Legislature(2003 - 2004)

03/16/2004 09:07 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     CS FOR SENATE JOINT RESOLUTION NO. 32(JUD)                                                                                 
     Proposing  amendments  to  the  Constitution  of the  State  of                                                            
     Alaska  relating to  appropriations from  the Alaska  permanent                                                            
     fund  to be  used  for a  program of  dividends  for all  state                                                            
     residents  and providing  a  conditional effect  and  effective                                                            
     date for the amendment.                                                                                                    
This  was the  first  hearing  for  this resolution  in  the  Senate                                                            
Finance Committee.                                                                                                              
Co-Chair   Wilken   stated   this   resolution,   "constitutionally                                                             
guarantees that 80 percent  of the revenue stream from the Permanent                                                            
Fund  under a  percent  of market  value approach  would  go to  the                                                            
Permanent  Fund Dividend.  This constitutional  amendment will  take                                                            
place  only if  the POMV  amendment passes  the  legislature and  is                                                            
approved  by  the voters.  This  constitutional  amendment  must  be                                                            
placed before the voters November of 2004."                                                                                     
SENATOR KIM  ELTON characterized  himself as  not a sponsor  of this                                                            
resolution  as much as he is a carrier.  He then characterized  this                                                            
resolution  as an "if 'a' then 'b'"  stipulation. He explained  that                                                            
if a constitutional  amendment were  adopted to implement  a Percent                                                            
of Market Value (POMV)  procedure, this resolution would provide for                                                            
a division of the revenue from the POMV approach.                                                                               
Senator Elton  relayed this resolution is a nexus  of the Conference                                                            
of Alaskans' recommendation  that if POMV were adopted in the Alaska                                                            
Constitution,  the Constitution should also be amended  to guarantee                                                            
Permanent Fund  dividends. He stated  this resolution is  one method                                                            
to accomplish  this. He detailed that POMV would provide  a "revenue                                                            
stream" of  approximately five-percent  the amount of the  corpus of                                                            
the  Fund.   Of  that  amount,  he   stated  80  percent   would  be                                                            
appropriated   to  the  dividend  and  20  percent  for   government                                                            
operations. He calculated  that the current market value of the Fund                                                            
would provide approximately  $280 million for government services of                                                            
the  approximate  $1.4  million POMV.  He  cited  observations  from                                                            
Permanent  Fund  Corporation  representatives  that  reviewing  past                                                            
performance provides insight  into predicting future performance. He                                                            
listed various other divisions  between 65 percent for dividends and                                                            
35 percent  for government  services, and  76 percent for  dividends                                                            
and  24  percent  for  government  services.   He acknowledged   the                                                            
difficulty in  accurately predicting the future in  that the certain                                                            
market performances and  asset allocation decisions must be assumed.                                                            
He predicated  this  resolution  based on  calculations  how a  POMV                                                            
would have  affected the Permanent  Fund if implemented since  1990.                                                            
Senator Elton  also pointed out this  approach would not  prioritize                                                            
dividend   payments  above   inflation  proofing,   explaining   the                                                            
assumption that POMV provides  inflation proofing because only five-                                                            
percent is withdrawn from the Fund.                                                                                             
Senator  Elton agreed  with  Senator  Hoffman's comments  that  also                                                            
reflect the  "notion" of the Conference  of Alaskans that  the State                                                            
has  transformed  a "pool  of natural  resources"  into  a "pool  of                                                            
money"  that  continues  to  grow. Senator  Elton  asserted  that  a                                                            
significant portion of  the corpus of the Permanent Fund is a direct                                                            
result of prudent actions of past legislatures in inflation-                                                                    
proofing the Fund.                                                                                                              
Senator  Elton  opposed  the committee  substitute  adopted  by  the                                                            
Senate   Judiciary  Committee   because  it   was  contingent   upon                                                            
legislative and  voter approval of a constitutional  spending limit,                                                            
which  he stated  has not  been finalized.  He  recommended  against                                                            
including  a  spending  limit  in  a proposal  to  constitutionally                                                             
guarantee the Permanent  Fund Dividend program, as such action could                                                            
be  considered   a  revision  rather   than  an  amendment   to  the                                                            
Senator Elton  then addressed the matter of whether  this resolution                                                            
would be  a revision of  the Constitution.  He surmised that  making                                                            
such a determination is inappropriate at the committee level.                                                                   
Senator Bunde  was pleased to note that the sponsor  pointed out the                                                            
income   from  the   Permanent  Fund,   which   he  calculated   has                                                            
"outdistanced  the income to the State"  generated from development                                                             
of oil resources. Senator  Bunde remarked that a POMV is intended to                                                            
stabilize  the earnings  of the  Permanent  Fund and  the method  in                                                            
