Mike. REPRESENTATIVE MIKE NAVARRE: I think we should try to focus on one plan, but at the same time we're going to have to put in information about the other plan, as long as there -- I would like to see the major component including income tax put in both of them. Also, if we can try to track where the -- what happens and make them as close to equal on the permanent fund. Because otherwise, what you set up is a conflict between the two plans on such things as well, this one increases the dividend and this one doesn't make you pay income taxes. And immediately you -- that becomes the discussion instead of what really should be the focus - - and that is a change in the statute -- well, I like actually either plan because I think it takes us on a road that we need to be headed on. But as long as we can sort of avoid the conflicts that might lead to not doing anything, I guess we should try to focus on one and then putting the information out on both of them, because it's going to get there anyway, because I think we're sort of -- I mean I think both sets are going to get there one way or another anyway. So, if we go with the endowment, people can bring up the composite. If we go with the composite, people can bring up the endowment. CHAIRMAN ROGERS: Georgianna. SENATOR LINCOLN: I would suggest that we go with one. First of all I want to say I appreciate Steve's comparison between the endowment and the composite, and I appreciate the compromise that he shared with the group of both. But I believe that if we go with an endowment -- I like including the public in decision making -- and if we have an endowment that requires a constitutional amendment, it requires us to go out to the public and sell it. And I like that. I want the public to buy into the plan; that that is their plan. Whereas, a statutory change - that's just the legislature saying we are the leaders, we'll do to the people, for the people. And I don't like that approach. So -- and if we give us a choice between a statutory or a constitutional approach, I think that the legislature, personally, will take the easy route and go with the statutory approach. So, I'm for one and I'd like to incorporate some of Steve's concern in the endowment plan and I hope that we can just present one. CHAIRMAN ROGERS: Pat. MR. POURCHOT: Mike gave most of what I was going to say, but it seems like -- I guess what I would like to see is that we do go back and try to make both plans in in close agreement as possible in regard to reserves policies, dividends, use of earnings, little taxes, big taxes, which I think is possible. If they're not, then I think that Mike pointed out the problem -- you'll choose your plan on whether or not you like the tax structure or not, or you like it because it's a higher dividend. I think we want to get away from that. Then, though, when we kind of mesh these big elements, then I would see that then you'd kind of frame the next decision in terms of whether it's a constitutional or statutory approach and it's probably - would be then a majority - the conclusion would be a majority of the commission favors this approach, statutory or constitutional for the following reasons; a minority would prefer statutory way of achieving it for these reasons. CHAIRMAN ROGERS: Lee. MR. GORSUCH: I think we're moving toward one plan with alternative approaches. So -- at least the conversations are, we getting these two different scenarios very close together - and the issue boils down to, in one approach there's a constitutional requirement that does impose some discipline and the other is -- that does not and therefore, has year to year improvisations that have both pros and cons. So, my own sense is that we ought to see if we can't sort of one plan that where we've agreed on the plan, that where we've agreed on the scenarios; two, that we lay out the approaches and that we come down and recommend one approach for the following reasons. And it seems to me that the issue on the endowment plan is an example. It has that one key feature to it which is the constitutional amendment. The rest of it can be debated every year the legislature gets together. But what the endowment does is it does create this sort of sustaining capacity for the offset to oil. The rest of it you fight out every year in terms of cuts, dividends, uses of whatever reserves remain, and so forth. So, I would say see if we can't get together and have one plan, two approaches, with our recommending one approach -- our preferred approach which in our conversations appear to be leading towards the endowment. CHAIRMAN ROGERS: I agree, I think, with the comments of Annalee and Mike and disagree, in part, with Lee. I think that presenting one plan is the best approach in terms of getting the public focused on issues. I think we have to say that if the plan fails, that elements of the plan can be adopted anyway. But, I think that we don't have one plan with two alternative approaches. I think that the -- there are fundamental differences between the endowment and the - the composite that make them -- they have the same groups of elements, but that doesn't make them the same plan. Because of the discipline, the sustainability and the limitation of volatility in the -- that the endowment offers and because of the flexibility and tie to performance -- greater tie to performance that the composite offers. And I think they're different enough in their fundamentals that even though the elements of income and the elements and expenditure are similar, it's not the same plan with two approaches; but two different plans with a group of similar elements. Annalee and then Steve. MS. MCCONNELL: As Mike pointed out we do have right now the dividend amounts being different under the two plans which could in and of itself drive a whole bunch of public conversation. And I guess this is -- part would be a question to Steve, at least for starters, and that is whether there would - whether you think there might be some advantage in adjusting the - the dividend payment amount in the approach that you had originally suggested. So, that we end up with something that's more comparable or we likewise adjust our endowment so that the differences don't fall on that one area because we've pretty much taken care of all the other elements now being pretty much the same in terms of individual items of taxation and individual items of spending levels and so on. I agree with you that there's still some fundamental differences in the nature of how we do the permanent fund earnings, but.... SENATOR RIEGER: Ya, I was kind of persuaded by Lee's argument that you probably can bring all the elements together to where it is one plan with two approaches and because some of those fundamental differences can be reconciled to make them the same. As far as the fiscal elements of how you close the gap, they can be brought close and that might be a reasonable way to approach it to say it's one plan with two approaches; one constitutional and one statutory. You know, clearly a constitutional approach is more disciplined in and by its definition, but that's - I don't think it's a fundamentally different plan. Maybe it is (indisc.) whatever. I think what Annalee is saying, you know, you can probably make the dividend formula the same - you could - I mean right now they're different. Just like you could make the payoff rule the same. You could make the endowment approach be a five year average minus inflation times 50 percent, which would be SB 51 again. So, that might be a reasonable way to say that there's one plan but there's two approaches to getting (indisc.). MR. LUDWIG: What about income tax? SENATOR RIEGER: Well, the way I see it, there's only consensus out five years or ten years or somewhere in there. And then there's that two or three or four way fork in the road and I don't think that we're going to be able to say that we have one plan from that point no matter what we do. I mean, at that point you point to four possible ways to continue to close the gap and it shows on these graphs, even this one that's called the Rieger revision. You always have the tools to close it in a variety of ways - either you cut dividends more, or you cut spending more or you raise an income tax or you find out that there were new revenues you hadn't counted on because there's time lag chipping in royalties and there's ANWR development or some combination. And I think that - I think that to go into that era and make that decision now in a plan - in a single plan will kind of detract from the report (indisc.) and there's just too much unknowns out there and there's too many philosophical differences amongst the commission, so I think - I still think there's one plan up to a point where you make that next fork in the road - whether it's the five plan or the eight year plan or whatever. And then we have to say, here's the road you can go on - they all work, but it's too far out for us to say this is what we're gonna say the state should do out there. But I think it's very comforting that there's a variety of ways that you still can close the gap and that we've identified them. CHAIRMAN ROGERS: Mike. REPRESENTATIVE NAVARRE: I agree that there are fundamental differences in the two approaches. I just wanted, Brian, to make sure that both of them included out five years or whatever an income tax, both of them assumed a certain level of dividends, if possible, and then all of these things level much of that flexibility to the legislature anyway. Both of - in both of the plans, unless you set up a flat amount for dividends, they leave some discretion to the legislature in all of them depending on what choices you make affect all the other numbers. And we should also assume that - or attempt to assume - that growth in the permanent fund is going to attempt to be relatively the same. CHAIRMAN ROGERS: Lee and then Mike. MR. GORSUCH: What's important to me is that -- is that we would not want to communicate to the public that if in fact they were to adopt the constitutional amendment it means the plan goes into effect. The only thing that goes into effect is the constitutional amendment. So the only way the public really gets a voice in this is if they get a chance to vote directly on the question of the constitutional amendment. And I think that has a lot of admirable qualities to it, because it means the legislature still has to fight out the issue about the taxes, cuts and use of dividends. But the one thing that they're assured of is that that savings account is offsetting oil and therefore that debate can go on at the appropriate level. And that's - that's why I think the endowment has some superiority is that it does offer that one opportunity for the voters to come in and take some money off the table, but still leaves open the - all the kinds of debates that we have. But I think it's going to be tricky because to the extent that the voters think when they adopt the endowment (indisc.- coughing) that they're necessarily adopting the dividend level, a tax level, a cut level -is going to misrepresent what they're going to necessarily get when they vote on the constitutional amendment. So, I am a little concerned about their perceptions that they're buying a plan, when really what they're going to be buying is a constitutional amendment and then the legislature still has to work out the plan. CHAIRMAN ROGERS: Mike, Judy - Mike O'Connor - Judy, Mike Navarre and then we are at the time set for public testimony. I'd like to see if we could close out this issue of the one versus two versus one with two before we move to public testimony. MR. O'CONNOR: Well, if we try to do what Mike has said and equalize the taxes and permanent fund, it still seems like there's a heck of a difference between the out years and 2010 with the balance of the fund. One is 29 million even with 5 million in reserves is only 34, and the other is 40 and I can't quite add up income tax and get there or subtract dividends and get there. That's $6 billion and it isn't coming from either of those two sources, so that's one thing to look at that's worth finding out. Because if you can get that closer, that's Bruce's grand kids trying to figure out how to stay in Alaska. CHAIRMAN ROGERS: Judy. MS. BRADY: Well, I think what we need to do is just concentrate on what we think about the plan and then - and then concern ourselves about the fact that, you know, what the public will think and how we can sell it later. I mean, let's just make sure that we can all say yes, I agree with this, or agree with this, or if we can't, then we do a little minority report or however we do it. But get this -- there's a huge difference in my mind between a constitutional endowment scenario that takes a whole lot of money off the table and - and limits you to whatever you have to spend plus a little flexibility in reserves. (Indisc.-coughing) flexibility in what you have to pay out (indisc.) constitutional for the dividend - I'd like to give some flexibility, but I'd like to give limited flexibility. So - but I think we just need to go and move forward - vote and (indisc.) from there. REPRESENTATIVE NAVARRE: The reason I like the endowment scenario has been discussed a little bit and that is that when you go out to the public debate about whether or not to support it, you talk about all these other provisions in this plan. You talk about the fact that this needs taxes, period. Whether - whether you get any of them in this legislative session or not, if you - you adopt the endowment scenario, you - there are going to be taxes and there will be debate about what those taxes are and it makes easier the legislative task of implementing whatever they are, because the public will know - this debate will take place on the endowment - not entirely, but the debate for the most part will take place and the public and education about the fact that there is going to be taxes and the reason we need taxes (indisc.) taking place. That's really the - and that's why I think that they - we should try to make them as equal as possible because that's going to be debated and determined by what the legislature does and if they don't do a certain level of one, they have to increase the others. And that's politics. CHAIRMAN ROGERS: It seems to me in terms of voting, we have about four choices - vote on them, drop one, vote on them, drop one, and then vote on the final two. One choice would be to come forward with a single plan and say this is the plan we endorse. A second is to come forward with two plans and say these are the two choices we're putting forward to the public. A third is to characterize it as a single plan with two approaches. And a fourth is to put forward a plan and say if this plan fails, here's a - here are a series of backup choices. So, we got one plan, two plans, a plan with two approaches, or a plan with a backup plan. And if you have to choose from one of those four, how many would favor putting forward one plan? One, two, three, four, five, six, seven. How many would favor putting forward two plans? UNIDENTIFIED SPEAKER (male): What was the third and fourth choices? CHAIRMAN ROGERS: The third choice is one plan with two approaches and the fourth is one plan with a backup plan. How many would favor two plans? Two. How many would favor one plan with two approaches? One, two, three. And how many would favor one plan with a backup plan? One, two, three. Okay, we're going to drop two plans from the voting and vote again. Now we have one plan, one plan with two approaches or one plan with a backup plan. Hugh, you're troubled. HUGH MOTLEY: Ya, I'm troubled because I - I sit here and listen and I'm afraid my silence may be misleading someone in that none of the plans we're considering are plans that I think solve the problem of volatility, sustainability of spending and I'm still troubled by the - I know there's another $400 million drop in oil revenues in the year 2011 alone. Now, I realize this is only a projection, but in fact, I think either one of these plans if we take them out in public, we're saying this - they're assuming we're going to fix the problem - and I really don't believe we've fixed the problem. (Indisc.-coughing) spending is still too high. So, I'm here voting when I'm not being totally open and honest; I don't see a plan here that does - that solves my problem. If I'm deceiving you, I don't want to do that. I'd almost rather not vote than say (indisc.) if you put out two, I don't like either one of them, because I don't think it does it. I do like some things about the endowment plan. Just to be totally honest - it does put some constraints on spending that are not there in the other plan. But it carries a connotation that it fixes things and it really doesn't fix things. We can't sustain the level of spending that we have today, that we briefly cut, and then it just continues to go up. And even just in nominal terms, we can't afford the nominal term increase in spending. Maybe I shouldn't even vote. MR. POURCHOT: You mean these don't work - the charts don't work? MR. MOTLEY: In my opinion, they don't work. In my opinion, they don't solve the problem of volatility and they don't solve the problem of spending. I think the spending needed to be cut more and I think we need to be starting from a much lower base and recognize that we have to live within our means. So, I'm just being -- before I vote you need to know where I'm coming from. I can't help where I'm coming from. CHAIRMAN ROGERS: Bruce, Judy, Annalee before we vote. MR. LUDWIG: We all kind of have our own ideas on how we ought to deal with it for what period and all that, but I go back to the resolution creating this. The resolution says we do a 3, 5, and a 10 year plan - it doesn't say 16 years. It says 10 years is the maximum (indisc.-coughing) and it says a plan. It doesn't say two plans. It doesn't say plan with a backup.... TAPE 1, SIDE B REPRESENTATIVE NAVARRE: ....a limit on spending, and it doesn't say that you can't go below that and I think that the debate is going to be and already has been - if you're talking about implementing taxes in order to support this level of spending, then the choice is always going to be reduce spending or increasing taxes. So, that part of the debate is not ever going to go away. (Indisc.) I just think that you have a tough time getting below this spending level and that's not because I'm not (indisc.) I just been trying to do it for a long time and it's - it's very difficult. CHAIRMAN ROGERS: Voting between one plan -- characterizing our report as one plan, one plan with two approaches, or one plan with a backup plan, how many favor one plan? One, two, three, four, five, six, seven, eight.... MS. BRADY: Wait a minute - what did we just vote on? CHAIRMAN ROGERS: One plan, one plan with two approaches or one plan with a backup plan. MS. BRADY: So, this first one was just one plan. CHAIRMAN ROGERS: One plan. UNIDENTIFIED SPEAKER (female): And we were not referring to.... CHAIRMAN ROGERS: We would not refer to other approaches or a backup plan. How many vote for one plan? I need to recount. One, two, three, four, five, six, seven, eight. How many one plan with two approaches? Four. And how many one plan with a backup plan. And who didn't vote? No, that's everybody okay. So, we're going to go forward with a single plan. Now the question is, do we go forward with an endowment plan.... UNIDENTIFIED SPEAKER (male): We need eight. CHAIRMAN ROGERS: It's eight.... UNIDENTIFIED SPEAKER (male): There was eight. CHAIRMAN ROGERS: Eight for one plan, four for one plan with two approaches, three for one plan with a backup plan. UNIDENTIFIED SPEAKER (male): Now we drop the low one and vote on the other two? (Laughter) CHAIRMAN ROGERS: That's actually a good idea - that's -- ya, that's -- we can see.... UNIDENTIFIED SPEAKER (female): (Indisc.) about majority? What ever happened to that being a.... MR. GORSUCH: Because we started out with four plans, we dropped the low one, and voted on the other three. Now we drop the.... UNIDENTIFIED SPEAKER (male): Constitutional amendment's involved. MR. GORSUCH: I just want to be on the winning side. (Laughter) CHAIRMAN ROGERS: Okay, notice of reconsideration has been given. By two-thirds vote, we can bring up immediate notice of reconsideration. How many favor one plan? UNIDENTIFIED SPEAKER (male): What's the other choice? CHAIRMAN ROGERS: One plan with two approaches. One, two, three, four, five, six.... (Laughter and chatter) CHAIRMAN ROGERS: Do people think we need more discussion on endowment versus composite before voting if that's the one plan, or are we ready to vote on which approach? How many.... MARIE WESTFALL: Just a minute. Could we just clear up for everybody - are we voting for the composite scenario or the Rieger revision composite scenario? CHAIRMAN ROGERS: On the two -- within whatever approach we choose, we then have a series of decision about - on the endowment it would be a spending rate, what we do with the CBR, what we do with income tax and other things. Within the composite, it would be what percentage to the general fund, what dividend rate, et cetera. It's just which of the two plans (indisc.-coughing). UNIDENTIFIED SPEAKER (male): And the numbers in both cases can still be tinkered with. CHAIRMAN ROGERS: Well, no we only need to do it with the one plan we're working on after this. UNIDENTIFIED SPEAKER (male): I mean - ya but.... CHAIRMAN ROGERS: Ya.... MR. GORSUCH: You're not necessarily buying.... CHAIRMAN ROGERS: No, you're not buying my endowment scenario or any other particular endowment scenario, if you're voting endowment. It's just do we do an endowment constitutional amendment and then we have to work out the details if we're going to do it, or do we go with the nonconstitutional composite approach and work out the details for that. MS. MCCONNELL: Assuming that somebody in the state of Alaska will ask of the question what if the constitutional amendment fails, if we take the approach of just saying one plan, how would we address that - not necessarily the written materials, but what inevitably will be the questions that come from the audience, reporters, groups we speak to. Because that might affect how I would.... (Discussion indiscernible). CHAIRMAN ROGERS: So, you -- the question is using a constitutional endowment approach or using a statutory approach. MR. POURCHOT: And if we lose on the details of the endowment, we can drop back to the other one? (Laughter) CHAIRMAN ROGERS: If you lose on the details, you can be in the minority on the final report. MR. POURCHOT: It does make a difference. There are some details that makes a big difference. MS. BRADY: It does. There are some details here that I'm voting for as part of the package. CHAIRMAN ROGERS: The problem is given about seven hours left of our work, if we have to keep working on both plans before we finally decide, we're -- we're trying to stay on two tracks at once and.... UNIDENTIFIED SPEAKER (male): We don't have time, ya. CHAIRMAN ROGERS: So, I'm trying to limit which one we work on, recognizing that, you know, I'm going to go for one of them. But if it comes out with some details I don't like, I'm probably going to vote against the final plan. (Indisc.) then we have to go back and start -- then we work until midnight. (Laughter and chatter) UNIDENTIFIED SPEAKER (male): But the question is constitutional or statutory. I mean, we're not saying that anything is on the table at the moment even though we know that there are only two.... UNIDENTIFIED SPEAKER (male): There's some commonalities, already. CHAIRMAN ROGERS: And I think we have some general themes. Since this isn't going to work, we'll proceed to public testimony. And then we'll break for lunch, and we'll figure out how the hell we can get through this. SENATOR LINCOLN: I think it's good work. I think we should just vote on it. Note: Too many people talking at the same time to discern who is saying what. CHAIRMAN ROGERS: Let's go to public testimony. I -- I -- Now I'm not. UNIDENTIFIED SPEAKER (female): Why don't we just vote on what we have and then we can just tinker with the details. UNIDENTIFIED SPEAKER (female): Yes, that's what.... UNIDENTIFIED SPEAKER (female): Vote on what we've got in front of us and tinker with the details after lunch - after the one we vote on. MR. LUDWIG: Do you need a motion to overcome the reluctance of the chair? (Laughter) CHAIRMAN ROGERS: Well, I guess if we're voting on something close to the two, I think the current composite unfairly portrays what the final composite is likely to look like. And maybe that's good because I favor the endowment plan, but.... MS. BRADY: Ya, but we know we're going to change things pretty much anyway. I mean we all kind of assume that, don't we, that we're going to equalize some of the things so it wouldn't be that kind of issue. SENATOR LINCOLN: And I would just suggest that for those testifying, I think it would be nice for them to know which direction this committee is going in. And I think we're ready.... CHAIRMAN ROGERS: Are you ready for a straw poll (LAUGHTER) on endowment versus composite. Note: Several of the commission members responded in the affirmative. CHAIRMAN ROGERS: Okay. SENATOR RIEGER: It is a totally different question than whether you do one or two plans. CHAIRMAN ROGERS: Well, we already voted on one plan. SENATOR RIEGER: I thought -- I thought (indisc.). UNIDENTIFIED SPEAKER (male): He wants to switch his vote from one plan with something to one plan with.... CHAIRMAN ROGERS: A majority of this commission voted for one plan. UNIDENTIFIED SPEAKER (male): It started out with one procedure.... UNIDENTIFIED SPEAKER (male): But we did have the eight votes.... CHAIRMAN ROGERS: There were eight votes. That's why we didn't need.... UNIDENTIFIED SPEAKER (female): Question. CHAIRMAN ROGERS: Straw poll on the question of endowment versus composite. All those who favor composite, please raise your hand. And how many favor endowment? Thirteen endowment, one composite, one abstention. MR. O'CONNOR: Then why did you not want to call for a vote? SENATOR LINCOLN: Moving along. UNIDENTIFIED SPEAKER (female): You didn't (indisc.), did ya? CHAIRMAN ROGERS: I didn't think we were ready to vote. (Laughter) CHAIRMAN ROGERS: I think we were ready for a straw vote, but I don't think we're ready for a final vote. Let's move now to public testimony. If you can make room for one more chair at this table, at that end. Okay, the first person, I think, is - the first member of the public that I saw come in that wants to speak, president of the university system, Jerry Komisar. Can I have an indication from the audience how many other people are wanting to speak. One, two, three. Okay, we'll go with a roughly five minute or so, but since it's a small group, I'll give some flexibility in that. JEROME KOMISAR, President, Statewide Programs & Services, University of Alaska, Fairbanks: I've prepared a written testimony that I could read until next Wednesday, which (indisc.). Instead, I'm going to distribute it. As you