SENATE RESOURCES COMMITTEE May 7, 1999 3:15 p.m. MEMBERS PRESENT Senator Rick Halford, Chairman Senator Robin Taylor, Vice Chairman Senator Jerry Mackie Senator Lyda Green Senator Georgianna Lincoln MEMBERS ABSENT Senator Pete Kelly Senator Sean Parnell COMMITTEE CALENDAR SENATE JOINT RESOLUTION NO. 18 Requesting Exxon Corporation to pay claimants for court-ordered damages resulting from the Exxon Valdez oil spill. MOVED SJR 18 OUT OF COMMITTEE CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 96(FIN) "An Act relating to deposits to the Alaska permanent fund from mineral lease rentals, royalties, royalty sale proceeds, net profit shares under AS 38.05.180(f) and (g), federal mineral revenue sharing payments received by the state from mineral leases, and bonuses received by the state from mineral leases, and limiting deposits from those sources to the 25 percent required under art. IX, sec. 15, Constitution of the State of Alaska; and providing for an effective date." HEARD AND HELD PREVIOUS SENATE COMMITTEE ACTION HB 96 - No previous Senate action. WITNESS REGISTER Representative Norm Rokeberg Alaska State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Sponsor of HB 96 Ed Martin, Sr. Kenai, Alaska POSITION STATEMENT: Opposed to HB 96 and any legislation that impacts the Permanent Fund dividend program without a vote of the people Senator Jerry Ward Alaska State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Discussed the effect of HB 96 on long range financial plans ACTION NARRATIVE TAPE 99-31, SIDE A Number 001 CHAIRMAN HALFORD called the Senate Resources Committee meeting to order at 3:15 p.m. Present were Senators Green, Taylor, Mackie, Lincoln and Halford. Chairman Halford announced the committee would first hear SJR 18 and then HB 96. SJR 18-EXXON VALDEZ DAMAGE CLAIMS SENATOR LINCOLN moved SJR 18 out of committee with individual recommendations. There being no objection, CHAIRMAN HALFORD announced the motion carried. HB 96-DEPOSITS TO THE PERMANENT FUND REPRESENTATIVE NORM ROKEBERG, sponsor of HB 96, explained that in FY 1980 the state received $4.07 billion in unrestricted general funds. As a result, the legislature enacted legislation to increase, from 25 to 50 percent, the amount of mineral lease royalties and bonuses deposited into the corpus of the Permanent Fund after February 15, 1980. HB 96 changes the statutory language enacted in 1980, and reestablishes the annual amount deposited into the Permanent Fund to the constitutionally mandated amount of 25 percent. HB 96 will allow a greater amount of the cash flow from existing and new oil fields to be deposited into the general fund. REPRESENTATIVE ROKEBERG referred to spreadsheets of revenue projections that will result from the enactment of HB 96, prepared by the Department of Revenue. He noted the smaller deposit to the Permanent Fund will not impact the 1999 dividend; it will decrease the 2000 dividend by approximately $1.70 per person. BRETT HUBER, legislative aide to the Senate Resources Committee, discussed a memo from the Permanent Fund Corporation that contained responses to three questions posed by Chairman Halford. Chairman Halford asked if the increase from 25 from 50 percent had not happened, how much less money would have been deposited into the Permanent Fund. The answer is $80,599,795. The second question asked how much less income would have been earned by those deposits had they not been at the 50 percent level. The answer to the second question was $66.6 million at an average return rate of 9.5 percent for nine years. The third question asked what the effect would have been on Permanent Fund dividends. The answer is that the impact to the last dividend would have been $60.54 per dividend. In addition, Chairman Halford asked what the impact would have been if, over that same time period, 100 percent rather than 50 percent had been deposited. The Permanent Fund Corporation has not responded with an exact number yet, however it estimates an additional $322 million would have been deposited, which would have earned an additional $264 million and increased the dividend by $252. CHAIRMAN HALFORD said the 100 percent scenario would have occurred if the state had saved 100 percent of its ownership share. There being no questions of committee members, Chairman Halford took public testimony. Number 164 ED MARTIN, SR. informed committee members he traveled to Juneau at his own expense to present to legislators a petition signed by 8,866 people from the Kenai-Soldotna area. CHAIRMAN HALFORD surmised that the subject of the petition was broader than HB 96, which, he explained, is one piece of the puzzle in the financial dilemma. He noted the legislation proposes to decrease the amount of money going into the Permanent Fund. MR. MARTIN said the people who signed the petition do not want the