Legislature(2003 - 2004)

03/22/2004 01:42 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
 HOUSE BILL NO. 298                                                                                                           
         An   Act   relating       to   the    distribution        of   appropriations                                          
         from    the     Alaska     permanent        fund     under     art.     IX,    sec.                                    
         15(b),     Constitution        of   the   State     of   Alaska,     and    making                                     
         conforming       amendments;        and    providing       for    an   effective                                       
 Co-Chair      Harris     MOVED     to   ADOPT     Work    Draft    Version      V  for    HB
 298    dated      3/19/04.       There     being     NO    OBJECTION,        it    was    so                                   
 MR.     PETER       ECKLUND,        STAFF      TO     REPRESENTATIVE           WILLIAMS,                                       
 explained        the    changes       by    comparing        Version       V   with     the                                    
 previous       version,      House     Special      Committee       on   Ways     &  Means                                     
 Version     U.     In  Version      U,  on   page    3,  lines     5  and   8,   the   word                                    
 "average"      was    changed     to   "annualized,"        at   the   request      of  the                                    
 Permanent       Fund    Corporation.        On   page    3,  line    6,   "10    calendar                                      
 years"     was    changed     to   "10    fiscal     years"     to   match     the   other                                     
 calculations based on fiscal years.                                                                                            
 On   page   3,   line    21,   after    the   word    "inflation"        the   remainder                                       
 of   that    subsection        (1)   and    (2)    is   deleted      after     the   words                                     
 "for     a   specific       fiscal      year     by,"     The     new    language       was                                    
 inserted       in   Version      V,   page    3,   lines     20-    26   was    a   change                                     
 requested by the Permanent Fund Corporation.                                                                                   
 MR     BOB     BARTHOLOMEW,           CHIEF       OPERATING        OFFICER,         ALASKA                                     
 PERMANENT        FUND     CORPORATION         (PFC),      DEPARTMENT        OF    REVENUE                                      
 explained       the   change     in   Version     V   starts    on   line    24   of   page                                    
 3.     The   PFC    has   recommended        a  simpler      way    to   calculate      the                                    
 annual     inflation      rate,     using    the   Consumer      Price    Index     (CPI).                                     
 The   Corporation        has   always     used    the    CPI,    and   would    now    look                                    
 at   the   change      in   one   12-month      period      instead     of   from    month                                     
 to month.  It is a technical simplification.                                                                                   
 Mr.   Ecklund      addressed       Representative         Croft's      questions       from                                    
 the   last    hearing     on   the   bill,    referring       to   page   3,   lines    17-                                    
 18   of   the   Ways    &  Means    Version      U.    The    language      states,     "50                                    
 percent      may    be   appropriated         to   the    general      fund"     and    "50                                    
 percent      may   be   appropriated        to   the   dividend      fund".       The   new                                    
 Version     V  states:       "not    more    than    50%   may   be   appropriated        to                                   
 the   general      fund"    and   "not    more    than   50%    may   be  appropriated                                         
 to   the   dividend       fund."       He   explained      it   was    in   response      to                                   
 questions       of   whether      "may    be   appropriated,"          meant    that    60%                                    
 or   40%   could     be  appropriated.         The    new   language      sets    more    of                                   
 an     upper      cap.     The     way      it    is     written       allows       future                                     
 legislatures         to   decide     a  cap    of   zero    to   50%    on   either     the                                    
 general fund or the dividend.                                                                                                  
 Mr.    Ecklund       referred       to    page    3,    line     14,    Work     Draft     V                                   
 subsection        (b),    "The     legislature        may    appropriate        from    the                                    
 fund     for    each     fiscal      year     the    amount      for    costs      of   the                                    
 corporation         associated        with     operating        and     investing       the                                    
 fund."     The    current     costs     of   operating       the   Fund     are   between                                      
 $45    and   $50    million     annually.         Those     operating       costs    would                                     
 be   taken     off   the   top,     and   then    50%    would    be   distributed        to                                   
 dividends, and 50% to the General Fund.                                                                                        
 Mr.    Ecklund      referred       to    page    3,    line    22,    subsection        (d)                                    
 noting      that    the    previous       version      was    silent      on    when    the                                    
 transfer      of   money    would    occur    from    the   Permanent       Fund    to  the                                    
 dividend      fund    and   the   General     Fund.      The    new   language      states                                     
 that     the    transfer      would      occur     "within      14    days    after     the                                    
 effective date of the appropriation."                                                                                          