which those  earnings are calculated.  He understood the  amounts of                                                            
the dividend would subsequently  become stable rather than fluctuate                                                            
as it has in the  past. By extension, he stated that  the 20 percent                                                            
used to fund State services  would also be stabilized. He listed the                                                            
budget  deficit  for the  current  year at  $500 million,  of  which                                                            
approximately one half could be offset with the aforementioned 20-                                                              
percent.   However  he warned  that the  deficit  would continue  to                                                            
increase and that this scenario would not adjust for inflation.                                                                 
SFC 04 # 40, Side B 09:55 AM                                                                                                    
Senator  Bunde asked  whether  the sponsor  had considered  how  the                                                            
remaining government  expenses in excess of those  covered by the 20                                                            
percent of POMV funds would be addressed.                                                                                       
Senator  Elton  qualified  that the  State  is fortunate  this  year                                                            
because the price  of oil is currently over $36 per  barrel, and the                                                            
$500  million deficit  amount  is a  conservative  estimate. In  the                                                            
future, he expected the  gap between revenues and expenditures would                                                            
be significantly  higher. He did not consider this  resolution to be                                                            
a complete fiscal  solution, but rather as a component  of a broader                                                            
fiscal  plan.  He  clarified  he did  not  intend  to  suggest  that                                                            
additional efforts to address  government funding should be ignored.                                                            
Senator  Bunde  agreed  that depending  on  the  price of  oil,  the                                                            
deficit  could be  approximately  $1  billion and  that "draconian"                                                             
taxes  and  budget  reductions  could be  necessary  to  offset  the                                                            
balance. He asked  whether, in the current year, the  entire deficit                                                            
would  be  equal to  fifty-percent  of  the  five  percent  earnings                                                            
available for appropriation under the POMV method.                                                                              
Senator  Elton replied  that  an equal  division of  the total  POMV                                                            
earnings of $1.4  billion would provide approximately  $700 million,                                                            
an amount  that would be  adequate to cover  the projected  deficit.                                                            
However, he cautioned  that if the deficit increased  to $1 billion,                                                            
the earnings would not be sufficient.                                                                                           
SENATOR GARY  STEVENS expressed  he is a "great  fan" of the  Alaska                                                            
Constitution and was "loathe"  to amend it too readily. He asked how                                                            
the sponsor  determined this issue  merits such an amendment,  given                                                            
that the  framers  at the Constitutional  Convention  determined  to                                                            
leave the details to the Legislature to resolve.                                                                                
Senator Elton  replied that the Constitution  has provided  Alaskans                                                            
with significant  latitude. He stated this resolution  would provide                                                            
further definition  as to how the  Permanent Fund would be  managed.                                                            
He reiterated  it would not be implemented  unless a constitutional                                                             
amendment relating to POMV was approved.                                                                                        
Senator Hoffman  commented that the  Constitution was very  general;                                                            
however specific changes  have been made to benefit few people, such                                                            
as  the limited  entry  provision  that benefited  few  fishers.  He                                                            
asserted this resolution would benefit every Alaskan.                                                                           
Senator Seekins  asked if the sponsor  had obtained a legal  opinion                                                            
advising  whether this  resolution conforms  to the  ruling in  Bess                                                          
versus Ulmer.                                                                                                                 
Senator Elton  informed he  had and described  the opinion  from Tam                                                            
Cook of the  Division of Legal and  Research Services advising  that                                                            
the matter is "indeterminate"  and could be determined by a court to                                                            
be a constitutional revision or amendment.                                                                                      
Senator Seekins  clarified that currently all income  generated from                                                            
the Permanent  Fund is deposited  into the  State general fund,  and                                                            
subject  to  discretionary  appropriation  by  the  legislature.  He                                                            
understood  this resolution would  provide that appropriation  would                                                            
no  longer  be  discretionary   and  instead  80  percent  would  be                                                            
distributed  as dividends  and  only the  remaining  funds would  be                                                            
Senator  Elton  affirmed,  noting  these  provisions  are  currently                                                            
statutory   and   this  resolution   would   codify   them  in   the                                                            
Constitution.  He  encouraged the  Committee,  as it  considers  all                                                            
approaches,  to  consider  that  all  Alaskans   must  endorse  this                                                            
constitutional amendment.                                                                                                       
Senator Seekins  asked if the sponsor would therefore  not "have any                                                            
problem that  the first dollar that  would have to be spent  for any                                                            
reason in any particular  year regardless of the financial condition                                                            
of the state of Alaska would be to pay the dividend."                                                                           
