SENATE JUDICIARY COMMITTEE Wasilla AK June 14, 1997 2:00 P.M. MEMBERS PRESENT Senator Robin Taylor, Chairman MEMBERS ABSENT Senator Drue Pearce, Vice-Chairman Senator Mike Miller Senator Sean Parnell Senator Johnny Ellis OTHER MEMBERS PRESENT Representative Vic Kohring COMMITTEE CALENDAR SENATE JOINT RESOLUTION NO. 18 Proposing amendments to the Constitution of the State of Alaska to guarantee the permanent fund dividend, to provide for inflation-proofing, and to require a vote of the people before spending undistributed income from the earnings reserve of the permanent fund; and relating to the permanent fund. PREVIOUS SENATE COMMITTEE ACTION SJR 18 - See State Affairs Committee minutes dated 3/13/97. WITNESS REGISTER Senator Lyda Green State Capitol Bldg. Juneau, AK 99811-1182 POSITION STATEMENT: Sponsor of SJR 18. Mr. Jim Kelly, Director Communications Alaska Permanent Fund Corporation P.O. Box 110460 Juneau, AK 99811-0460 POSITION STATEMENT: Opposed SJR 18. Mr. Ron Lorenson, Attorney Simpson, Tillinghast, Sorenson, and Lorenson 1 Sealaska Plaza, Ste 300 Juneau, AK 99801 POSITION STATEMENT: Opposed SJR 18. Mr. Dwain R. Carney Wasilla, AK 99687 POSITION STATEMENT: Opposed SJR 18. Ms. Holly Gerlack Wasilla, AK 99687 POSITION STATEMENT: Commented on SJR 18. Mr. John Murphy (address unknown) POSITION STATEMENT: Supported SJR 18. Mr. Walter Fergus Wasilla, AK 99687 POSITION STATEMENT: Commented on SJR 18. Mr. Marvin B. Cook P.O. Box 9 Talkeetna, AK 99676 POSITION STATEMENT: Supported SJR 18. Mr. Charlie Huggins P.O. Box 878115 Wasilla, AK 99687 POSITION STATEMENT: Supported SJR 18. Mr. Bruce Knowles (address unknown) POSITION STATEMENT: Supported SJR 18. Mr. Leo Kaye HC30, Box 12934 Wasilla, AK 99654 POSITION STATEMENT: Supported SJR 18. Mr. Roy Burkhart P.O. Box 204 Willow, AK 99688 POSITION STATEMENT: Supported SJR 18. Ms. June Burkhart P.O. Box 204 Willow, AK 99688 POSITION STATEMENT: Supported SJR 18. ACTION NARRATIVE TAPE 97-38, SIDE A Number 001 SJR 18 - CONST. AM: PERM. FUND INCOME & DIVIDEND CHAIRMAN ROBIN TAYLOR called the Senate Judiciary Committee meeting to order at 2:00 p.m. and announced SJR 18 to be up for consideration. SENATOR GREEN, sponsor of SJR 18, said there is a fear among people that something is going to be done to the Permanent Dividend Fund that people haven't had input on or that the legislature might at some point use the Permanent Fund for something other than what they think it's intended. Most people already think that nothing can be done with the Permanent Fund without their vote, but that isn't the case. SJR 18 corrects that and makes sure that the people are consulted before anything is done with the Permanent Fund. MR. TUCKERMAN BABCOCK, former staff to Senator Green, explained that SJR 18 does not propose a change to the existing management of the earnings of the Permanent Fund, except for the statutory basis which now can be changed any time by 11 senators, 21 representatives and a signature of the Governor. SJR 18 changes it to a constitutional basis requiring 14 senators, 27 representatives, and a vote of the people before any changes could be made to the Permanent Fund. The effect of this change would be to take the spending of dividends and the spending of inflation-proofing off the table unless the voters approve changing it. It also adds the requirement that left-over money (undistributed income) can only be spent if the voters approve it. SJR 18 is good public policy, he said, because for the last 18 years fear has been a big part of the process and it would eliminate the confusion about what to do with the undistributed income and how that might affect the dividend. There is no change to the status, definition or earnings. It only makes it a constitutional basis instead of a statutory basis. MR. BABCOCK suggested that the Committee might want to add findings to SJR 18 clearly describing the public purposes behind the dividend, inflation proofing, and undistributed income. MR. JIM KELLY, Director, Communications, Alaska Permanent Fund Dividend Corporation, cautioned the Committee that this legislation might weaken the State's long-standing position that fund income is not subject to federal taxation. Secondly, he said, that in the future legislators might wish to move away from a distribution policy tied to fund earnings to something other like market value which a lot of endowments do now. The Investment Policy Options Committee is in the process of doing extensive review on that very topic, but hasn't made a recommendation yet. He also noted that the Permanent Fund is made up of two parts, the principal, which is protected by the Constitution, and the income, all of which is subject to appropriation by the legislature every year. MR. RON LORENSON, Private Attorney, said he was concerned that the income would be subject to federal income tax. They have always taken the position that it isn't, but there is no guarantee that that will continue to be the case. A real concern is that