Legislature(2003 - 2004)
02/27/2004 08:00 AM Senate JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CHAIR RALPH SEEKINS called the Senate Judiciary Standing Committee meeting to order at 8:03 a.m. All members were present. Chair Seekins announced that he planned to review all four resolutions before taking any action of them today and that SJR 24 would be heard first. SJR 24-CONST AM: GUARANTEE PERM FUND DIVIDEND SENATOR OGAN, prime sponsor of SJR 24, told members he decided to introduce this legislation because of his sincere belief that the voters will not allow any other use of the permanent fund until the permanent fund dividend program is protected in the Alaska Constitution. SJR 24 contains a provision that delays its effective date until the voters approve a constitutional amendment related to an appropriation limit. He explained: I feel if - even with constitutionally protecting the permanent fund dividend that if it was protected, let's say tomorrow, that a lot of legislators would perceive that the rest of the money is available for appropriation and there would be a feeding frenzy. I have a personal belief that government generally grows in direct proportion to the amount of money available to spend and so I think we should protect the dividend, put a spending cap in place and then, and only then, discuss some of the excess earnings to be used for some of the critical needs that we have as a government. As we all know, oil prices have been high but production will continue to decline in the near and far term and, even with the gas pipeline, we are not going to have adequate revenues to balance the budget in a few short years. I think this is an important first step. He explained that SJR 24 essentially enshrines the permanent fund dividend program, as it exists in current statute. SENATOR FRENCH asked if SJR 24 would put the entire earnings reserve account inside the permanent fund itself, instead of leaving it as a separate account. SENATOR OGAN said it would. SENATOR FRENCH asked if the distribution methodology for dividends would remain the same, that being 21 percent of the net income for the last five years. SENATOR OGAN said it would and explained that Section 3 of SJR 24 enshrines the existing dividend formula. He said at the end of the day, if the percent of market value (POMV) plan is adopted, SJR 24 would have to be amended to use that approach. He said he does not believe the POMV is a bad thing on its face, but if it is adopted he believes the dividend should still be protected. SENATOR FRENCH asked how inflation proofing would work under SJR 24. SENATOR OGAN deferred to Mr. Storer for an answer. MR. ROBERT STORER, Executive Director of the Alaska Permanent Fund Corporation (APFC), told members as he reads SJR 24, inflation proofing would remain by statute. Currently, the dividend formula takes precedence over inflation proofing, although both are appropriated annually. He said if the existing statute were memorialized in the Constitution, the dividend would again take precedence over inflation proofing. SENATOR FRENCH asked if SJR 24 requires that 50 percent of the income available for distribution be transferred from the earnings reserve account and used for the dividend program. SENATOR OGAN said that is correct. SENATOR FRENCH asked how that compares with the current dividend program. MR. STORER said they are the same. SENATOR OGAN explained that SJR 24 would put the existing statute in the Constitution, verbatim. CHAIR SEEKINS announced that he would take testimony on all four resolutions before the committee simultaneously. He then asked for a motion to adopt version H [SJR 24] as the working document before the committee. SENATOR OGAN so moved. CHAIR SEEKINS announced the motion carried without objection; therefore Version H was before the committee. He then designated a proposed amendment distributed to members as Amendment 1. SENATOR OGAN moved to adopt Amendment 1 [for the purpose of discussion], which reads as follows. 23-LS1543\H.1 Cook 8/19/04 A M E N D M E N T 1 OFFERED IN THE SENATE TO: SJR 24 Page 2, lines 14 - 15: Delete "a new section" Insert "new sections" Page 2, following line 18: Insert "Section 31. Suspension and Repeal of amendments. (a) Notwithstanding Section 1 of Article XIII, the 2004 amendments to Section 15 of Article IX are suspended on the date of an initial determination by the Internal Revenue Service that all or a portion of the permanent fund is subject to federal taxation. The suspension is terminated on the date the amendments are repealed under (b) of this section or one hundred eighty days after the date of a final, nonappealable judgment or order by a federal court deciding that no portion of the permanent fund would be subject to federal taxation as a result of the amendments. During the period of suspension under this subsection, Section 15 of Article IX shall apply as it read on January 1, 2003. (b) Notwithstanding Section 1 of Article XIII, the 2004 amendments to Section 15 of Article IX are repealed one hundred eighty days after the date of a final, nonappealable judgment or order by a federal court deciding that all or a portion of the permanent fund is subject to federal taxation. Upon repeal of the 2004 amendments under this