Legislature(2003 - 2004)

04/30/2003 08:15 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                                                                               
Number 1233                                                                                                                     
CO-CHAIR  WHITAKER  announced that  the  last  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.                                                                  
[The following motion  occurred at the beginning  of the meeting,                                                               
immediately after  the motion  regarding the  adoption of  the CS                                                               
for HJR  9.  The motion  is as follows:   REPRESENTATIVE CO-CHAIR                                                               
HAWKER  moved to  adopt  committee substitute  (CS)  for HJR  26,                                                               
Version  23-LS1006\I, Cook,  4/29/03,  as  the working  document.                                                               
There being no objection, Version I was before the committee.]                                                                  
Number 1346                                                                                                                     
RON LORENSEN,  Attorney at  Law, Simpson,  Tillinghast, Sorensen,                                                               
and  Longenbaugh; testifying  as  outside counsel  to the  Alaska                                                               
Permanent Fund  Corporation, testified in  support of HJR  26 and                                                               
answered questions.   He  told the members  that a  working group                                                               
convened  yesterday  afternoon  at   the  direction  of  Co-Chair                                                               
Whitaker  to  review  a  couple   of  alternate  formulations  of                                                               
language.  The  main focus was subsection (b) on  the top of page                                                               
2 of  the committee  substitute draft.   He  explained that  as a                                                               
result of  that discussion  there was  unanimous agreement  as to                                                               
what the appropriate substitution  for the language in subsection                                                               
(b) should be.   He told the  members that is what  is before the                                                               
committee now  in the new  work draft,  Version I.   Mr. Lorensen                                                               
said that in order to make  the title consistent with that change                                                               
the title has  been adjusted slightly.  The last  two words "over                                                               
time" that  were in Version H  have been removed.   Otherwise, he                                                               
commented, the title remains the same.   He noted that there is a                                                               
minor change  in Section 1  of the bill.   The new  language that                                                               
has been provided changed the  language in Version H from "Except                                                               
as provided in  (b) of this section", to the  language in Version                                                               
I which  says, "Except as  appropriated under this section".   He                                                               
said he believes this an appropriate change.                                                                                    
Number 1612                                                                                                                     
REPRESENTATIVE  ROKEBERG commented  that he  does appreciate  the                                                               
efforts of Mr. Lorensen, Mr.  Bartholomew, and Mr. Hogan, and the                                                               
members  who worked  on the  committee substitute.   However,  he                                                               
maintained  his  discomfort  with  the objective.    He  said  he                                                               
understands the  corporation's desire  to give some  assurance to                                                               
the public that there will be  some constraint on the part of the                                                               
legislature  in  terms  of  determining  what  the  appropriation                                                               
should not exceed.   Representative Rokeberg told  the members he                                                               
understands  the political  implications in  offering the  public                                                               
some comfort; however, he is  still not convinced that litigation                                                               
might  not  rise out  of  this  legislation  if there  were  some                                                               
disagreement in the  amount appropriated by the  legislature.  It                                                               
appears  that while  this language  certainly preserves  a policy                                                               
objective of offsetting inflationary  impacts and maintaining the                                                               
real  value of  the fund,  he said  he is  not sure  that is  the                                                               
proper  economic  policy  that  the  legislature  should  pursue.                                                               
Representative  Rokeberg emphasized  that  he  does not  disagree                                                               
with  the policy  objectives put  forth in  the bill,  but he  is                                                               
concerned about possible litigation.                                                                                            
REPRESENTATIVE ROKEBERG said  he would prefer to  have the bill's                                                               
language default to  that presented in Version D  and would offer                                                               
amendments that would eliminate  the first sentence in subsection                                                               
(b).   He  recommended  that the  committee  and the  corporation                                                               
focus  on the  statutory framework  which  needs to  go with  the                                                               
amendment to be put forth before the people [of the state].                                                                     
Number 1957                                                                                                                     
REPRESENTATIVE ROKEBERG  told the  members that he  believes that                                                               
in order  for the  people to  understand this  legislation, there                                                               
will  need   to  be  more   than  a   stand-alone  constitutional                                                               