 Mr.    Ecklund      referred      to   a   change      in   Version      V  on    page    4,                                   
 Sec.     5,   which      now    states,      "The     operating        budget      of   the                                    
 corporation         shall      be    included       in    the    state's       operating                               
 budget     under    AS   37.07     (Executive       Budget     Act)."       He  said    the                                    
 Corporation is agreeable to the language change.                                                                               
 Representative          Chenault       asked     if    the    Corporation        has    any                                    
 problem with the change to 14 days.                                                                                            
 Mr.      Bartholomew           commented          on     the       timing        of     the                                    
 distributions.         The   dividend      distribution         historically        ranges                                     
 from    a     $500     million      to   $1   billion      lump     sum   distribution                                         
 that    is    needed     within     the    first     week    of    October.      It   is   a                                   
 policy     call    if   the   money    resides      in   the   General      Fund    or  the                                    
 Permanent       Fund    for   that     period.     It   has    been    transferred        in                                   
 July,     so   this     change     is   in    line    with    how    the    Corporation                                        
 handled      the   dividend       this    year.     The   new    language      providing                                       
 an   allocation       for   state    services      would    require      discussion       on                                   
 whether      to   pay    a   lump    sum    at   the    beginning       of   the    fiscal                                     
 year,    or   on   a  quarterly      or   monthly     basis.       He  said    that    when                                    
 there     is   a  steady     cash     flow,    it   is   easier      for   the    Fund    to                                   
 plan    to    do   a  recurring       payment      rather      than    a   lump    sum.    A                                   
 lump    sum   requires      determining       how    many   securities       to   sell    or                                   
 how   to   raise     the    cash.      However,      Mr.    Bartholomew        said    that                                    
 the   Fund    could     make    it   work    as   written     for    a    $1.2    billion                                      
 transfer      on    that    date.     He   asked     the   committee       to    consider                                      
 approaching         the    state     services       portion      from     a   cash     flow                                    
 standpoint       with    either     a   quarterly      or   monthly      distribution.                                         
 He said it would work as written.                                                                                              
 In   response       to   a  question       by   Co-Chair      Harris,      Mr.    Ecklund                                      
 explained       that    language      was    removed      from    Section     10   of   the                                    
 previous       Version       U,    and     confirmed        it    now    provides       one                                    
 effective       date     of   January       1,   2005     if   voters      approve      the                                    
 constitutional amendment.                                                                                                      
 Co-Chair      Harris      MOVED     to   amend     Amendment       #1   by   adding     the                                    
 words    "not    more    than"     before     (1)   and   (2)    to   incorporate       the                                    
 change in Version V. Co-Chair Williams OBJECTED.                                                                               
 Co-Chair      Harris     explained      that    his   Amendment       #1  would     change                                     
 the   50-50    allocations        to   the   General     Fund    to   not   more    than   a                                   
 40%    appropriation         to   public     education,       and    not   more    than    a                                   
 60%     appropriation          to    the    dividend.           He    said     that     his                                    
 reasoning       is    to   ensure      that     the    public     would      accept     the                                    
 measure,      and    would    understand       that    the    Legislature        wouldn't                                      
 take    any    more    of   the    dividend      money     than    is   necessary       for                                    
 the    operation       of    the    public     education        portion      of   general                                      
 government.          He   remarked      that    education       is   the    most    highly                                     
 supported      service      by   the   public.       He  submitted       the   amendment                                       
 hoping      that      it    would      help     to    pass      the    bill      and    the                                    
 constitutional amendment.                                                                                                      
 The amendment to Amendment #1 reads:                                                                                           
 Page 3, lines 19-20:                                                                                                           
         Delete all material and insert:                                                                                        
         "(1) not more than 40 percent may be appropriated for                                                                  
                public education;                                                                                               
         (2)  not more than 60 percent may be appropriated to                                                                   
                the dividend fund"                                                                                              
 Vice-Chair       Meyer    commented       that    the   60-40    split    is   closer     to                                   
 what    the   "Conference        of   55"   had    recommended.        He   agreed     that                                    