know -- I'm going to hold on to two, the rest can be sent around -- the Board of Regents has been very interested in the activities of the commission, not only because of potential impact on the university, but because of their general interest in the state of Alaska. They - they were ready to come down with a group, and they still with recommendations to this commission. There would not be quite as many recommendations as there are caribou in this state, but it would be close to that number. I committed myself to come down and to make a presentation to you and testify, not necessarily to every one of their points, but I think to some of the major themes that came up within the regents. In the - in the written testimony, which I hope you have an opportunity to read. If I was going to suggest how to read it, I think I'd read the first three paragraphs and the last three paragraphs and then the middle. The first three paragraphs are a general thank-you and - and the statement is that - that you're putting time and effort on what I think and what the board thinks as the most important problem and major issue facing Alaska. And I think the board and I certainly want to give my thanks to the intensity of time that you've put in - into this. The last three paragraphs was sort of a late thought when I was putting this together, but over the last three years, we've really seen two major attempts to force a public dialogue on crucial issues. The first attempt was President Clinton's attempt to build a health plan, which fractured on minutia and became hopelessly fragmented. And the second attempt to get a public dialogue was Republican Contract for America, which grabbed the public imagination because all the elements lead to a single theme. And I think - I think it's imperative that somehow the work of this commission boils down on just a few items or perhaps a single item. My feeling is that the contract -- I was going (indisc.) a Contract for Alaska, but I was talked out of that so I'm using Alaskans to contract with its own people and - and I think it would be far different from the federal contract because I think Alaska is in far better shape than - than the country is and that we have an ability to do things, largely because of the permanent fund, that the Nation at large, does not have. JEROME KOMISAR continued: The single theme, if I was going to try to develop one for the commission - and the commission's thinking is certainly far ahead of mine and more knowledgeable than mine - would be on the issue of deflation. What are the deflationary impacts of each of the changes that you're thinking of? And you could set up -- (indisc.) on deflation -- what zaps the energy of the state -- what takes away from the economic vitality? There were certain actions that you will -- that you will subscribe that are going to limit economic activity and there are other actions that will have less of a negative impact. There may even be some actions that have no negative impact. And I will try to array the recommendations on the basis of those that do the greatest harm to the general economic energy within the state. One of the things that would do no harm to the economic energy would be discontinuing putting money into the inflation proofing fund. The inflation proofing fund has no immediate effect upon the economy of Alaska. It is questionable if it has a long run effect. In fact my argument in this piece is that inflation proofing is wonderful if the schools are well maintained, the potholes are filled, and if the water is pure. But if you have is diminished basic services in this state, that inflation proofing is like Nicholas II holding on the the Czar's jewels. It -- it doesn't really buy you very good insurance; in fact, it ultimately invites a certain level of catastrophe. The most deflationary thing that we can do is cut government expenditure. That's not a - you know - a subterfuge from - from the liberal element or something that political parties have put into place; it has to do with complex economic organizations. There's a certain economic impact to public expenditures and there's a terrible impact when you cut them. Capping -- the second thing that would have a deflationary impact; not as much as - as - as cutting public expenditures, I'm sure you've discussed this already, is cutting the permanent fund dividend. That has a deflationary impact, too. Capping the permanent fund dividend however, does not have a deflationary impact. And, in fact, if the capping allows you to spend in certain other ways there is an economic stimulus. One of the things I recommend to you, if-if-if you look at a permanent fund dividend of $990, as you have, and you look at its distribution to the wealthiest Alaskans, you really have issue two checks. You've issued one check that goes immediately to Washington, D.C. of the value of $376. Now Washington needs the money, but I don't think that was the role of the permanent fund. Is there a way of developing a tax structure, so that element is taken - is taken aside. My sense is - is really just those. One to thank you and two to - to appeal to you to try to come down, which you may already have, to a document that has a certain centrality so it can be publicly discussed. If it has too many variables and if it is too fragmented, the kind of public discussion that commission after commission failed to get in this state I'm afraid may be failed to get once again. And if it was something such as a single issue, I would - I would put it on the side of trying stimulate an economy and - and test every one of your potential actions against that. But thank you very much. I hope you have to read - to read this and I must say I - I - when - when the commission was put together, I was very envious of Lee's appointment. I thought that - that - that as an economist, as well that I would - I would have loved to have spent time with the commission. And I see as he gets more exhausted (indisc.) that I'm very lucky to be in Fairbanks and beyond that, I'm sure he's making a much better contribution than I could ever. MR. GORSUCH: Thank you very much. MR. KOMISAR: Any questions? CHAIRMAN ROGERS: Questions from members of the commission? REPRESENTATIVE NAVARRE: Mr. Chairman. CHAIRMAN ROGERS: Mike... REPRESENTATIVE NAVARRE: Thank you. CHAIRMAN ROGERS: Next is Joan Diamond. Joan is coming up - we did get also something from the International Association of Residential and Community Alternatives, but I'll hand it out. JOAN DIAMOND: I have --I brought some that could be run off, I just didn't run it off before I came. CHAIRMAN ROGERS: That's okay. If you want to leave it, we can make a copy and pass it out. MS. DIAMOND: My name is Joan Diamond. I'm basically speaking for myself. I have a background in public health so much of the information that I'm speaking to has to do with that background. I'm here in support of increasing alcohol excise tax that's been proposed in the commission report and also considering some specific policy - some specific public policy that in the long range plan for financial stability has a lot to do with looking at the control of alcohol. That from a public health perspective. The state costs are so tremendous and to a large degree in response to state crises response to alcohol use that in taking a look at the excise tax on alcohol, it has a lot to do with reducing the cost of government. It's well established that if the price of alcohol goes up, consumption, associated problems and (indisc.- coughing) services go down. For long range planning, consider the following all of which is supported by the Alaska Injury Control Plan. Raise the alcohol excise tax to reflect the 1995 consumer price index. The excise tax is not been adjusted for 12 years; 1983 was the last time it was adjusted. The state is losing millions of dollars in revenue each year. It has never been indexed for inflation. I think it is the only commodity we have that has never been indexed. So, indexing it for inflation so that it keeps pace with all other commodities, as we know as inflation erodes the actual price from year to year, beer has come to be the same price as soda price -- or nearly, unless you buy imported beer. Establish equivalencies for taxing beer, wine and spirits. After prohibition, spirits were erroneously taxed at a higher level with the myth that hard liquor was more dangerous than beer. We know that the amount of alcohol is the same in an ounce of spirits, a glass of wine and one can of beer. Alaskans consume 12 times more beer than any other alcohol beverage. Also, give back to the municipalities the right to tax alcohol at whatever the local level votes to agree, without restrictions that were established in 1985 that prevent local communities from taxing alcohol at a rate higher than any other local sales tax. Right now we are inhibited from doing that. In addition, Medicaid dollars are disappearing. As a result additional public policy can do a lot to reduce the cost like mandatory helmet laws, which I know are controversial and primary enforcement of seat belts. It would go a long way in reducing the cost of hospitalization, long term care, and the lifelong SSI or social security payments from injuries on the roads and highways. We know that helmets and seat belts work and protect the rest of us from paying for it. Last year in Alaska, one hospital billed Medicaid $106,000 for a single head injured person who wasn't wearing a helmet. That's one. This did not include doctor bills, lab tests as well as all the long range care, the maintenance, that goes with one brain-damaged young man in the state of Alaska. The argument that it is a personal right to ride at my own expense just doesn't fly anymore. Finally, a bill -- a bill for graduated licenses, which I know is in the legislature right now for juveniles, is also needed in long term planning. Since our juveniles cost us the most as they transport themselves from one injury, whether it's violence to - or unintentional injury, one injury waiting to happen to another. Juveniles can earn the responsibility to drive and save us the cost for paying for the crisis. Any of these measures, I know are controversial because I've watched them come up and go down, as different interests fight to keep whatever side they want. What I'm asking to commission to act -- begin or maybe continue to act in the public's interest in looking at some of these recommendations. Thank you. CHAIRMAN ROGERS: Ms. Diamond, thank you. Were there questions from any member of the commission? MS. DIAMOND: The.... CHAIRMAN ROGERS: Georgianna. SENATOR LINCOLN: It's not a question so much as just a statement for prevention and all that I really am a believer that we have to do more in prevention and in the long run it's going to save the state money. Last year in our prison system, we had one AIDs victim that cost of the state $876,000. One. And we've got three in there now. And we need to do more toward the prevention rather than after the end result. MS. DIAMOND: So, what does it take to do that? SENATOR LINCOLN: Well, we have -- I guess more money into prevention.... MS. DIAMOND: Sometimes I think though people think that prevention is more money and sometimes it's good public policy. UNIDENTIFIED SPEAKER (female): Absolutely. MS. DIAMOND: And we don't need to throw more thousands of dollars -- I'm not sure people even can see what prevention means. On some of these measures in terms of pricing alcohol as a prevention strategy that public health continues to promote. Yet, I mean, we know everyone sitting at this table, the incredible resistance from the alcohol industry to keep the price down so that the consumption can continue at the high rate. Dollars are made when we drink a lot, not when we drink a little. So, it - it will be a constant tug of war between who is acting in the public's interest versus the individual right to live the way we want. And I think it's going to be a ongoing battle in the state with the Alaskan mentality, which is I want to do what I want, when I want, how I want. And maybe as the dollars begin to dwindle and there's this tug of war, maybe there will be a shift from this public individual right or private right versus public good. We've swung so far to individual right, you know, maybe there will be a swing now back into more moderate thinking and part of public policy is a preventive way to do it. So, I agree with you. And this document that I have from you from the state of Alaska is to give you an idea of some of the costs of just one person hospitalized and it has nothing to do with long term costs, it has nothing to do with criminal justice system incarceration; it's only being hospitalized in the hospital for one person for all sorts of different things. So, you get an idea of what we're spending for each one of these people. CHAIRMAN ROGERS: Steve. SENATOR RIEGER: Do you think that the right public policy is the mandatory helmet or the lack of a right to free medical care if you're injured while not wearing a helmet. MS. DIAMOND: You're saying one or the other? SENATOR RIEGER: Ya, I mean if you wanted to prevent that you could either say you must wear a helmet or b) if you have an accident not wearing a helmet, head injury, maybe you don't get care. MS. DIAMOND: We'll never do that though. The American way is to always -- not to leave a person bleeding on the road. We'll never do that. We'll never leave that person bleeding on the road. SENATOR RIEGER: Okay. MS. DIAMOND: We never will. I mean that's not the American way. We'll always pick them up and we will take them to the hospital -- I mean we all know that -- we'll never do that. So, you know, for the people who -- I know the ABATE group that fights so hard against the helmet law and I know how hard it is on-road and off- road vehicles, and I know how hard policy is to extend statewide. I mean I've listened to the arguments and I hear the public testimonies. I just think that either we get real about our costs that we put out for people who say I have a right to live the way I want. Well, that's true if they have those long term costs to cover themselves. But insurance, whether you pay by your employer, ends at a certain point and it never goes for long term care. Sometimes it's cut off at hospitalization early. So, we will always foot the bill for these young people who feel that throwing all caution to the wind is their right. Well, it is as long as the public dollars don't support it. And it always will. So, I guess from my point of view is, it's a small sacrifice to put a helmet - I mean, I put a helmet on myself and my kids when they go bike riding. I feel it's a small sacrifice to - to protect the brain when you know (indisc.) it will in exchange for reducing the costs if there is an injury. CHAIRMAN ROGERS: Mike. REPRESENTATIVE NAVARRE: I was just going to say that I started out originally as a supporter of the helmet law, but there are some good statistics on the other side too that suggest that in many cases vision impairment from helmets, hearing impairment potentially from helmets and the additional protection that you may get in - in accidents, there - there may be a correlation between the two and - and you heard that testimony also and it boils down to I guess whose statistics you believe. MS. DIAMOND: California passed the helmet law in 1990 -- it's been two yeas -- 1992, they had a 37 percent reduction already the first year from reduced head injuries. Mostly it's young men. REPRESENTATIVE NAVARRE: Did they have an increase in accidents, though with the decrease in head injuries? MS. DIAMOND: No, they didn't and it's interesting. There's all sorts of counters to arguments that you're giving about reduced hearing and all of those kinds of things. I've seen all the literature and what's interesting as a by-product from California as a result of the helmet law, they've had a (indisc.) difficult time getting body parts for their donor organs in the California program. You know the young men whose hearts and lungs we all want, if we're the one that needs the organs -- their organ transplant program has had a substantial decrease that they never even considered would be a by-product of the helmet law. I know it sounds silly, but I'm just trying to bring.... CHAIRMAN ROGERS: Well, it's a very graphic example.... Laughter MS. DIAMOND: ....and I know - I know the research, I know all the research that's been put forward and it's been refuted over and over and over again. The best - the best examples are the state's who have passed it, and we're watching California the best, because they have the best data for follow-up. Their costs have been cut substantially. And this is a cost committee - I mean, this is what you're about. CHAIRMAN ROGERS: Thank you. MS. DIAMOND: Thank you very much. CHAIRMAN ROGERS: Roger Cremo. I've heard that name somewhere before. ROGER CREMO: This commission has been very fortunate to have a chairman who conducted himself so brilliantly, and I really mean that, throughout -- throughout these many months. Whether he guided or steered is irrelevant. The fact is he did it brilliantly. The legislature commissioned you to -- as I read its directive -- commissioned you to find a way to end unsustainable spending and to do it in a systemic way - their word, systemic. Incidentally, the legislature said, that you should come up with cuts in spending and increases in revenue because obviously whatever the system there - those things are needed. And also incidentally, they said tell us what to do for the next three years, and five years, and ten years and incidentally, they said tell us what you think of forward funding and the relationship between the state and the communities -- the local governments. The main thing they told you was to provide for systemic change that eliminates - terminates unsustainable spending. I don't think you've done that and I just want to say so. I don't think you've done that at all. Sustainable spending is alive in Alaska. Unsustainable spending is alive in Alaska and it will be alive after you finish, apparently. And I think that's a great mistake. I think it's a failure on your part to do what the legislature asked you to do. Sustainable spending is achieved in - in - in a civilized government - civilized society by the back pressure, if you like, that the people exert on the legislature. By the people -- the people by their resistance to tax, their resistance to not only confiscatory tax, but to almost any tax, is the great restraint against - against unsustainable spending. And on the conventional revenue side of things in Alaska, we have that restraint -- we have that element of restraint -- we have that factor at work in Alaska. But we don't have it at work when it comes to our wealth, because we have wealth -- the other states don't have it. There is no restraint in the case of wealth. The people have no say. The legislature can, without any concern about resistance from the people, can reach into that wealth. I think your task is, and has been, to take that authority away from the legislature -- shouldn't have had it in the first place -- they've wrecked the place using it. Anybody in doubt about that -- I can't imagine anybody being in doubt about the fact that the legislature, through its unrestrained spending has caused terrible problems. Why do you think we're here? That has not been taken away. Sure, some money has been taken off the table, some accumulated natural resource revenue -- a pittance in comparison to the billions that have yet to come through the pipe. Those you've left on the table. About the only little gouge you took in those -- you said, well we'll go from 25 percent of -- of -- of the -- the -- excuse me -- at my age, words fail me sometimes -- CHAIRMAN ROGERS: Royalties. MR. CREMO: Thank you. ...of the royalties, you're moving that up to 50 percent. That's helpful, but it isn't -- it doesn't solve things. As long as you leave to an inventive legislature, the opportunity to pull the natural resources revenues to it and avoid the permanent fund, it will do so. Our legislature, five years from now, may put the emphasis on - on the tax -- on the production tax and take the emphasis off the royalty. Who knows whether to - to avoid the partial mechanisms that you've set up. They're not enough -- they're not enough. You haven't taken away -- haven't provided to the people -- the ones you serve -- you haven't provided to the people the weapon they need to keep the legislature from spending and continuing to spend on an unsustainable basis. I don't care whether the -- whether the natural resource revenues suddenly drop -- you call it volatility -- or whether over the long run, they decline because their production changes, or whether they go up severely, as they will if there's an ANWR, and if there's oil at ANWR. All those -- all those events cause great strife in Alaska and will continue to cause great strife because you haven't provided a way to prevent it. CHAIRMAN ROGERS: Thank you. Questions. Thank you for your continuing participation. Representative Finkelstein. REPRESENTATIVE DAVID FINKELSTEIN: Thank you. I appreciate this opportunity. I also wanted to express my appreciation to all the committee members for your hard work. I (indisc.) catching up the meetings to realize how happy to not be on the committee -- to not have to be here for all these meetings, but I just want to make a quick pitch on why I think it's a good idea to move up in your schedule the income tax. The income tax is a funny issue and I think people don't really understanding what the average Alaskan thinks about the income tax. I -- there have been polls and I've participated in some that show the majority of Alaskans -- majority of Alaskans don't at this time favor an income tax. But the experience I've had - and I've had and I've got a fair amount of it (indisc.) because I was the sponsor of the income tax last year in the last legislature. The response I get is a significant portion of people, you know, less than 50 percent, who actually support it right now -- who hear about it and say, yes, that's a good idea, we never should have gotten rid of it, we need the money, we've got a half-billion dollar deficit. And of the remainder of the people, they're not all opposed to the income tax. What happens when you discuss things with them, you find they fall into a bunch of categories. There's a category of people who say yes, we should have an income tax, but we need to cut the budget more or we need to cut back on things more. And everyone that says that has a different perspective of what that means and, you know, different perspective about whether that's been accomplished. There's a significant portion of people who say yes, we have to have an income tax, but not right now. Sort of like they just -- they want to delay a little bit longer -- but they believe we need it. There's a significant amount of people who say well, my preference is a sales tax or my preference is cap the dividend or they name a bunch of things and they won't pick an income tax on a poll, but it doesn't mean they're against an income tax. It's just that any time you get a large group of people, you're going to get different views on what the priorities are. They believe though that something has to be done to produce some revenues for the people of the State of Alaska. It's -- you know, the bottom line of this issue is, it's still amazing we're not the only the only state in the country that gives out $1000 to everyone in the state, but we're the only state with no sales taxes and no income tax. We're the only state that doesn't rely on its citizens to pay something for government and I personally think we probably shouldn't ever gotten rid of the income tax, we should have reduced it to a lower level and had to increase it, you know, as times required. If we'd even had it at a small percentage of it originally was, we'd of had billions of dollars more in the meantime. And I just ask your consideration as best you can for trying to move that up as far as you can because the -- I just am convinced the average Alaskan isn't against paying for government. The average Alaskan accepts they've got to pay something for government. They may all have a little bit different take and they may not pick the income tax right now as their first preference, but I believe from my experience that most people can accept an income tax in the near future. CHAIRMAN ROGERS: Steve. SENATOR RIEGER: Do you think the average Alaskan would support an income tax with sole purpose of which is to add more money to the permanent fund so that there can be more payout beyond the year 2010? REPRESENTATIVE FINKELSTEIN: I don't know because until you -- you know -- ask a question, you never find out. I personally support an income tax under any scenario. I'd support it to pay for garbage pickup -- I mean -- you know, we just need to get more sources of money from our citizens and the obvious point of which everyone here realizes is the reductions in dividends -- which may be necessary -- but reductions in dividends hurt exclusively Alaskans. Income tax hits people who are non-Alaskans, as well. CHAIRMAN ROGERS: I have to respond to Steve's (indisc.), but let me put it in the form of a question. Do you think it's fair to characterize an income tax as being put forward for the sole purpose of putting it into the permanent fund, when it also provides some diversity of state revenue sources. Note: The response was indiscernible. REPRESENTATIVE FINKELSTEIN: Thank you. CHAIRMAN ROGERS: Did anyone else from the public who wants to speak? I don't have anyone else signed up. MR. GORSUCH: I (indisc.) this before Roger left, but it's in regards to the endowment plan and you know, first is, Roger, I think I speak for almost everybody in this room when we say publicly that we hold you in high admiration for your vigilance in trying to advance the concept that you firmly believe is in Alaska's long-term interest. And you've been faithfully attending every meeting that we've been at just because of your concern that we all try to do what's good for the State of Alaska. So, I wanted to compliment you for your constant contribution to advance Alaska's welfare. I did, however, want to share with you and the other commissioners why I think your endowment is not in the state's long-term interest. I use by way of a parallel -- first let me say that I'm not an apologist for the state's spending, but I would have to argue that this is a better community and a better state than it was before -- before oil, by a long shot and that significant efforts have been made once our wanton days in early 80's sort of rein in those kind of expenditures. In part that's been driven by a fall of petroleum prices, but even as early as 1980's the legislature has been struggling with making voluntary deposits into the permanent fund and, in fact, almost half of the principal of the permanent fund is the result of voluntary actions on the part of the legislature. So, it's