amendment.  He  said that the policy issues  the corporation puts                                                               
forth,  that  he  agrees  with,  can  be  addressed  through  the                                                               
statutes, rather than the constitution.                                                                                         
REPRESENTATIVE  GRUENBERG  opined that  there  needs  to be  more                                                               
discussion about this issue.                                                                                                    
CO-CHAIR   HAWKER   commented  that   Representative   Rokeberg's                                                               
position  is consistent  with the  conceptual vision  of a  long-                                                               
range fiscal  plan that  was discussed in  committee a  couple of                                                               
days  ago.    In  those discussions  the  members  envisioned  an                                                               
accompanying statute  to explain  what the legislative  intent is                                                               
regarding this constitutional  amendment, as well as,  what to do                                                               
with the  appropriations that  would be  made subsequent  to this                                                               
amendment.  He  summarized his comments by saying  that he agrees                                                               
with the position put forth by Representative Rokeberg.                                                                         
Number 2235                                                                                                                     
ROBERT  BARTHOLOMEW, Chief  Operating  Officer, Alaska  Permanent                                                               
Fund Corporation,  testified in  support of  HJR 26  and answered                                                               
questions.   He told the  members that  Representative Rokeberg's                                                               
statement  does bring  to focus  one  question that  needs to  be                                                               
addressed, which is  the purpose of the proposed  language.  Both                                                               
the  original  version  and  Version  I, try  to  blend  the  two                                                               
sentences together  so that there  is one standard from  which to                                                               
weigh  what  should  be appropriated  from  the  permanent  fund,                                                               
instead of  two [standards], he  said.  Mr. Bartholomew  told the                                                               
members that the  board supports having one concept.   The policy                                                               
statement that  this sentence  makes is that  it is  important to                                                               
maintain  the real  value of  the permanent  fund and  protect it                                                               
against inflation.   He pointed out  a question that needs  to be                                                               
answered by  the committee and  legislature.  If the  language is                                                               
taken out  and only the  5 percent spending limit  remains, could                                                               
there  be policies  stated in  statutes that  would be  different                                                               
than the policy  statement here, of protecting the  real value of                                                               
the permanent fund, he asked.   That is why the board believes it                                                               
is important to  have the language [in the  constitution], and it                                                               
is up to the  legislature to decide if it is  the policy it wants                                                               
also.  He urged  the members to focus on that  issue and not move                                                               
the policy statement to statute.                                                                                                
CO-CHAIR WHITAKER asked  if the option provides  that a mandatory                                                               
5 percent of the  value [of the fund] will be  allocated or up to                                                               
5 percent [will be allocated].                                                                                                  
Number 2424                                                                                                                     
MR. BARTHOLOMEW  replied that the  when saying 5 percent  will be                                                               
allocated, he reads that as saying  a mandatory 5 percent.  There                                                               
are other  options.  He  commented that [the language  should be]                                                               
up to 5 percent may be allocated.                                                                                               
REPRESENTATIVE ROKEBERG  replied that  he completely  agrees with                                                               
Mr. Bartholomew that  the amount should not exceed 5  percent.  A                                                               
policy  call  by each  legislature  would  be required;  however,                                                               
there  would be  a  cap on  how  much can  be  appropriated.   He                                                               
commented  that there  may  be a  tendency to  default  to the  5                                                               
percent.    Representative  Rokeberg  told members  he  does  not                                                               
disagree with this  policy, but the question is where  to put it.                                                               
If it  is placed in  the constitution, then  it may give  rise to                                                               
litigation if  someone thinks the legislature  missed the target.                                                               
He pointed out that the policy  the legislature has used over the                                                               
last 20 years has included  inflation-proofing and protecting the                                                               
fund which  is in statute.   Representative Rokeberg  asked where                                                               
the problem  is.   Perhaps it is  with the public,  he said.   He                                                               
emphasized  that the  corporation  has done  a  wonderful job  of                                                               
creating and  growing the  fund; and the  legislature has  done a                                                               
good job of keeping its hands off of the fund.                                                                                  
Number 2706                                                                                                                     