 40%    is    appropriate         for     public      education,        but     expressed                                       
 concern     that    50%   could     also   be   appropriated        for   education       in                                   
 the     50-50     split.         He     thought      that     50%     would      get    the                                    
 Legislature        closer     to   the    amount     needed     for    education.         He                                   
 thought      the    discussion       would     center     on    the   40-60     split     or                                   
 50-50    split.       He  indicated       that    he's   inclined      to   leave    it   at                                   
 50-50     but   would     agree    to   change     public      education      to   50%    in                                   
 (1) of Amendment #1.                                                                                                           
 Representative            Hawker       agreed       with       Vice-Chair         Meyer's                                      
 thinking.        He   drew   attention       to   the   new   fiscal     note    from   the                                    
 Department        of    Revenue,        dated     3/22/04       at    12:30      pm.    The                                    
 analysis        gives       current        projections          of     appropriations                                          
 available      to   the   Legislature's         discretion       under    the    adoption                                      
 of   the   5%   POMV    in   a  constitutional         amendment.        He  noted     that                                    
 in   FY   2006,     the   50-50     split    breaks     out    Public     Services      and                                    
 Per    Capita      Dividend      at    $641    million      each.        It   climbs      to                                   
 about     $800     million       each     in    FY    2011.     Combining        the    two                                    
 figures      totals     about    $1.2    billion     in   FY   06   and   $1.6    billion                                      
 in   FY   11.   Looking      at  immediate       need,     the   proposed      amendment                                       
 would     increase      the    amount     appropriated         by   10%    from    50%    to                                   
 60%     for     an     approximate          additional         $120     million        into                                    
 dividends        and     away      from     public       services,        and     perhaps                                      
 Representative           Hawker      discussed       the     attempt       to    increase                                      
 education      funding      by   about    $90   million     a   year   for   all    future                                     
 years,     asking     where    it   will    come    from.      He   doubted     that    the                                    
 current     $30    per   barrel     oil   price    would    be   sustained.       As   that                                    
 price    declines,       he  said    the   state     would    have    to  "scratch"       to                                   
 meet    the   recurring      budget     requirements.         He   voiced    reluctance                                        
 to   designate        that    extra     10%    or   $120     million      to   dividends                                       
 when    it   is   needed      for   schools.         He   noted    that     the   schools                                      
 need    an   additional       $30   million      to   $40   million      above    the   $90                                    
 million      each   year.     He   calculated       that    $120    million     in   a  per                                    
 capita     dividend       for    600,000     residents       has    a   net    effect     of                                   
 $200     each.         He    noted     that      public      testimony        this     year                                    
 predominantly         asked    the   Legislature        to  pay    for   schools     first                                     
 and   expressed       support     for   using     some   of   the   state    wealth     for                                    
 state      programs.           He    was     not     inclined       to    support       the                                    
 Representative            Croft      spoke       against        Amendment        #1     for                                    
 different       reasons.      He    said    that    it   would     amend     a   statute,                                      
 and    it   doesn't      matter     what    those     two    sections      are    because                                      
 they    give    a   false     perception       to   the    public     as   long    as   the                                    
 words    "may    be   appropriated"         are   used.     It's    a  statement       that                                    
 these     percentages         could     be    used    for     public     education        or                                   
 dividends       or   for   anything,       and   different       numbers     could     also                                    
 be     used.       The     language         doesn't        put     any      substantive                                        
 restrictions         on    what    the     Legislature        can    and     cannot     do.                                    
 Different        percentages         wouldn't       guarantee        the    result,       or                                   
 restrict      the    power     of   appropriation.            He   doubted      that    the                                    
 amendment       makes      the    difference        the    sponsor      intended,       and                                    
 said that it gives a false impression.                                                                                         
 Co-Chair      Williams       asked    how    the   change     from    50%    to   40%   for                                    
 state    services,       amounting      to   about    a  $200    million     reduction,                                        
 would affect the cash flow for payout.                                                                                         
 CHERYL      FRASCA,      DIRECTOR,       DIVISION      OF    MANAGEMENT       &   BUDGET,                                      
 OFFICE     OF   THE   GOVERNOR      replied      that    she   perceived       the   issue                                     
 to   be   the    amount     of   shortfall       over    the    next    5  to   6   years.                                     