subsection, Section 15 of Article IX is amended to read as it read on January 1, 2003." CHAIR SEEKINS noted without objection, Amendment 1 was before the committee. SENATOR TOM WAGONER told members that he has had great concerns about enshrining the permanent fund dividend in the Constitution since before he took office because of the differing opinions on whether or not doing so would enable the IRS to tax the permanent fund. People knowledgeable about tax law say if the permanent fund dividend is enshrined in the Constitution, the IRS's ability to tax the permanent fund becomes tenuous because that money would no longer be available for government services. Amendment 1 contains a safety valve so that if the IRS attempts to tax the permanent fund, the dividend would revert to a statutory mandate, not a constitutional mandate. He said he believes Amendment 1 should be attached to any permanent fund dividend bill because it gives the legislature final control. SENATOR THERRIAULT felt adopting Amendment 1 would be prudent because the IRS will not guarantee that any interpretation of the tax code and case history is correct. He noted, however, that SJR 24 is structured so that the earnings reserve is still maintained and can be used for a public purpose, which probably mitigates the threat of taxation by the IRS. SENATOR ELLIS raised a point of order and asked Chair Seekins to clarify whether the motion involving Amendment 1 was to introduce it for discussion. CHAIR SEEKINS clarified it was to adopt Amendment 1 for the purpose of discussion and not to incorporate it into SJR 24. SENATOR ELLIS noted it is atypical to ask if there is objection to introducing an amendment for discussion and wanted to affirm that the committee did not adopt the amendment. He then asked Senator Wagoner if he has read the legal opinion that Attorney General Renkes solicited on the taxation issue and, if so, asked him to comment on it. He maintained that the legislature has spent some money to get to the heart of the taxation issue because it has been a point of debate for years. Senator Green introduced a bill years ago to enshrine the permanent fund dividend but it received a lot of criticism that it would trigger unfavorable IRS action toward the State of Alaska. He asked if Senator Wagoner has read those materials but did not find those opinions definitive. SENATOR WAGONER said he has read a couple of opinions that contradict each other or take different approaches toward what the IRS can and cannot do. He said Amendment 1 provides him with a higher comfort level than any of the opinions he has read. CHAIR SEEKINS asked if the IRS has ever been constrained by the opinion of a state attorney general. SENATOR WAGONER said the only entity that can restrain the IRS is Congress. SENATOR ELLIS requested that Attorney General Renkes provide a position on the need for Amendment 1. He said the attorney general went through the time and expense of soliciting an opinion from a Washington, D.C. law firm so he would appreciate hearing his opinion. SENATOR WAGONER said he didn't think what the attorney general said would matter because Amendment 1 provides a comfort level that he wants anyway for himself and a lot of other people who distrust the IRS. He said he feels it would be a waste of Attorney General Renkes' time. CHAIR SEEKINS asked if Attorney General Renkes' opinion was in writing. SENATOR WAGONER said if it is, he would get a copy for committee members. He repeated that he feels Amendment 1 is a prudent safety valve. SENATOR OGAN noted the only opinion that really counts is of "the guys that wear the robes in the U.S. Supreme Court so everybody else has got an opinion about it." He agreed that Amendment 1 is a circuit breaker if an adversarial opinion kicks in and removes the dividend program from the Constitution. SENATOR THERRIAULT pointed out that the language contained in Amendment 1 is identical to Section 3 of SJR 19 that Senator Ellis cosponsored. SENATOR ELLIS told members he was not arguing against the inclusion of Amendment 1. He maintained, "I was asking about the attorney general - the time and expense we went to as a state and that might be a legitimate part of the committee record. I'd hate for Senator Therriault to mischaracterize my...." CHAIR SEEKINS asked Senator Wagoner to get a copy of the written opinion to insert in the record. SENATOR WAGONER offered to do so today. SENATOR OGAN said one reason he introduced SJR 24 was because of a lengthy discussion he had with constituents in the Mat-Su Valley during the interim about the fact that the founding fathers of Alaska decided the state should retain the subsurface rights to land in Alaska. All residents collectively own the subsurface mineral estate, with the exception of the lands owned by Native corporations and lands patented before statehood. Additionally, the Alaska Constitution declares the subsurface rights as dominant so that a surface owner must allow access to the subsurface. That is also included in the Statehood Compact. According to Section (6)(i) of that Compact, the U.S. attorney general is specifically instructed to litigate in the U.S. district court to procure those subsurface rights for the federal government if the state conveys the subsurface