CO-CHAIR  WHITAKER noted  that Representative  Rokeberg's concern                                                               
is with  the definition  of real  value and  subsequent potential                                                               
litigation.   He  asked if  Representative Rokeberg  is satisfied                                                               
with  the  language  that  the appropriation  may  not  exceed  5                                                               
REPRESENTATIVE  ROKEBERG   agreed.    In  response   to  Co-Chair                                                               
Whitaker's  request,   Representative  Rokeberg  said   he  would                                                               
provide an amendment to that effect.                                                                                            
Number 2744                                                                                                                     
JAY  HOGAN, Deputy  Director, Office  of  Management and  Budget,                                                               
Office  of  the  Governor,  testified  on  HJR  26  and  answered                                                               
questions.   He  directed  the members'  attention  to Section  1                                                               
where two key words:   "principal" and "income" are being deleted                                                               
from the  constitution.   This language has  been in  place since                                                               
the [Alaska  permanent fund] was  adopted in 1976.   According to                                                               
the constitution  the income was  to be deposited in  the general                                                               
fund, but as Representative Rokeberg  pointed out the legislature                                                               
has not done that.  Mr.  Hogan said it was [the administration's]                                                               
feeling that  with the  principal gone and  with income  gone, it                                                               
would  be  appropriate to  put  the  term  "real income"  in  the                                                               
constitution.  This would become  the standard for the percent of                                                               
market value (POMV),  as opposed to the standard  of the previous                                                               
concept  which   differentiated  between  and  relied   upon  the                                                               
concepts  of  principal and  interest.    He explained  that  the                                                               
removal  of  these  two  terms   are  the  strongest  reason  for                                                               
inserting the words "real value".                                                                                               
REPRESENTATIVE ROKEBERG  commented that Mr. Hogan's  argument has                                                               
CO-CHAIR  WHITAKER  stated  for the  record  that  Representative                                                               
Harris had joined the meeting.                                                                                                  
Number 3000                                                                                                                     
MR.  LORENSEN stated  that  both he  and  Tamara Cook,  Director,                                                               
Legislative  Legal   and  Research  Services,  agree   that  this                                                               
language creates a  single standard which is  5 percent [payout].                                                               
The introductory language  is really an explanation of  why the 5                                                               
percent  is there.    While it  was an  important  issue for  the                                                               
board, it  no longer provides that  second, independent standard,                                                               
he said.   Mr. Lorensen said  he believes that the  only standard                                                               
that  is  enforceable   with  respect  to  the   actions  of  the                                                               
legislature is the 5 percent POMV rule.                                                                                         
Number 3110                                                                                                                     
REPRESENTATIVE ROKEBERG  said he  believes that the  courts would                                                               
find that there  are two standards in place one  of which is [the                                                               
5 POMV] and the other is that real value is maintained.                                                                         
MR.  HOGAN, as  a person  who was  there when  this decision  was                                                               
debated originally, said  it has always been  a disappointment to                                                               
him that the  original concept of money flowing  into the general                                                               
fund  really never  happened.   One of  the main  assumptions was                                                               
that the  permanent fund would be  available at such a  time as a                                                               
legislature and governor  felt it was necessary to  draw upon it.                                                               
By  statute,  the  legislature  has made  use  of  the  otherwise                                                               
provided  by law,  rather  than money  flowing  into the  general                                                               
fund.   He said he  believes that the  term "real income"  is one                                                               
that  is generally  understood within  the financial  world.   He                                                               
said  a  financial  expert  could  appear in  court  and  make  a                                                               
convincing argument  that it  does mean something.   It  could be                                                               
shown  to have  a  direct  relation to  what  the legislature  is                                                               
trying to  do, which  is to protect  the fund  against inflation;                                                               
thereby, only  using the average  real income of that  fund which                                                               
turns out to be 5 percent.                                                                                                      
Number 3331                                                                                                                     
REPRESENTATIVE   ROKEBERG   asked   Mr.   Bartholomew   about   a                                                               
hypothetical market situation in which  there is a period of very                                                               
high, double-digit inflation.   He asked if  the market typically                                                               
