JOINT SENATE JUDICIARY & STATE AFFAIRS COMMITTEE February 4, 2000 8:10 a.m. MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Dave Donley Senator Jerry Ward Senator Lyda Green Senator Kim Elton MEMBERS ABSENT Senator Rick Halford, Vice-Chairman Senator John Torgerson Senator Johnny Ellis Senator Jerry Mackie Senator Randy Phillips OTHERS PRESENT Senator Loren Leman Representative Scott Ogan Representative Jerry Sanders Representative John Coghill COMMITTEE CALENDAR Discussions with former Governor Hammond on SJR 35. WITNESS REGISTER Former Governor Jay Hammond General Delivery Port Alsworth, AK 99653 POSITION STATEMENT: Gave opinion on SJR 35 ACTION NARRATIVE TAPE 00-05, SIDE A Number 001 CO-CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to order at 8:10 a.m. The first order of business to come before the committee was the opinion of former Governor Hammond on SJR 35. Chairman Taylor introduced former Governor Jay Hammond. Chairman Taylor explained that the purpose of SJR 35 is to provide an opportunity for the people of Alaska to vote on whether the legislature should continue to protect and defend the PFD. SJR 35 retains the formula that provides for a PFD and inflation proofing, and it establishes parameters on how the money left over is spent. That has been the practice in the legislature since the creation of the PFD. Number 166 FORMER GOVERNOR JAY HAMMOND, who held office from 1974 to 1982, stated that initially when the August 14, 1999 advisory vote failed, many people speculated the legislature would do nothing. He felt that was unlikely. At an Alaska Humanities Forum gathering held in Anchorage, he felt the public understood the true question but he felt the public vote reflected a primary concern to not touch the PFD, somehow the public has to be removed before the legislature can get toward a balanced budget plan. The legislature is better equipped to decide who needs budget cuts, or revenue enhancing is the best means of accomplishing those objectives. There are certain basics that should be met to meet the public accord, one being the reassurance that the PFD essentially will remain the same, unaffected. That can be accomplished in two or three different ways. SJR 35 calls for a constitutional amendment, enshrining the PFD. Senator Mackie's proposal would do something similar to SJR 35, and there are other proposals out there. What form that will take, he is certainly not the best person to make that decision. He has suggested that once the PFD is assured, how the budget gap is closed is up to the legislature. There have been discussions about revenue enhancements, revenue cuts, and he suggested that the State receive benefits from the oil wealth, roughly in this proportion. The State only receives approximately 10 percent of the benefits in the dividend. The other 90 percent have been going to government services, that is another benefit. He would suggest that by addressing it through cuts, reduce the benefits that primarily go to Alaskans, the dividends go exclusively to Alaskans. The benefits of other state services go primarily to Alaskans, and if you use that approach solely you will neglect another source of revenue. The enormous amount of transient workers, commercial fishermen, tourists, who don't receive benefits from either of those sources, the dividend and state services. If you choose to simply cut services, it is not as bad as cutting dividends. If you need more money, doing something that would cap some of the other transient sources. There are several services out there that would do less damage to the average Alaskan, than would a reduction in the dividend, and perhaps a reduction of services. Keep all the options on the table, don't just cut or impose taxes; take a look at a broad mixture that takes those elements into consideration. Whatever program is adopted has to be a major step toward resolving the budget gap. Give the people relative assurance that the PFD's are essentially the same as in the past. Concerns have been voiced about a constitutional amendment, one being that it might change the PFD's tax exempt status with the Internal Revenue Service. The other concern is that if the constitutional amendment doesn't pass. There is no backup that assures the public that the PFD will remain unaffected. A vote of the public on that question would have almost the same force and effect on legislative violence to the PFD, as would a constitutional amendment. The legal ramifications are also of concern. If the constitutional amendment were floated out, and there was no backup, the legislature would be back to square one. Number 667 CHAIRMAN TAYLOR explained that SJR 35 would only put a constitutional vote before the people. Do you want the assurance that the same system that you have grown used to over the years, will be protected in that fashion. There is no discussion here about fully resolving the fiscal gap, a plan to resolve that might take $1.2 to $1.5 billion. Income taxes and other things will generate $300 million, which is only a small portion of it. Whatever plan is used to resolve the budget problem will be a fairly complex plan. Alaska has many other sources and opportunities for revenue, land sales being one of them. The legislature has several such bills floating around also. Number 769 SENATOR GREEN stated that she watched the debates on the advisory vote; her main opposition was the language. An issue debated on both sides was that the public doesn't mind the legislature using some of the money if the people are assured that the dividend will not be affected. The people's confidence was shaken on the advisory vote, the legislature has to go back and bring the public to an understanding that the legislature is trying to inflation proof the fund. This was based on the non-renewable resources, it does not regenerate itself. SENATOR GREEN's initial interest in introducing SJR 35 was to give the public the assurance the PFD is protected. The tax issue was just a "red herring." Anytime you inquire further about court decisions and inquiries from the IRS there is disappointment in the response because it is always no. Is the IRS going to come in one day and say the State is prevented from doing this by agency administration and lawyers. It involves changing the bar, how many votes and support it requires to appropriate and pay