Legislature(2003 - 2004)

04/29/2003 07:07 AM House W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HJR 26-CONST. AM: PF APPROPS/INFLATION-PROOFING                                                                               
CO-CHAIR  WHITAKER announced  that  the final  order of  business                                                               
would be HOUSE  JOINT RESOLUTION NO. 26,  Proposing amendments to                                                               
the Constitution of the State  of Alaska relating to and limiting                                                               
appropriations from  and inflation-proofing the  Alaska permanent                                                               
fund by  establishing a percent  of market value  spending limit.                                                               
He  told  the  members  that  that  HJR  26,  23-LS1006\H,  Cook,                                                               
4/23/03, is before the committee as a working document.                                                                         
Number 2446                                                                                                                     
TAMARA COOK,  Director, Legislative Legal and  Research Services,                                                               
Legislative  Affairs Agency,  testified on  HJR 26,  and answered                                                               
questions  from the  members.   Ms. Cook  explained that  she was                                                               
provided  language  to work  from  and  proceeded from  a  policy                                                               
neutral view,  but also from the  point of view of  a technician.                                                               
She said  the change  in language  on page  2, subsection  (b) is                                                               
framed   as  a   structure  within   the  constitution   that  is                                                               
susceptible to being  enforced in the courts.  Ms.  Cook told the                                                               
members  that  her concern  was  how  the first  sentence  [would                                                               
impact] the second sentence in  the original version [of HJR 26].                                                               
The  second sentence  is  reasonably specific  as  it provides  a                                                               
formula that is  capable of being ascertained to  the extent that                                                               
one  [believes] accounting  is a  concrete  science; however,  it                                                               
actually is  not, she commented.   Assuming that accounting  is a                                                               
concrete  science,  the second  sentence  says  how much  can  be                                                               
appropriated from  the permanent  fund every  year in  terms that                                                               
should generate  a specific  number.  Ms.  Cook pointed  out that                                                               
the first  sentence seems  to make  a statement  of policy.   She                                                               
said  in looking  at  the  [language in]  the  original bill  [it                                                               
appears]  the  legislature wants  to  achieve  something that  is                                                               
predictable  so that  the real  value  of the  permanent fund  is                                                               
preserved  over time.    However,  the term  "over  time" is  not                                                               
defined, so  it is  unclear if  it is ten  years, five  years, or                                                               
what.   Ms. Cook expressed  concern about [the outcome]  if there                                                               
is a  challenge as  to the validity  of a  specific appropriation                                                               
[under] the  language in  the original version.   Does  the first                                                               
sentence give  the court  the authority to  use its  own judgment                                                               
[to  determine] the  real value  is not  being [maintained]  over                                                               
time, she asked.  It may mean  that the courts get to decide what                                                               
real value  equals and what  period of time ["over  time" means].                                                               
[If  using the  original  language], she  said  she believes  the                                                               
courts  would   have  the  power   to  invalidate   any  specific                                                               
appropriation,  even one  that clearly  complies with  the second                                                               
sentence.    If  the  language  in  the  first  sentence  remains                                                               
somewhat vague,  the legislature will have  essentially left [the                                                               
interpretation]  up to  the  courts to  enforce  a concept  which                                                               
could make it  very difficult for the legislature  or anyone else                                                               
to build a budget, she explained.                                                                                               
MS. COOK noted that another path  the court could take is to look                                                               
at the  language that  was originally composed  in this  bill and                                                               
say that  the first sentence's  reference preserving the  fund is                                                               
just too vague to apply.   [In this case], the courts would never                                                               
overturn an appropriation  that meets the criteria  of the second                                                               
sentence.    The  courts  would  not  want  to  substitute  their                                                               
judgment that  this particular appropriation  is no good.   There                                                               
is either a  sentence that can be enforced in  a draconian way or                                                               
a sentence  that cannot be  enforced at all, Ms.  Cook commented.                                                               
What was  not present  was a  system where  the outcome  would be                                                               
certain and she told the members that alarmed her.                                                                              
Number 2053                                                                                                                     
MS.  COOK explained  that  she  took the  language  and tried  to                                                               
structure the  wording so it  would work.   She said she  was not                                                               
sure of  the policy  result that the  legislature [was  trying to                                                               
achieve] because  the second sentence was  understandable to her,                                                               
whereas  the first  sentence was  difficult to  understand.   She                                                               
said she  tried to reduce the  first statement to a  statement of                                                               
policy, but  not an  enforceable statement of  policy.   Ms. Cook                                                               
explained that  she then tried  to reword the second  sentence in                                                               
an effort  to make  it say  this is  the way  the policy  will be                                                               