acts negatively  to inflationary  trends and  in turn  drives the                                                               
value down.                                                                                                                     
MR.  BARTHOLOMEW responded  that  the executive  director of  the                                                               
Alaska Permanent  Fund Corporation has previously  testified that                                                               
what Representative Rokeberg described  is a worst-case scenario.                                                               
He  said  that has  happened  in  the  past  when there  is  high                                                               
inflation and dropping asset values.                                                                                            
Number 3433                                                                                                                     
REPRESENTATIVE  ROKEBERG remarked  that in  a situation  in which                                                               
the  corpus and  principal  of the  fund was  being  eroded by  a                                                               
hyper-inflationary situation, which would  also drive value down,                                                               
this kind  of language  would mean the  legislature would  not be                                                               
able to draw out any funds.                                                                                                     
MR.  BARTHOLOMEW  replied   that  if  the  board   was  making  a                                                               
recommendation  in a  one- or  two-year  period such  as the  one                                                               
Representative  Rokeberg  described,  he  said  he  believes  the                                                               
board's recommendation  would be to  take the long-term  view and                                                               
continue  to  recommend  that  the  legislature  would  still  be                                                               
protecting the fund by allowing  an up to 5 percent distribution.                                                               
However, as  Representative Wilson previously discussed,  if this                                                               
kind of situation  lasted for five, eight, or ten  years, then it                                                               
would  be prudent  to  review that.   He  emphasized  that it  is                                                               
important  to maintain  a long-term  view because  there will  be                                                               
good and  bad years in  the future.  The  board looks at  this in                                                               
five-, ten-, and fifteen-year periods,  and he believes the board                                                               
would continue to recommend [the 5 percent payout].                                                                             
Number 3626                                                                                                                     
REPRESENTATIVE ROKEBERG  asked why  the "over time"  language was                                                               
removed from the bill.                                                                                                          
MR. LORENSEN responded that the  "over time" language was removed                                                               
as a result of  the comments made by Ms. Cook  yesterday.  It was                                                               
her view  that "over time" is  an ambiguous term and  did not add                                                               
anything to the bill.                                                                                                           
CO-CHAIR  WHITAKER commented  that it  is important  to have  the                                                               
leeway  to make  judgments about  language that  would [minimize]                                                               
potential litigation.                                                                                                           
Number 3800                                                                                                                     
REPRESENTATIVE ROKEBERG  pointed out that  the easy way  to avoid                                                               
litigation is to payout 100 percent to dividends.                                                                               
CO-CHAIR  HAWKER   commented  that   he  is  in   agreement  with                                                               
Representative Rokeberg on the importance  of the long-term view.                                                               
He said that he is concerned  that without the over time or long-                                                               
term  concept in  this  clause, there  does not  seem  to be  any                                                               
indication that real value is  to be measured over time; assuring                                                               
that  real value  is being  preserved could  mean that  there can                                                               
never be a  decline in value however temporary.   This is a grave                                                               
concern to him, he said.                                                                                                        
Number 3911                                                                                                                     
MR. LORENSEN  responded that he understands  the concern Co-Chair                                                               
Hawker raised.   He commented  that perhaps there is  another way                                                               
to describe  that longer period  of time without using  the "over                                                               
time" language.                                                                                                                 
MR. HOGAN  told the  committee that  current state  law describes                                                               
what "income" from  the permanent fund means.  He  said he thinks                                                               
the statute  in Alaska is  the appropriate  place to fill  in the                                                               
details  and explanations  of  terms  such as  real  income.   He                                                               
pointed out  that the  current statute  describes income  for the                                                               
permanent fund.   Mr. Hogan said  he also believes that  if it is                                                               
the legislature's intention  to have these two terms  travel as a                                                               
pair,  then that  presents  a different  legal  argument at  some                                                               
point  in time  because the  details of  what the  legislature is                                                               
thinking  is   all  included,  if   not  in   the  constitutional                                                               