Senator   Elton  corrected   that  the  "first   dollar"  would   be                                                            
appropriated  to inflation proof the  Permanent Fund. The  reminder,                                                            
he affirmed  would be allocated 20  percent for government  services                                                            
and 80 percent for the dividend.                                                                                                
Senator  Seekins clarified,  "we would inflation  proof our  savings                                                            
account no matter what  our other requirements were for State income                                                            
to meet  the needs of the  State of Alaska.  The second dollar  then                                                            
would  be for a  dividend. Then  we could  worry about  the rest  of                                                            
State needs after that."                                                                                                        
Senator Elton  countered he  would not characterize  the process  in                                                            
this way. I  saw no "difference" between  the funding available  for                                                            
the dividend and  that for State services; both would  be guaranteed                                                            
in the Constitution.                                                                                                            
Senator Hoffman  stated the Fund would  first be inflation-proofed,                                                             
"then government gets a  crack at it and then the people get a crack                                                            
at it." He noted the ratio  of funds allocated for dividends and for                                                            
government services could be changed.                                                                                           
Senator Bunde  asserted that the "ultimate recipient"  of government                                                            
spending is  the people, that government  services are provided  for                                                            
the people, and therefore  100 percent of the earnings would benefit                                                            
the people.                                                                                                                     
Senator  Bunde  asked  Senator   Seekins  as  Chair  of  the  Senate                                                            
Judiciary  Committee, if the  issue of whether  these proposals  are                                                            
amendments  or  revisions  to the  Constitution  could  be  resolved                                                            
before the process of an election and court challenges.                                                                         
Senator Seekins  shared his research  into the matter of  dedicating                                                            
income in the  Constitution from the Permanent Fund  to the dividend                                                            
program.  He  learned  that  if  the  legislature  were  to  pass  a                                                            
resolution  to amend  the  Constitution in  this  manner, the  issue                                                            
would be  challenged in court  before the  election was held  on the                                                            
subsequent ballot  initiative. He knew of no other  method to obtain                                                            
a  court  ruling  on  whether  such a  change  would  be  deemed  an                                                            
amendment or a revision.                                                                                                        
Senator Seekins  warned that such  change to the Constitution  would                                                            
be the  first instance  in which  funds were  allocated directly  to                                                            
individuals.  He  explained  that historically,  revenues  from  the                                                            
Permanent Fund have been  deposited into the State general fund then                                                            
appropriated  for dividends. He remarked  this change would  subvert                                                            
the legislative  appropriation authority and would  therefore likely                                                            
be considered  a revision  to the Constitution.  He noted the  State                                                            
Supreme Court would make the ultimate decision on the matter.                                                                   
Senator Elton relayed his  understanding that a court decision would                                                            
not  be  rendered  until  after a  ballot  initiative  passed  in  a                                                            
statewide election.                                                                                                             
Co-Chair  Green studied the  calculations  of the dividend  payments                                                            
provided  in a POMV  process and the  impact on  the dividends  if a                                                            
percentage of the available  amount were appropriated for government                                                            
services. She  anticipated a "bidding war" could ensue  in effort to                                                            
establish support for certain percentage amounts.                                                                               
Senator  Elton  interpreted   the  graph  provided   by  the  Alaska                                                            
Permanent Fund  Corporation, titled  "Comparison of dividend  payout                                                            
methods;  Historical  and  forecasted   data"  [copy  on  file],  to                                                            
indicate that  if this resolution had been enacted  between 1990 and                                                            
the  current  year,  the division  would  be  "about  76 /  24".  He                                                            
qualified that  the method of managing  and investing the  assets of                                                            
the Fund  have  changed. He  stated that  under  this approach,  any                                                            
asset allocation  decision or market behavior changes  could distort                                                            
future earnings. He cited  testimony given by representatives of the                                                            
Corporation that  to replicate future "dividend behavior"  under the                                                            
current  method, an  allocation  of 60  or 65 percent  to  dividends                                                            
would be likely.                                                                                                                
Senator Hoffman suggested  that instead of entering a "bidding war",                                                            
the  legislature  should  present  options  to  voters  listing  the                                                            
impacts  that  allocating   different  percentages  for   government                                                            
services  would   have  on  the  dividend.   He  cautioned   against                                                            
practicing  "one-ups-man-ship."   He asserted  that  the  State  has                                                            
developed its oil reserves,  a nonrenewable resource, and allocating                                                            
the proceeds to all Alaskan  residents. He commented that whether or                                                            