accomplished.   It was  her hope that  the second  sentence would                                                               
prevail over  the first in  any litigation,  she said.   For that                                                               
reason the word  "shall" became "should", which is  never seen in                                                               
a constitution, and that is why  the word "therefore" is added on                                                               
line 5.   She said  what she was  trying to  do in this  draft is                                                               
point  out the  tension between  these two  sentences.   Ms. Cook                                                               
told the members  that she will try to resolve  the tension so if                                                               
there is an appropriation that  is enacted that complies with the                                                               
second sentence  formula, a court  will be reluctant  to overturn                                                               
it  based   on  the  strength   of  the  first  sentence.     She                                                               
acknowledged that  this may not be  where the members want  to go                                                               
with this legislation.                                                                                                          
MS.  COOK told  the  members if  they wish  to  trump the  second                                                               
sentence, by the  first sentence, then there are  two things that                                                               
need to  be kept in  mind.  One, the  first sentence is  not very                                                               
concrete, so the members need to  be [cognizant of the fact that]                                                               
the  courts will  ultimately  be making  decisions  based on  the                                                               
facts that are presented in  litigation.  Those decisions will be                                                               
what ["over  time" means] and  what the  "real value" is  so that                                                               
the courts  can judge a  specific budget.   She pointed  out that                                                               
this  could result  in  a  budget failing.    Ms.  Cook told  the                                                               
members that she could easily  redraft the bill to strengthen the                                                               
first sentence  and have the  language point to the  formula, but                                                               
always subject to  a determination of what the real  value of the                                                               
fund is  protected over  time.  Ms.  Cook reiterated  her concern                                                               
that the first sentence is  not very concrete and the legislature                                                               
will  be leaving  it  up to  the court  to  decide whether  there                                                               
should be litigation on a case-by-case basis.                                                                                   
Number 1816                                                                                                                     
CO-CHAIR  WHITAKER  commented  that   this  was  the  subject  of                                                               
discussion at  the last meeting  and that  is the reason  why Ms.                                                               
Cook provided  the committee with  an explanation of  the change.                                                               
He noted  that Representative Rokeberg  was the person who  had a                                                               
significant concern with  the change; however, he  is not present                                                               
Number 1750                                                                                                                     
CO-CHAIR  HAWKER told  the members  that he  is not  speaking for                                                               
Representative Rokeberg;  however, he has discussed  this subject                                                               
with  him.   He  said  he concurs  with  the  explanation of  the                                                               
predicate  clause in  this  [subsection] which  is  vague in  the                                                               
statement of policy and direction.   Co-Chair Hawker said that he                                                               
believes  the  committee  intends   to  very  clearly  state  the                                                               
conclusive clause.  It should  be unequivocal, no shading or gray                                                               
[area]  and  [nothing  left]  for  legal  interpretation.    [The                                                               
language] should say that appropriations  from the permanent fund                                                               
may  not exceed,  et cetera.    He told  the members  that he  is                                                               
leaning  toward   recommending  that  the  predicate   clause  be                                                               
eliminated from this draft for  all the reasons stated.  Co-Chair                                                               
Hawker agreed that  this legislation should not be  left open for                                                               
interpretation by the  courts.  He said he does  not want this to                                                               
be  removed from  the land  of  legislative intent  and into  the                                                               
vague land of court decisions.                                                                                                  
CO CHAIR WHITAKER asked if the  concern was that if there was not                                                               
language  that related  to a  series of  down years  a 5  percent                                                               
allocation   from  the   value  of   the  permanent   fund  could                                                               
potentially lead to  the erosion of the principal.   He asked Ms.                                                               
Cook if he  is correct in his conclusion that  this is the reason                                                               
for the inclusion of this language.                                                                                             
MS. COOK  replied that  is the  reason for  the inclusion  of the                                                               
language; however, she  pointed out that she  did not participate                                                               
in the policy decision.                                                                                                         
Number 1518                                                                                                                     
RON  LORENSEN,  Attorney,  Simpson,  Tillinghast,  Sorensen,  and                                                               
Longenbaugh,  testifying   as  outside  counsel  to   the  Alaska                                                               
Permanent Fund  Corporation, testified in  support of HJR  26 and                                                               
answered questions  from the members.   He pointed out  that what                                                               
is before the  committee is the original version of  HJR 26 which                                                               
represents the  board's recommended language.   That language was                                                               
discussed by  the board and  adopted.   He told the  members that                                                               
when   discussing  this   language,  he   alerted  them   to  the                                                               
possibility  that  the  two sentences  could  be  interpreted  as                                                               