a change in the purpose of the fund could increase arguments in favor of its being taxable right now. There are a couple of issues in question. One is whether or not the income accrues to the State or does the legislature have access to that income which it does under the present arrangement. Under the proposed constitutional amendment, a significant portion of that income would be taken off of the legislature's plate which disqualifies it as income accruing to the State. Another way to approach this question as to whether the income from a governmental fund accrues to the State is to analyze whether or not any part of that income is subject to any private interests. Now there are no private interests that have any right to any part of the income of the fund. SENATOR GREEN asked for clarification. MR. LORENSON explained that the dividend is created by statute so the legislature has the ability to modify the dividend and having that ability defeats the argument that there's a private interest. SENATOR GREEN asked what is a private interest. MR. LORENSON explained that a private interest belongs to someone who is not part of government, like a private individual or corporation. If the Permanent Fund dividend is established by the constitution as an absolute right of every resident of the State, you would substantially strengthen the argument that you have created a private interest in that income. These two things certainly enhance the potential for the argument that the income of the fund would be taxable under federal law. The other approach that's used by the courts and the IRS in looking at whether or not income of a government is taxable is if the entity provides official governmental services or functions. Changing the constitution would at least weaken our argument that the purpose of the Permanent Fund is to provide some sort of essential governmental functions or services. Right now all of the income is available to the legislature for appropriation for those purposes with the intent that the legislature determines what is necessary. CHAIRMAN TAYLOR asked what type of tax structure we would be looking at if the people decided to vote for more protection for the Permanent Fund. MR. LORENSON replied that he hasn't tried to study that and he is not a tax expert, although he has assumed it would be the corporate rate. CHAIRMAN TAYLOR asked him to check on that for the committee. SENATOR GREEN asked if there is an annual review by the federal government of the Board and the vulnerability of that status. MR. LORENSON replied that he wasn't aware of any. SENATOR GREEN asked what was the difference between declaring the dividend and declaring it in advance. MR. LORENSON explained that the important difference was who has control over whether there will be a dividend and what it will be. Right now the legislature retains the control each year. Under the constitution, the ability to make those decisions will be taken away from the legislature. SENATOR TAYLOR explained that income from a revokable trust, for instance, is taxable. An irrevocable trust is not taxable. Part of his concern is that the dividend is less than 50% of the income that comes in because of five-year averaging and the inflation proofing and the undistributed income account. Vesting this right to every individual citizen might very well make this thing taxable. If we did, the IRS would tax the Permanent Fund for the full amount of income, about $700 million. He thought they should really look at this. MR. LORENSON concurred with his comment. He said he didn't really have a solution to this problem. SENATOR TAYLOR asked if anyone has requested an advisory opinion from the IRS. MR. LORENSON replied that no one had done that because of wanting to stay low on the IRS radar scope. MR. DWAIN R. CARNEY said he thought this legislation was stupid. He said they elect legislators to spend some money sometimes. To have an election every time they want to spend some extra money would be expensive and time consuming. He also thought we ought to spend some of the money for prevention, maintenance, and infrastructure instead of saving it. SENATOR TAYLOR said he thought that there was a lot to be said for the original purposes for which the fund was set up which was to provide for what everyone believed would occur, the down turn of the oil economy in Alaska and to have a fund available for the rainy day. And that's exactly what's happening. MR. CARNEY said he didn't see where all the fear was that it was going to get spent. MR. CARL CONDOR, SR. said they should make every effort to make any issue perfectly clear to the people who are going to vote on it. Right now the packet they have is not enough, especially if what Mr. Lorenson says is true. He thought protecting the dividend and inflation proofing was a good idea. He thought the legislature should have some leeway. He felt if they just did something with public safety with what's left over, they will have accomplished