not as though nothing has been done over the years and those efforts continue to be made. But I genuinely am concerned about the idea of a fully endowed state spending level. I think this is like inheriting wealth, and all you do is live off the inheritance. I think it leads to the wrong kind of economic vitality that President Komisar was referring to; that is, you don't have to get out and work, you don't have to find new natural resources to bring additional revenues into the state's stream, you don't have to be creative, you can do zero population growth, you can sort of coast on this endowment because we now have a sustainable level of spending. Why do we need more sort of cutting down old growth timber, why do need (indisc.) of ANWR, why do we need a gas pipeline -- we're set, we're endowed, we don't need more development. I think we've struck a reasonable balance in which we've tried to bring that declining oil revenues from a one time -- I think Alaska would be extraordinarily fortunate if we were to have anything even close to another ANWR come into the state's picture. This was a once in a lifetime type of episode and we're now trying to compensate for it. And I think by trying to go to sort of this offset to the oil production as a way of creating some stability for Alaska as we know it, still puts pressure on us to go out and find more natural resources. It still creates sort of this idea of the appropriate level of spending depends on how much you want to pay in dividends and how much you want to collect in taxes. I think that's the kind of relationship we want to have. We can still have that argument about the appropriate level of state spending, but you got to pay for it. But the issue is we can't pull the rug out, just because oil production is going down. But I don't want to have disincentives for future resource development, and I know we've talked about this before and respectfully disagree on the issue. But I wanted to sort of share with you publicly, I think you've made a great contribution to my own thinking on this particular question, and even though I haven't come to the same point that you have in your advancement, I think the very fact that we have the endowment on the table, even though only you may see it as a half a loaf is in part due to the vigilance that you've shown to continue to try to inject this issue about a some degree of sustainability and it's on the details where we disagree. But I wanted to thank you publicly and also explain, in part, why I've come to the position I have, which is at variance from your own. CHAIRMAN ROGERS: I'd like to echo your comments in every respect on that. With every respect. Note: Indiscernible comments. CHAIRMAN ROGERS: In terms of our decision matrix, what -- we'll have a series of decision to make after the lunch break, deal with how we approach the endowment plan. What I'd like to suggest is a series of -- of decisions as follows: First, we deal with the issue of spending rate under the endowment and the choices would be fixing a percentage or floating a percentage based on long-term performance. First, we deal with what rate to fix it at. If we choose the second, what rate to float it at as a five-year, ten-year, or percent below performance. Second, we have the issue of changing rate of deposit into the permanent fund from 25 to 50, or not changing it from 25 to 50. MR. GORSUCH: Mr. Chairman, on that first one, could Steve and Pat come back after lunch with a proposal? Would that be too much to ask? CHAIRMAN ROGERS: Ya, in terms of running the figures? MR. GORSUCH: No, no, I think they could -- I think, if I understood them correctly, they could live with the three and one- half, they just want to make sure the language in the constitutional amendment is tied to something other than three and one-half, even though we use three and one-half for planning purposes, that's what I understood to be their -- their position. CHAIRMAN ROGERS: I think we'll have to get into that when we get into the discussion. The third issue is CBR, whether to eliminate it or to fix it, and under either one, what and when we dump out of it into the permanent fund. The fourth is on the dividends -- whether to go with a formula dividend, a capped dividend, or a formula with a cap, as I guess might be Mike's approach. I think those are some of the basic building blocks. Then we have -- then we'll come back around to income tax. MR. POURCHOT: Can I interrupt? CHAIRMAN ROGERS: Yes. MR. POURCHOT: This is maybe just a little bit. I don't want (indisc.). I'd like to ask you to list (indisc.) earnings reserve account. CHAIRMAN ROGERS: Okay. Yes, and there is none and we need one. MR. POURCHOT: ... kind of a harebrained idea, I'd like to just try out as.... UNIDENTIFIED SPEAKER (male): What'd he say? CHAIRMAN ROGERS: Permanent fund earnings reserve. So, we have five major groupings -- decisions under the endowment: Spending rate; constitutional dedication to the permanent fund of royalties; constitutional budget reserve; permanent fund dividend; permanent fund earnings reserve. It's 12 o'clock, let's break until about 1:15. If everybody could be back here on time and then we'll go into that decision process. TAPE 2, SIDE A CHAIRMAN ROGERS: ...from which of those decision we make is then a second set and maybe a third set. As I understand the argument so far, the argument for the set percentage is it's economical (indisc.) the Constitution we can set up -- set a number that we know is low enough to be safe. The argument for floating is that we can't perfectly predict what's going on and setting a floating percentage that's based on five or ten year average still provides some predictability, but -- but allows us to move with reality and the argument for a range is that that gives the legislature some flexibility to set the numbers. The argument against a set percentage is that it may not recognize reality and doesn't give us enough flexibility. The argument against floating, I don't know. And the argument against a range that I've heard expressed is that whatever the range is, the legislature will pick the highest one on the range. Are there other arguments than those that people want to advance for or against any of those three choices before we vote? Mike and then Lee. MR. O'CONNOR: Well, a floating range, obviously if you have a bad year, let's say it was like last year where it was zero, spending is going to have to go down. CHAIRMAN ROGERS: But with a float, I think we have to assume that it's based on long term, like the five year average, the ten year average or something like that. I think that's what Pat and Steve who've advanced that idea would say. SENATOR LINCOLN: Would you explain the range again. CHAIRMAN ROGERS: The range, I think and Annalee was suggesting that the draw could be you know, something like not less than three and one-half not more than four or something like that. MS. MCCONNELL: But in combo with that, I'd - I'd probably would still want to tie it to more than just one year at a time. Not just.... MR. LUDWIG: What do you mean? MS. MCCONNELL: Instead of having it be as of June 30 of the previous fiscal year or (indisc.) projected to the end of that current year that it would be five year average or ten year average. MR. LUDWIG: On the float? CHAIRMAN ROGERS: On the percentage or on the... MS. MCCONNELL: No, on the range. If you said 3 percent, I still think there might be some advantage -- I'm nervous about picking any one day and saying you'd take a percentage of earnings on that one day. MR. LUDWIG: I thought -- (indisc.) misunderstanding because I thought the second range were based on a percentage of the balance. CHAIRMAN ROGERS: Of the market value, ya. MS. MCCONNELL: But the market value... MR. LUDWIG: Or book value. I'm not convinced market is the right word (indisc.). CHAIRMAN ROGERS: Byron persuaded me that market is the right way to go on that. But he's -- by the way, Byron said that he can bring the permanent fund's investment performance advisors on line, assuming we can find a telephone line and a speaker phone, if we want to get into some of that. MS. MCCONNELL: But you had it pegged to the upcoming fiscal -- so in other words, you'd make a budget in May, you'd do a flat budget in May based on a projection CHAIRMAN ROGERS: Of the final market.... MS. MCCONNELL: .... a month away. Okay. MR. GORSUCH: You know, my concern about the -- the idea of the float is it does create then a lot of internal -- potential internal volatility and pushes the fund into a very conservative investment portfolio if they are trying to meet what they politically recognize to be an expectation for state government; that is, even though the argument is going to be you're independent to come up with whatever -- whatever your real earnings are. My guess is that they're going to want to ensure that they keep some degree of -- of -- of stability and they're going to wind up becoming much more conservative investments than would otherwise be the case through the set percentage. The set percentages actually give them a chance to be of -- in a more balanced arrangement than I think the -- the float would. And I'm wondering if we couldn't get to the issue of the -- how should I say -- the inappropriate judgments or the discontinuity with the performance by you know building in some kind of statutory audit performance that basically takes a look at the you know, portfolio with some connection back to the its real - real earnings. I'm just afraid that the float -- long-term float is going to have some other undesirable consequences that will introduce more potential instability with the only way of offsetting is for the trustees to second guess what that dollar requirement is and as a consequence wind up in very conservative investments in order to meet what they think the state is going to need. It puts a real downward picture on that investment portfolio rather than increased flexibility. CHAIRMAN ROGERS: I think there are ways to improve any one of those three if we choose it. On the set percentage, I think to say instead of, as I wrote it, based on the market value on June 30, you say on the market value of the previous December 31. And then it's a known number throughout the legislative session. I think on the float, if you're looking at saying the pay out is based on 1 percent less than the real -- the average real earnings for the last five years, that you use a number that builds in a -- a cushion against some -- some down periods. So, in my way of thinking either of those were (indisc.) the range doesn't work -- say the lower or upper because (indisc.). Hugh, did you have your hand up? Okay. Steve and then Bruce. SENATOR RIEGER: Well, I think that Lee's point is correct although if it's a five year average, it is really tempered to a great degree because if you're sitting there and you know that a percent of your payout is based on what's already passed, it really diminishes your concern about what you're going on that last 20 percent, whether you're going to yield a 6 percent bond yield or a potential 2 or 10 percent stock yield. So, I think that it's still there and I think it's always true that as long as you have people looking at your performance, you're going to be more nervous when you're out there in more volatile investments. The best you can do on that is to do a longer term average. The -- one other point that I'd raise that doesn't have any financial validity, but it might have a kind of a perception validity is that, when you talk about a payout that's based on performance, it's going to be clear that your payout -- what you're paying out is earnings. When you talk about a pay out that's based on some value or market value, the perception is you're paying -- you're taking some money out of the permanent fund itself and I think it's going to be a harder sell with -- it's just a semantics thing, but it's going to be a harder sell to say let's take x percent out of the corpus each year as opposed to saying let's take some slice of earnings. For what it's worth, I think it's at least worth considering. MR. GORSUCH: But you get into -- you get into definitions of real earnings which is what you're -- it's been hard to explain to the public -- inflation and what real earnings are, just like what real dollars are. MS. BRADY: It's hard to explain, to me. CHAIRMAN ROGERS: I think people understand if you say we're going to.... MR. GORSUCH: Three and one-half percent is pretty clear. CHAIRMAN ROGERS: If you're going to pay out 3 l/2 percent and you say that on average, that should fully inflation-proof and then some, there may be some years that we under inflation-proof but those will be balanced by the ones we over. People will understand that, I think. But there is the risk in that year that you do dip in. MR. LUDWIG: It does require a better explanation or more explanation. CHAIRMAN ROGERS: I think real earning requires more explanation. Bruce. MR. LUDWIG: There's circumstances where I think range could be good. You know, Mary's brought up a number of times that if there's a disaster, and if you could have a trigger of some sort that was real and objective or population increased by x percent or some kind of objective disaster measurement could happen where we could kick it in. I still wouldn't look at more than a quarter of a percent. I mean I wouldn't - I wouldn't want to have a big -- big range. MS. BRADY: You know what? I can't follow this conversation real, real well and I've been dealing with this stuff for a long time, so I'm assuming like I'm kind of an average citizen -- person -- and so, but I what - I will listening to when I'm listening to the conversation is that people who know about the permanent fund agree that what we did was right even though -- was okay to do -- and was protecting the fund and was -- that we described it correctly even if they might have a different idea then I would be willing to buy into the plan if I hear people who understand (indisc.) about the fund saying we did it wrong, we didn't understand, then I'm going to start getting nervous about the whole thing. So, all I'm interested in is that people who discuss this -- you know, who discuss it all the time, sit there and nod and say yes, there are these three things and either one of them would be an acceptable thing to do, this is the one we choose as the most acceptable, then I think you can argue it in public however you want to argue it. Just so we don't have this real serious disagreement among the people who know about it that this is a good thing to do. CHAIRMAN ROGERS: Pat. MR. POURCHOT: I'm not setting myself up as one who really knows about it, I just happen to come next in the conversation. If you tie it to the real rate of return, by definition, you can not get in trouble, as trouble is defined by invading your corpus over time. You absolutely know -- not year to year, over time -- that's the definition of real rate of return as we have defined it in the use of the permanent fund. Not just here, but historically. So.... MR. GORSUCH: That's -- that's not true. You could have unrealized losses just as you can have unrealized gains in that portfolio, and artificially pop up real earnings because you didn't take your losses, just as you -- we have it now where you got potentially $2 million of unrealized gains, it can go the other way and your so called real earnings are an over-statement because you failed to take your losses in any given year. MR. POURCHOT: Now wait a minute, let's not confuse market and book value, here. MR. GORSUCH: No, I'm not. I'm talking about book value. Book value.... MR. POURCHOT: No, we're talking about market value. We're talking about market value. MR. GORSUCH: Market value has in the 4.79 percent increase an assumption associated with the -- the $2 billion of unrealized gains, otherwise we wouldn't lower the rate of return when we do the adjustment. CHAIRMAN ROGERS: Steve. UNIDENTIFIED SPEAKER (male): We wouldn't lower the.... MR. POURCHOT: I don't follow what you just said. CHAIRMAN ROGERS: It is after lunch time and I think all of us are having some trouble thinking.... I'd like to invite Byron up to the table, since we're talking about taking.... MS. BRADY: Why don't we just have the permanent fund tell us the best way they'd like to see (indisc.). But do these give us different amounts of money (indisc.) I want to know. CHAIRMAN ROGERS: Potentially. BYRON MALLOTT: Mr. Chairman, I think that I can talk from back here. I'd mentioned to you that I'd asked Michael O'Leary from Callan & Associates to stand by to be available to me if issues like this could arise, because that's what they do everyday. I just now wanted to ask him two questions. Whether using the spreadsheet as you have with essentially the -- the accounting value using a nominal rate of return really matches up in terms of market value and whatever payout rate. You would assume that the answer is yes and the answer was yes. But I did want to double check that. And secondly, I asked him about this whole notion of a payout rate both relative to the fund and prospective sizing it relative to -- to both past market performance -- market performance, I emphasize not fund performance because I think it's important for all of us to keep in mind that almost the whole history of the permanent fund has been in a bull market for all practical purposes, and at some point it's going to go the other way, and it could go that way for some period of time. And I just asked him what kind of options that other endowments may have used and he said it's not atypical for a -- an endowment to use a moving average of three to five years. He said that you don't need to go beyond five years, at least (indisc.). So he said that that made sense using a moving average of either three or five years. He uses th example there, again off the top of the head, calculating the in-flow of new revenues in addition to market growth of the asset. But if you used the 5 percent payout rule, for example, that the real payout rate is about 4.6 or 4.7 because you're adding asset value as you're paying it out. So -- so -- anyway that just gives you a frame of reference. He did indicate that he would be available on the phone during the course of the afternoon, if he did have -- or if you did have specific questions relative to these kinds of issues. CHAIRMAN ROGERS: So -- so, he said if we used 5 percent of the -- of the market value of the average of the past five years, that equals 4.6 percent of the current market value. MR. MALLOTT: That was just ballpark. CHAIRMAN ROGERS: Okay. MR. MALLOTT: And he just used 5 percent as an example, not as a (indisc.). CHAIRMAN ROGERS: So -- so, if our target pay out rate is about 3 1/2, we would want to say 4 percent of the average market value of the last four years -- five years or something like that. MR. MALLOTT: Recognize that all this is, is just (indisc.) right now, but I think that it gives you a sense of -- of the rates. I was particularly interested in his reaction to (indisc.) the spreadsheets, whether using cost accounting plus a nominal return puts you in the ballpark (indisc.). CHAIRMAN ROGERS: Do we want to try to get a teleconference hooked up and ask him questions or is that enough information for people to make decisions? MR. GORSUCH: I was just wondering if we could ask Byron to call him back just one more time and ask him on -- if we had average data on a set of market versus five year average based on the what we call the float -- the real earnings -- if he could tell us what the pros and cons of those two options, that would be helpful. MS. BRADY: Can we hook him up and so everybody can hear and then you guys can ask questions.... MR. MALLOTT: We certain could. He did say (indisc.). The issue (indisc.) and I think you might want to explore this with him, because (indisc.), but fundamentally, you really can't talk about the endowment approach in terms of net income, cost, and so forth when you move an endowment to a market, market, market, and the payout rule has to do with a percentage of the value of the portfolio at the market. And I think that that conceptually is important. I don't think it changes anything, but I think it helps to uncomplicate it (indisc.). And again Mr. Chairman, I know that you're at a point where you're trying to get the policy framework and I don't want to hang you up in detail, but I just wanted to make sure that -- that concept all hung together. MS. MCCONNELL: (Indisc.) 13 billion would be a detail, but once we get over 13 billion.... CHAIRMAN ROGERS: One choice we have is to make a first cut at it and to say that we think there should be some -- that there's room for debate as to what the appropriate payout rule is -- here's an example of one that we have used for purposes of our calculation, but you know we don't have pride of authorship, necessarily. Steve. SENATOR RIEGER: It seems to me that -- maybe we can check this with O'Leary -- but if you have a conservative pay out rate as kind of your target transferred to the general fund and it's important that that be conservative for the purposes of this thesis, and if you were a typical fund manager or that manager's fund advisor -- permanent fund, I think that the likelihood the pressure to be conservative will be greater with the fixed pay out than with a market -- five year average of market performance, because there's nothing in it for you to exceed your target, but there's a lot of penalty for falling short. So, if you know that -- you know, that it's likely that you could do 4.6 percent long-term real rate of return, but nobody's gonna -- but there's some risk, you know 80 percent of the time you can make that, but 20 percent you'll fall short of whatever the right number is. But you could with 100 percent certainty do a 3.5 percent forever, there's going to be a strong temptation to keep your job and keep your financial advisor job and recommend the 3.5 percent sure thing allocation rather than take that little chance of falling short in order to get the higher return. So, there's -- I think -- I mean -- I -- in Pat's camp because I think that you're a lot safer and you can never invade principal -- you go on an actual performance basis, but I think that there's that second effect when you start -- and I think it would be nice to talk to him about it. When you start trying to second guess how will the actual fund managers and advisors behave under those two different types of demands placed on the permanent fund. CHAIRMAN ROGERS: Steve, I think you're right if we use the percentage of the previous year's market value. But what I heard Byron say was that you use a percentage of the average market value in the last five years which means you really are tied to investment performance because the market value has changed based on that investment performance. And I think the scenario that Byron lays out does very well link to performance and get away from the possibility of invading principal. Judy. MS. BRADY: I guess my question again is how much will all of this -- what is the difference in -- in how much money would be available to spend and my other question has something to do with what Bruce asked -- it has to do with flexibility. Are we going to sunset this eight years from now so if the legislature decides they want more of a payout, are we going to hold them to it or -- so that puts pressure on taxes and stuff where actually you don't need to because you actually should be -- the endowment should be paying more as time goes on -- see I don't know if I want to decide now that eight years from now we should still be bulking up the permanent fund when other things have happened, maybe you want a bigger pay off here. CHAIRMAN ROGERS: I -- I think if we're looking at setting something in the Constitution, you have the opportunity every two years for a re-set, but realistically you have the problem maybe -- the opportunity not that frequently because the legislature is not going to want to go back and re-set it.... MS. BRADY: Oh, you -- in the Constitution, given the opportunity to re-set.... CHAIRMAN ROGERS: Ya, ya because they -- well, no -- no, they could go in and propose to the voters to amend the Constitution. MS. BRADY: Oh, ya but you don't -- you don't want to get that started in your Constitution. What if the Constitution.... MR. GORSUCH: We've been doing it for the last 12 years. MS. BRADY: Ya, but we haven't made all that many changes, but what if -- what if you went -- what if you did as part of the constitutional things, let the -- let the legislature re-set that number every four or five years, that they would not redo the Constitution, they would just have the chance to re-set that number every four or five years or six years or.... CHAIRMAN ROGERS: And so a legislature could decide this year we want to re-set it to 10 and spend like crazy. MS. BRADY: For ten years or eight years -- ya.... Note: Tape indiscernible -- everyone talking at the same time. REPRESENTATIVE NAVARRE: .... because then that would only require -- it would still require two-thirds but the pressure would be to stay with the number that is currently or whatever is established as the constitutional level, but it would -- I mean it would allow for possible adjustments. Otherwise, I think -- I think Judy's right - we'll have a hard time ever getting a change. CHAIRMAN ROGERS: So could they set it at eight? Could the voters say.... REPRESENTATIVE NAVARRE: No -- they could set it but then it goes to the voters for approval. MS. BRADY: So you have the argument again, so do people -- because otherwise people end up paying more taxes; there'll be all this kind of stuff when you have this much money available and then it should be looked at every once in awhile, (indisc.) what you want to do again. MR. LUDWIG: I thought part of our recommendation was going to be do this every five years or so - with different people. CHAIRMAN ROGERS: I guess I'm concerned that if you could change the pay out rate through legislative action approved by the voters, that a legislature coming in and say, we want to raise the dividend to $2,000, so all you need to do is adopt this constitutional -- or adopt this new pay out rate of 9 percent next year and we'll give a special distribution. REPRESENTATIVE NAVARRE: That could happen anyway. MS. BRADY: And that's not.... CHAIRMAN ROGERS: Not under -- not under -- not if we have a fixed number. REPRESENTATIVE NAVARRE: Sure it could. MS. BRADY: Ya, but that's not fair -- I mean, we're going to have future.... REPRESENTATIVE NAVARRE: The legislature -- they'd go in and say we want to increase the dividend. In order to do that we have to change this rate, we put the constitutional vote before the people (indisc.) so that if that type of irresponsible... This would too. It just says that you have to put some number before them which means that probably that the number that the legislature puts up would be, I think, at or near that pay out number and the final vote is by the public and if they