not these residents  remain in Alaska in 25 years,  they would still                                                            
receive some  benefits of the resources.  He doubted any  recipients                                                            
of  the dividend  were  "buying a  golden  condo", but  opined  that                                                            
individuals  are   better  able  to  spend  these   funds  than  the                                                            
Senator  Bunde  relayed a  comment  made  during the  Conference  of                                                            
Alaskans that  the U.S. Congress has  been "generous" to  Alaska and                                                            
is are "not  unaware" of  "what we do up  here". He noted  that over                                                            
one-half of  the State's annual $10  billion budget is comprised  of                                                            
federal funding  and that  Alaska receives  $7 for every $1  paid to                                                            
the federal government.  He hoped this practice would  continue, but                                                            
warned  it  is  contingent  upon  the  perceptions   of  members  of                                                            
Congress. If Alaskans  vote to constitutionally "lock  up" money and                                                            
dedicate  its use  for personal  expenditures,  and  yet expect  the                                                            
federal  government to fund  basic services,  he predicted  Congress                                                            
could reconsider its appropriations to the State.                                                                               
Senator  Stedman calculated  that a  division of  60 percent  and 40                                                            
percent  of POMV  revenue  was  more realistic.  He  reiterated  his                                                            
mosaic  analogy and  the impact of  each component  on the  complete                                                            
State  fiscal  situation, specifically   the "doors"  this  proposal                                                            
could "close"  to other funding  sources, such  as from the  federal                                                            
Senator Elton  remarked that it is difficult to predict  the future.                                                            
He ascertained  Alaskans do not consider the Permanent  Fund to be a                                                            
"shock  absorber"   for  deficit   funding.  He  recalled   Governor                                                            
Murkowski's  statement  that  the "cushion"  is  the Constitutional                                                             
Budget  Reserve fund  and  that a  balance of  at  least $1  billion                                                            
should  be retained  in that  fund. Senator  Elton  agreed with  the                                                            
Governor on this point  and furthered that the Permanent Fund should                                                            
be managed in the same manner as other State resources.                                                                         
SENATOR  HOLLIS  FRENCH   emphasized  the  proposed  constitutional                                                             
amendment is the  focus and characterized it as "highly  principled"                                                            
and "highly pragmatic".  He expounded that the discussion represents                                                            
a  "classic  American struggle"  between  "power  and  liberty,"  of                                                            
whether money  should be appropriated to government  or individuals.                                                            
He furthered  that the issue  is pragmatic  in that if a portion  of                                                            
earnings  from the  Permanent  Fund are  to be used  for  government                                                            
services,  a proposal for  this must be crafted  that would  receive                                                            
public  approval.   He predicted  that a  proposal to  adopt a  POMV                                                            
method would  not receive public approval  without this resolution.                                                             
He remarked  upon  the Conference  of  Alaskans conclusion  that  to                                                            
receive  public  approval  for POMV,  an  "iron clad  guarantee"  of                                                            
continued dividend payments would be required.                                                                                  
Senator Elton  appreciated the comments.  He agreed the matter  is a                                                            
conflux of policy and philosophy  but stressed that politics is also                                                            
an  issue.  He  surmised  that  the  public  needs   assurance  that                                                            
dividends  would be guaranteed  if POMV were  enacted and he  stated                                                            
this resolution is the result of this need.                                                                                     
Senator Hoffman  asked about the division  of three to five  percent                                                            
POMV between  inflation proofing  and allocation  for dividends  and                                                            
government. He  asked whether the sponsor had considered  that five-                                                            
percent could be too high.                                                                                                      
Senator  Elton  stated  that in  constructing  this  resolution,  he                                                            
divorced himself from that  question and rather addressed allocation                                                            
of the income  "stream". He emphasized  that any discussion  of POMV                                                            
must  include  discussion  on  the  appropriate   annual  amount  to                                                            
withdraw  from  the Permanent  Fund.  He  qualified  that  different                                                            
entities reached  different conclusions  of the appropriate  amount.                                                            
Exampled that  the withdrawal amount  from the Harvard Endowment  is                                                            
decided annually  based on the performance of that  fund. He pointed                                                            
out that  other endowment  funds  are managed  differently than  the                                                            
Alaska Permanent  Fund. He stressed  that this Committee  as well as                                                            
the Senate  should scrutinize  the percentage  amount. He relayed  a                                                            
suggestion made  at the Conference of Alaskans that  five-percent is                                                            
appropriate and  would not impact the corpus of the  Fund over time.                                                            
Whatever decision  on the POMV amount, he stressed  would not affect                                                            
this "tag-along" Constitutional  amendment, because it is predicated                                                            
on the annual revenue.                                                                                                          
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             

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