 She    said    if    the    assumption       is    flat    spending,       it    averages                                      
 between      $700    and    $800    million      in   each    of    the   next     5  or   6                                   
 fiscal      years      based      on    the     fall     forecast.        The     pending                                      
 increase      in   K-12    funding      raises     it   by   another      $85    million.                                      
 She    said    that    50%   helps     a   lot   in   filling      the    gap,    and   40%                                    
 helps "not quite as much."                                                                                                     
 Co-Chair      Harris     agreed      with    Ms.   Frasca     if   the    intention       is                                   
 to    fill    the    gap     only    with     Permanent       Fund     earnings.          He                                   
 argued     that    40%   plus    other     revenues      from   the    gas   line    or   an                                   
 income     tax   would    achieve      the   goal.       The    budget    could     easily                                     
 be   balanced      on  100%    of   the   earnings      of  the    Fund.     Ms.    Frasca                                     
 responded      that    is   correct     but   she    said   that    she   "based     it   on                                   
 what has been passed so far."                                                                                                  
 Co-Chair      Williams      agreed     with    Representative          Croft    that    the                                    
 split     can    be   "dressed,"        but    he   observed       that    spending       on                                   
 education       is   a  selling      point    for    the    public.       He   expressed                                       
 that    the   state     can't    afford     a  "wish     list"    of   a  gas   line,     an                                   
 income     tax   or   high    oil   prices     with    a  fiscal     gap    of   $600-700                                      
 million      a  year.      He   said,    the   Permanent       Fund    is   a  rainy    day                                    
 fund,     and   "It's     raining     out    there,     and   I   don't    want    to   get                                    
 wet."      He   spoke    for    taking     care    of  state     services,      and    said                                    
 that he strongly opposed the amendment.                                                                                        
 Co-Chair      Harris     questioned        adding     "shall"     rather     than    "may"                                     
 and asked if it would cause a legal problem.                                                                                   
 MS.    TAMARA     COOK,     DIRECTOR,        LEGISLATIVE        LEGAL     AND    RESEARCH                                      
 SERVICES,      explained       that    fundamentally        it   wouldn't      matter     in                                   
 the   context      of   the   two   provisions.          The   lead-in      language      is                                   
 mandatory,         which     states       "appropriations           for     a    specific                                      
 fiscal     year    are    limited      as   follows."      With    the    insertion       of                                   
 the   language,       "not    more    than,"     some    discretion       is   built    in,                                    
 whether      "shall"      or   "may"     is   used.        The   language       says    the                                    
 Legislature        can   go   up   to   a  certain     percentage        for   a  certain                                      
 purpose.       In   any    case,      statutorily        the    Legislature         cannot                                     
 dedicate      revenue.      Ms.   Cook    said,    from    that    point    of   view,    it                                   
 may     be    that     this      provision        would     not     be    enforceable,                                         
 depending       on   the   form     of   the   constitutional          amendment       when                                    
 it's    adopted.      She   hastened       to  remind     the    committee      that    the                                    
 current      allocation       in   AS  37.13.145       repealed      in   this    bill    is                                   
 also    not   enforceable        as   a  dedication.        She   expressed       that    it                                   
 has    been     very     potent      in   explaining        the     behavior       of   the                                    
 Legislature         with     respect       to    the    use     of    Permanent        Fund                                    
 income.     To   that    extent,     she   concluded,       there     is  no   reason     to                                   
 suspect      that    the    new    provision       143    [Sec.     37.13.143]       would                                     
 have less political force.                                                                                                     
 Co-Chair      Williams      asked    for   clarification         that    currently      the                                    
 Legislature        may   use   the   Permanent       Fund   in   any   way   it   wishes.                                      
 Ms.   Cook    affirmed,      saying     that    the   Legislature        is  restricted                                        
 to   the    use    of   the    Fund    income,      but    there     is   currently       no                                   
 restriction        in    the   Constitution         regarding       how    that     income                                     
 can    be   used.       The    Legislature         statutorily        has    elected      to                                   
 distribute        it   under     a  formula      providing       for    dividends       and                                    
 inflation      proofing.         She   said   it   has   mathematically          resulted                                      
 over    the   years    in   an   accumulation        of  additional       money     in  the                                    
 earnings      reserve      account.      She    noted     that    that    statute      also                                    
 could     not    be    enforced       as   a   dedication,         and    it    has    been                                    
 adhered      to   by   the   Legislature        because      of   the   public      policy                                     
 decision it makes every year.                                                                                                  
 Co-Chair      Williams      asked    if   the   Legislature        has   ever    used   any                                    
 part    of  the    Permanent      Fund    earnings      for   state    services.        Ms.                                    