don't approve it, then the existing rate continues. MS. BRADY: And where we fail always in our constitutional amendments on the spending limit we never could change it so it never worked. So, if we had been able to change that automatically every four years. I mean, when we try to prevent future bad decisions we always screw up forever. CHAIRMAN ROGERS: Pat and then Annalee. MR. POURCHOT: In answer to Judy's first question -- what are the differences in the amount between the different options. The true answer is we don't know because therein lies this risk -- minimization that we're going through. And -- but all we do know is that if you just said today, based on just -- its approximate 4 1/2 percent real rate of return -- just today, but we don't know what it's going to be in the future and that's what we're trying to modify. The 3 1/2 percent rate, obviously is 1 percent different, on a $20 billion corpus, that could yield you a difference of $200 million in annual contributions -- 1 percent on $20 billion. So, to the extent today, based on history, that you move to the true real rate of return on average versus 3 1/2 percent is $200 million dollars annually. But we don't know what's going to happen in the future, we don't know whether.... MS. BRADY: And that's not enough. MR. POURCHOT....it's going to be five long years in a row or whether it's going to be much higher and so you're -- you're -- you want to protect your corpus and I think some of us would argue though, you - you want to front load your permanent fund and that's how - how we set up this projection from moving to 3 1/2 to 4 percent and I would argue that some of us would say in your out years, there's nothing wrong with taking advantage of five good years in a row. MS. BRADY: Yes. MR. POURCHOT: And so, I don't know if it's so necessary in the out years that you are so conservative below whatever your five year real rate of return happens to be. MS. BRADY: But if we only have 200 million, we're - we're at the same here, we're going to have $667 million. MR. POURCHOT: You'd -- you'd have 200 million more if you went to your.... MS. BRADY: Oh, 200 million over the 667. Oh, I thought you meant that was all we were going to get and I was going to say whoops. CHAIRMAN ROGERS: Lee and then Hugh. MR. GORSUCH: Well, I just -- I don't -- I don't think it would be wise to put a sunset provision in the constitutional amendment. You can always go back after a revised constitutional amendment. MS. BRADY: What about automatic -- what about (indisc.) every five years you had to re-set the number. You didn't go for a constitutional amendment, you just re-set -- you just had to -- legislature reaffirm or change the number. MR. GORSUCH: We don't want the legislature dinking with us. We want either the real rate of return or the endowment return in the Constitution. I mean the whole idea was to take us out of the legislative arena. MS. BRADY: (Indisc.) you've taken out of the near stuff, but I -- okay. CHAIRMAN ROGERS: Hugh and then Annalee. MR. MOTLEY: I hadn't raised my hand. Laughter UNIDENTIFIED SPEAKER (male): But we know you wanted to say something. CHAIRMAN ROGERS: Annalee. MS. MCCONNELL: If -- if we were to put in the Constitution a maximum -- I don't have any problem with saying that the legislature could take it below a maximum level, so that you don't require that -- that it be at 4 percent, but you say -- or whatever would be the number -- but you say at maximum it's 4 percent, you could as this scenario started off at 3 1/2, I might bump it up to 375 part way through (indisc.) to 4 or something like that. But I don't have so much heartburn with the legislature making -- making some moderate adjustments, I think if we smooth it out on a five year basis, there's less need to do change from year to year anyway because you smoothed out the income stream and that's the condition under which you'd be tempted to jack up the rate. So, if we five year average it and give a range together, I think perhaps we -- we'd get to a good -- we retain some flexibility without going through too many hoops or running amuck. MR. GORSUCH: Why don't we wait until we hear what our consultant has to say on this. I'm willing to give some kind of deferral to the advice on A and B and I don't.... MS. BRADY: But don't you think -- and don't you think that with the permanent fund there, if the legislature started to run amuck on this that the permanent fund trustees would start having a fit, and the public would start having a fit, and.... (Indisc.) concerned -- I'm just concerned that we'll be so I'm just ... CHAIRMAN ROGERS: The endowment plan that I put forward said 3 percent of the previous year's market value. An equivalent dollar amount is Byron's modification, from Callan and Associates 4 percent of the average of the previous five years market value, which builds in some performance. Steve, how would you word your real earnings (indisc.). SENATOR RIEGER: I'd say the previous five years average rate of return. CHAIRMAN ROGERS: The average... SENATOR RIEGER: ...rate of return over the.... CHAIRMAN ROGERS: Average percent of return? SENATOR RIEGER: Average dollars return. It would be actual money. Ya, average -- average real return, which is a total return -- market value return (indisc.). CHAIRMAN ROGERS: In either of these you could dip into principal - - for any of these -- you can dip into principal for a single year, but on average for these two -- or this one would guarantee that on average you didn't over long market cycle. MR. GORSUCH: But if Steve's doesn't have a percentage, then in fact there is no growth in the -- internal growth inside the fund. The whole idea of the 3 1/2 percent was to allow about a percent of retained earnings inside the fund that is the source of its building up over time. So, unless you went to 80 percent of.... SENATOR RIEGER: There's still dedicated royalties going in. MR. GORSUCH: We know what those are. There's 200 million. The endowment plan doesn't work if you distribute -- as we have the spreadsheet here -- doesn't work if you pay out all the earnings. SENATOR RIEGER: Oh, it does so. I mean, even the difference between 35 and 40 million out there -- it doesn't totally close your gap. It's a matter of degree. I mean none of these -- none of these build up a -- none of these build up an endowment that's so big that you -- you 100 percent fund the general fund for the next 50 years. MR. GORSUCH: This spreadsheet doesn't -- these numbers don't work if you don't retain some earnings. SENATOR RIEGER: Well, sure they do. You that -- even that one that's called the revised.... MS. MCCONNELL: They get bigger, yes. SENATOR RIEGER: Big is a matter of maybe $100 million difference payout in the out year between this one which is the low (indisc.) of the permanent fund and this one which is the highest, which raised the royalty contribution 50 percent and, you know, had an income tax bumping in and everything else. SENATOR RIEGER: None of them totally solve the problem, it's a matter of degree. MR. GORSUCH: Do you know how much principal it takes to earn $100 million a year? CHAIRMAN ROGERS: Two and a half billion at 4 percent. MR. GORSUCH: Two and a half billion is a lot of money. SENATOR RIEGER: That's my point. Look at it the other way -- 2 1/2 billion only gets you 100 million a year, and it doesn't solve your problem one way or the other. MR. GORSUCH: It solves $100 million worth. SENATOR RIEGER: It solves 100 million.... UNIDENTIFIED SPEAKER (male): It's only a hundred million. MS. BRADY: I also -- it also (indisc.) for a ten year period, so it might build a lot of schools, it might fix a lot of roads, or it might fix a lot of other things that we need that we can't make up the difference in taxes.... SENATOR RIEGER: Not logically.... MS. BRADY: There's some kind of trade off. SENATOR RIEGER: Why don't we have a $2 billion tax burden starting right now so that by God, by the year 2010 we'll have 100 percent endowment. I mean, it's.... MR. GORSUCH: I don't support -- all I support and am trying to argue along is that we want to have some offset to the -- to the declining oil production that contributes. That was the gap that we've -- I thought we were trying to fill. We used -- we left a spread for conventional taxes and in here we still have half of an income tax, we still have $340 million worth of dividends being paid -- we've got enough cushion in here, but the only way that's possible is if over time you're trying to have an income generating capacity to offset oil. And you can't go after taxes as a way of simply trying to continue to do that. So, the idea is that you're trying to avoid this kind of crunch downstream. CHAIRMAN ROGERS: Pat, I'll get to you in just a second. I want to see if anyone has the wording for another alternative that is 3. MR. POURCHOT: That's -- that's what I was raising my hand for. What I had thought about was - was combining those two concepts, which is -- and again, this isn't how it will always work, but it's worked historically to gear to your 3 l/2 percent. Now today would be average dollar real return of previous five years minus 1/2 percent for the first five years, and then -- I'm sorry -- minus -- I'm sorry, I misspoke -- minus 1 percent for the first five years, going to minus 1/2 percent thereafter -- percentage of this rate of return, average dollar real rate of return averaged over five years. That's the same today approximately as laid out here -- well except for in Brian's, you take your 3.5 clear through 05, I guess that's another sub-option, how long you take your conservative pay out. MS. MCCONNELL: To be -- I'm not sure I understand what (indisc.) let me try this out. If the real rate of return -- if the real return $100 million, then are saying minus 1 percent of that 100 million, or minus 1 percent of something else? I'm not.... MR. POURCHOT: It's then same dollars or percentage. I was -- I was (indisc.) converting real rate of return in a percentage, so today it's 4 1/2 percent. So, for the first five years or the first ten years, you would take 3 1/2 percent and then thereafter it would rise to 4 percent. CHAIRMAN ROGERS: But you're using dollar return, not percentage. UNIDENTIFIED SPEAKER (female): Dollars not percentage, ya. MR. POURCHOT: It doesn't make any difference. CHAIRMAN ROGERS: Well, except how you -- except these have to be words in the Constitution -- it does make a difference. Somebody is going to interpret them.... MR. GORSUCH: So it'd be either 80 percent or 75 percent of the dollar amount.... MR. POURCHOT: ...of the dollar amount. CHAIRMAN ROGERS: Okay, you could do it -- if you did a percentage of the dollar amount rather than minus the.... Good. Judy. MS. BRADY: Okay, now let me -- let's explain this so I understand it because we'll probably have to explain it in the (indisc.). Under A, you would still have one whole percentage point each year that just would be internal to build up the fund. UNIDENTIFIED SPEAKER (male): Yes. MS. BRADY: So, the fund would build up faster with A, but you'd have less to use for -- for running government. UNIDENTIFIED SPEAKER (male): Yes. MS. BRADY: Under B.... CHAIRMAN ROGERS: It's the same as A, but it's smoothed over a longer period of time. MS. BRADY: So, (indisc.) you'd still have a whole full percentage? CHAIRMAN ROGERS: Yes. MS. BRADY: Earning.... CHAIRMAN ROGERS: Because of the buildup. MS. BRADY: Okay. And do all these -- are we taking the permanent fund down? I mean, are we.... CHAIRMAN ROGERS: Dividend? MS. BRADY: Dividend down, so.... CHAIRMAN ROGERS: That's -- that's independent of this, but yes. MS. BRADY: Are we dumping that money into the fund, too or are we using that for spending? CHAIRMAN ROGERS: Under the -- under the endowment approach, the dividend is within whatever that amount is, so you have to choose between dividend and spending. MR. GORSUCH: For -- for clarity, B is what we're working with and that's just the modification of the five year spread, right? CHAIRMAN ROGERS: B is a modification of A, and D is a modification of C. MS. MCCONNELL: And D is now going to be some percentage of C, right? MS. BRADY: Okay, so what's the big difference between A, B, and C? So, the big differences are between A and B on one end, and C on the other. So, like the difference from B and C is the real difference, right? UNIDENTIFIED SPEAKER (female): The rest is (indisc.). MR. POURCHOT: In theory they're all the same, you just -- you're just not trying to judge what the markets are going to be like 15 years from now.... MS. BRADY: Well, one apparently allows some money internally, so the fund builds up a little faster and one allows some more money to be used for general fund operating. Is that the main difference? MS. MCCONNELL: A, B and D allow build up of the fund. CHAIRMAN ROGERS: C doesn't. UNIDENTIFIED SPEAKER (female): C does not. C takes the full earnings, spread out -- you know takes out the bumps and spikes and stuff, but C basically uses all the earnings. The other three don't. CHAIRMAN ROGERS: Except that under C, in its defense, the legislature could choose to make an additional permanent fund deposit. UNIDENTIFIED SPEAKER (female): True. UNIDENTIFIED SPEAKER (female): It just gives them some flexibility. CHAIRMAN ROGERS: Does everyone understand A, B, C, and D? MR. LOESCHER: I understand (indisc.)....80 instead of 80 or 90.... CHAIRMAN ROGERS: What I'd like to do is to try a structure vote on this with people voting for either A or B, or C or D and then once we've decided whether to follow the A or B approach or the C or D approach, then we'd divide within that group. I think that's the way to vote that allows.... MS. BRADY: What do you want to do now? CHAIRMAN ROGERS: Okay, if you support A or B, you'd vote yes -- you'd vote for that. If you support C or D, you'd vote on that. Where the majority goes, then we'll look within the A or B flat rate approach or the C or D.... MR. GORSUCH: (Indisc.) until after we hear from O'Leary, because my vote on B or -- I'd be voting for B or D, depending upon what O'Leary says about this idea of risk and return. Do we have him on line or.... MELISSA FOUSE: We can get him. MS. BRADY: Can somebody explain to me just where we're getting him, because.... MS. FOUSE: Well, we have to go in the library. CHAIRMAN ROGERS: Oh, we have to go in the library to get him, so why don't you get him on the line and then come call us. MS. BRADY: (Indisc.) you think -- Lee you're saying that you have to have that 1 percent because you're trying to build it up to so much and Steve's saying, hey, we're trying to build it up, but how do we know what (indisc.) in the future. Is that kind of it? SENATOR RIEGER: I mean actually -- you know, I mean -- I'm not hung up on that 80 percent or 90 percent of real earnings versus (indisc.). I mean that's -- that's a side issue. But I'm trying to demonstrate you know, the bigger issue in that it's -- in my opinion -- it's great to work towards an endowment and endow as much of the general fund as we can. But none of these scenarios come close to endowing the general fund and it's at what price do you beef up the endowment even further. Some of us fall out, you know when you don't have 100 percent being available in real earnings. Others of us might fall out when we start adding additional taxes to build up the fund or someone might fall out at some other point. But it's all a matter of degree. At what price do you build up your corpus and you know, so this is just one issue in a whole spectrum of issues of how much sacrifice.... CHAIRMAN ROGERS: Okay, we got him on line -- let's.... TAPE 2, SIDE B CHAIRMAN ROGERS: The motion before us is to adopt B with the friendly amendment of up to 4 percent. Is there further discussion? (Indisc.--several people speaking at once.) CHAIRMAN ROGERS: Judy. MS. BRADY: I just want to know, now, (indisc.) right? CHAIRMAN ROGERS: It's roughly the same--whenever we break or overnight we re-run it to make sure. So we've got to look at what the last five years market value numbers are, which I hope we have some. Are they on Rieger (indisc.) spreadsheet? UNIDENTIFIED SPEAKER (Male): We don't know . . . CHAIRMAN ROGERS: It's that book, right? . . . Okay, we'll get that and calculate it ... MS. BRADY: Okay, because I just don't want to have any unintended (indisc.) on other parts (indisc.). CHAIRMAN ROGERS: Lee. On the motion to adopt up to 4 percent of five years. MR. GORSUCH: One caveat we had talked about was if in fact there was some kind of interest or extraordinary event for which we'd like to have a little flexibility, and as (indisc.) said the response to Brian's question was 4 or 5 percent. He would unequivocally say it would be sustainable over a long draw. And we're using the low number--the 4 percent--his figure, which if I understood what Byron had said earlier, the 4 percent is effectively more like 3.5. We're back to the 3.5, but that we could go 5, which would be the effect of 4.5. And to get to the point I think Judy would rephrase earlier some others, if we wanted to create a provision whereby a 3/4 vote of the legislature could authorize an additional point, an additional one percent draw, that would be a possibility. CHAIRMAN ROGERS: Mike. REPRESENTATIVE NAVARRE: I think he also said that on policy decisions there was a lot more downside than to investment. And that might lead to a short period of time with very good earnings, convincing policy makers to jump up that amount, which might not ever be reduced again, simply because of the expectation of spending that could be provided with that type of a draw. CHAIRMAN ROGERS: Sean. REPRESENTATIVE PARNELL: I wanted to share--I just told Mary--I'm torn right now, not because of the policy goal but because I think we're just going down the wrong path, for the reasons I've already tried to articulate. Hugh has tried to articulate. And so I'm trying to figure out how I can be of the most help, and have the most meaningful input I can in the process. So, I don't want to vote no on everything just because I don't like it, I just want to try to participate (indisc.). In other words, it would be easy for me to say, no, I'm not going to go for floating percentage because I think we're going down the wrong path. It would be easy for me to say, no, I'm not going to set a percentage because I think we're going down the wrong path. But, I just want you to know that even though I strongly disagree with this type of a downward climb that we're heading down towards, I will try to meaningfully participate in the decisions. UNIDENTIFIED SPEAKER (Male): Is there another type of a balanced plan that you would support? REPRESENTATIVE PARNELL: I would support something along the lines that Roger Cremo was promoting. CHAIRMAN ROGERS: But it doesn't balance. REPRESENTATIVE PARNELL: Well, it does if you use different assumptions. Your--you know, I'm not--we don't need to get into a debate over that. We've already agreed that we're going to cut a hundred million dollars over three years. And that's a parameter that was set before deciding on whether we're going to have an endowment. That's a parameter that impacts the ability to use the Cremo endowment, because of other policy implications, and now that we're this far down the path of coming to this endowment--I mean, I'm willing to work within the parameters that have been set. At this point in time. That's all I wanted to state for the record. CHAIRMAN ROGERS: I would hope that everyone--if there are areas that we get off what you support, you try to make the best of where the group is. I think that's what Hugh had said earlier. UNIDENTIFIED SPEAKER (Male): Right. CHAIRMAN ROGERS: In the hopes that we come up with the best possible plan. Mike O'Connor, you had your hand up? MR. O'CONNOR: I changed my mind. CHAIRMAN ROGERS: Okay. Are we ready to vote? The proposal before us is to adopt B, up to 4 percent of the average of the previous five year's market value. All those in favor please raise your hand. One, two, three, four, five, six, seven, eight, nine, ten, eleven, twelve, thirteen votes. ... That takes care of that first group of decisions. We have before us the 25/50 for the permanent fund deposit rate, the CBR, the permanent fund dividend, and the treatment of the permanent fund earnings reserve. And we'll take a five minute break before we get to those. (Break) UNIDENTIFIED SPEAKER (Female): I would leave it at fifty percent, and I would say--I would make it specific to ANWR, that if ANWR comes on 75 percent. By statute, so people could change it, but I think that it would be--I think there's going to be some other fields that would come on. See, I don't know--if West Sack(??) came on, I mean, is that a new field? UNIDENTIFIED SPEAKER (Male): (Indisc.) UNIDENTIFIED SPEAKER (Female): Well, I'm concerned about--we're going to have a lot of pressure on to spend it anyway, and we've already decided we're not going to do a payout, even on the earnings. We're going (indisc.). CHAIRMAN ROGERS: So we have--alt one is 50/75. Alt two is 50. And alt three is 50, with 75 specifically to ANWR. If ANWR's open and if there's oil there. UNIDENTIFIED SPEAKER (Male): Where's gas production put in currently? CHAIRMAN ROGERS: Gas production currently is at 25 percent from Prudhoe, and McIntyre is at 50. If there's any gas produced there. And so, the alt--any of the three alternatives would boost the deposit for royalties from gas production. MS. BRADY: Let me just talk a policy issue for a minute, because you do have every state that has some good things happen to it, their budgets go up. Because they get more--in terms of reoccurring revenues. Because we own so much of our land, our reoccurring revenues tend to be attached to oil and gas production. So we do better--our ability for new schools, new roads, new all of that--goes up. And I think we should continue to allow that. I'm a little concerned that we are saying that we're trying to control even our natural flow of funds. UNIDENTIFIED SPEAKER (Male): (Indisc.) UNIDENTIFIED SPEAKER (Male): I need somebody to explain to me why we're increasing from 50 percent to 75 percent the new fields. UNIDENTIFIED SPEAKER (Male): My rationale for that--I think Judy just talked me out of it, but my rationale for that was, since we're not counting on any of that money today, it's a freebie into the fund, and builds us in the out years when I see we have trouble, and I guess I'm persuaded partly by Hugh with that (indisc., coughing) drop we get in 2011, and thereafter. That anything we do here helps that. But I guess Judy persuaded me to leave that issue open, and the legislature can always decide to make it a policy. MS. NORDALE: But it doesn't leave it open with Judy's amendment by having 75 percent of ANWR. UNIDENTIFIED SPEAKER (Male): No, I think she persuaded me to go with two. UNIDENTIFIED SPEAKER (Male): But by doing it by statute you are sort of leaving it open. MS. NORDALE: But see, I would leave it--I would even probably go 50 percent. Is that the way it is now? CHAIRMAN ROGERS: Right now, the statute calls for 50 percent. On new fields. MS. NORDALE: I guess I'd just leave it in statute. Not change it. MS. BRADY: Could we--can I make another one up there? CHAIRMAN ROGERS: Sure. MS. BRADY: And that maybe would be at least 50 percent constitutional and 50 percent of new fields. CHAIRMAN ROGERS: Well actually, 50 percent constitution--it would have to be 50 percent, because it's 50 percent on all ... UNIDENTIFIED SPEAKER (Male): (Indisc.) 