legislature to use any money from the Permanent Fund or cap the Permanent Fund dividend without a vote of the people. CHAIRMAN HALFORD asked how many people signed the petition. MR. MARTIN replied he had 8,866 signatures with him, however he guaranteed that over 9,000 people have signed the petition. Most of the signatures were obtained as the petitions were circulated among about 150 businesses in the Kenai-Soldotna area. He read a summary of comments he received from the people he spoke with: A time for a new approach to our budget problem has come. The tree has bore so much fruit, it has weakened and threatened its own survival. Shortfall - a key word to justify more burden to the people. Shortfall really means government overspending and its hunger for more money. What government needs is to live within the funds it already has, not spending more. We should concentrate on government efficiency - how to maintain the services needed at a reduced cost. Contracting to private businesses. All services needed - that does not require permanent employees of government. What savings could be realized by the citizen that pays the bill? Why hire someone in government to do 100 days work a year, which would require training, salary, benefits, including insurance, hospitalization, pension costs, pension, per diem, travel, transportation, car or truck whenever needed, when contracting to one who is already trained and does the work as a specialist. Bonding insures the taxpayer gets his money's worth. Government employees do not give us that efficiency. We have a very serious problem when we Alaskans are paying in excess of $10,000 per man, woman, and child for government and its services while other states in the Union spend around $3,000 per person per year. With that in mind, how can we justify any increases in funding? What is needed is better management in government spending. How can lowering the standard of living of all Alaskans by taking away the permanent fund dividend improve the betterment of Alaska? It cannot. What it will do is hurt the least able amongst us: the children, the elderly, the disabled, and the person who is trying to raise a family. Why not let the people have this dividend to spend as they choose? This will help the economy of Alaska instead of requiring the less fortunate to look for more public assistance which would, in turn, cost more. Administrating, maintaining, enforcement of a greater public assistance program should not be our goal. We, as a state, are very fortunate. We have tremendous resources - land, oil, gas, timber, minerals and the geographic position as a hub to the Pacific Rim. Why not use these resources and manage government more efficiently? The true goal should be for the people to have every opportunity to prosper in this great state. I'm sure the government of Alaska has enough trained people in Juneau to figure this out. If not, when election time comes, our elected officials will be replaced by those who will follow the will of the people. The time has come to say, 'Enough is enough.' It is time to change attitudes and manage our government to benefit all Alaskans, the people who pay the bill. MR. MARTIN indicated that more signatures would be forthcoming as the petition is being circulated in Fairbanks, Wasilla, Seward, Homer, and Valdez. He emphasized that he participated in collecting signatures in Kenai and Soldotna only. CHAIRMAN HALFORD repeated that HB 96 is a relatively small piece of a financial puzzle that would reduce dividends by a few dollars. He asked Mr. Martin if his position is that no effect on the dividend should occur without a vote of the people. MR. MARTIN said that is correct and that people want the cost of government made reasonable before other avenues are explored. He noted as a former director of the public works department in Wasilla, he believes privatization is the way to save dollars. Number 319 SENATOR TAYLOR expressed appreciation to Mr. Martin for coming to Juneau at his own expense to talk to legislators. He noted that a recent weekly television station poll asked viewers whether the Permanent Fund should be used to support state government. Only 20 percent of the respondents were in favor. He recieved a similar response from a poll he conducted in his district. MR. MARTIN maintained that the public is very angry about the idea of spending more money on government programs instead of fixing the actual problems. SENATOR LINCOLN thanked Mr. Martin for his efforts and asked Mr. Martin how he collected the signatures. MR. MARTIN replied he left copies of the petition at businesses for employees to sign. He noted the business community is very upset because limiting the Permanent Fund dividend will take money out of circulation and bankrupt some businesses. Also, limiting the Permanent Fund dividend