creating two  separate standards that  would then have to  be met                                                               
with respect  to an  expenditure from  the Alaska  Permanent Fund                                                               
Corporation.  It was clear that  the board accepted the fact that                                                               
there would  be two separate  standards, and he said  he believes                                                               
it is the board's desire that the two standards [be enforced].                                                                  
MR. LORENSEN explained  that the 5 percent standard,  as Ms. Cook                                                               
has stated, is  the easily determinable standard.   The board had                                                               
a general concern  that at some future time there  may be a major                                                               
shift  in the  capital markets  and that  the shift  could be  so                                                               
substantial  that  the 5  percent  [payout]  could no  longer  be                                                               
supported  by a  prudent investment  policy  on the  part of  the                                                               
permanent fund  corporation.  Because  of this concern,  he said,                                                               
it was  felt that there should  be an overlay that  would protect                                                               
against  the possibility  of this  substantial  shift in  capital                                                               
markets.  He identified that as  the reason the board felt it was                                                               
appropriate and necessary to have  [two] separate standards which                                                               
could ultimately lead to litigation.   [Litigation] would involve                                                               
the presentation of experts and  ultimately the legislature would                                                               
be looked  to for a  determination, probably not every  year, but                                                               
from  time to  time.   The  presentation would  be  based on  the                                                               
presentation to  the legislature  by experts  that could  say the                                                               
fund can  support a  5 percent  payout [or  not].   Those initial                                                               
steps would  be necessary under  the two-tiered approach,  but he                                                               
said that is what the board was  looking at and what is still the                                                               
[board's] preference.   He said  that the board has  not convened                                                               
to  get  a determination  as  to  how  it  would respond  to  the                                                               
suggested  revisions.   Mr.  Lorensen  told  the members  he  can                                                               
understand  Ms.  Cook's  thinking   and  her  efforts  in  making                                                               
adjustments to  the legislation.   The full body has  not weighed                                                               
in, but  some individual members have  indicated their continuing                                                               
preference for the two standard approach, he added.                                                                             
Number 1152                                                                                                                     
CO-CHAIR  HAWKER  commented  that  he finds  the  first  standard                                                               
troublesome by its vagueness.  He  asked if real value is defined                                                               
in legal  statute or is it  a term defined in  generally accepted                                                               
accounting principles.  What does "over time" mean, he asked.                                                                   
MR.  LORENSEN replied  that  real value  is  an economic  concept                                                               
which  has  fundamental  grounding.   It  is  not  an  accounting                                                               
concept or  a legal question,  except that the  legislature might                                                               
say that real  value, as provided for in  the constitution, means                                                               
value as an economist [would interpret  it].  He said he believes                                                               
a definition could  be fleshed out in the legislation.   There is                                                               
an economic  concept of what real  value is that would  be viewed                                                               
as  part of  the question  regarding  whether or  not that  first                                                               
sentence was complied  with.  He turned to Ms.  Cook's point that                                                               
there  is no  indication  what  "over time"  meant  and told  the                                                               
members  that  this  is  very  common  economic  language.    The                                                               
language "over  time" means  over the long  term, which  was what                                                               
was intended  by the board.   Mr. Lorensen agreed that  there may                                                               
be a  better way to  express that.   Since the fund  is permanent                                                               
and is  going to be  in existence  in infinitude in  theory, what                                                               
"over  time"  really  means  is  over  the  time  of  the  fund's                                                               
Number 0937                                                                                                                     
CO-CHAIR HAWKER commented  that "real value" and  "over time" are                                                               
economic  concepts.   He  expressed  concern  that this  language                                                               
promotes  concepts, not  empirical benchmarks  and measures.   He                                                               
pointed out  that there are  a lot  of really bright  lawyers out                                                               
there that can run concepts in all directions.                                                                                  
MR. LORENSEN  commented that  this might  [create the  need] from                                                               
time to  time for a review  with financial experts as  to whether                                                               
the standard had  been met.  Although experts  can have different                                                               
opinions,   he  hoped   that   with  a   solid   record  of   the                                                               
[legislature's intent] the courts  would accept the legislature's                                                               
[intent].  That should be the way it goes, he remarked.                                                                         
Number 0758                                                                                                                     
MS. COOK  reminded the members  of the committee  what subsection                                                               
(b)  means  as a  matter  of  constitutional  law if  the  second                                                               
sentence  was  not  there.    She explained  that  it  means  the                                                               
legislature has given its control  over the budget to the experts                                                               