50 percent constitutional, unless you're making--you carve out Prudhoe--you'd have a tremendous drop in revenue to the general fund. CHAIRMAN ROGERS: You have 244 million in the first year (indisc.). Mike. REPRESENTATIVE NAVARRE: One of the things we're not protecting against though is the--the lease sale where you get a billion dollars for ANWR (indisc.). And they spend 500 million of it in the legislature a year. CHAIRMAN ROGERS: That is current law. And under alt 2, that still would be the case. Under alt 1 they'd have 250 million to spend, and alt 3 they'd have 250 million to spend. If it was a billion dollar bonus coming in. MS. NORDALE: Yes, but since we know ANWR is the only thing coming on, that we're going to get a billion dollar bonus for, why don't we just do something for ANWR? Instead of your bonuses going ... CHAIRMAN ROGERS: Because you do it in 1995, and the field doesn't come on until 2004, and you have all the service-related responsibilities and that 250 million not spent. MS. NORDALE: What are you--maybe I misunderstood what you were arguing. What were you arguing? CHAIRMAN ROGERS: Well, I'm saying that if it's 500 million it's that much more that you have expense. All I'm saying is that if you don't change it, you get your lease sale money tomorrow. Production. And all the people will come for 10 years, and the money's gone. Ya. It's gone tomorrow, if you don't make a change in the existing system. MS. BRADY: I think (indisc.) point is right when you--there is a real difference between something that's a one-time unit as opposed to a periodic thing that royalties would represent. And I think it would be worth increasing the percentage for those kinds of payments. At the moment I don't care too much whether that's a constitutional or statutory--maybe in statute, but I think it should be a different rate than regular old royalties. UNIDENTIFIED SPEAKER (Male): Where does the money go now? MS. NORDALE: Now it's being treated the same as royalty payments and severance taxes. CHAIRMAN ROGERS: So an alternative would be to go 50 percent in the constitution, 75 percent of bonuses, and 50 percent of other resources. MS. BRADY: But but but but ... CHAIRMAN ROGERS: But but ... MS. BRADY: We're going to have some more lease sales, with probably bonuses although everybody's hoping bonuses kind of go away for a while. But anyway, other things with bonuses. I think we want those to go in, because right now is kind of a quiet time. UNIDENTIFIED SPEAKER (Male): Go into the permanent fund? MS. BRADY: No, no. Go into the budget. Because we're going to have some capital needs and some other things, for lease sales. But why don't we just separate out ANWR and say that for ANWR sales, 75 percent of the bonuses go to the permanent fund. So that our regular business as we go (indisc.) stays the same. And if ANWR opens then we treat that separately, because that's going to be a whole new field. CHAIRMAN ROGERS: Is that 75 percent of 90 percent, or 75 percent of (indisc., laughing). MS. BRADY: According to our governor, it's going to be 75 percent of 50 percent. CHAIRMAN ROGERS: And our delegation. MS. BRADY: Oh yes, and our delegation. UNIDENTIFIED SPEAKER (Male): Our current governor. MS. BRADY: Our current governor. UNIDENTIFIED SPEAKER (Male): And our current delegation. (laughter) CHAIRMAN ROGERS: Who's next? Mike, I'm sorry. REPRESENTATIVE NAVARRE: I guess I share some of the frustration with the spending of the legislature, but I want to point out that in fact the legislature didn't spend it all. When we had the opportunity, we didn't spend it all. We made significant deposits into the general fund, above and beyond what were required under the constitution. And that while I think that to some degree we need to attempt to reduce the discretionary authority of the legislature in order to force some conservatism, on the other hand, I have a fundamental objection to representative government being neutered. So I think that you have to allow some responsibility that is contained in the constitution to remain with the legislature. So, while I support going to 50 percent constitutionally, I think trying to address every (indisc., coughing) beyond that (indisc., coughing) beyond what's--what the legislature is trying to do. CHAIRMAN ROGERS: Lee? MR. GORSUCH: I think when the public voted initially on the constitutional amendment for the permanent fund, there was an impression that when they voted the for percent it was 25 percent of everything. Well, it turned out it wasn't 25 percent of everything. In fact, corporate income taxes didn't come under that provision, and severances are outside of that. And as a consequence, if you look at the total value, since these other two sources of state income represent over half of the total oil revenue stream, it was really like 12 and a half percent. So I personally think that moving to the 50 percent constitutional requirement gets us closer to where we thought we were with the 25 percent. If we're going to continue to exempt severance and corporate income taxes. Which at least historically has been a big source of the total oil related revenues. CHAIRMAN ROGERS: Steve and then Chris. SENATOR RIEGER: (Indisc.) important that--to some extent, stability is good, but to some extent a little volatility is good, too. And I think I see some pattern with (indisc., coughing) if we overstabilize, what happens is that all of your activities get chewed up by formula programs. There's nothing left (indisc.), there's nothing left to do (indisc.) one time things. So, I think that there's some case to be made that you ought to stabilize but within limits. And it's kind of an accident that I'm even here this morning. I'm not really that alarmed if maybe there would be some extra money now and then, that's one time money. Because there's probably some things there waiting for that. CHAIRMAN ROGERS: Bruce. MR. LUDWIG: I have a question for Judy. You made the comment that the oil companies were trying to get away from bonuses. MS. BRADY: No. That was that little--that little report. The oil policy council. MR. LUDWIG: Where would these--like would royalties go up a percentage, or something? MS. BRADY: Ya, there would be trade-offs. It would go--there would be a couple of trade-offs they recommended. I don't know what the companies think about the whole package. But, the point is here, that we know probably the feds would (indisc.) Cause they always do. And ANWR is on federal land, and so the question is, what do you want to do with those bonuses. Do you want to treat them--which we hope is a lot of money, because we hope everybody's real interested. And that's the money that tends to be--there's going to be some pent-up needs at that time, because that's going to be, what, six or seven--it could be--well, hopefully not that long. CHAIRMAN ROGERS: In terms of voting, I want to structure two votes. First, on the constitutional, and then on the statutory. I think that makes it a little bit easier. So on the constitutional, between 25 and 50. Mary. MS. NORDALE: I move we stay with the current (indisc.) the constitutional. (Indisc.) CHAIRMAN ROGERS: Moved and seconded to stay at 25. Are you ready to vote? Alt D in the statute (??). UNIDENTIFIED SPEAKER (Male): The current policy? CHAIRMAN ROGERS: Well, we'll be voting just on the constitutional side. Then we'll vote on the statutory side. UNIDENTIFIED SPEAKER (Male): (Indisc.) vote for two together, the constitutional and the 50 percent. CHAIRMAN ROGERS: Ya. So, motion made for no change. UNIDENTIFIED SPEAKER (Male): Where's the spreadsheet? CHAIRMAN ROGERS: We have another 250 million a year to spend. If the permanent fund goes down. So the current statute is amended by a simple majority. The current statute--ya, a simple majority could change it. All those in favor of keeping the constitution at 25 and the statute at 50, please indicate by raising your hands. Five. All opposed. Eight. The motion fails. UNIDENTIFIED SPEAKER (Male): I move alternative number 2. CHAIRMAN ROGERS: Alternative 2. Change constitutional to a 50 percent dedication, leave the statute as is. MS. NORDALE: For clarification, then, we're talking about 50 percent of everything, regardless of when it came on line, right? CHAIRMAN ROGERS: Correct. MS. NORDALE: And that would be 50 percent bonuses, 50 percent royalty, 50 percent straight across the board. CHAIRMAN ROGERS: Federal mineral lease revenues. MS. NORDALE: Everything. CHAIRMAN ROGERS: Yes. Minus 250 million from the revenue stream. Correct. Balanced by the payout from the permanent fund. That's what the spreadsheet shows. Ready to vote? All in favor of alternative 2, the (indisc., laughter, many people speaking at once). Are you ready to vote? We're voting on alternative 2, which will be to recommend a constitutional amendment changing it from 25 to 50 percent. No change in the statute. All those in favor, please raise your hands. Thirteen. The motion passes. We have adopted alternative 2. Okay, next we get to treatment of the constitutional budget reserve. And, alternative 1 is to leave as is. Alternative 2 is repeal, and put all the money into the permanent fund upon repeal. Alternative 3 is to--is to what? MS. NORDALE: It's the scenario that you had yesterday, where the periodic deposits were made. CHAIRMAN ROGERS: Deposit amounts in excess MS. NORDALE: (Indisc.--coughing) 1.5 (coughing). CHAIRMAN ROGERS: Deposit annually the excess over 1.5 billion into the permanent fund. Is there another alternative? MS. NORDALE: Isn't it our ... don't we use the CBR to build 96 and 97 where we did away with this? CHAIRMAN ROGERS: Yes. And under--if we're dealing with--if we repeal and put it in the permanent fund, the vote takes place after 96 and 97. MS. NORDALE: Okay, so number 2 ... CHAIRMAN ROGERS: Number 2 is what's on the spreadsheet that I will produce. Number 1 is on Steve's bill. Alternative 3 is on the composite before Steve's, which showed the annual dumping of the excess over 1.5. Alternative 4 would be to fix it, basically having revenues rather than funds in the general fund, repealing the (indisc.). It speaks to revenue rather than funds available in the general fund, or alternatively repealing the sweep or both. (Indisc.--coughing) the two approaches basically, the reason it's not working is because of the sweep provision. If we can fix that problem--most people who would want to keep the CBR would want to do that fix, I think, almost regardless of party. UNIDENTIFIED SPEAKER (Male): (Indisc.). CHAIRMAN ROGERS: Well, (indisc.) that's between (indisc.--several people speaking at once). You replenish it from one-time windfalls when they come in, and (indisc.--coughing) with the sweep (indisc.- -coughing) has is that you replenish it by raiding existing funds, for the value at year end. UNIDENTIFIED SPEAKER (Male): I don't care if you call it repeal, sweep or payback, it's the truth that it's a raid on existing things like the marine highway fund that have caused a automatic three-quarter vote every year regardless of what spending has been. CHAIRMAN ROGERS: But it still would be replenished by all administrative proceedings if ... UNIDENTIFIED SPEAKER (Male): But the obligation (indisc.--coughing) UNIDENTIFIED SPEAKER (Male): Doesn't matter. CHAIRMAN ROGERS: If there's a windfall, it goes in. Just as currently, if there's no windfall it doesn't go in. So it's not a function of what had been drawn in the past at all. Are there other alternatives that people have besides those four? A major subpart of 2 is that you would keep the language in (indisc.) as it is for depositing future windfalls into the permanent fund corpus. We put in five or six hundred million dollars I think into the revenue projections, and if we just repealed it, it would just--I assume--go into the general fund. UNIDENTIFIED SPEAKER (Male): So, you're saying keep it? Or are you saying take the language on settlement and put it into the permanent fund. UNIDENTIFIED SPEAKER (Male): The prospective language. There's still some debate over what's in there. MS. NORDALE: Well we need to know that, right now, we're showing that the remaining settlement money would go into the earnings reserve in order to bring that up to levels. So we have to be careful that we ... tie all these pieces together. CHAIRMAN ROGERS: Actually, ya. Cause that's another thing, an element, that's another way of dealing with a reserve. Lee. MR. GORSUCH: What do we now think the purpose of the CBR is? CHAIRMAN ROGERS: A volatility (indisc.) to ensure that (indisc.). MR. GORSUCH: It seems to me that, on the one hand, if there's this idea that it appears to be the receptacle for settlements, and therefore there's a higher (indisc.) for expenditure of those funds. That that purpose is quite different from the oil price volatility, and it seems to me that it creates some confusion about how are we going to handle oil price volatility if not through the CBR, then what other vehicle do we have to do that? And I came back then to the idea of, we're going to have the permanent fund earnings reserve ending balance as we've kept it at a billion dollars, whether it was our idea that the earnings reserve could serve as the stabilizer for both permanent fund as well as oil price commodities or not. So, it's not clear to me in my mind--I understand the CBR's purpose, to sort of pull in these windfalls and require some leverage before you can let them out, but what I wasn't sure as we were thinking about the permanent fund earnings reserve was whether that could do double duty, serve as a stabilizer for permanent fund earnings distribution and oil price volatility, or whether we need two separate funds. CHAIRMAN ROGERS: Mary. MS. NORDALE: I would like one fund. Apart from the--I just want one fund out there, and everybody else can argue it out but what the constitutional budget reserve fund fixed was the permanent fund earnings reserve balance. But I don't want two funds to draw from, that's why I like the endowment. If we were going to take one of those funds and dump it into the permanent fund so we could use it as an endowment and this one single reserve fund then became a kind of fix-it fund if things went bad for a year. And that's all it was, we dumped everything else into the permanent fund. We dumped settlements, we dumped all of that into the permanent fund, and just kept this one fund as a--and we kept it low enough so that it wouldn't be--it would be volatile but would be immediately apparent that we were like breaking the contract here. And it really was a fund that moved, so that if we got in trouble we could help ourselves out for a few years. CHAIRMAN ROGERS: The proposal that I put forth on the endowment scenario, which is really number 2, would have an almost identical impact if instead we adopted Steve's fix-it, and deposit the amount in excess of a billion and a half to the permanent fund, and take the permanent fund earnings reserve and get rid of it. So you put it into the corpus of the permanent fund. So that ... MS. NORDALE: So, it becomes a question of which is most politically likely or easiest to happen. CHAIRMAN ROGERS: And the other difference, and it's not real major, is that the permanent fund earnings reserve, because it's invested by the permanent fund corporation, is earning a slightly higher rate on average than the CBR, which is invested by treasury on short-term investments. UNIDENTIFIED SPEAKER (Male): Immediate term. CHAIRMAN ROGERS: Immediate term. The difference is historically 8 percent--7.94 percent--versus 6 percent. But I think you have the same impact, but where do the earnings go. Do the earnings reserves go as part of the calculation to the endowment. And the earnings of the CBR go into the CBR. MS. BRADY: The earnings reserves don't go as part of the endowment calculation. CHAIRMAN ROGERS: Right. No, the earnings of the permanent fund earnings reserve under this model are deposited into the permanent fund. They are not (indisc.--coughing). UNIDENTIFIED SPEAKER (Female): (Indisc.). CHAIRMAN ROGERS: They are part of the permanent fund. Which is another reason that it is at least as--an artificial fence built around these because it's part of the permament fund, makes it difficult because if you spend any of that you're raiding the permanent fund. That's the rhetoric they sometimes ... Mary MS. NORDALE: It seems to me that before we vote specifically on CBR options a little bit more generic conversation about reserves and Lee's point, I think, should come first. The route we've taken with the five year averaging on the endowment side deals to a large degree with the volatility and predictability issues that we had with that one chunk of income. The main purpose I see at this point moving forward for a reserve is to deal with oil price volatility. So it seems to me that we should--setting aside the mechanics for a moment of which place we put it in. But we need to think about establishing an amount of reserves that is pegged to the oil volatility issue and how much--over what period of time and what price drop do we want to say we should be prepared to meet out of our reserves. And, the issue of repayment. I think those are the two critical elements. And then we can decide which of these funds has a better chance of giving us the mechanics that we want. But I'd like to suggest an amount that's pegged to the anticipated oil and gas related revenues for the following year, something like that, so that it's that one forward business that you had in an earlier version of the plan. CHAIRMAN ROGERS: That would be about a billion five, right now. After adopting the 50 percent. A billion four or a billion five is, would be the--basically one year if Prudhoe shut down, we could cover. UNIDENTIFIED SPEAKER (Male): Where would you get the money to put into. UNIDENTIFIED SPEAKER (Male): Or two years if CHAIRMAN ROGERS: Two or three years of low oil flows. UNIDENTIFIED SPEAKER (Male): That would be part of the CBR? CHAIRMAN ROGERS: What she's saying is--whatever, if we go down to one fund, whatever fund it is, it should have an amount equal to that. And the rest would all go into the permanent fund. UNIDENTIFIED SPEAKER (Male): I'm just asking where we'd get that money. CHAIRMAN ROGERS: Either out of the CBR or the permanent fund earnings reserve. MS. NORDALE: If before we adopt it we take that much money out ... so I think in terms of--for instance, in terms of where we are on quantities here, we're a little bit shy although not. We're maybe in the 200, about 200 range million less than where we would be between two to three, depending on which year you look at. And so I think, as we look at the mechanics, if people feel comfortable with that amount, and that the purpose is oil volatility as opposed to needing it ... we don't need it for dividend stability. We don't need it for general fund earnings stream. Or for permanent fund stability. It's just for oil volatility, isn't that everybody's common understanding of what our purpose would be? CHAIRMAN ROGERS: Does everyone basically agree that's the purpose of having a reserve fund at this point? Is for oil price volatility. UNIDENTIFIED SPEAKER (Male): Do we know what the question of that 1.6 is volatile, as opposed to fairly fixed? UNIDENTIFIED SPEAKER (Female): I'm sorry, I missed the first part of what you were saying. UNIDENTIFIED SPEAKER (Male): We have two billion available revenues. General fund revenues. Oil is 80 percent, so it's like one-sixth. What part of that one-sixth is (indisc.--coughing) prices? What part's volatile? Is all of it volatile, is half of it volatile? UNIDENTIFIED SPEAKER (Female): Well certainly not all of it. Unless we would presume the complete shut-down of the pipeline, which is one of Brian's cases. Will Condon's suggestion was to take an approach of saying we should be able to handle two years of ten dollar oil. That was sort of his idea of what would be the kind of situation that gave us more than just a 1986 period of time with prices going haywire, but major change in the national--I mean on the international scene. UNIDENTIFIED SPEAKER (Male): So at ten dollars you'd be looking at 750 million a year. UNIDENTIFIED SPEAKER (Male): Ya. Somewhere around ... UNIDENTIFIED SPEAKER (Female): But you'd have two years UNIDENTIFIED SPEAKER (Male): At what point do they shut the pipeline down? Eight dollars? Seven dollars? At some point it's not worthwhile for them to drill. CHAIRMAN ROGERS: You have to have a negative wellhead value of some amount. Because just to keep everything running, they're going to run it at a loss for a little while. MS. NORDALE: Plus you get the terrific--the fed would step in, because of national emergency they need the oil. The fed would step in and say you can't, there'd be all kinds of ... UNIDENTIFIED SPEAKER (Male): Wouldn't we start a war before that happened? (laughter) CHAIRMAN ROGERS: Mary. MS. NORDALE: I just like to throw out a couple of ideas. I know that they're not going to be very perfect here, but ... If we had a fund ... we fixed the CBR and characterized that as the hedge against volatility, I think we would be on safer ground, because I think that the pressures for spending are going to be such that the earnings reserve of the permanent fund will be drawn down. Perhaps not by great increments in every year, but I think in some years. We've got a lot of unmet needs that are going to become more apparent, and I think the temptation is going to be too great to overcome. And with the scenario that we're working on now, we show that there is a gradual decline in draw down of the earnings reserve, below that which is recommended to be a hedge against volatility. So, I think that we really need to have two funds. I don't like the idea of having to have separate little accounts. But on the other hand, I think that if everything is in one fund, and it's drawn down, we have nothing to--we run the risk of not being able to hedge against volatility. We have nothing to meet emergencies with, and we get ourselves into a position of being unattractive as a marketer of debt. So that we don't have a way of creating capital improvements when we need them. That is a debt amount is gradually created. CHAIRMAN ROGERS: I'm not concerned on the natural disaster side. We have the ability to issue debt without voter approval, to meet a natural disaster. So I don't think we need a fund on that side. And I think that Steve's concept of tying the CBR to revenues rather than amount available for appropriations keeps the spending limit in there. It would say if the amount of revenues for a fiscal year is less than the amount of revenues for the previous year, then they can make an appropriation by a 3/4 vote. So we think I keep the concern that Hugh has had of that CBR being able to be raided. I don't know, I guess we'd have to repeal the C section, the section that says by 3/4 vote you can do it no matter what. For public purposes. MS. NORDALE: I'd like to have you explain your idea about revenue bonds for disasters. I'm not confident that they would be ... I'm not talking about constitutional capability during a crisis, I'm talking about practicalities of floating a bunch of funds when your revenue is so constricted as we have it portrayed here and you're losing your flexibility moment by moment in terms of the (indisc.). So, I think that as a matter of practicality, not as a matter of constitution, we should really consider the fact that it might not be in the State's best interest to rely solely on floating revenue bonds in order to meet disasters. CHAIRMAN ROGERS: Judy. MS. BRADY: Well, disasters ... I think what we need to be concerned about is what we know, and that is volatility of oil. And I think the 1.5 billion is okay as long as, you know, as long as it's not just a dictated fund for everyone who's kind of short. And I don't care which way we go. I think that's a six of one, half a dozen of the other, what do we think is easiest to work with and accomplish that. Disasters work kind of in and of themselves, and the money flows from the feds. And I don't think that the mechanisms ... and with our permanent fund there we would not ... I mean that's ... we don't need a disaster fund, and in fact a disaster fund is simply asking for somebody to declare a disaster. For someone to step in. It really is ... they really are just very, very ... MS. NORDALE: But the only draw down you can make on the permament fund, Judy, is whatever percentage you've got under market value ... MS. BRADY: You don't have to do anything on the perm ... if we had a big disaster here, the way it works is you don't ... you've got two or three years to get your act together, and pass whatever laws you have to pass or do whatever it is you have to do. I mean the money ... is the main thing. CHAIRMAN ROGERS: Annalee. MS. MCCONNELL: I think our problem is less with the humongous disasters and more with--if Ross Kinney were still in the room, I suspect he'd be a little concerned. I think we do need the ability to go back after a budget has been established and provide money. Not everything is fully covered by the feds. For those things where you need some--I think in our capping jargon of yesterday, this would be in the small category. But some ability to go beyond what was budgeted initially, if you have that kind of thing that happens at the wrong time of year. So, I agree with Mary that we need some of that. But I think at the larger level, it's almost like the working poor not having health insurance. We're in better shape for the really mega things, but in some ways ... UNIDENTIFIED SPEAKER (Male): (Indisc.) not really the small stuff MS. MCCONNELL: The Kenai kind of, Koyukuk level of expenditure. The small to medium kind of thing. UNIDENTIFIED SPEAKER (Male): I guess I prefer having the earnings reserve act as a dual purpose, because fixing the CBR, if we fix the revenues, then ... are you talking about repealing the 75 percent provision? CHAIRMAN ROGERS: Eventually. UNIDENTIFIED SPEAKER (Male): And I guess maybe we're okay that way. Maybe we should just say that if revenues are less, then you can draw from the earnings reserve of the permanent fund rather than having two funds. Because the CBR ... you may be able to fix it, you may not be able to fix it. But my impression is, it's too new yet for the legislature to really have determined how to manipulate it. CHAIRMAN ROGERS: On the issue of one fund versus two, are people ready to make a choice as to whether we have one reserve fund or two reserve funds? How many would favor two reserve funds? How many would favor one reserve fund? Okay, that's ... once you have an endowment you don't need ... if we're going to have one, are you ready to vote on whether that should be the CBR, with whatever changes we make to it, or the permanent fund earnings reserve, with whatever changes, or do we want to discuss the changes first. MS. NORDALE: Could I just have somebody talk real shortly about what they see as the pluses and minuses of both of them? I don't have any strong feelings about ... CHAIRMAN ROGERS: Who wants to give that one a try? Pat? MR. POURCHOT: I'm going to just repeat what you said, Brian. I think that you can shape them to whatever you want mechanically, but I guess I'm persuaded that having something within the umbrella of the permanent fund is superior, in that you ... to the extent that it's not being used, the earnings contribute to our overall corpus building, and ... UNIDENTIFIED SPEAKER (Male): I have to disagree. I think we ought to keep the permanent fund over here, and then if we need a budget reserved capped at a billion and a half, with fixes 1, 2, A B and maybe C, on the 75 percent thing. I'd be more comfortable, and then the legislature and the governor figure they've got to tap it, they can get to it. But that would be the distinction that I would make. CHAIRMAN ROGERS: Annalee. MS. MCCONNELL: There's a major element that's missing in the earnings reserve that I think we would have to deal with. And that is repayment, which is currently not--there's no mechanism for repayment. In looking at the two, I think that the critical issue that I would identify would be, one is your access to it both the mechanics and the purposes. And, secondly, what is the mechanism for repaying it and keeping it at a reasonable level. The third one that Sean has identified as a concern is how, and I guess it leads back to the first part. Is there any way we can structure some protection so it's not just considered more money on the table for sort of regular old purposes? And I think that is a combination of both mechanics and the aura that you set up around it. I tend to agree with Pat that, ironically, even though the mechanism is technically easier to get at the earnings reserve now, psychologically it's much harder to break. MS. NORDALE: So what do you ... MS. MCCONNELL: Well, if we ... I guess before we do this, I'd like to talk about what we could set up for the permanent fund earnings reserve as a repayment mechanism, which is a big missing item right now. I'd like to suggest any settlements going in the earnings reserve. To say that any settlements would go in there, and carry forward any year end last balances from the unrestricted general fund. And there may be some other things people can suggest. TAPE 3, SIDE A CHAIRMAN ROGERS: ...referred to in the statutes and so any mechanism we design for the permanent fund earnings reserve, we have to decide whether it's constitutional or statutory and if it's constitutional, it's going to end up looking just like the CBR. If it's statutory, there's opportunity for legislative mischief. I guess where I'm coming around to - even though the earnings are a little bit less is Steve's concept of fixing the CBR with revenues in the sweep, maybe just saying the only time it can be drawn is a drop in revenues and -- and then depositing the amount over the 1/2 billion in the permanent fund because the alternative is creating a PFER and then loading it up to where there's no difference from the current CBR. MS. MCCONNELL: And how would you treat that in -- what would be the Kenai flood level kind of thing under that scenario you would not be able to use the CBR. CHAIRMAN ROGERS: I -- I could see an exception.... MS. MCCONNELL: Okay. CHAIRMAN ROGERS: ...for meeting natural disasters declared by the Governor according to law, which we've used in the statute several times. We've always been comfortable with letting the Governor -- the meeting natural disasters declared by the Governor as prescribed by law. That hasn't been a problem ever. If that's been abused.... MS. BRADY: Ya, but it's going to get more and more political.... CHAIRMAN ROGERS: But I don't -- I don't think you're going to deal with the problem on -- on that, since the legislature would still have to appropriate, etc. MS. NORDALE: Let me -- let me get some clarification. If I understand your scenario is that on settlements that are received after this conversion of the CBR into the permanent fund, they would go into the earnings reserve, not into the principal of the fund. Correct? CHAIRMAN ROGERS: Correct. MS. NORDALE: Okay, so then you would have a real confusion of what purpose as far as the earnings reserve account is concerned and that was the reason that I was suggesting perhaps we needed two funds. I don't like the CBR the way it's structured; it would have to be fixed like Steve suggested, for me to (indisc.