will lower the standard of living of all Alaskans. Instead, he suggested raising revenues through land sales and the creation of a new tax base. CHAIRMAN HALFORD asked Mr. Martin what short term method he would suggest to cover a $100 million shortfall for essential government services after the legislature goes through all of the steps of privatizating and streamlining state government services. MR. MARTIN said he would first look to resource development and would consider capping the Permanent Fund dividend as a last resort. He does not believe the legislature has begun to scratch the surface of the privatization issue. CHAIRMAN HALFORD maintained that although he does not like the idea, he would accept the establishment of a statewide sales tax before he would support limiting the Permanent Fund dividend. MR. MARTIN cautioned committee members that any legislator who supports limiting the Permanent Fund dividend is performing political suicide. SENATOR TAYLOR asked Mr. Martin to lend support to his land bill. MR. MARTIN stated the opportunity to homestead in Alaska was the thing that helped him most in life. He asked legislators to give his children and grandchildren such opportunities. Number 572 SENATOR WARD began to discuss a computer run of the prospective results of the House Majority long range financial plan. SENATOR MACKIE objected to Senator Ward's discussion on the basis that it was not germane to HB 96. He moved HB 96 from committee with individual recommendations. An unidentified committee member objected to the motion. SENATOR MACKIE objected to the fact that testimony is being taken on the long range fiscal plan which is not the purpose of the hearing. He noted he could agree with the Chair's decision to hear the previous speaker because he traveled to Juneau to give his testimony, however he does not believe the Senate Resources Committee is the appropriate forum to hear the long range fiscal plan. CHAIRMAN HALFORD stated that Mr. Martin's petition deals with changes to the Permanent Fund, which HB 96 will affect. SENATOR WARD asked for the committee's permission to speak and stated his testimony pertains to the Permanent Fund. SENATOR LINCOLN said that she will vote against the motion to move HB 96 from committee because she has not had the opportunity to ask questions of the sponsor. SENATOR TAYLOR agreed with Senator Lincoln and said he feels ill prepared to move the bill from committee at this point in time. SENATOR MACKIE asked if Senator Ward will be addressing HB 96 or whether he will be presenting his plan to close the fiscal gap. CHAIRMAN HALFORD told Senator Ward he must tie his testimony to HB 96 from the start. SENATOR MACKIE withdrew his motion to move HB 96 from committee. SENATOR WARD distributed a document to members that compares the projected income from three plans: the House Majority long range financial plan which would be unveiled the following day; the Governor's income tax plan; and a resource development plan under which dividends would increase. Each plan would go into effect on January 1, 2001. SENATOR WARD said enactment of HB 96 will prevent the plans from working. He maintained that the Constitutional Budget Reserve fund (CBR) could be used to fill the gap until the voters choose a plan at the next election. SENATOR TAYLOR asked Senator Ward if any computer runs were done to determine the impact of placing 25 percent rather than 50 percent into the Permanent Fund under any of the plans. SENATOR WARD said such computer runs were done and that the results showed that the decreased deposit to the Permanent Fund would harm the dividend program. CHAIRMAN HALFORD repeated that the impact would be less than $10 on future dividends, but that it would have been as high as $60 per dividend had it been applied over the past 10 years. SENATOR WARD said he opposes any plan that alters the Permanent Fund dividend program. Number 572 SENATOR TAYLOR commented that the impact of $10 per dividend is relatively small. He maintained that enactment of HB 96 would impact each of the computer runs presented by Senator Ward. TAPE 99-31, SIDE B SENATOR WARD summarized by saying the legislature is going to spend $50 billion between the present and 2004, when the CBR runs out. The amount of revenue generated during that time period will be $39 billion, leaving a shortfall of $11 billion. He said he believes the people of the state want resource development to occur to raise revenue to fill the gap. He emphasized it is wrong to alter the Permanent Fund dividend program at all until the people vote on a plan. SENATOR LINCOLN expressed concern that HB 96 is not part of either Majority's plan and that a plan should not be adopted on a piecemeal approach. Senator Lincoln acknowledged that although the impact of $60 per dividend does not seem like much, it