amendment, in the statutes that accompanies it.                                                                                 
Number 4049                                                                                                                     
REPRESENTATIVE HEINZE commented that this  is a delicate piece of                                                               
legislation,  and she  expressed the  need to  make the  language                                                               
very clear so there is no question [as to its meaning].                                                                         
REPRESENTATIVE HARRIS  asked why the  first line in  Section 2(b)                                                               
is  included,  as he  believes  it  only  serves to  confuse  the                                                               
public.   He said  all that really  needs to be  said is  that no                                                               
more than 5  percent of the value of the  fund averaged over five                                                               
years is to  be used as a  stream of revenue.   He reiterated his                                                               
belief that  the first line  does not need to  be in the  bill at                                                               
Number 4241                                                                                                                     
MR. BARTHOLOMEW responded that the  5 percent was not included to                                                               
take  money off  the  table  from the  legislature.   That  first                                                               
sentence addresses why 5 percent is  used and that has to do with                                                               
asset allocation  and the investment philosophy  of the permanent                                                               
fund [corporation]  which shows that  there will be 5  percent in                                                               
real income  available for distribution  over the long term.   He                                                               
commented  that this  [sentence]  is  explanatory language  which                                                               
could be related via the "record" rather than the constitution.                                                                 
REPRESENTATIVE  HARRIS opined  that  the words  "ensure the  real                                                               
value" in  that first sentence  could be  interpreted differently                                                               
by lawyers.  For instance, in a  year in which the rate of return                                                               
is less  than 5 percent, the  funds would actually be  taken from                                                               
the  principal   of  the  fund.     He  questioned   whether  the                                                               
aforementioned would  be interpreted  as ensuring the  real value                                                               
of the  fund.  He  told the  members he believes  [including this                                                               
language in the bill] would be a bad thing.                                                                                     
Number 4519                                                                                                                     
REPRESENTATIVE GRUENBERG  said in his experience  courts construe                                                               
constitutional    provisions     differently    than    statutes.                                                               
Constitutional provisions  are usually very short  and very broad                                                               
while statutes are  normally more detailed.  He  used the analogy                                                               
of  a body  in which  the  constitution forms  the backbone,  the                                                               
statutes provide  the skeleton,  and the regulations  provide the                                                               
flesh while  the agencies and  the legal  interpretations provide                                                               
the  meat,  bone, and  skin.    Although  this kind  of  language                                                               
[Section  2(b)]  generally  would   not  be  in  a  constitution,                                                               
occasionally, it is.   For example, in  the [Alaska] Constitution                                                               
the right to  keep and bear arms  [includes explanatory language]                                                               
as follows:                                                                                                                     
        A well regulated militia being necessary to the                                                                         
      security of a free state, the right of the people to                                                                      
     keep and bear arms shall not be infringed.                                                                                 
TAPE 03-19, SIDE B                                                                                                            
REPRESENTATIVE  GRUENBERG pointed  out that  the first  phrase is                                                               
the purpose section.  He  added that the constitution was amended                                                               
to ensure  that there was  an individual  right to keep  and bear                                                               
arms  because  the people  of  the  state believed  the  proposed                                                               
section might be unduly restrictive.   He said it is important to                                                               
be careful  what is  put into the  constitution because  it could                                                               
later  be  used against  [the  purpose  of  the amendment].    He                                                               
summarized his comments by saying  there is precedent for placing                                                               
[explanatory language in the constitution].                                                                                     
Number 4624                                                                                                                     
CO-CHAIR HAWKER noted  that the Second Amendment has  been one of                                                               
the  most  heavily litigated,  and  may  be  a good  argument  in                                                               
opposing the inclusion of this [explanatory clause].                                                                            
REPRESENTATIVE  GRUENBERG  said  he  would like  to  examine  the                                                               
perceived problem  that this  language is intended  to cure.   He                                                               
said he thinks the problem boils  down to the question of how the                                                               
legislature politically  prevents the people from  going into the                                                               