-coughing), but it concerns me that we would have this real mess and I don't particularly want to have sweeps and pay backs and all the rest of this stuff incorporated in the earnings reserve. I think that's just sheer disaster -- we're asking for more of the same, only more -- much more. CHAIRMAN ROGERS: Like you, I'm uncomfortable with the way it's laid out on the spreadsheet. I think we need something better than that. Mike and then Bob. MR. O'CONNOR: What's the -- could you explain the permanent fund reserve again then -- you're saying it's done by the permanent fund board and has no statutory regulations.... CHAIRMAN ROGERS: As I understand it, the permanent fund earnings reserve was set up as an account by the permanent fund to hold their earnings until the legislature did something with it. And it's appropriated from -- it's been appropriated from time to time, but I don't believe there's any reference to an earnings reserve in the statutes, is there. SENATOR RIEGER: I think we did. I think the permanent fund approached us and asked us to statutorily authorize.... They did create it and asked for back up. MS. NORDALE: What -- it serves as the holding account so that when the distribution is made, it -- you know, the appropriation for inflation-proofing, appropriation for dividends is made, the appropriation for administration of the fund is made. Anything is excess frequently is pumped into the principal. But it's basically -- if everything went into the principal of the fund, you couldn't get it back out again for dividends, for inflation-proofing, or anything else. MR. O'CONNOR: It's just for their use. MS. NORDALE: No, no, it's for the state's use so that you do get.... MR. O'CONNOR: Well, that's what I mean. It's (indisc.). MS. NORDALE: Ya, so they can actually.... MR. LUDWIG: Get rid of the.... MS. NORDALE: Well, so they can use it.... MR. LUDWIG: They can't spend it. The legislature's the only one that can spend it. They have to appropriate the money. MS. NORDALE: But Bruce, what I'm trying to say is that if all the money went into the principal of the fund, the legislature couldn't touch it, the fund couldn't touch it, nothing. So the account really holds this money until the decision is made how to use it and then it's distributed. CHAIRMAN ROGERS: But under an endowment payoff scenario, you don't need it anymore. MS. NORDALE: That's right. UNIDENTIFIED SPEAKER (male): It's just.... MS. NORDALE: Well, you don't need it anymore unless you're trying to hedge against (indisc.). CHAIRMAN ROGERS: But we voted for one -- it could be that you could do it all in the CBR instead of the PFER. MS. NORDALE: Ya, except that I think that (indisc.) the CBR or the ERA is reachable by the legislature majority vote, you'll likely find (indisc.) disappearing very rapidly. MR. O'CONNOR: Okay, but it's just a vehicle. MS. NORDALE: Ya. MR. O'CONNOR: And the second thing is then the draw from general fund spending monies on the endowment scenario would have to, at that point, come back out of the constitutional budget reserve if in fact we said we didn't want to use.... CHAIRMAN ROGERS: Correct. MR. O'CONNOR: That's all I wanted to know. CHAIRMAN ROGERS: Robert. MR. LOESCHER: Mr. Chairman, I -- not to reiterate what I said, but I was persuaded by the oil volatility discussion Annalee put forward and having -- you know, being able to present that to the public as a reserve that's capped and with the changes in that CBR business I think makes sense. The other thing is not to get tangled up into the permanent fund, the public perception of being tangled in there for our disasters and all these other things is important. The other thing is we don't want to add to the burden of the permanent fund -- if they need a reserve to meet our pay out requirement, that's up to them, their asset allocation, their management scheme to get there. But if we put it in there as a requirement, they have to management a separate fund, a billion and a half dollars separately, make it more liquid, short-term it, do whatever, and I -- I -- I really think that's a problem. I -- I just would like to argue for fixing the CBR and capping it. CHAIRMAN ROGERS: Bruce. MR. LUDWIG: Does the fix address the voting percentage? I've been real impressed with the way we've all sat here and dealt with each other and we represent some pretty extreme viewpoints. And I've never seen that in the legislature. I mean, you kind of go down and there's machine gun nests here and there, and that's the one thing in my mind that that higher percentage in the voting does is, is makes you come and talk to each other at some point. And I kind of hate to see that go away. CHAIRMAN ROGERS: Mike. REPRESENTATIVE NAVARRE: Except that what's going to happen is it's all of a sudden going to be whoever's in charge is going to make it an appropriation, however much you want to spend to get three- quarters vote, because you set it up as a vote on education or something like that. I mean I just -- I just see lots of ways that it could be manipulated. The three-quarter vote ends up being a buy-off rather than - rather than any super majority of the legislature having to sit down together. I -- and I would disagree with your comments -- I'm not sure that it causes us to sit down together all that -- all that much. CHAIRMAN ROGERS: Mike, so -- so if it's tied to the revenue drop, then you could accept a majority, and -- and if you could only pull out of the CBR the amount of the revenue drop, then a majority could do it, you don't need a three-quarters. REPRESENTATIVE NAVARRE: Right. The only thing then where you need a three-quarters vote maybe is the emergencies after the disasters.... CHAIRMAN ROGERS: Steve and then Lee. SENATOR RIEGER: The fix that I described earlier that's Bruce's point kept the three-quarter vote - super majority vote - but it was only a super majority vote when what was being proposed was increases in spending. The simple majority prevails below package of appropriations which equal to or below it at prior years, three- quarters above. And the point I was making is that the way it's operating right now, you can -- you have to get a three-quarter vote even if you're going to cut spending 10 percent, so as long as you're getting the three-quarter vote, might as well just do whatever you want. So I'm --- this would restore the dramatic difference in vote requirement between an increase and a status quo by doing away with the sweep. CHAIRMAN ROGERS: Mike, respond before I go to Lee. REPRESENTATIVE NAVARRE: Again though, if you set it up as an overall increase rather than the way that it sort of has been attempted in the past, and that is separating it out so that all of the budget that the majority happens to want is -- is encompassed in the general fund portion and then what it takes in order to get votes out of the CBR, which may end up resulting in an increase in overall spending, comes out -- is forced in a separate piece of legislation. You see what I mean? SENATOR RIEGER: I do see what you mean, but I think that there is -- I think that there's enough going round and round in the legislature, that you can't really pull that off. I mean you could try, but I.... MS. BRADY: What if you just tied it, Mike (indisc.) -- just tied it to so much of a drop in oil revenue. I mean not some, cause every state has -- you know, bad farm years in agriculture states and all that, but what if you just tied it to a certain percentage of drop that you that you -- to access you need a 50 percent vote, and anything more than that you need (indisc.). REPRESENTATIVE NAVARRE: I like -- I guess I like the CBR -- CBR and you tie it to the volatility without any three-quarters vote. If you want more money to spend, pick any one of these -- income tax, motor vehicles tax, any other type, fee increases, any one of those other ones to get to that funding -- to that increase rather than a three-quarter vote because you set up lots of unpalatable situations. MS. BRADY: Well, the simpler the better, that's for sure. CHAIRMAN ROGERS: Lee. MR. GORSUCH: It does sound like a CBR if we have a -- under the fix there are several characteristics we've not talked about, but the one is it has a cap on it in terms of the total amount that's in it. If we might have a different rule to it, we want to have a replenished provision incorporated as a part of it, and -- but then I wanted to come back to the question about the -- the normal reserves. I remember when I sat on a school board and the auditors always came in and said, well the rule of thumb is you ought to have about a 2 or 3 percent fund balance to be able to allow for unanticipated kind of fluctuations that typically go on from year to year, inside a budget of your size, at that point we were about I think 200 million, suddenly they were suggesting we should have somewhere around $40 to $60 million in reserves. Well, I think we had 10 or something. And we were getting beaten up all the time around that question about having $10 million -- why aren't you putting that on the table in our negotiations, why aren't you putting that on the table for new playground equipment, and so forth. How does the government handle this just normal cash fluctuations over which you have little control whether it's liabilities of one sort where you lose a bunch of lawsuits, and another one is where more -- you know more kids show up, we're not going to have supplementals -- how are we going to deal with that 2 to 3 percent fluctuation on a $2.4 billion budget? I ask that question apart from the CBR; that is, within the budgeting thing, I mean, how do we handle the requirement for some just normal fluctuations in an operation that big and complex? MS. MCCONNELL: The way we do it now is that they -- the draw on the CBR is flexible. The legislature appropriates sort of easy generic language enough to cover any gaps if our fees or our corporate income taxes, let alone oil prices, if those things were less than anticipated, but our expenses remained the same and we didn't change the expense levels, the difference would come out of CBR. The 2 to 3 percent rule that's used for school districts is very different, at least for municipalities, that have a broad variety of powers including you know road and police and those kinds of things, the rule of thumb is 8 to 10 percent because the nature of your business at a school board, it's pretty fixed. You don't have a lot of unanticipated things like you know big snowfalls and disasters or crime waves and all that kind of jazz. But we do it now through the CBR. If we were to take something like this, I think we would still need some of that same protection because other -- there's no way we could know and balance to the penny. So, we probably would need some sort of protection to allow us to use this reserve, if that kind of circumstance happened. Obviously, what we do along the way -- or at least (indisc.) now, is monitoring along the way, so that if our revenues are lower than expected or our beginning of year expenditures are higher, we're telling departments to go back and reduce their expenditures for the remainder of the year. That won't always be possible, depending on when you find out -- you know, if you have a natural disaster on June 29, that's very different than if you have it on January 2. MR. GORSUCH: So, what I'm trying to get at though is if -- if we restrict this to the oil price, which has a nice, tight rationale to it and so forth, we still have a budgetary issue which we have not addressed in terms of just the normal kinds of things for any kind of entity of that size and magnitude and complexity, and I guess I'm looking for a -- something that rounds out our -- our package so that doesn't come back and then all of a sudden, we've got a -- something that isn't tied down in terms of another problem. MS. BRADY: Well, you might not be able to pay longevity bonus that year, you may not be able to pay all the permanent fund dividend that year, or -- I mean, somehow you're going to have to decide that you're going to do some kind of tradeoffs if we're going to keep balancing. You can't -- our problem is we can't keep looking for new money every time you know, we know they're going to come in with a formula increase and ask for another $16 million for every - - that was their answer to fixing, was asking for more money, and you're going to have disasters and you're going to have this kind of stuff and I guess -- I guess if you're going to hold the line, you're going to have to start cutting programs. MR. GORSUCH: But somehow Judy, you still have to be able to hold the money. I mean this -- I mean we -- we could ask the state to budget 8 percent specifically for those sort of contingencies. But every time any entity has a -- has a contingency fund, it gets gobbled up through all kinds of other kinds of issues. So, I mean -- I agree we want to try to incorporate within some -- some sense of discipline, but I don't think ad hocing it throughout the year is the way to responsibly do it. So, I'm not trying -- I'm not suggesting we have a loophole here, but I'm just trying to figure out how you could create it so that it would be an acceptable good management practice. MR. O'CONNOR: What's the matter with the way they do it? MR. GORSUCH: Well, it -- I mean nothing, except that it -- it extends beyond the conversation we're having on the CBR. CHAIRMAN ROGERS: Georgianna and then Mike. SENATOR LINCOLN: Well, the is the part that I guess I have the most heartache about. I keep looking up at the board and thinking, well, which way will I way to vote on this. Because unlike Mike, the CBR, I thought, did force the Senate to sit down and talk with one another about the give and take. I thought that was a real good check and balance that we had when we couldn't agree -- whoever is in control -- when you have a majority and a minority -- that I think that it's healthy to have the check and balance system. And the CBR with the three-quarter vote -- it wasn't there unless the minority was also included in the discussions with the majority. So, this past year I saw that as being very healthy. I think we had -- in the Senate anyway -- a number of meeting where we had to negotiate some of the concerns that the minority had, some of the concerns the majority had. So, I have -- I just have - - I'm torn on whether it should be in the earnings reserve, but check and balance would be there and whether there should be some in both. I'm just torn on this one. This is the only area that I really haven't developed an opinion at this point. It just -- it's a tough one. CHAIRMAN ROGERS: Mike. REPRESENTATIVE NAVARRE: Part of my concern with the CBR is that it sets up a situation where a super minority of the legislature is in a position to leverage over what may be a super majority opinion or consensus. So, for that reason, I don't particularly like the -- the three-quarter vote requirement even though it works to the advantage of the minority at this point. Lee's raised a good point in that if we set it up -- however, we set it up, if you come back the following year and you have underestimated what the formula funding for education or for any of the other formula programs may require, you don't have any -- any place to get the revenues when you go back for a supplemental. Unless you built it in to the budget and under the constraints that we put on expenditures, I think that you're going to -- you're gonna have everything gobbled up, so that you'll be at the top of the line spending going in to what may be a need for supplemental. And on the other hand.... REPRESENTATIVE PARNELL: (Indisc.) heard this before. REPRESENTATIVE NAVARRE: What's that? REPRESENTATIVE PARNELL: That's exactly what we were all saying before -- you're right -- I mean, you're absolutely right. I didn't mean to interrupt you, Mike. REPRESENTATIVE NAVARRE: And -- and -- but you also then, in trying to fix that, you've got to be real careful because the flip side of that is that if you allow some draw for a supplemental, the legislature will build supplementals into the budget. CHAIRMAN ROGERS: Judy then Steve. MS. BRADY: The point is this time though, they can build it in, but they start drawing down that -- they're only going to have -- they're not going to have what they had to draw down on before and maybe this time when the school districts come back and say we need a supplemental, they're going to have to say no. And you guys are gonna have to start doing some reform. You're going to have to start doing some things differently and at some point it's really going to come down to no -- either that or we're kidding ourselves when we just -- we just go back to letting them spend whatever they can. REPRESENTATIVE NAVARRE: No, it's -- but it's based on projections, the way the formula is set up to work now. All you do is create additional chaos by saying no in January to spending that's already taken place. MS. BRADY: Then say no earlier. I mean.... REPRESENTATIVE NAVARRE: Well, what you're saying is cut education spending at.... MS. BRADY: I'm saying hold it, but tell them you're going to have to cut it in the next couple of years and they've got to start being prepared.... REPRESENTATIVE NAVARRE: I don't have any problem with that. Whatever level you tell them they have to cut it to is the amount that goes in the budget. The rest of the budget adjusts so that you reach this arguable level of spending -- whatever that is -- but whatever happens with that, when you come back in January you have no mechanism to address supplementals. MS. BRADY: Right. REPRESENTATIVE NAVARRE: Well, that's -- that's not realistic. MS. BRADY: Well, that's what we're trying to deal with here is what's not been realistic. CHAIRMAN ROGERS: Steve. SENATOR RIEGER: I just -- two things. You can't have any mechanisms to deal with supplementals if you've built it in. I mean, there's no room for a supplemental if you spent right up to the limit in the prior year's appropriation package. But if you have an allowance of $20 million -- whatever the number is, that's there. My main point I think was -- is to point out that the argument that a super majority -- super minority can hold up the will of the majority is a valid one, but my concern is that right now that risk is out there even if maybe we were all doing fine in the Senate this last session. At some point -- at some point, you could have a paralyzed government where the will of the majority is thwarted, but I think that with a fix, there's always a way to leave town -- the only thing you can't do is leave town and increase spending. CHAIRMAN ROGERS: Okay, Annalee, do you want to discuss what's on the board? MS. MCCONNELL: I took a stab at -- it seems to me that all this discussion points to the fact that we need at least a statute that clearly outlines what should be our state reserves policy and mechanisms and so on. I just took a stab at what some of those might be. Purposes -- the largest one probably in terms of quantity being the issue of volatility of oil and gas revenues, but I think we should acknowledge that other revenues will fluctuate, also. And if oil and gas revenues drop, obviously you're going to see a drop in many other kinds of revenues. Natural disasters and cash flow, which is an issue and does need to be dealt with somehow because our money comes in roughly evenly over the 12 months, but we have bigger pay out requirements in the summer, at the beginning of the fiscal year. An amount - I just took a stab at saying up to two times the current year oil -- that O&G -- oil and gas revenues. The reason I suggested current year was I think it's a little -- there's a lot more room for manipulation if you're projecting out a year and at least if you're talking about current year and you're doing it during the budget cycle, you've got eight months of experience already, so the opportunity for changing it is a little bit less. The reason I put question marks above oil and gas revenues was that I -- since other revenues can fluctuate I don't know if it makes sense to peg it just to those. I thought we should have some sort of a provision to deal with the issue of not letting it get too large, should we end up with a bunch of windfalls in a row or something like that, so I thought maybe at least every three years that any excess should be deposited over the recommended amount be deposited into the permanent fund. These are all, again, just ideas for discussion. Replenishment should, at a minimum, include settlements, year end balances of undesignated general fund -- oh, I meant to include the one that Bruce mentioned which is the -- something about the -- the bonus kind of the excess -- the bonus payment amount that is not already going to the permanent fund, if there any like ANWR bonuses, other bonuses, or something along those lines -- windfalls that are not settlements, but that come out of other activity. And then access - one idea that got thrown out was majority vote if the projected revenue, and it would be defined, by the way, we're including federal revenues in that, for instance, is less than the current year. MS. NORDALE: Or you have a natural disaster. (Indisc.) you've got to be able to access it to meet those purposes. MS. MCCONNELL: Right. That should be added. MS. NORDALE: So, you -- your access has to include natural disasters and cash flow. MS. BRADY: Why don't you just say cash flow instead of using natural -- natural disasters, and I will tell you again why, because then if you need -- need money for a natural disaster, it would come out of cash flow that (indisc.) problems, there could be other things as well. But saying natural disaster is a total, total, total invitation to just -- to not only declare them when legislators put pressure on the Governor's Office, but also it's -- it's like a never (indisc.) the price tag goes up like you cannot believe. It's just.... CHAIRMAN ROGERS: I think cash flow isn't a problem because Revenue considers it part of the total (indisc.) subsection of the general fund. MS. NORDALE: The problem is though, that if it's constitutionally sequestered for those specific purposes to draw down just to meet cash flow requirements is a real problem. CHAIRMAN ROGERS: But that's not the way they actually operate. MS. MCCONNELL: Revenue actually would prefer to have it clarified. We believe that it is the understanding of the legislature, we've talked about it with LB&A, but it's not explicitly authorized and so -- Judy is right, but if we said cash flow the natural disaster asterisk would be incorporated by virtue of cash needs. CHAIRMAN ROGERS: Steve has a constitutional amendment already drafted that says this and says this and says this. SENATOR RIEGER: Says that except the natural disaster.... CHAIRMAN ROGERS: It does not say the natural disaster. It doesn't provide for either the size or the automatic deposit. It doesn't deal with natural disasters cash flow or ANWR, but gets us a lot of the way there. It -- it keeps the 75 percent for any purpose. MS. MCCONNELL: Could you just (indisc.) beside natural disaster so we don't forget about that.... CHAIRMAN ROGERS: Yes. However, for cash flow purposes, you're not really appropriating it, you're just temporarily borrowing it. MS. MCCONNELL: I know, but I was just using the word access instead of appropriation to make it clear how the fund is used. MS. NORDALE: When the general fund had lots of extra cash in it, that was not appropriated. It didn't make a difference. Now, if you have a constitutional.... CHAIRMAN ROGERS: What you do is, you're having the CBR buying revenue anticipation notes issued by the Treasury. Okay, the question is how to word this, whether -- one thing I would advocate is on this -- the amount would be to just allow by majority vote a deposit to the permanent fund and not have any triggers built into the Constitution on dumping the amount over 1.5, but just allow that to be done from time to time by appropriation. MS. MCCONNELL: Are we going to first discuss the constitutional amendment, because we could -- the reason I'm asking is that things like that provision might be things that we -- we would like to put in statute even though we didn't necessarily want it to be in the Constitution. Thinking about the concern that Sean has raised for instance that if you get too much in the reserves it's a temptation and so you might, by statute, want to do some things to encourage that not to build up so far. CHAIRMAN ROGERS: I think -- think in the Constitution we'd have to say that by simple majority you can dump into the permanent fund, whereas right now by majority -- you need three-quarters to dump it in. MS. MCCONNELL: And then let the statute -- and then the statutes could always be done to make it more stringent. CHAIRMAN ROGERS: Yes. Sean. REPRESENTATIVE PARNELL: This is just a -- maybe Steve can answer this, because I'm not sure how we're using the word stabilize state spending. The first sentence, "The purpose of the budget reserve fund is to help stabilize state spending from year to year." So, what we're trying to do is we're trying to build some protection against use of budget reserve funds by saying that we only want to use it to stabilize state spending. I'm not sure that -- what does that mean -- stabilize state spending. UNIDENTIFIED SPEAKER (male): So, if revenues drop.... SENATOR RIEGER: It's a statement of purpose. I mean.... CHAIRMAN ROGERS: The actual mechanics are that the only time you can dip into it by majority vote, is if your revenues drop as Steve has pointed out. I support that. SENATOR RIEGER: (Indisc.) limits and how far you can (indisc.). REPRESENTATIVE PARNELL: Okay, I see what you're saying. MS. NORDALE: The supremes are going to have a wonderful time with that. CHAIRMAN ROGERS: I'd like to change it to statewide state revenue instead of statewide state spending, although it's meaningless. MS. BRADY: Ya but, state revenue (indisc.). UNIDENTIFIED SPEAKER (male): Spending just has bad connotations. UNIDENTIFIED SPEAKER (male): Yes. MS. BRADY: Tell me this -- how much would it mean -- how much money are you talking about up to two times current year -- how much would that be? MS. MCCONNELL: No, no