out the dividend. To change the bar it would go to a 2/3 vote in the legislature, and a vote of the people. For people who have the ability to testify they might say that it could raise a tax question. Number 1035 SENATOR WARD stated that there are people who truly believe that legislators can't touch the dividend without a vote of the people. The original legislation reads that it is at the mercy of the legislature. Senator Ward asked Governor Hammond what the reasoning was behind the creation of the PFD. Number 1140 GOVERNOR HAMMOND stated that he advocated for 50 percent of lease bonus royalties and severance taxes. The legislature at that time cut severance tax out, cutting the total contributions in half. The 50 percent was reduced to 25 percent, but the legislature has infused money in the fund to offset that reduction. At that time he asked that half the earnings be used for dividends and the other half be used for government services. If the fund had the contribution level that was originally proposed, it wouldn't need inflation proofing. It would have been impossible to add additional constraints to require a vote of the people. Using some of the money for public purposes, and one public purpose is inflation proofing the fund. If 50 percent of the funds earnings shall be allocated for public purposes, and don't even mention dividends, maybe that is more legally tenable. If the legislature did that the State would have to have something to acquire public support. What if the State needed more of those moneys than what some formula restricted you to, to keep the State out of bankruptcy. There should be an escape clause that the allows the legislature to have access to those funds or change that formula. Number 1367 CHAIRMAN TAYLOR explained that the Constitutional Budget Reserve Fund does need a 3/4 vote to pass, and since the fund was created the State has had to utilize the fund almost every year. REPRESENTATIVE OGAN explained that an opinion by legal counsel for the legislature stated that HJR 49 could potentially be a tax problem. Representative Ogan asked Governor Hammond to explain in detail the why the legislature can alter the dividend program, but the legislature can't touch the principle of the fund without changing the constitution. Representative Ogan then explained what happened last year with the advisory vote. GOVERNOR HAMMOND stated that he is totally opposed to a cap on the dividend. Suddenly there has been international interest in the PFD program. Countries and corporations are interested in how the fund was created and the dividend program itself. Governor Hammond advised legislators not to touch the dividend program because the program would not be as successful if the public was not involved. The public is always looking over its shoulder to see how their government is spending the money. Governor Hammond stated that no more than 50 percent of the earnings should be used to inflation proof the fund; dividends wouldn't necessarily have to be mentioned. A vote of the public would eliminate the government's ability to cause mischief with the money. SENATOR TAYLOR said that in essence SJR 35 does just that. It says the State will conduct things just as it has, changing nothing. 50 percent of the Permanent Fund's earnings will go to dividends, and the other 50 percent will ensure the public there will be inflation proofing. It will be the opposite of Senator Mackie's plan. The public believes it already has that right, but it doesn't. The government should give it that right, and preserve that right within the constitution. GOVERNOR HAMMOND said he also wanted to create an investment entity that the public would own shares in. Like any other investment or stock, the public should have an opportunity to vote on it, but that plan was "Zobelized". There are problems with the simplistic approach of shareholder voting, because a vast majority of the shareholders are children who don't have the right to vote. There should be a vote of the people, or as close as you can get to it without posing legal ramifications. It should be looked at like a stock portfolio and the shareholders, or the public, should have a say in how it is conducted, not left up primarily to the legislators. Number 1921 REPRESENTATIVE OGAN stated some facts about the income tax and state sales tax. He pointed out the public would certainly be interested in State spending, if there was an income tax. GOVERNOR HAMMOND said when the income tax was eliminated people criticized the State for living beyond its means. To correct that, people must cut their living expenses, or increase their means. By eliminating the income tax the State has severed a connection between the public purse and the politicians. That had to be re- established. That was another reason for creating the dividend program. He disagreed with eliminating the income tax. He felt that it should be suspended or reduced, but not eliminated in case the State needed it. GOVERNOR HAMMOND questioned how economic development is possible, particularly the type that generates new population increases. If the State is not extracting enough money to offset the cost of services provided, that is a formula for uneconomic development. Other states know they have to extract money through taxes and user fees to support economic development. If the state cannot balance the budget through cuts and needs revenue type enhancements, it can impose an income tax or state sales tax. It can structure income taxes to reduce the percentage paid by Alaskans and increase the percentage paid by transients. Governor Hammond gave some other creative ideas on taxes and credits given to Alaskans. The Mackie Plan is the opposite of what the PFD was created for. If the legislature allowed people to borrow $25,000, at current dividend levels it would prime rate plus, and all the public would do is relinquish their dividend until the balance is at zero. The only ones that would pay out of pocket are short time people that are going to leave the State. Number 2267 SENATOR TAYLOR said the important deal today is will the legislature give the public the assurance they believe they have had all along. That is, will there be some semblance of protection to the dividend program, and will there be some semblance to inflation proofing the fund. That is all SJR 35 