Legislature(2015 - 2016)BUTROVICH 205

02/11/2016 09:00 AM Senate STATE AFFAIRS

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        SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS                                                                     
9:50:21 AM                                                                                                                    
CHAIR STOLTZE announced the consideration of SB 128.                                                                            
9:51:00 AM                                                                                                                    
CRAIG  RICHARDS,  Attorney  General, Alaska  Department  of  Law,                                                               
Juneau, Alaska, stated  that the legal opinions  regarding SB 128                                                               
were  not  considered to  be  a  critical  driver issue  for  the                                                               
administration. He  specified that  the issue  with SB  128 would                                                               
only  arise if  a  Constitutional Budget  Reserve (CBR)  reverse-                                                               
sweep did  not occur. He  said even though  he has not  gone back                                                               
every year, there has never been  a situation where there was not                                                               
a reverse sweep.                                                                                                                
CHAIR  STOLTZE  asked  Attorney  General  Richards  to  define  a                                                               
ATTORNEY GENERAL RICHARDS explained as follows:                                                                                 
     If  you have  funds in  the general  fund that  are not                                                                    
     fully used  at the  end of  the year,  the constitution                                                                    
     provides that  those funds are  subject to  being swept                                                                    
     into the CBR as a  mechanism to sort of require savings                                                                    
     into  the CBR,  and as  a  mechanism to  have that  not                                                                    
     happen when the CBR  sweep would occur, the Legislature                                                                    
     has  periodically or  routinely done  what is  called a                                                                    
     "reverse CBR  sweep" every year  where they,  by three-                                                                    
     quarters vote. Say that funds  that would be subject to                                                                    
     the constitutional  sweep, we go ahead  and appropriate                                                                    
     that all back  to the original place. So  even if funds                                                                    
     are subject to the sweep,  the reverse sweep would undo                                                                    
     it effectively.                                                                                                            
CHAIR STOLTZE observed  that the sweeps were  done in conjunction                                                               
with the Office of Management  and Budget (OMB). He detailed that                                                               
a sweep is not just a  legislative initiative, but rather a joint                                                               
understanding  and effort  with  a lot  of  involvement from  the                                                               
ATTORNEY  GENERAL  RICHARDS  emphasized   that  the  sweeps  have                                                               
historically  occurred with  a generic  statement  with a  couple                                                               
lines without  a detailed fund  itemization. He pointed  out that                                                               
the  number of  accounts that  were uncontroversially  subject to                                                               
sweeps  were  in  the  neighborhood   of  a  couple  of  hundred,                                                               
including: the  Mental Health Trust,  bond reserve  accounts, oil                                                               
and gas tax credit account, and the School Trust Account.                                                                       
9:54:03 AM                                                                                                                    
CHAIR STOLTZE noted  that the Power Cost  Equalization (PCE) fund                                                               
was subject to the sweep.                                                                                                       
ATTORNEY GENERAL RICHARDS continued as follows:                                                                                 
     Power Cost Equalization is a  little different, so I'll                                                                    
     get  to that  one next.  So these  are things  that are                                                                    
     subject  to the  reverse sweep  every year  and there's                                                                    
     never  been a  problem, it's  never been  an issue  and                                                                    
     it's just sort  of occurred as a matter  of course. Now                                                                    
     we  can't  predict a  hundred  percent  that is  always                                                                    
     going to  happen, but we  just think  particularly when                                                                    
     you look  at the history of  the legislature respecting                                                                    
     rules   based  and   customary  framework   around  the                                                                    
     Permanent  Fund, we  have a  high degree  of confidence                                                                    
     that  the  legislature  will continue  to  respect  the                                                                    
     Earnings Reserve Account, even if  it were subject to a                                                                    
     sweep, not saying  it is, and that just  like they have                                                                    
     with  Mental  Health  Trust funds  that  it  is  highly                                                                    
     probable  that a  reverse-sweep would  always occur  in                                                                    
     such a manner as to protect the ERA.                                                                                       
     Now  the only  way  we  think we  find  ourselves in  a                                                                    
     situation where  there can even really  be a legitimate                                                                    
     challenge  is  if in  fact  that  reverse sweep  didn't                                                                    
     happen. So  let's talk about this  very low probability                                                                    
     event,  let's say  that occurs.  Now that  is the  only                                                                    