 Cook     thought      that     once     or   twice      small     amounts       from    the                                    
 earnings       reserve      or   income     account      were     used    to   reimburse                                       
 litigation       expenditures        of   the   Department       of   Law   when    it  was                                    
 at   fault    in   litigation.       She   said    there    might     have   been    other                                     
 isolated instances involving very small amounts.                                                                               
 Representative         Hawker     noted    that    over    the   last    8  years    since                                     
 1996,     the    Legislature         has    appropriated         over     $238    million                                      
 from       Permanent         Fund       earnings         for       other       purposes.                                       
 Appropriations           to   the     Department        of    Corrections         through                                      
 provisions       in   statute      allow    taking     dividends       from    felons     to                                   
 use    for    the     department's         operations.        Supplemental          social                                     
 service      benefits       are    paid    to    recipients        who    also    receive                                      
 dividends.        The    Legislature        has    also     funded     administrative                                          
 costs    of   the   Departments        of  Revenue,      Public     Safety,      and   Law.                                    
 In    response        to     a   question        by     Representative           Stoltze,                                      
 Representative          Hawker      affirmed       that     it    is    money     already                                      
 appropriated for dividends that has been redirected.                                                                           
 Ms.   Cook    agreed     that    Representative          Hawker     is   correct.       She                                    
 cited    AS   37.13.145,       the    distribution        system     that    puts    a  set                                    
 formula      amount     into    the    dividend      fund.      She    clarified       that                                    
 in     the     dividend        fund     statutes,         the     Legislature          also                                    
 identified        some    appropriations          that     are    taken     out    of   the                                    
 dividend       fund,      not     for     the     distribution,          but     for    the                                    
 purposes      Representative          Hawker     has   itemized.        It   is   part    of                                   
 the dividend program.                                                                                                          
 Co-Chair      Harris     commented       that    constitutionally,           25%   of   oil                                    
 royalties       go   into     the   Permanent        Fund    automatically,          so   it                                   
 was   felt     that    25%   or   more    can   toward      the   operations       of   oil                                    
 and gas to help perpetuate and build up the Fund.                                                                              
 Co-Chair      Williams      noted    that    the   Legislature        hasn't     used   the                                    
 Permanent       Fund    earnings       since     enactment.          Ms.   Cook     agreed                                     
 that     it     is    fundamentally           true.      As    the     earnings        have                                    
 accumulated,          the     Legislature         has     swept      the     additional                                        
 earnings       back     into     the    principal        of    the    Permanent        Fund                                    
 through a special act of appropriation.                                                                                        
 Co-Chair       Williams       commented        that     if   this     measure       passed                                     
 right    now,    it   would    be   difficult      to   change     the   numbers     up   or                                   
 down.       He   recommended        that    the    Legislature        can    always     pay                                    
 more    to   the    dividend       distribution,         but    it   can't     lower    the                                    
 dividend amount.                                                                                                               
 A   roll     call     vote    was    taken      on   the     motion     to    adopt     the                                    
 amendment to Amendment #1.                                                                                                     
 IN FAVOR: Chenault, Foster, Harris                                                                                             
 OPPOSED:       Stoltze,      Croft,     Fate,     Hawker,     Joule,     Meyer,     Moses,                                     
 The MOTION FAILED (3-8).  Amendment #1 was not adopted.                                                                        
 Vice-Chair       Meyer     agreed     with     Co-Chair      Harris     in    dedicating                                       
 money     to    education       in    statute.       He    proposed      a    conceptual                                       
 Amendment       #2   using     the    50-50     split    that     would    state,      "50%                                    
 may be appropriated for public education."                                                                                     
 Amendment #2 reads:                                                                                                            
         Page 3, line 19:                                                                                                       
         (1) not more than 50 percent may be appropriated for                                                                   
         public education;                                                                                                      
 Amendment #2 was adopted without objection.                                                                                    
 HB    298     was     heard      and     HELD      in    Committee        for     further                                      

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