could mean a lot to a large family. She remarked that she wants any proposed change to the Permanent Fund dividend program put before the voters. SENATOR WARD stated that he is opposed to HB 96 because it would alter the approach of putting the plans before the voters. He remarked that the Governor's tax plan will not work after 14 years. The resource development plan requires that resource development be on line by the year 2004, otherwise severe cuts will have to be made to the state budget. SENATOR LINCOLN asked Senator Ward if he is implying that a special election will be held this November. SENATOR WARD clarified that the vote on the plans would take place during the general election in November of 2000. He repeated that the CBR will cover expenses until the year 2004. SENATOR LINCOLN thanked Senator Ward for informing committee members that a House Majority plan was forthcoming. Number 533 REPRESENTATIVE ROKEBERG commented that he has been working on HB 96 for several years and introduced it at this time thinking the political climate was right for the legislature to consider such a change in public policy. He expressed concern that people do not realize that HB 96 was not introduced as part of a master plan but it has been adopted by the House as such. HB 96 speaks to resource development revenue and any future leases will have to be reviewed to determine the percentage of the income that is placed in the general fund, otherwise the same cash flow bind will occur. REPRESENTATIVE ROKEBERG said HB 96 can stand on its own merits, and that in the first year it will generate $11 million to the general fund which will reduce the need for additional taxation. He repeated that HB 96 will have no impact on the amount of the Permanent Fund dividend this year and will reduce it by $1.76 next year. He thought Chairman Halford's retrospective amount of $66 would depend on the amount of revenues generated and is not a fair analogy because it would not effect future dividends. He added that the first area wide lease sale took place on the North Slope last year and it generated $53 million, the fourth highest lease revenue in the state's history. The state budget would have received an extra $12.5 million had HB 96 been in effect. Number 468 CHAIRMAN HALFORD commented that if HB 96 is enacted, every dollar that is generated for spending will come directly from the principal of the Permanent Fund. He believes the state is currently spending more than its share of the nonrenewable resource trust for future generations of Alaskans. Today's needs are being put above the needs of tomorrow, yet tomorrow we will have less oil revenue and need a lot more in terms of Permanent Fund revenue. He said his concern can best be characterized by the bumper sticker that says, "We are spending our children's inheritance." REPRESENTATIVE ROKEBERG noted he believes his credentials as a fiscal conservative are impeccable, and although he shares Chairman Halford's concerns, he believes HB 96 is the right fiscal policy. SENATOR MACKIE asked Chairman Halford if he is assuming the Permanent Fund will be used in the future to fund government services. Number 443 CHAIRMAN HALFORD said that oil production will decrease at a consistent rate and then level out for many years. When it levels out the citizens might decide to use Permanent Fund income for government services. That generation will only have one-quarter of the income from Prudhoe Bay and its interest. This political generation, from 1969 through to the present, has spent $70 billion on a population of half of a million during that time frame. He stated he is most concerned that the next generation have the opportunity to make the decision on how and when to spend the Permanent Fund. SENATOR MACKIE noted his concern is that if the legislature does not make some fiscal policy decisions that provide for a balanced budget in the future, the legislature will be setting up a scenario in which today's children will no longer receive a Permanent Fund dividend. CHAIRMAN HALFORD said he believes the government will spend everything that it can at any given point in time. Number 412 SENATOR TAYLOR asked whether the House Majority's long range fiscal plan relies on the $11 to $12 million of increased income to the general fund that HB 96 would divert from the Permanent Fund to operate government. REPRESENTATIVE ROKEBERG said his understanding of the House Majority's plan is that it contains a component of approximately $100 million of new revenue. The sources of that revenue will be the tobacco settlement money, HB 96, and additional dividends from the Alaska Housing Finance Corporation and the Alaska Industrial Development and Export Authority. SENATOR TAYLOR said if HB 96 passes it will create $11 million of new general fund revenue to support the daily