in  the courts.    Ms.  Cook warned  that  the aforementioned  is                                                               
questionable public  policy when  talking about  a constitutional                                                               
document.   The  court  is going  to  try to  give  some kind  of                                                               
meaning  to every  word that  appears in  the constitution.   The                                                               
court will not ignore language.   If the court does not know what                                                               
it means, it  will invent a meaning  for it.  That is  the way it                                                               
is, she stated.                                                                                                                 
MS. COOK used the example  of the [constitutional] budget reserve                                                               
fund language,  which has been a  source of some litigation.   It                                                               
is  a constitutional  provision that  the legislature  considered                                                               
for  many  years  before  presenting  it  to  the  voters.    The                                                               
legislature   apparently  knew   what  the   words  used   meant.                                                               
Subsection (d), the  notorious sweep language, was  passed by the                                                               
legislature  with  the understanding  that  a  limited amount  of                                                               
state  funds would  be  susceptible to  the  sweep language;  the                                                               
legislature very swiftly  passed a statute fleshing it  out.  Ms.                                                               
Cook read the last sentence of the sweep language which says:                                                                   
     The legislature shall implement this subsection by law                                                                     
MS. COOK  said that the  legislature specified that  amounts left                                                               
over in  the general fund that  are not going to  be appropriated                                                               
are going to  be used to repay the  constitutional budget reserve                                                               
fund.   Furthermore, the legislature  was clever enough  to point                                                               
out to the court that it was  retaining the power to define it by                                                               
law.  The legislature passed the  law, and the court looked at it                                                               
and said  no, the court knows  what the general fund  consists of                                                               
because  that is  language with  ordinary meaning.   Essentially,                                                               
the court said  it consists of everything in  the treasury except                                                               
the  permanent fund  and  maybe  the budget  reserve  fund.   The                                                               
statute  which  would  have  limited the  sweep  and  would  have                                                               
protected  some  of the  restricted  general  fund [dollars]  was                                                               
thrown out  by the  court despite the  fact that  the legislature                                                               
preserved to  itself the right to  implement it by law.   The law                                                               
was invalidated.   Ms. Cook  said that there  is not a  valid law                                                               
that implements  subsection (d)  anymore.   She told  the members                                                               
she shared  this information as  a warning  that the state  has a                                                               
court that may decide that it  understands what real value is and                                                               
it understands  that as  lawyers not as  economists.   The courts                                                               
tend  to  [interpret]  language  as lawyers  do  rather  than  as                                                               
economists  do.    Ms.  Cook  said  that  there  were  a  lot  of                                                               
economists  trying  to  defend  subsection  (d),  but  the  court                                                               
essentially said that it did not  care how the state accounts for                                                               
general  fund  money  or  what  satisfies  acceptable  accounting                                                               
practices.    When  the  constitution   says  general  fund,  the                                                               
[courts] gave it  a very broad meaning.  Ms.  Cook summarized her                                                               
comments by saying  that is why as a technician  she is concerned                                                               
[with the language in HJR 26].                                                                                                  
REPRESENTATIVE  WILSON  commented  that [vague  language]  really                                                               
concerns her  too.  For  that reason  the committee must  be very                                                               
careful that the unintended does not happen again.                                                                              
Number 0318                                                                                                                     
CO-CHAIR  WHITAKER  said he  interprets  Ms.  Cook's comments  as                                                               
saying that no matter how  definitive the legislature attempts to                                                               
be, it may  be interpreted otherwise.  He asked  if he is correct                                                               
in that assertion.                                                                                                              
MS.  COOK  responded  that  the  court  will  strive  to  give  a                                                               
reasonable  interpretation  of  the language  placed  before  it.                                                               
However,  the court's  reasonable interpretation  may not  be the                                                               
same reasonable  interpretation as that envisioned  by the people                                                               
who are working with the language.                                                                                              
Number 0235                                                                                                                     
CO-CHAIR WHITAKER asked  if it is possible to  be more definitive                                                               
with this language than is currently written.                                                                                   
MS. COOK responded  that it is possible [to  have more definitive                                                               
language]  and  to  the  extent  that  there  is  not  definitive                                                               
language, she  said, it  is because the  people who  are thinking                                                               
about it,  do not really know  what the members mean  to say yet.                                                               
That is why  the language is inaccurate.  There  are two possible                                                               
solutions to the concerns of the  permanent fund, the first is to                                                               
decrease  the 5  percent and  take the  risk that  the fund  will                                                               