just the oil and gas -- if it were just gas portion, then.... CHAIRMAN ROGERS: Two years worth of oil and gas revenues is about three billion. MS. BRADY: I think that's way too much. MS. MCCONNELL: I'm sorry (indisc.). Yes. NOTE: Too many people talking at the same time. CHAIRMAN ROGERS: Which is about what one year of oil and gas revenues would be. MS. BRADY: And I really would urge you to take the natural disaster thing out. I've worked this fire fund from the federal side and the state side and I'm telling you it just.... MR. LUDWIG: I can't imagine a situation where you couldn't get three-quarter vote for a natural disaster, if it's truly a disaster.... MS. BRADY: Well, even your local disasters though, you just can't be surprised how much money it takes when agencies start -- start hiring double time personnel and their price went up and up and pretty soon the money is all gone. CHAIRMAN ROGERS: The other question -- the question I have with Steve's amendment, I think in order to achieve these, we would need to add the ability to access for deposits to the permanent fund, we would need to add the -- we have to deal with the issue of three- quarters vote or not to go into it for other purposes and then we have to - if we want to, add natural disasters and cash flow. MR. O'CONNOR: A lot of this depends on how we're gonna -- what we're gonna do with the proposals on the budget, too because what happens is you take a $100 million out of the general fund and all of a sudden it's a $100 million less than was in the year before and we've tried to play that shell game already and the next thing you know, we're at 2.6 instead of 2.5 (indisc.) some other agency, so I think a lot depends on how we're going to handle the budget proposal...5.6 versus the 2.4 number we're trying to get to. CHAIRMAN ROGERS: The effect of Steve's amendment though is that where from year -- one year to the next year, where we're projecting spending to go up at inflation plus half the population growth, if we had a revenue dip, it wouldn't be able to draw on it except for a flat budget, because it's only if revenues are below the prior year. So, -- so, the first thing the legislature has to do is to find a way to hold the line on the budget. Then if it can't do that, if the revenues are lower, they can dip into the lower revenues. But there's not an ability, as I read this, to cap this for any spending greater than the previous years. SENATOR RIEGER: You can with a three-quarter vote. CHAIRMAN ROGERS: But you can with a three-quarter vote. So with a majority vote, you can get revenues up to where they were last year. REPRESENTATIVE PARNELL: Is it important or necessary to have the first sentence in there and if so, why? SENATOR RIEGER: No, it's not necessary. Just -- here and there in the Constitution there is language like that and we thought it would help explain what we're trying to accomplish since this the supremes seemed so confused (indisc.) when they took on the last court case. But you know, I -- I don't think it adds anything except clarification, but if people think it confuses things.... MS. MCCONNELL: My suggestion would be that we do the clarification through statute because then if we find out that there's a problem with the way we had described it at least we could fix it more easily than we could if.... SENATOR RIEGER: We tried to do that, remember Judge Reese didn't like our clarification by statute last time, you know. CHAIRMAN ROGERS: That's after the fact, though. Okay, we'll want to proceed on to -- to some sort of decision making on this so we can keep rolling here. Do people have an -- does someone want to make a motion to adopt some plan here. Mike. REPRESENTATIVE NAVARRE: I still am wondering how the earnings. Is it invested as part of the permanent fund or would it be invested as part of the general fund with the earnings going to the CBR and then an occasional deposit because of that into the permanent fund. Whereas if it was invested as part of the permanent fund, it would increase the level of the endowment. CHAIRMAN ROGERS: The current law -- current constitutional -- current Constitution reads, "Money in the budget reserve fund shall be invested so as to yield competitive market rates to the fund." And maybe that leaves it open as to who invests it. Normally, that competitive market rates has been Treasury, but I think we'd have to say permanent fund if we wanted permanent fund. SENATOR RIEGER: That's a good point, Brian. I mean I think it could be co-mingled, really. You know, it's just accounting reports separately. But I don't see there's any reason why we have to -- we have to physically segregate those funds and then it has to (indisc.). CHAIRMAN ROGERS: I would be concerned about co-mingling with the permanent fund even though I like the higher earnings, because it basically forces a -- an asset allocation on the permanent fund trustees that they always have that amount of the fund in cash, and so it may tend to artificially depress total fund earnings. And so, I'd rather keep them separate, because since by three-quarter vote, you could appropriate the whole billion and a half, they have to have a billion and a half cash all the time. SENATOR RIEGER: Or in readily liquidible -- liquidatible securities which is everything except real estate. CHAIRMAN ROGERS: Ya, except there are times that I hate to have them you know, invested at their current policy which has less than 10 percent in cash and suddenly you know (indisc.) have an appropriation that -- that, but maybe it would be better to ask Byron on that. Byron, do you have any thoughts about whether you want to invest the budget reserve fund? MR. MALLOTT: (Indisc.) Treasury can be mandated to meet any public policy call, you can do it right now. (Indisc.) Treasury invested the way it does, I assume (indisc.) meet cash flow requirements and that will always be there. CHAIRMAN ROGERS: Mike and then Annalee. Annalee and then Sean. MS. MCCONNELL: If we have a fund that's separate -- CBR, then I mean, I agree with Byron that we can tell them what we want in the way of liquidity. But if it's separate, then there's no other place to go. You have to do all of your management within that one entity. Byron if we were to have -- if instead of having a CBR, we were to have an earnings reserve -- one reserve which is the earnings reserve account, what is your opinion of what changes that would make if that account was -- became the oil volatility account. Would that have to change your investment practices in your mixes of what.... MR. MALLOTT: I would not think so. I was just (indisc.) just to get a sense of it, and it's written in constitutional form it could be statutory. I was trying to capture what you were -- what you referred to earlier by way of constitutional payout ... and this would follow up on the language that you had prior. Income from the permanent fund shall be deposited in the permanent fund, not more than 4 percent of the average market value of the permanent fund earnings shall be deposited in the earnings reserve account of the permanent fund. The percentage to be deposited shall be determined by law (indisc.) any three fiscal years, and the corporation's earnings reserve account shall be made by law to the general fund. Amounts in the earnings reserve account shall be co- mingled with the permanent fund. (Indisc.) create an account that constitutionally that the legislature could -- could appropriate to and from in a way that would give you an additional account to create flexibility, but I was speaking more to how money would flow from the permanent fund to (indisc.). I would just pose a public policy question as to why you would expect to have any return less than market rate returns on an ongoing basis except for what you'd need to meet current cash needs. Anything beyond that ought to be invested at a rate that maximizes market return. CHAIRMAN ROGERS: Annalee, Sean. MS. MCCONNELL: Actually, it just occurred to me that in terms of liquidity, since we're talking about a budget that gets passed in May and granted there's a veto period and so on, but obviously the budget cannot end up higher on June 30 than it was -- the Governor can't veto up -- that changes the nature of the liquidity a little bit in that there is some time for -- for planning which you would have to do for withdrawal. So, it may not be much of a problem, cause also you wouldn't be -- even if you were appropriating 500 million for some reason be it huge crash or really low oil prices, you're not going to need every dollar of that right away, so you have the opportunity to make a plan in plenty of time to deal with that over the course of the 12 months. CHAIRMAN ROGERS: That's true. Sean and then Lee. REPRESENTATIVE PARNELL: Brian, my question is more procedural because I felt like you had a real rational and logical sequence of choices for us to make on the previous page. (Indisc.) this really fits in -- Steve's amendment fits in with the fix and I just wanted to make sure -- are we going to go back to the decision making once we talk through -- is that where we're going? CHAIRMAN ROGERS: (Indisc.) I've sort of lost track (indisc.) where we are. Lee. MR. GORSUCH: Well, I think the -- the page you just went from is in fact the potential fix; that is, what I would encourage us is to incorporate the areas that Steve does not incorporate in his bill and go ahead and amend the Senate Joint Resolution 30 to accommodate these other features that Annalee had identified and move this thing forward. Then procedurally (indisc.) I'd like to move off this subject and see if we can.... CHAIRMAN ROGERS: No, we're still on this subject. MR. GORSUCH: No, no, I'm saying once we move off this subject, is we've got budget cuts, dividends and taxes to yet wrap up. I'm concerned about our evening plans. I'm wondering if those are flexible or we're actually committed to.... CHAIRMAN ROGERS: My intent is that we'll break at 6 o'clock. We have dinner reservations at 7 and we'll reconvene tomorrow morning at a time yet to be established. Going back to Sean's issue, among the CBR treatment, if we -- if we adopt the idea that the -- the next page is how we go about fixing really what that's become, I believe is a combination of 3 and 4 into the next page. So, among the choices of 1, 2, and this new number 3, are people ready to vote on that or do you want more discussion? MS. NORDALE: Annalee was proposing that the 1.5 be a different number and I'm wondering if.... MS. MCCONNELL: I was mistaken -- it should have been -- I said two times and that was wrong. I was thinking that two years of.... MS. NORDALE: So, 1.5 is okay? MS. MCCONNELL: Ya. MS. NORDALE: Okay. CHAIRMAN ROGERS: So, in terms of this -- in terms of this voting, we leave as is, repeal, or go to the next page. MR. GORSUCH: Do a straw poll on 3 and 4 combined. CHAIRMAN ROGERS: Yes. Georgianna. SENATOR LINCOLN: Mr. Chairman, I just need to go, I guess, a step beyond that because to do that, I hear that now we going to start writing legislation. Is that the intent that we're going to rewrite a piece of legislation and submit that? CHAIRMAN ROGERS: My intent has been that the constitutional change that we suggest be incorporated into a single constitutional amendment that might incorporate portions of SJR 30 or other pieces. But that we try to put forward a single constitutional amendment that puts our package out and ask the Rules Committee to introduce it by request of the commission. I think that -- that rather than separate pieces of legislation, having a package in a single one, may help the process. But that's just my own feeling.... SENATOR LINCOLN: Okay, or to submit that these are the points that we want included in a constitutional amendment that would be put forward by the Rules Committee or whoever. (Indisc.) that we're not going to write that piece of legislation verbatim and say here's the piece of legislation that we would like to see go forward, just the -- the points to be included in it. CHAIRMAN ROGERS: Because the resolution creating the commission asks to us submit specific legislation, I guess my take on that, as one member of the commission, would be that we be very specific when we're talking about amending the Constitution and that we give the outline when we're talking about pieces of legislation. We just really don't have enough time to do, you know, each of the tax bills, or each of the policy bills, but I think that amending the Constitution is such a big deal, I don't want to give an outline for it, I'm not comfortable supporting that, I want to see the final language before the commission. But certainly if others disagree, I'm open to change on that. But, like Pat -- like Pat's comment earlier about amending the Constitution, I want to be pretty sure what it is I'm voting for before I sign off on it. SENATOR LINCOLN: Well, Mr. Chairman, just in following through on that, I guess I'd be at this point, somewhat.... TAPE 3, SIDE B CHAIRMAN ROGERS: ...alternative number 3. Well, I think we've got that taken care of. UNIDENTIFIED SPEAKER (female): (Indisc.) for number 1. Laughter CHAIRMAN ROGERS: We're back to this in time for a 10-minute break. BREAK CHAIRMAN ROGERS: Have we voted between whether to make it the PFER or the CBR? UNIDENTIFIED SPEAKER (female): No. MS. NORDALE: No. MS. NORDALE: Well, I thought the previous vote was to vote -- to modify the CBR, to more flexible use of it and that would keep it distinct from the ERA. CHAIRMAN ROGERS: So does that then have the effect of saying that.... UNIDENTIFIED SPEAKER (male): Having two.... CHAIRMAN ROGERS: Well no, we voted for one though so, I think by saying we want to modify the CBR that means that we'll dump the permanent fund earnings reserve into the permanent fund. UNIDENTIFIED SPEAKER (female): Yes. CHAIRMAN ROGERS: And then work from the CBR. Is everybody comfortable with that? UNIDENTIFIED SPEAKER (female): Yes. MR. LOESCHER: I so move. CHAIRMAN ROGERS: Is there an objection? MS. FOUSE: Can you restate that, please. MS. BRADY: Let's take a vote on it because.... CHAIRMAN ROGERS: That's a big item.... CHAIRMAN ROGERS: Okay, all in favor of.... UNIDENTIFIED SPEAKER (male): Should we wait until we have everybody else here or.... UNIDENTIFIED SPEAKER (female): Well, we got eight. UNIDENTIFIED SPEAKER (male): We got eight. CHAIRMAN ROGERS: Okay, all in favor of dumping the earnings reserve into the permanent fund, raise your hand. One, two, three, four, five, six, seven and a half. SENATOR LINCOLN: No, that was eight - I saw it. MS. MCCONNELL: In terms of timing, are we talking about doing that only at the time when all this.... CHAIRMAN ROGERS: Yes. MS. MCCONNELL: So, at the same time, just flip the places it goes to and from. Okay. CHAIRMAN ROGERS: Okay now on the constitutional budget reserve, again I'm assuming that whatever the constitutional amendment is on the CBR is the same constitutional amendment as the endowment (indisc.-coughing) constitutional amendment that deals with that and probably repeals the spending limit at the same time, since it doesn't mean anything anymore anyway. For those who missed the vote, we -- we voted -- we voted to interpret the vote to, since we already had a voted one reserve fund and we had voted to fix the CBR that we then voted clearly consistently with that that we dump the permanent fund earnings reserve into the corpus of the permanent fund upon adoption of the amendment. And it was by a majority.... UNIDENTIFIED SPEAKER (female): Unanimous. CHAIRMAN ROGERS: By a majority of the members of the commission. MR. GORSUCH: Hear, hear. REPRESENTATIVE PARNELL: On a different issue, but going back to your second point, I think there might be some merit in just keeping our recommendation to delete the spending limits separate.... CHAIRMAN ROGERS: Okay. REPRESENTATIVE PARNELL: So, that that doesn't get muddied up -- I mean have a separate resolution for that that we recommend happen, as opposed to attaching it to this resolution on the CBR. CHAIRMAN ROGERS: Well, actually we've already got a resolution on the permanent fund and the CBR piece is part of the same plan. I think what we want is a single resolution that has the permanent fund and the CBR provisions (indisc.-coughing). REPRESENTATIVE PARNELL: And the spending limit in the same.... CHAIRMAN ROGERS: Well, we'll have to vote on (indisc.-coughing) not include the spending limit in that. But again, I think that, and maybe -- maybe we ought to have a decision on this as to whether the individual pieces of legislation that we recommend would be ones that we recommend as newly introduced by the commission, or whether we use other people's bills that are floating around as the -- you know use somebody's for the income tax and somebody's for the motor fuel tax and somebody's for this constitutional amendment or that. My own preference is.... UNIDENTIFIED SPEAKER (male): Can we pick and choose? CHAIRMAN ROGERS: Pardon. UNIDENTIFIED SPEAKER (male): Can we pick and choose? CHAIRMAN ROGERS: My own preference is that we ask for a package to be introduced at the request of the commission so that it takes out any partisan ownership of individual bills. But if people disagree with that, say so. SENATOR LINCOLN: No, Mr. Chairman I was going to agree totally with you on that point and as well as I would like to see that any resolution or bill that we have drafted go to our Leg Legal for review before we submit it to the Governor and the legislature. CHAIRMAN ROGERS: I think that anything needs to go through the review and certainly, we don't have the power to introduce legislation but Rules Committee could at our request. UNIDENTIFIED SPEAKER (male): If they so chose. CHAIRMAN ROGERS: And they've done -- they do that often for interim groups. But again, that would be up to the chairman of the Rules Committee on either side as to do it in that fashion. Other thoughts on that issue? Okay. Looking at the CBR, on the issue of natural disasters language in the CBR constitutional amendment, all those in favor of including natural disaster language in the CBR section of the constitutional amendment, are you ready to vote? MR. POURCHOT: What's -- I'm sorry -- what's the -- where are we are far as the trigger? You're only having a purpose because of the trigger, right? CHAIRMAN ROGERS: This is where we get down to the access. What -- whether - whether you have majority or super majority access to the CBR for the purposes of natural disaster. MR. POURCHOT: Is that what we're voting on, or are we just voting for a general purposes section. Why are we having.... MS. NORDALE: Well, the two are tied together. CHAIRMAN ROGERS: The purpose is, if - if you don't put it in the access, then the purpose doesn't matter. MS. NORDALE: Right. CHAIRMAN ROGERS: You got -- so really it has to be in the access section. MR. POURCHOT: That's what I'm asking. What are we voting on? CHAIRMAN ROGERS: On whether to put - to allow access to the CBR for natural disasters.... MS. BRADY: On what kind of vote? CHAIRMAN ROGERS: (Indisc.) somebody want to make a proposal on that? MS. NORDALE: I didn't hear what she said. CHAIRMAN ROGERS: So whether it's a -- we have two sections of the CBR, remember. A 50 percent vote section and a 75 percent vote section. Judy. MS. BRADY: If you allow - if - see it's kind of like - the whole thing is kind of like city councils voting on school district budgets you know where they don't get to veto, they just come to say yes or no. (Indisc.-coughing) all the bills from a natural disaster, you know, you don't get to say, well gosh, you gave these guys 50 bucks an hour -- you know, you just have to vote it in cause it's a whole bunch of money, so -- and that's the same kind of thing that happens with cash flow, I'm assuming. So, what I would suggest is that you allow access for cash flow emergencies of some kind or cash flow and the Administration can make this (indisc.) to you and you can decide on a simple majority vote. But you take out natural disasters so it doesn't become you know, kind of a honey pot for all the circling bears. CHAIRMAN ROGERS: Steve. SENATOR RIEGER: Well, the existing language or even under the fix in resolution 30 allows an appropriation for any purpose - any purpose - cash flow, disaster, whatever - on a three quarters vote so, I think that if anything were a true emergency, probably the three-quarter vote is there. UNIDENTIFIED SPEAKER (female): Ya, if you can.... SENATOR RIEGER: I would speak against having loopholes and I think that -- well, I think (indisc.), and I think that (indisc.), it's probably -- it would be a loophole and it would probably be used (indisc.). I think it would really be a.... MS. BRADY: Well, you'd get the votes, ya. I wouldn't worry about it. CHAIRMAN ROGERS: Bruce, Pat, Annalee. MR. LUDWIG: I agree with Steve on the natural disaster, but I'm kind of bothered about the cash flow. I -- I don't know why the legislature would have to vote on the cash flow. I mean they appropriate the money for a budget -- I mean, you're just talking about timing and when that's paid out of the general fund. That seems more of a mechanical thing than a -- an access. SENATOR RIEGER: Well, I -- I'd have to check the statutes, but I - - either in the Constitution or the statutes, revenue anticipation notes within a year are permissible and there is already a mechanism for cash flow. You must know that. MS. MCCONNELL: But we don't want to have to do -- it is more costly to the state to use a revenue anticipation note than to borrow against the CBR, which is.... MR. LUDWIG: Well, why does the legislature have to approve that if there's a statute or a constitutional provision allowing access. MS. MCCONNELL: The reason -- the concern came up that the Constitution does not say that you're allowed to use the CBR -- to borrow against the CBR on a temporary basis for cash flow purposes. There's sort of an irony in it in that until the very last day of the fiscal year, you actually don't know how much you're allowed to use from the CBR. So, there was just an interest on the part of Revenue in clarifying that it is in fact permissible as long as you're staying within your expectation of the total amount needed. If you think you're going -- if the CBR is expected to be 500 million over the whole year, is it okay to use 200 up-front in August to pay the bills for these cash flow purposes. MR. LUDWIG: But is it necessary that the legislature vote on that? I mean, if they appropriate the budget, and let's assume they don't appropriate anything out of the CBR, that everything is based on revenues, you're just talking about timing when money comes in. MS. MCCONNELL: Right, but if legislature did not appropriate any from the CBR, then we would not be allowed to borrow.... MR. LUDWIG: Even if the Constitution or the statute said you were allowed to? MS. MCCONNELL: Yes. MR. LUDWIG: I'm wondering why on an annual basis the legislature would have to vote for that. If -- if enabling legislation says that's a function of it. MS. MCCONNELL: Because the -- you're not allowed to do something by statute that is prohibited by the Constitution. The statute can make it narrower and tighter, but can't expand the purposes. So, if we're going ahead and fixing the CBR.... MR. LUDWIG: I'm not arguing about the fix.... MS. MCCONNELL: Ya, you're (indisc.). MR. LUDWIG: Ya, I'm just asking about the mechanics - why the legislature has to, on an annual basis, appropriate $200 million for cash flow. CHAIRMAN ROGERS: You wouldn't and actually you could fix it in the interim borrowing section of the Constitution which says the state may borrow money to meet appropriations for fiscal year in anticipation of the collection of the revenues. You could just insert from the budget reserve fund or other parties, and that would, I think be the kind of clarification that wouldn't require a legislative vote. MR. LUDWIG: So, it really wouldn't need to be done then for access (indisc.) purpose. MS. NORDALE: No, it has to be both. CHAIRMAN ROGERS: It -- it has to be either in -- in the access section here or in the interim borrowing section. MR. LUDWIG: But wouldn't -- wouldn't.... MS. MCCONNELL: But this is a (indisc.) that probably we aren't the best group to do in the next 15 minutes. CHAIRMAN ROGERS: I'd personally rather leave it out of this and if Revenue wants to make a case before the legislature, let them make that case. MS. MCCONNELL: (Indisc.) amendment. I'm okay with that. MR. O'CONNOR: ... administrative problem. CHAIRMAN ROGERS: So, on the issue of natural disasters, first Steve has pointed out that the existing 75 percent super majority can -- can cover that. I guess I would feel that if we later decide to repeal the 75 percent, we ought to come back and revisit the natural disaster issue. But is we're going to leave it at 75 percent for any purpose we don't need -- it's already covered. MR. POURCHOT: I'm -- I'm real concerned we're heading down what I think is kind of a wrong road here. This was laid out for a different alternatives in dealing with reserves -- the general area of reserves. Then we flipped back and made some decisions specific to a constitutional amendment restructuring the CBR. Reconstituted, the CBR would work fairly straightforwardly, hopefully - if these words mean what we think they mean - if we did have just a majority vote to bring spending levels up to last year's expenditure. Or a three-quarter vote for any purpose. If you go back in now and start further restricting when the majority vote or when the three-quarter vote is to take effect, I think you're headed right back down the old problem we've had the last two or three years with the constitutional budget reserve account. You can -- it's just going to get very complicated. Every one of those words is subject to interpretation. So, I would say that just leave the words alone. It doesn't even have to words with -- when you say fix the CBR, fixing the CBR means dealing with the words that have been in court. CHAIRMAN ROGERS: It's revenues versus amount available for appropriation. End of sweep. MR. POURCHOT: Right. CHAIRMAN ROGERS: And that's what SJR 30 does. Reportedly. SENATOR RIEGER: Oh ya. CHAIRMAN ROGERS: That amendment, when added to our other amendment, would not need -- in order to deal with the amount issue, by three-quarters vote, we're covered. We might want to say by a majority vote we can deposit the permanent fund, so you don't need a three-quarters vote to go to the permanent fund. That makes it easier to carry out our plan. MS. MCCONNELL: As long as you had the amount equal to the current year oil and gas revenues. CHAIRMAN ROGERS: I'm nervous about how a court would interpret current year oil and gas revenues. I'd rather say this is the plan and then leave it up to the legislature (indisc.