rights to anyone else. He feels very strongly that the dividend program needs to be protected because it represents the people's share of the collectively owned subsurface mineral rights. CHAIR SEEKINS announced that with no further objection, Amendment 1 was adopted. SENATOR FRENCH said he is curious about the language in the appropriation limit that is currently working its way through the legislature. SENATOR OGAN said no one knows whether the legislature will have an appropriation limit at the end of the day, and how it will work, but SJR 24 will not take effect without one. He said he believes they should all be linked. He added: And then we get into the discussion of whether or not it's a revision and I gotta put that on the record. I mean - and it's a little risky, and at the end of the day we might wish to just take that out and let it fly on its own. It could be viewed as a revision and we have to be honest with people that's a possibility. Of course they may view this as a revision because this effective date affects more than one section of the Constitution and I think the best case to address that and - so the committee needs to be cognizant of that. I don't want to try to hide it from anybody. CHAIR SEEKINS pointed out, under Bess v. Ulmer, any section of the Constitution that affects too many other sections is no longer an amendment; it would be a revision. SENATOR OGAN said he is unsure whether a constitutional amendment with an effective date contingent upon another [constitutional amendment] has ever been put before the voters so it is an untested section of law. CHAIR SEEKINS noted that according to Bess v. Ulmer, an amendment to the Constitution is a clarification; a major change is a revision. SENATOR ELLIS asked whether the governor has taken a position on SJR 24. SENATOR OGAN said he has not had a discussion with the administration about it. SENATOR ELLIS asked if he plans to do so. SENATOR OGAN replied, "I don't think it's a function of the executive branch to - it's nice when they support your work but, frankly, the separation of powers, I think it's something we should - it'd be nice to have but isn't required to have to consider an amendment." SENATOR ELLIS agreed but said the majority frequently solicits the governor's position, as it is important to the way the majority views various pieces of legislation. CHAIR SEEKINS asked Senator Ellis to restrict his comments to his own conversations with the governor. He expressed concern that the term "you all" is inclusive and other people are not available to defend their positions. SENATOR ELLIS asked the chair why he wanted to restrain his right to speak on the issue. He then clarified that he was referring to the Republican Majority when he said "you all." CHAIR SEEKINS said the Republican Majority was not present and he did not want Senator Ogan to answer for him. SENATOR ELLIS said he would ask the chair separately and was only interested in Senator Ogan's position. SENATOR OGAN repeated that he has not discussed SJR 24 with anyone in the governor's office. SENATOR THERRIAULT pointed out that SJR 24 prioritizes dividends over inflation proofing. He cautioned that the state could pay dividends during a down market and give the next generation a diminished asset. He views the permanent fund as a mechanism for taking a one-time asset and making it multi-generational so that possibility weighs heavy on his mind. CHAIR SEEKINS noted that with no further discussion on SJR 24, he would set it aside until the end of the meeting. SJR 32- CONST AM: PERM FUND INCOME FOR DIVIDENDS SENATOR KIM ELTON, sponsor of SJR 32, described the measure as "if POMV, then SJR 32." The intent of SJR 32 is to codify one of the recommendations of the Conference of Alaskans: to constitutionally protect the permanent fund dividend. He said in response to Senator Therriault's concern about prioritizing inflation proofing over dividends, SJR 32 follows the POMV method, which does just that. SJR 32 also provides that 80 percent of the earnings from the POMV would be used for dividends. He stated: It would probably be fair to point out that the sharpest minds at the [Alaska] Permanent Fund Corporation have, when they look out ahead and they compare this recipe to the existing recipe that's in statute, they would suggest that...a return that would probably most equal the existing statutory dividend would be in the neighborhood of about 60-40 - 60 percent for dividends, 40 percent for other purposes to be determined by the legislature. But, Mr. Chair, if you look back to 1990 and you take a retrospective look, the formula, if we had been operating under a POMV, the formula that most closely would replicate the existing statutory language would be in the neighborhood of about 76-24 so this errs just slightly to the benefit of the dividend program, 80-20 does. SENATOR ELTON said he firmly believes the legislature has been able to protect the growing pool of the permanent fund because of the nexus between the permanent fund and the dividend program. He repeated that SJR 32 is written so that its enactment is contingent upon legislative and voter approval of the POMV methodology. SENATOR OGAN moved to adopt Version H of SJR 32 as the working document before the