corpus [of  the permanent fund].   If the concept of  the fund is                                                               
changed to an  endowment, there will be less concern  if there is                                                               
no dividend  because it guarantees  a payout.   If this  were not                                                               
the case,  there could  be a  need to  go to  the [corpus  of the                                                               
fund].  He  asked Mr. Bartholomew if that is  the primary purpose                                                               
of the amendment.                                                                                                               
MR. BARTHOLOMEW  responded that is  the secondary reason  for the                                                               
amendment.   The  primary  reason,  he said,  is  to assure  that                                                               
inflation-proofing  of the  fund  moves from  an optional  annual                                                               
appropriation to  [mandatory] inflation-proofing.  This  would be                                                               
done  by moving  [inflation-proofing] into  the constitution  and                                                               
ensuring  the  fund's protection  against  inflation  is the  top                                                               
priority.   However,  inflation-proofing  could  be done  without                                                               
achieving  the second  objective, which  is to  assure an  annual                                                               
distribution.    He said  it  is  the board's  recommendation  to                                                               
achieve both objectives.  This effect  on the economy can go from                                                               
zero to a billion dollars and is very dramatic.                                                                                 
Number 4314                                                                                                                     
REPRESENTATIVE GRUENBERG  commented that he prefers  options that                                                               
allow  the  people   who  govern  to  use   [whatever  tools  are                                                               
available] to govern well, although  that, too, is a risk because                                                               
those that govern  can do so badly.   He stated that he  is not a                                                               
fan  of dedicated  funds and  he  does not  support amending  the                                                               
constitution very often.  The  permanent fund is the exception to                                                               
the rule,  he said.   If this  amendment passes, this  would more                                                               
stringently  dedicate   funds  by  imposing   more  requirements.                                                               
Although the  dividend is  not in the  constitution, it  might as                                                               
well be because  it is so politically protected.   He pointed out                                                               
that the  legislature still has  the legal option to  do whatever                                                               
is necessary to  govern.  He asked  if there is a  way to achieve                                                               
these  goals without  amending the  constitution, thereby  giving                                                               
the legislature  the ability to  do what  it must at  some future                                                               
time when faced with unforeseeable circumstances.                                                                               
MR.  BARTHOLOMEW  responded  that  the board  believes  that  the                                                               
proposed  changes,  which  passed  through the  Alaska  House  of                                                               
Representatives  last year  in a  statutory  version, proves  two                                                               
points.   The statutory option  to inflation-proof or  not, truly                                                               
does not improve  the protection of the permanent  fund, he said.                                                               
The second objective, which would  take out that word "principal"                                                               
which would allow the legislature  in a short-term down period to                                                               
have  an  annual  distribution,  definitely  cannot  be  achieved                                                               
without  amending the  constitution.   In summary,  he said,  the                                                               
board believes these two objectives  cannot be achieved without a                                                               
constitutional amendment.                                                                                                       
Number 3934                                                                                                                     
REPRESENTATIVE ROKEBERG asked if  leaving the word "principal" in                                                               
the first  section while  deleting all  references to  real value                                                               
and inflation-proofing  would send a  message to the  public that                                                               
the principal would be maintained.                                                                                              
MR.  BARTHOLOMEW responded  that there  is an  attorney general's                                                               
opinion that  is currently being  worked on to  determine whether                                                               
the permanent  fund's historical interpretation of  principal and                                                               
income  are  accurate.   Currently,  there  is no  legal  opinion                                                               
saying  that the  legal interpretations  are incorrect,  he said,                                                               
but  by   leaving  the  word   principal  in  and   removing  the                                                               
introductory phrase  [out], this brings  the members back  to the                                                               
proposal that was submitted to the legislature two years ago.                                                                   
Number 3738                                                                                                                     
REPRESENTATIVE ROKEBERG pointed out that if the 6 percent                                                                       
override in HJR 1 was deleted, the committee would have the                                                                     
exact language he believes is needed now.                                                                                       
[HJR 26 was held over.]                                                                                                         

Document Name Date/Time Subjects