grow,  rather than  risk  that the  fund will  drop.   The  other                                                               
observation  is  that this  is  a  constitutional provision  that                                                               
limits the amount  that the legislature may  appropriate from the                                                               
fund.   It does not say  that the legislature has  to appropriate                                                               
all that money every year.  If  there is a fiscal crisis with the                                                               
fund,  the   permanent  fund  corporation   should  be   able  to                                                               
demonstrate that fact to the  legislature in a convincing fashion                                                               
so  that it  does  not  appropriate the  full  amount over  those                                                               
periods of severe decline.                                                                                                      
CO-CHAIR WHITAKER  asked if  language could  be crafted  to bring                                                               
the legislation to that end.                                                                                                    
MS. COOK  replied no.   The  second point Ms.  Cook made  is that                                                               
perhaps it is  not necessary to address [the issues  in the first                                                               
sentence].    Perhaps the  legislature  needs  to have  faith  in                                                               
future  generations to  do the  right  thing.   She said  perhaps                                                               
there is only  so much control that can be  made with the limited                                                               
knowledge [the legislature]  has about what people  in the future                                                               
will  have  to deal  with,  which  cannot  be conceived  of  now.                                                               
Maybe,  she  suggested,  just  the second  sentence  is  all  the                                                               
control that  should be  expected to be  imposed on  those future                                                               
Number 0029                                                                                                                     
MR.  LORENSEN told  the  members that  his  responsibility is  to                                                               
ensure that the board's point of  view with regard to this matter                                                               
is  presented.   He said  he  does not  believe he  can make  any                                                               
further recommendations beyond what Ms. Cook has stated.                                                                        
TAPE 03-17, SIDE A                                                                                                            
CO-CHAIR  WHITAKER asked  for Mr.  Hogan's  thoughts on  Co-Chair                                                               
Hawker's point.                                                                                                                 
Number 0038                                                                                                                     
JAY  HOGAN,  Deputy  Director, Office  of  Management  &  Budget,                                                               
Office  of the  Governor,  testified  on HJR  26.    He told  the                                                               
members that his  major concern regarding the  first sentence [in                                                               
subsection (b)]  is that there  will be objections raised  to any                                                               
use of  the permanent fund  other than the  way it has  been used                                                               
for  the  last  20  years.   Other  states,  he  said,  who  have                                                               
permanent funds and  used them [to fund]  various state purposes,                                                               
had this kind of language explaining  what was trying to be done.                                                               
He said they were trying to  guarantee stability of the fund, and                                                               
availability year in  and year out.  This  [sentence falls] short                                                               
in  trying to  get that  point across.   The  real purpose  is to                                                               
protect  the  permanent fund  over  the  long  haul to  make  the                                                               
resource predictable as  far as value used.  That  was the thrust                                                               
behind  the first  sentence.   It may  very well  lend itself  to                                                               
further  discussion  and   explicit  discussion  in  accompanying                                                               
statute relating to this bill, he noted.                                                                                        
Number 0310                                                                                                                     
REPRESENTATIVE WILSON  pointed out that the  legislature is using                                                               
financial  language  and there  is  concern  that a  court  might                                                               
interpret  the language  differently than  what is  meant by  the                                                               
legislature.   She asked  why the resolution  could not  just use                                                               
plain English.                                                                                                                  
CO-CHAIR WHITAKER agreed that is  what the committee is trying to                                                               
do.    He said  the  effort  has been  to  make  the language  as                                                               
understandable  and  clear  as  possible with  the  intent.    He                                                               
commented  that  the discussion  has  led  the committee  to  the                                                               
belief that  no matter how  much effort  is expended to  make the                                                               
intent clear, it might not be possible.                                                                                         
CO-CHAIR  WHITAKER asked  committee  members to  work on  putting                                                               
together clarifying language before tomorrow.   He said it is his                                                               
intent to move this resolution from  committee in the next day or                                                               
Number 0454                                                                                                                     
REPRESENTATIVE  HEINZE  asked why  the  language  could not  just                                                               
start  out by  saying that  it  is the  legislature's intent  [to                                                               
preserve the fund] for future generations.                                                                                      
MR. LORENSEN commented that is something that could be                                                                          
discussed, although statements of intent are unusual in a                                                                       
CO-CHAIR WHITAKER replied that the members need to contemplate                                                                  
that issue before the meeting.                                                                                                  
[HJR 26 was held in committee.]                                                                                                 

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