committee. CHAIR SEEKINS announced that without objection, the motion carried. SENATOR FRENCH said his greatest concern is inflation proofing and that is protected fairly well under the POMV scheme. He said he tries to work backwards from the election in November to figure out a plan that will gain favor with the public to provide a dividend and allow some earnings to be used for essential government services. He believes SJR 32 goes a long way toward doing that. He asked Senator Elton if he has received feedback about how the public will receive this resolution. SENATOR ELTON said one reason he introduced SJR 32 was to make sure the legislature had all of the pieces necessary to accomplish the goals of the Conference of Alaskans. The one piece he found missing was a mechanism that provides a fairly simple and easily understood division of the earning stream for dividends and government services. He has had a considerable amount of discussion with people in his district and also with people at the conference. He noted one way to accomplish policy, especially when a revision of the Constitution is required, is to include a market component. The legislature must structure the constitutional amendment so that people can understand its benefits. He believes the POMV approach will be adopted if the citizens understand its effect on the permanent fund dividend. CHAIR SEEKINS asked Senator Elton if he has any letters of support or e-mail messages showing support that could be inserted into the record. SENATOR ELTON said that SJR 32 closely reflects the Conference of Alaskans' recommendations. CHAIR SEEKINS asked Senator Elton to show a nexus. He said he read the Conference of Alaskans' report but the recommendations were not supported by enough of a majority that the legislature would have passed them as a proposed constitutional amendment. SENATOR ELTON said it is unusual that a bill he introduces is heard within 10 days so he does not have letters of support. CHAIR SEEKINS asked how many bills he has had referred to the Senate Judiciary Committee. SENATOR ELTON said none. He then indicated the suggestions from the Conference of Alaskans were not supported unanimously but 37 of the 55 delegates suggested enshrining the dividend in the Constitution. CHAIR SEEKINS said he is not aware of anything in the conference report that suggested an 80/20 split. SENATOR ELTON said the Conference of Alaskans did not identify an appropriate split for earnings and dividends but SJR 32 comes closest to matching what the existing program has provided over the last 15 years. He repeated that despite the fact that this recommendation was not approved unanimously by the conferees, 37 out of 55 delegates did suggest the dividend be protected in the Constitution. He pointed out that kind of a margin in a legislative race would be considered as overwhelming. CHAIR SEEKINS repeated [that margin] would not suffice for a constitutional amendment to come from the legislature. SENATOR ELTON argued that would if the threshold is considered to be what it would take to pass on the general election ballot in November. CHAIR SEEKINS asked if he believes the 55 conference delegates were representative of the people of the state. SENATOR ELTON said he does not. The conferees were from a much higher socio-economic stratum than the average Alaskan. He added that two-thirds of the conferees indicated they earned over $100,000 per year. SENATOR FRENCH commented that the various proposals before the committee represent a struggle between the government and the people for the earnings of the permanent fund. The people have repeatedly expressed their will to get their share of the fund's earnings. SJR 32 embodies that will most closely. CHAIR SEEKINS asked Senator Elton if he recalled what top two funding sources the conferees suggested the legislature look at. SENATOR ELTON replied a unique voting system was applied at the Conference. When the conferees were able to vote anonymously, there was a weighted average. The conferees were asked to decide on their top three revenue enhancements. The weighted average showed an income tax was the preferred method, by a very slight margin, over the earnings of the permanent fund, which had a relatively small margin over natural resource taxes. He said he would characterize the top two as a virtual dead heat between the income tax and the permanent fund earnings. CHAIR SEEKINS responded, "All of which are the people's money, correct?" SENATOR ELTON agreed. SENATOR THERRIAULT asked Senator Elton why he chose an 80/20 split rather than a ratio that is closer to the status quo. SENATOR ELTON repeated that the sharpest minds at the Alaska Permanent Fund Corporation (APFC) did projections to the year 2010 and suggested that to best replicate the statutory dividend formula, 60 percent of the earnings stream would be necessary. Because many variables could occur in that timeframe, he personally took a retrospective look to 1990, had the POMV methodology been in place. The split of earnings would have been about 76 percent for dividends and 24 percent for government. He said he picked an 80/20 split in favor of the dividend. SENATOR THERRIAULT said if the POMV methodology is established, the earnings reserve will no longer