does. SENATOR LEMAN stated the problem the State has with financial experts theories. If the market drops off then the State could lose the PFD in eight or nine years. A better method to pay the dividend is instead of paying it on realized gains, to pay as a portion of the value of the fund. There is still incentive to keep the fund, protect it and keep it growing, but maybe providing incentive for people to play with creating realized gains. Last year, Governor Knowles proposed the PFD board sell some of it to create earnings. Maybe we should change the formula, so we protect it and have it in perpetuity. GOVERNOR HAMMOND said he was not opposed to that. SENATOR LEMAN asked Governor Hammond if the State should keep the concept of paying dividends off some type of earnings, keep the concept of inflation proofing and doing it that way. GOVERNOR HAMMOND said yes that would be ideal. TAPE 00-05, SIDE B SENATOR ELTON asked Governor Hammond if he would feel more comfortable if the legislature enshrined what was in the constitution, to using 15 to 20 percent of the income stream for other government purposes. Number 2346 GOVERNOR HAMMOND replied whether or not the legislature enshrined it in the constitution, he would have no objection to 15 percent that still allows for inflation proofing and full funding dividends. Some people think that it may take 37 percent, only leaving 13 percent for other public purposes. He would support even the 50-30-20 or the 40-30-30 approach, but the 40-30-30 would erode the dividend by roughly 20 percent by what it would otherwise be. But, anything beyond that gets into the guts of the dividend concept and why it was created. Governor Hammond referred to a plan from Senator Torgerson. SENATOR ELTON stated that it probably wouldn't matter that much if the legislature were to enshrine the progression of the fund, and then using a capped portion of the dividend stream. SENATOR TAYLOR said that is exactly what the bill does, there is no cap. Each discussion on the undistributed income account, those are discussions that have to be taken up in the legislative process and in public debate. By passing this bill the State is not going to have only the legislature in a smoke filled room, making a decision that impacts the dividends or impacts inflation proofing. The public is then assured they will have a vote on the subject, before it was to occur. The people believe they have a right to a vote, the legislature should make certain the public does have that right. Number 2177 SENATOR GREEN said the concerns of the public across the State was a discomfort when it comes to a decision of the PFD. Until the legislature assures the public that it is not the intent of the legislature to spend the dividend program, and by passing SJR 35 or a similar measure then there can be discussions handling the problems the State has with its budget. REPRESENTATIVE SANDERS asked Governor Hammond about the government getting 90 percent of the money and the public gets 10 percent. Now, the State is saying perhaps another 15 percent. When that was given to the government, they used all of that and a little more. If they are granted another 15 percent, how long will it take before the government expands to use all of that and a little more. How does this thing progress if the legislature does not enshrine and protect the dividend, and inflation proofing by a vote of the people. GOVERNOR HAMMOND said the additional income that could have been used for other purposes, that went into undistributed earnings it went as icing on the cake. If we are going to give anything up it should be that. There is no way to write a meaningful spending limit. Governor Hammond refers to the Dave Rose Plan, and that is something that the State should maybe look at again. SENATOR TAYLOR said all plans are worthy of debate. The legislature always goes one step further. The legislature just needs to make sure the public can have a vote on what happens to the corpus of the fund before it's tapped. That will be put into the constitution. GOVERNOR HAMMOND said his concerns were if the constitutional amendment gets voted down and the legislature doesn't have a backup. Is there a catastrophic escape clause provision. If the legislature carried on even after a vote of the people, it would be political hari-kari. If you can avoid that and accomplish the same thing in a simpler approach, it is something to consider. SENATOR WARD said he thought the legislature would never try to take the dividend without a vote of the people. Last year the House of Representative passed the legislation with an effective date, regardless of whether the advisory passed, the time had come that the system was grabbing the money. GOVERNOR HAMMOND said there hasn't been a public vote expressing the opinion of the people in the manner that he thought they would express themselves. Once that is done, the State would have constraints on the legislature that weren't in existence before the vote. SENATOR DONLEY said obviously the existing appropriation limit in the constitution has never worked, the calculation under the existing constitutional language would give the State six billion dollars in general funds to spend now. There is a way to craft constitutional restraints on spending that might be effective, in our system of government is not conducive to downsizing, because of the pressure on the legislature by the constituents for more. In America, very few legislatures and executive branches have been successful in downsizing. Number 1820 REPRESENTATIVE OGAN said the Majority Caucus from the House of Representative introduced companion legislation to Senator Donley's bill because capping the PFD only will not fix the spending problem. The companion legislation caps spending and protects the PFD. CHAIRMAN TAYLOR expressed the committee's gratitude to Governor Hammond. GOVERNOR HAMMOND commended committee members for confronting an issue that has to be resolved. SJR 35 is an element of the total package that has to be addressed first. If the State of Alaska continually draws off the budget reserve account, the dividends will go into a free fall and probably exhaust in the near future. Any action to preclude that is worthy of pursuit. There being no further business to come before the committee, CHAIRMAN TAYLOR adjourned the meeting at 9:10 a.m.