operation of state government but it will take $11 million from the corpus of the Permanent Fund. He thought people need to understand the difference between the capital flowing into the Permanent Fund and the interest generated off of that capital. If the legislature starts spending both the interest and the capital, future generations will have a lot less "seed corn" to plant. REPRESENTATIVE ROKEBERG commented that the policy question rests on whether that money should be made available for general fund spending in light of the $1 billion shortfall. If the issue comes down to taxation or lowering the amount of the dividend, he believes lowering the dividend will have less of a negative impact. CHAIRMAN HALFORD repeated that by setting aside 25 percent into the Permanent Fund rather than 50 percent, the state will be spending 75 percent of the income each year and will be diminishing the size of the portfolio of future generations. He likened the situation to a farmer who sells off parts of the farm to sustain a high lifestyle. He said this political generation is used to receiving a high level of service but it needs to figure out how to get more for less. REPRESENTATIVE ROKEBERG stated regarding the analogy to the farmer who is forced to sell off parts of his farm to sustain his family's lifestyle, the legislature needs to consider that if the farmer's wife continues with her great cooking, more and more people will want to move in. He said the legislature needs to consider that Alaska has a high level of social services, the dividend, and immigration. SENATOR LINCOLN expressed concern that constituents statewide do not want the legislature to take any action that will affect the Permanent Fund dividend and that there is no way to predict how much the dividend might decrease in future years if HB 96 passes. She repeated that any plan that will impact the dividend should be voted on by the people. She noted that although Representative Rokeberg said HB 96 is a simple bill and a small piece of the overall plan, she, as a Minority member, has not seen any plan. She reminded participants that although Alaska's budget is the largest of any state and its population is the smallest, Alaska is unlike any other state. She informed Representative Rokeberg that she will not be voting for HB 96 because it affects the dividend and will not provide the people with a chance to vote on it. REPRESENTATIVE ROKEBERG said he agrees with Senator Lincoln and explained that HB 96 was not originally part of the House Majority plan but it was adopted as such. He agreed that the people should vote on a plan and he would prefer a vote this year to provide more time for implementation. He maintained that the House has been arduously working on a plan for three months. He noted this legislation could be enacted this year if it is the will of the Senate. He asked the committee to move the bill and hold it if that would satisfy the committee's concerns about the House Majority plan. SENATOR TAYLOR asked Representative Rokeberg if HB 96 is a part of the House Majority's long range fiscal plan. REPRESENTATIVE ROKEBERG said it is. SENATOR TAYLOR stated that according to Senators Torgerson and Ward, the Governor's tax plan "falls off a cliff" in about 12 to 14 years. He asked Representative Rokeberg if he is assuming that the new income generated for the general fund from resource development will benefit from the enactment of HB 96 and will do so at the expense of the corpus of the Permanent Fund. REPRESENTATIVE ROKEBERG explained that the House plan uses a Logsdon perspective and a sensitivity matrix as to probabilities of new fields and production to enhance the probability of resource income. CHAIRMAN HALFORD said he understands the plans to take income from the Permanent Fund instead of the CBR account and that the Permanent Fund generates higher income so the state will lose more. He thought that variable would skew people's decisions. REPRESENTATIVE ROKEBERG said the assets of the House plan would be managed as part of the Permanent Fund and would therefore get a higher rate of return. SENATOR TAYLOR said he would prefer to invest 100 percent of oil royalties into the Permanent Fund and then use the income from that Fund in the future when the people need to rely on it. He said the argument is whether we should be saving more of the seed corn or eating it today. REPRESENTATIVE ROKEBERG said it depends on the price of oil. TAPE 99-32, SIDE A REPRESENTATIVE ROKEBERG noted the House plan assumes the CBR will be depleted within two years. Senator Ward's estimate of four years could be based on higher oil prices. CHAIRMAN HALFORD noted the question of what government services people want and how to pay for those services has not been addressed for 30 years and needs to be. He then adjourned the meeting.