-coughing) deposit a little bit -- you know $10 too much, I'd hate to have it go to court -- have to fight it. MS. MCCONNELL: Say it's 500 too much and took the reserves down, you know, in an unwise way that would be also parallel. CHAIRMAN ROGERS: It would be.... MS. MCCONNELL: (Indisc.). CHAIRMAN ROGERS: But it's much harder to, I guess to clutter up the Constitution to... Mike. MR. O'CONNOR: How do we handle the case where ANWR comes in (indisc.) and we get a half a billion dollars, general fund goes to three and a half? Last year it was two and a half. So to get there they take another billion dollars out of the CBR. MS. MCCONNELL: But it would take a three-quarter vote. CHAIRMAN ROGERS: No, it would take a majority vote. Mike's.... MS. MCCONNELL: Well, it would take a majority vote as proposed. CHAIRMAN ROGERS: As the current -- as the current amendment is written, the year that you get the ANWR bonuses, half of them go in the permanent fund, the other half go to the general fund and can be spent. The next year, after you spent the half a billion, the revenues are down by half a billion and therefore you could draw a half a billion out of the CBR. SENATOR LINCOLN: That amendment you're speaking of is (indisc.). UNIDENTIFIED SPEAKER (male): It gets (indisc.) every year. CHAIRMAN ROGERS: Unintended consequences. MR. POURCHOT: You have to think about what you're going to spend it on. Typically, you'd be spending it on one-time items (indisc.) capital construction.... MR. O'CONNOR: (Indisc.) now we're talking about deferred maintenance. Every place in here there's deferred maintenance. MR. POURCHOT: But you very easily might be able to drop - wouldn't necessarily replenish it. MR. O'CONNOR: Well ya, but let's just say that -- let's say it's 200,000, I mean 200 million -- it's not as big a number, but it's still there, you know. We (indisc.) eliminated our purported controls that we spent six months trying to put together. CHAIRMAN ROGERS: Judy. MS. BRADY: I still think the answer is just to treat ANWR bonuses separately -- I mean just a separate line that says, you know that you don't get to count ANWR bonuses for this to make it up. If you -- you get half the bonuses, but you don't get to use that in your calculation. CHAIRMAN ROGERS: You could do that if you said - taking again the language from SJR 30, if the amount of unrestricted revenue is available for -- except bonuses is (indisc.). MR. O'CONNOR: Oil prices could go to 30 bucks a barrel again - same thing happens. MS. BRADY: Ya, but that's alright because you have the money for it. I mean the.... MR. O'CONNOR: You got it one year and then the next year you go get it out of CBR. MR. LUDWIG: What happens when the CBR is drained? Isn't that kind of a control in and of itself? MR. O'CONNOR: Not unless we have some kind of excess deposit (indisc.) control, which we don't have in there. MR. LUDWIG: I'm not sure why we have to appropriate from -- to the permanent fund. I mean, why doesn't it just automatically - when the bucket fills up at 1.6 or whatever, the overflow goes into the permanent fund automatically. CHAIRMAN ROGERS: I'm trying to figure out how to write the bucket. MS. MCCONNELL: What about saying give oil and gas revenues because the -- this windfall is only going to happen with oil and gas. It's not like we're going to get a spike out of corporate income tax or anything else.... If oil and gas revenues in any year are more than some percentage above the previous years, then it goes into the reserve unless - something -- I wouldn't necessary want it completely (indisc.) in but I think at least making the presumption that any spike in oil prices goes in to the reserve or to the permanent fund might not be a bad idea. CHAIRMAN ROGERS: Judy and then Lee. MS. BRADY: Oh, I have an idea. If you're worried about too much money, we'll just tell the companies they don't have to pay taxes (indisc.) and golly, they'd probably -- they'd have to think about it a little bit, but you know, then we wouldn't have t worry about all this extra money. CHAIRMAN ROGERS: Now you're doing (indisc.) oil and gas policy council. MS. BRADY: ....mucking up the budget. Wouldn't everybody love to have our problem that you know, what do we do with all this.... CHAIRMAN ROGERS: Lee. MR. GORSUCH: Well, I think we -- we can handle it by revising the replenishment and simply have a replenishment device which is whenever oil prices are in excess of 10 percent of the prior year forecast and (indisc.). MR. O'CONNOR: Current year oil revenues, not oil prices because that takes care of lease bonuses or (indisc.). SENATOR RIEGER: I think we're getting down to trying to provide for every contingency that's out there -- the purpose of the commission is to fill the fiscal gap or close it somehow or another and now we're trying to anticipate individual revenue streams. You know it's got to some.... You know Mike made his case before he left; there's got to be some remaining budget process at some point and when there have been excess revenues before there have been special deposits to the permanent fund and sometimes - you know, sometimes it works and sometimes it doesn't. But I think trying to get too -I'll use Brian's word - mechanistic might -- I mean my experience has been when we've tried to prescribe the future in statute or in Constitution, it's always wrong and I think we're getting to that point here, about how the appropriation process will work -- you know, there's some general principles (indisc.) is one thing. CHAIRMAN ROGERS: Mike and then Annalee. MR. O'CONNOR: Well, the antithesis to that is when we got 600 million bucks and they spend it in 20 days or whatever, and the Governor (indisc.) but I mean, you know I agree with you but I'm not sure that I believe the control mechanisms exist. SENATOR RIEGER: Well, they don't always. I mean (indisc.) but sometimes they do, sometimes they do. That time it did not and the Governor lead the charge in wanting to spend that. As you recall the Senate.... MR. O'CONNOR: I didn't blame anybody, I just said it happened. SENATOR RIEGER: ...dug its heels in and said .... CHAIRMAN ROGERS: Annalee. MS. MCCONNELL: We talked about having -- having an overall resolution that would be the fiscal plan that would be adopted by the legislature. What if we put this kind of a more than 10 percent sort of deal as an element of the plan in the resolution so that we make a clear message that we think it should be -- every consideration should be given to making a special deposit when you get that much money, but it's not locking it into the Constitution or a statute. MR. LUDWIG: I thought we were locking in the amount. MS. MCCONNELL: Well, I'm suggesting an alternative -- I agree, we got to be careful we don't get to every situation but I think it would be a good idea somewhere to lay out we think it's just as much a concern when more money comes in than expected as it is when too little money comes in. That was just a way of trying to find a compromise way of communicating that. MR. MOTLEY: I guess my concern is if you literally don't trust the legislature to live within the limits of reasonable bounds, I think we're in trouble anyway. I don't know how to write such a document, so I guess I have to believe that the majority will not make the same mistake again. MR. LUDWIG: Natural disaster. Laughter CHAIRMAN ROGERS: Okay, I believe the proposal before us is to modify the budget reserve fund to refer to revenue instead of amount available for appropriation, to eliminate the sweep provision, and to allow by majority vote deposits into the permanent fund. MS. MCCONNELL: And (indisc.) clarifications that's right now the sweep is totally repealed, the replenishment of the fund, if we ended up taking out, would be currently off of deposit -- I mean settlements.... CHAIRMAN ROGERS: Settlements and from the investment of the fund. MS. MCCONNELL: ...and investment of the fund, but would not include year end balances of the general fund (indisc.) general fund, I'd like to throw out whether we would want to include that year end -- that's the one item out of the sweep that has not caused anybody any problems that I'm aware of, saying if you've got a fund balance in the plain old general fund, that could go into the reserve as a replenishment. It's all these other funds that have created the problems. So, it's just throwing it out as a question of whether we want to add that in as one more replenishment. UNIDENTIFIED SPEAKER (male): (Indisc.) problem though. CHAIRMAN ROGERS: Ya, if you leave -- if you leave the undesignated fund balance, you've got better cash flow. MR. GORSUCH: Keep it under the signature authority of the director of the Office of Management and Budget. UNIDENTIFIED SPEAKER (male): Ya, there you go. SENATOR RIEGER: That phrase you used quote in the plain old general fund is in the eye of the beholder. I think that the courts looked at it (indisc.) MS. MCCONNELL: I just wanted to clarify.... MR. LUDWIG: (Indisc.) in the access part, we say majority vote if projected revenue less than current year. Why don't we just exclude bonuses from that figure. So -- so what if they spent it? They'd have to have three-quarters next year to be able to go over that. REPRESENTATIVE PARNELL: I don't know - this almost sounds like something for committee work in the legislature, but we're kind of talking about terms - are we doing any better using the word revenue than an amount available for appropriation. Are we talking about projected revenue. I mean projected revenue seems to be subjective as well. UNIDENTIFIED SPEAKER (male): Subjective by who? REPRESENTATIVE PARNELL: Ya, ya. And that can be manipulated to a majority vote as well. I think I'll just (indisc.). CHAIRMAN ROGERS: That's true. Lee. MR. GORSUCH: Is there objection to having a provision which allows for 25 percent of all future bonus funds shall be contributed to the CBR? CHAIRMAN ROGERS: I object. MR. GORSUCH: Just for the hell or it or.... CHAIRMAN ROGERS: The more pieces we split it into and the more words we have to add to the Constitution, the less I like it. MR. GORSUCH: Well the argument -- the argument for it would be we've now got 50 percent of continuing revenues off of oil and gas development. And one item that we do not have is the -- is the truly one-time bonus funds and if we put 25 percent -- an additional 25 percent of the bonus it would leave only 25 percent of that bonus money available for general fund appropriations. MS. BRADY: I have an idea. This is not original - Pat will laugh and Lee will laugh and some other people will laugh, but you know one of the problems we're going to have is capital spending. And we also know that many of our communities are gonna go -- have to do some capital. What if we put bonuses into the capital matching grant program and built that up as a source of matching grant capital program, cause that's where the pressure is going to start to come real serious. CHAIRMAN ROGERS: I think we have the same problems on state facilities -- state-owned facilities that we do on local (indisc.- coughing). MS. BRADY: What? CHAIRMAN ROGERS: There are elements of capital spending that are out of that such as spending on deferred maintenance of public facilities such as new buildings that might be needed by Fish and Game, or DOT, or Highways, or whatever and capital matching grants only applies to municipalities. MR. GORSUCH: Call for the question. SENATOR LINCOLN: Mr. Chairman. CHAIRMAN ROGERS: Georgianna. SENATOR LINCOLN: I -- I'm going to vote against it. I just -- I don't have that sense of comfort with the majority vote. I've seen it both ways and I -- I'd like to think that reasonable people would -- could sit down and come up with a plan that -- a spending plan or any movement of funds, and have that as the -- in the best interest of the general public of Alaskans. I don't have that feeling - that comfort level, so the majority vote I really -- I can't support it at this point. CHAIRMAN ROGERS: Sean. REPRESENTATIVE PARNELL: I think our appropriations process - our legislative process is split (indisc.) majority vote and philosophically I -- I disagree with you, but Georgianna I -- I have struggles with recommending this for a different reason -- that's because I'm not sure that wording is going to get us where we want to go. SENATOR LINCOLN: Well, I too.... REPRESENTATIVE PARNELL: And so I -- I agree. (Indisc.) Georgianna's original proposal. I agree with the concept of what we're trying to accomplish, I just don't agree that this gets us where we want to go. CHAIRMAN ROGERS: I -- I think that -- that Georgianna's earlier suggestion that whatever we draft up goes to Legislative Legal and gets reviewed should address that issue and we're likely to see something that's different. I think what we're voting on now would be a concept that by majority vote the legislature could appropriate an amount up to; fill the gap the drop in revenues by super majority the legislature could go over that amount; by majority the legislature could dump money into the permanent fund and the sweep provision is gone. MS. NORDALE: By majority goes into the permanent fund? CHAIRMAN ROGERS: Yes. MR. LUDWIG: Question. UNIDENTIFIED SPEAKER (male): Question. CHAIRMAN ROGERS: Are you ready to vote? All those in favor of modifying -- so modifying the CBR, please indicate by raising your hand. Three, four, five, six, seven, eight, nine, ten, eleven, twelve. MS. NORDALE: With the except of the majority vote for into the permanent fund, I'd -- I'd like to take a vote on leaving that at three-fourths. CHAIRMAN ROGERS: Okay. All those in favor of.... MS. BRADY: What did you just vote on then? MS. NORDALE: Well, we voted on a -- on a package, and what I'm saying is I'd like to amend the package where a three-fourths vote for appropriations out of the CBR to the permanent fund. MR. LUDWIG: Why. MS. NORDALE: Because I think that the -- with the revenues to the CBR being limited to settlement and interest earnings, we're likely to see a tremendous drop in the available funds to meet the kind of need that this reserve is established for. And if we pull everything out of there, we're not going to have a CBR -- or we're not going to have a reserve fund. It's all going to be part of the permanent fund and available for spending with a majority vote. UNIDENTIFIED SPEAKER (male): So, with the majority (indisc.) say put a million dollars in -- a billion dollars in the permanent fund (indisc.). UNIDENTIFIED SPEAKER (male): So, with the majority (indisc.) say put a million dollars in -- a billion dollars in the permanent fund (indisc.). MS. NORDALE: The ERA and pull it right back out again. CHAIRMAN ROGERS: Further discussion of requiring three-quarters vote for transfers from CBR to permanent fund? MR. GORSUCH: Are we requiring, as we had stated in one of our purposes, that the amount was to be the 1.5 billion in the two years? CHAIRMAN ROGERS: That was not included in the motion. MR. GORSUCH: Well, I would -- I would support the division of the question, then because I was voting to support the package under the presumption that we have the amount agreed upon and that the voluntary deposits would be in excess of that amount. So, I do want to see the CBR maintained at a $1.5 billion level. MR. LOESCHER: Mr. Chairman, when we voted on the previous page, I thought that was part of 3 and 4 (indisc.). CHAIRMAN ROGERS: But the -- but whether that goes in the Constitution or law was not established by the vote on the previous page. MR. LOESCHER: Mr. Chairman, I would align my comments with Mr. Gorsuch, then (indisc.) a million and a half (indisc.) to maintain. MS. BRADY: This (indisc.) choice -- we can do it (indisc.) a billion and a half, but they can't do it up to that. And then what about the pay back? If we want to keep it to a billion and a half, how do we do the pay backs? CHAIRMAN ROGERS: I think if we want to keep it to about a billion and a half, we can leave it up to the legislature to appropriate from time to time the amount in excess of a billion and half. I don't think we need to write that in to the Constitution. MS. BRADY: Well, I don't either, but -- but how do they repay it? (Indisc.) follow what I'm asking. MS. MCCONNELL: (Indisc.) could be each year the legislature could decide to, for instance, appropriate the undesignated general fund balance at the year end. I mean there are a number of mechanisms that would do the dump in the appropriations bill, so that there would be plenty of ways the legislature could do that mechanically. CHAIRMAN ROGERS: The issue of replenishment, as things now stand, is by settlements, by earnings, or by special appropriations into the CBR. MS. BRADY: Okay, I didn't understand -- I forgot that. CHAIRMAN ROGERS: The issue of when you dump from the CBR to the permanent fund and how - I think there are two themes: One that would say whenever you're over a billion and a half, it automatically dumps; another would say that the legislature by majority can dump. Lee. MR. GORSUCH: Well, just in general this is a complaint to all the lawyers who draft this stuff -- no one in the public is going to understand this amendment that says, is to help stabilize spending from year to year if the amount of unrestricted revenue combined amount of unrestricted revenue and money paid from the fund from unrestricted revenue from the fund, I mean no one knows what this means. I think our -- we should try to go forward with a fairly simple piece of language that at least has -- I don't know how this works, Mary, whether there can be an accompanying piece of -- of intent that's embodied when you enact the language as the constitutional provision that there's some interpretation.... MS. NORDALE: You have a statement of purpose. MR. GORSUCH: But I really feel that when we're asking people to do this amendment, it ought to be clear that our purposes are there and this implementing language is subservient to that purpose. And part of that purpose is to maintain a $1.5 billion fund, and I don't -- I prefer the concept that we had than the language that I see in front of me. CHAIRMAN ROGERS: Georgianna. SENATOR LINCOLN: Well, first of all I don't think that this language is what we've adopted. I think that we've -- what's adopted is a concept that we're going to write our own language - that's what I understood. Maybe that was the vote we took while you were out of the room, but that's -- that's what I said, I've got a lot of little things circled here of concerns that I've got of what the interpretation is - what that means and that's what we argued about for days and weeks in the legislature, as you know. But my concern in why I would vote for a three-quarter vote -- I still haven't been convinced -- that when we say that it takes a majority to move money from the CBR into the permanent fund to fill a gap, I don't know if that gap is this or because it's just a simple majority to dump in, that gap is this because it takes a simple majority, or if it's this or if it's this. Whereas if it took a three-quarter vote, it's much harder to go from this gap that's here to here. And that's why I liked -- it's much more difficult to get that three-quarter vote, granted, but it forces folks to look at what the spending level is going to be. And it forces, I think, the general public to become more involved, if you will, in that process. I worry about just a simple majority. CHAIRMAN ROGERS: The motion on the floor is to set a requirement at three-quarters vote for an appropriation into the permanent fund. We'll have a later vote on whether to set some formula that would automatically -- at this point, we don't have an automatic formula on the earlier vote. So, on the issue of three-quarters versus majority for the permanent fund, are you ready to vote? UNIDENTIFIED SPEAKER (male): Question. CHAIRMAN ROGERS: All those in favor of the motion that three- quarters vote be required for an appropriation from the budget reserve to the permanent fund, please raise your hand. Two, three, four, five, six. All those opposed -- correction, all those for a majority vote. One, two, three, four, five, six, seven, eight. MS. BRADY: Clear majority. CHAIRMAN ROGERS: No, I don't have Mike's proxy for that vote. UNIDENTIFIED SPEAKER (male): Two-thirds. SENATOR LINCOLN: I got it. Laughter CHAIRMAN ROGERS: In writing? UNIDENTIFIED SPEAKER (female): Oh. MR. POURCHOT: Mr. Chairman, would you entertain a motion to rescind our previous action in failing to adopt the motion to blow up the CBR altogether? CHAIRMAN ROGERS: A motion's been made to rescind our action in fixing the CBR and instead blow it up. Laughter MR. LUDWIG: And what would go in it's place then? CHAIRMAN ROGERS: We'd go back to 3:30 and start our discussion.... MR. LOESCHER: Mr. Chairman, that billion and a half question is -- do we need to make a motion to fix our previous motion? CHAIRMAN ROGERS: We will have to do that, but we're still at this -- we didn't have a majority of the members of the commission, I don't think, on that last vote. I counted -- I must have missed somebody's vote. UNIDENTIFIED SPEAKER (male): I abstained -- I didn't vote. UNIDENTIFIED SPEAKER (female): Oh-oh. The pressure's on. UNIDENTIFIED SPEAKER (male): You can't abstain. MR. O'CONNOR: Why not? I don't think -- I don't think that the thing covers everything that needs to be covered (indisc.). Expenditure -- that's why I abstained, and that doesn't change (indisc.) vote the first time. MS. BRADY: I have a suggestion. CHAIRMAN ROGERS: Well, let's -- let's vote a second time and see if anybody's changed their mind in this. The issue being requiring three-quarter vote.... MR. GORSUCH: Should we try to 1.5 first and then do.... CHAIRMAN ROGERS: Ya, let's try the 1.5 first cause there -- how would we -- how would those who favor constitutionally setting the -- the movement from the CBR to the permanent fund, how would you see that being laid out in the Constitution? MR. LUDWIG: (Indisc.) fiscal year.... CHAIRMAN ROGERS: With a flat $1.5 billion or with a tie to a projection of oil revenues or.... UNIDENTIFIED SPEAKER (male): Let's do it from the (indisc.), that's how we get everything else. CHAIRMAN ROGERS: Lee. MR. GORSUCH: Well, one -- one possibility might be to simply -- instead of saying the purpose of the budget reserve fund is to help stabilize state revenues, spending from year to year is to say it's -- the purpose of the budget reserve fund is to protect state revenues from volatility of oil and gas revenues. And it should provide for the equivalent of last year's state revenues received from oil and gas -- general fund revenues. That's about 1.6 this year; it will go down a little bit the following year and so forth. But -- and it would be almost the equivalent of the 1.5. CHAIRMAN ROGERS: Now is that state revenues -- revenues excluding the revenues that are deposited in the permanent fund or including those revenues? UNIDENTIFIED SPEAKER (male): General fund. CHAIRMAN ROGERS: General fund actually isn't a term used.... MS. NORDALE: Excluding bonuses. CHAIRMAN ROGERS: ...in the Constitution. Pat. MR. POURCHOT: Well, once again in that last exchange, it seemed like we've slid into this, I think, a trap by talking about the 1.5 million and a constitutional amendment, I don't connect those things. I don't think you have to address everything. Just because we're on a constitutional amendment doesn't mean we have to pile all the elements into the constitutional amendment. We have a whole bunch of things on our spending sheets here that we're recommending to the legislature that they do. They're not in the Constitution. I would see it just being a straight recommendation that would be reflected on our spreadsheets that everything in excess of a million and a half dollars is deposited into the permanent fund corpus. You know and it just shows up that way and that's what we're recommending that they do. CHAIRMAN ROGERS: I agree with you and that's why I supported the majority being able to do that into the permanent fund was so that we wouldn't have to put it in the Constitution. UNIDENTIFIED SPEAKER (male): Me, too. CHAIRMAN ROGERS: So -- so I'm going to vote against setting the 1.5 in the Constitution. MS. NORDALE: The problem that I have with that is that because the revenues to the CBR restrict it to (indisc.) special appropriations earnings is that I see that over time, of course, it's going to dwindle and -- and perhaps that's quite appropriate. The thing is that if that is happening and we're seeing a decline in receipts to the CBR but we still see the benefit of it, if you get this automatic dump by the majority, you may find yourself shortening the life of the CBR and the protection that it gives. I think that you need to consider that when you're rushing to bulk up the permanent fund. CHAIRMAN ROGERS: Lee, do you want to restate your motion on.... MR. GORSUCH: I would propose language that would say the purpose of the budget reserve fund is to maintain a cash balance equivalent to one-half of the prior year's spending. CHAIRMAN ROGERS: Spending including federal.... UNIDENTIFIED SPEAKER (male): The court had a lot of fun with that language. MR. GORSUCH: What (indisc.) state appropriates -- state general fund.... UNIDENTIFIED SPEAKER (female): I liked your earlier version of tying to the previous year's general fund oil and gas revenues. I think there's -- I suspect there's more -- more certainty to that than the other approach. MR. GORSUCH: It's amazing we can't even define (indisc.). UNIDENTIFIED SPEAKER (female): I know. CHAIRMAN ROGERS: Okay, a motion's been made to.... UNIDENTIFIED SPEAKER (male): What's the motion? CHAIRMAN ROGERS: ...to put -- to put into the Constitution a purpose and then a (indisc.) -- and that was the purpose language, then how are you going to have the -- were you not going to set the formula in the Constitution, but just say that's the purpose and leave the three-quarter vote to do it? MR. GORSUCH: No, I wanted to have a required balance. CHAIRMAN ROGERS: How? MR. GORSUCH: Well, the easiest way is to say 1.5 billion. Note: Tape is indiscernible -- everyone talking at the same time. UNIDENTIFIED SPEAKER (female): ....then it's no problem, they can put as put as much in as they want. CHAIRMAN ROGERS: I'm with Mary on that, we don't need it in the Constitution. Are we ready to vote on -- on this as to whether to put.... MS. BRADY: We could just say (indisc.).... CHAIRMAN ROGERS: ...a base of 1.5 in the.... MS. BRADY: We could have some money -- in the Constitution we could say we should put some money. MR. POURCHOT: Would that little, medium, or big? SENATOR LINCOLN: The language (indisc.) was the amount in excess of 1.5, so. CHAIRMAN ROGERS: Well, actually she was -- I think Annalee was using that as a place holder for.... MS. MCCONNELL: Well, and I -- it shouldn't say up to 1, because then you could have a dollar in the reserve which doesn't make any sense. UNIDENTIFIED SPEAKER (male): Minimum amount. MS. MCCONNELL: Ya. MR. LUDWIG: I wouldn't want to get in a situation where they spent half -- half a billion and the next year have the court say that the first half billion we spend next year has to go to the CBR or something either. I mean that's sort of what we got now, that.... CHAIRMAN ROGERS: Mike. TAPE 4, SIDE A NOTE: Tape 4 is blank.