something and lived up to the voters. Public safety is the number one item under any government. MS. HOLLY GERLACK testified that what bothers her according to what Mr. Lorenson said is that the government is somehow separate from us, the people. She asked if Senator Green introduced the legislation because the legislature wasn't doing its job. Why introduce this law if the legislators are listening to the people? TAPE 97-38, SIDE B Number 001 MS. GERLICK said she was concerned with the assumption that the money would become private if we, the people, have some say in how it's spent. She also wanted to know why the proceedings with the Permanent Fund are kept confidential. SENATOR TAYLOR said he didn't really know, but imagined there were some situations where an investment might affect the price of a stock if it were public information, as in insider trading. He noted that the FTC closely monitored information that was let out. He also said that the legislature had never appropriated any of those monies for any purpose other than to put them back into the Fund. The money has never been used for a special project. MR. JOHN MURPHY said he understood that by 2018 there would be enough money in the Permanent Fund to perpetuate for eternity. He preferred to take his chances for better or worse for what the dividend turns out to be, but he didn't want the legislature to control that. He also asked why we have to go to the IRS and ask them how to run our State. This is not income that we earn. SENATOR GREEN responded that it's because of the way the Permanent Fund was set up as a business that operates independently. CHAIRMAN TAYLOR added that every state and city has an independent savings account which is invested and taxes aren't paid on those. MR. MURPHY said he thought the IRS issue was just a scare tactic that had no founding in fact. SENATOR GREEN said she wanted to make sure that he didn't construe this as capping the Fund. MR. WALTER FERGUS said when the legislature gets to the point where they can no longer provide the services the State is required to serve like roads, public safety and education, that's the time to use the Permanent Fund. He wanted to see the people have a vote also, but didn't want to have to pay federal taxes. CHAIRMAN TAYLOR said that Alaskans are in a higher tax bracket than anyone else in America. He thought we should have to ask those folks who work if they want taxes increased and if they want it to come out of the Permanent Fund. MR. MARVIN B. COOK said he thought the State government had certain innate functions that must be performed, but it is the mark of socialism if a government owns the wealth-making properties of a state or nation. We are not supposed to be a socialist government, we are supposed to have the freedom of a republic. We don't have the freedom to own the oil wealth in the State of Alaska, nor the coal wealth. That is an abomination that should be corrected. Funding an educational endowment is symptomatic of a socialist government. He did not want the governor or anyone else establishing a fixed education trust to pay all the money the education establishment wants. The State Legislature should eliminate whatever power they have over the education establishment of the State and put that power in the hands of the local communities and let them run it so we can have true education again. MR. COOK also said that he supported this year's legislature. CHAIRMAN TAYLOR said he agreed with his socialist comments because a government shouldn't own anything but the buildings government sets in and a DOT warehouse to make sure the road grader is out of the rain. They don't need to own anything else. Lands in the original 15 states are owned privately except for land that was purchased by the government from the state and private people who owned it. This is why he introduced a bill to give away 103 million acres of land and put it into private ownership. MR. CHARLIE HUGGINS supported Mr. Cook's testimony. He supported this year's legislature. He thought there might be a tax liability, but he thought that could be determined and suggested calling a tax consultant who could give them just as good an opinion as an IRS person. MR. BRUCE KNOWLES supported SJR 18. He thought that legislators loose touch with their homes when they go to Juneau. MR. LEO KAYE supported SJR 18. He thought it was good for issues to go back to the people for a vote. He thought that too often we don't have the opportunity. MR. ROY BURKHART said his Board of Directors voted unanimously to congratulate the legislature on the good job they did last year. He agreed with Senator Taylor regarding private lands. MS. JUNE BURKHART said it's exciting to be part of the process using faxes, computers, telephones and working with people like Senator Green and Representative Osterman. CHIARMAN TAYLOR told them how much he enjoyed being in their community and thanked them for their participation and adjourned the meeting.