be in existence. He asked Senator Elton to elaborate on how the 20 percent would be used. SENATOR ELTON said the 20 percent is unallocated and would be available for government spending, which would be codified by the legislature and the budget process. SENATOR THERRIAULT noted that under POMV, 80 percent of up to 5 percent would be used for dividends. If the legislature uses 3 percent instead of 5, 80 percent of that amount will be used for dividends. SENATOR ELTON explained that SJR 32 is based on a 5 percent return from POMV. If the return is less, the 80/20 ratio remains the same but a lower amount would be available for each. SENATOR THERRIAULT asked Senator Elton: Even though it doesn't say it here, the use of the other 20 percent, it's your intent that it be available for appropriation and, in fact, you say here at least 80 percent of the amount appropriated so that 20 percent has to be appropriated for something. You have appropriated it from the earnings and whatever you have appropriated out, 80 percent shall go to a dividend but you have appropriated that other 20 percent too and you can't get to the dividend unless you appropriate that 20 percent. SENATOR ELTON said he thinks all legislators would view this as a revenue source in the same way that an income tax or additional resource taxes would provide an income stream available for appropriation. This constitutional amendment provides that 80 percent of this revenue stream would be preserved for the dividend program. The other 20 percent would be available for government spending. SENATOR ELTON said he appreciates the fact that SJR 32 is linked with the POMV. He believes there is a growing realization that the POMV truly is the best way to make the permanent fund permanent. TAPE 04-10, SIDE B SENATOR FRENCH maintained, regarding what split more accurately reflects the current system, there is no bright consensus. The APFC board has said a 60/40 split produces the current dividend. However, Sharman Haley, from the Institute of Social and Economic Research at UAA, recently wrote an article [in the Anchorage Daily News] in which she said the appropriate split is 70/30. He indicated that trying to replicate what is basically an earnings driven system under the current value driven system is like comparing apples to oranges. He commended Senator Elton for erring on the side of caution. CHAIR SEEKINS indicated the discussion is not about whether the POMV system is a good one but about how much would be given to whom. SENATOR ELTON agreed and pointed out that during his tenure in the legislature, the asset management of the fund was changed. He added: All of those changes, what happens in the marketplace, all of these things make it very difficult to say with any kind of real authority it is 61.3 percent to most closely replicate - I mean you can't do that. We can trust the best minds that we have down at the permanent fund, and I do trust them but it's kind of a rolling target that could change next year also. SENATOR OGAN asked Senator Elton how much new money would be available to spend on government services with an 80/20 split. SENATOR ELTON estimated about $260 million, based on a 20 percent of the 5 percent return from the POMV, which would be $1.3 billion this year. SENATOR OGAN said he believes offering 80 percent for dividends is very generous, but his concern is that a new $275 million funding source for government services will cause government to grow and the state will be in the same situation that it's in today in five years. He noted he wants to see a constitutional spending limit enacted first. SENATOR ELTON commented that the legislature has acted in an extremely responsible way regarding the use of the permanent fund earnings. Regarding Senator Ogan's concern about new money being available for appropriation, he sees any new revenue stream as backfilling deficit spending that will allow the legislature to draw down the budget reserve at a slower rate. CHAIR SEEKINS asked if all of the earnings of the permanent fund have been available to the legislature for spending since the beginning of the dividend program. SENATOR ELTON said they have and because the program is statutory and not constitutional, it only requires a simple majority vote. SENATOR OGAN expressed concern that SJR 32 means to him that the remaining budget gap will have to be filled with an income or sales tax to lock in the 80/20 split. SENATOR ELTON agreed but noted that additional spending cuts are possible. He said the discussion is moving toward a philosophical one and his view is that SJR 32 is not a fiscal plan. It could be one component of a fiscal plan. CHAIR SEEKINS asked Senator Elton if he believes in the need for an income tax before looking at spending the permanent fund earnings. SENATOR ELTON said his position is most closely reflected by that of the fiscal policy caucus, a group made up of 28 members of the legislature. Its package included a cruise ship tax, alcohol tax, oil industry tax and a small income tax. He pointed out that none of the 28 members believed that plan was a perfect one, however they agreed it was as close as they could come to one. On an individual basis, they all preferred a different plan. CHAIR SEEKINS announced a recess.