     situation  where   there  is   going  to  be   a  legal                                                                    
     challenge, we'd  have to change  what we  are currently                                                                    
     doing  pretty dramatically.  Now  if  that happens,  we                                                                    
     believe, and  we'll let the  "brainiacs" go at  it here                                                                    
     in a  minute here  on their  different reasons  why, we                                                                    
     believe that the Supreme Court  has basically said that                                                                    
     even if  there wasn't a  reverse sweep, it  was brought                                                                    
     in inclusive across  a plethora of all  of the hundreds                                                                    
     of state  accounts that  would be  subject to  it, that                                                                    
     the ERA would not be subject  to it for the same reason                                                                    
     that,  well the  Supreme Court  has said  it isn't  and                                                                    
     it's the  same reason that the  Power Cost Equalization                                                                    
     account has not  been viewed as subject  to the reverse                                                                    
     sweep  and for  some  reason our  pension funds  aren't                                                                    
     subject to the reverse sweep.                                                                                              
     Now  the theory  that  the Supreme  Court might  change                                                                    
     their mind and change  the status and classification of                                                                    
     the  ERA, as  I  understand it  is  basically that  the                                                                    
     governor's  plan  would  change the  character  of  the                                                                    
     account  by  having a  situation  where  we are  having                                                                    
     production taxes  going in, so  we have a  new insource                                                                    
     and  we are  now going  to take  money out  of the  ERA                                                                    
     under the  plan for something other  than dividends and                                                                    
     somehow these two  events occurring either individually                                                                    
     or  in conjunction  would change  the character  of the                                                                    
     account in a  way that the Supreme Court  might view it                                                                    
     differently.  Well,   we  don't  think   that's  likely                                                                    
     because look  at history, under  that logic  that means                                                                    
     that when the Legislature  appropriated $3 billion into                                                                    
     the pension  funds, under that logic  then suddenly our                                                                    
     pension  accounts would  be subject  to the  CBR sweep,                                                                    
     suddenly the  Power Cost Equalization, which  has funds                                                                    
     flowing both ways  through it, would now  be subject to                                                                    
     the  CBR sweep  and we  just  think that  is a  legally                                                                    
     mandated or a practical outcome.                                                                                           
     The  final  thing   is  if  we  have   two  really  low                                                                    
     probability  events  occur,   one  is  the  Legislature                                                                    
     changes  the way  it does  the reverse  sweep as  would                                                                    
     impact the ERA,  so that you then have  the genesis for                                                                    
     a legal  challenge, and the  Supreme Court  changes its                                                                    
     point of  view and now says  the ERA is subject  to the                                                                    
     sweep, if these two  low probability events occurred in                                                                    
     sequence in such  as we had to change,  we would change                                                                    
     at that  time, because  we would  have a  decision, the                                                                    
     decision  would have  clarity and  we would  design the                                                                    
     system  around  whatever  the Supreme  Court  said.  So                                                                    
     that's a long way of saying  that we think it is highly                                                                    
     unlikely that  the Earnings  Reserve Account  will ever                                                                    
     be in  a situation where it  is subject to a  sweep and                                                                    
     if it does, then at  that time, just like that decision                                                                    
     will make  the Power Cost Equalization  fund subject to                                                                    
     it,  it would  make our  retirement assets  potentially                                                                    
     subject to  it, we'll deal  with it if that  really low                                                                    
     probability event occurs.                                                                                                  
9:57:42 AM                                                                                                                    
CHAIR  STOLTZE  pointed at  that  Attorney  General Richards  can                                                               
create law  based on his  opinion whereas the Legislature  has to                                                               
go through three constitutional readings,  a majority vote, and a                                                               
signature  by  the  governor.  He  asked  that  Attorney  General                                                               
Richards  clarify that  the PCE  and the  pension funds  were not                                                               
subject to sweep.                                                                                                               
ATTORNEY GENERAL  RICHARDS replied  that the Department  of Law's                                                               
position  has always  been that  the PCE  fund and  pension funds                                                               
were not  subject to sweep and  subjecting them to a  sweep would                                                               
only occur if the court doctrine changed.                                                                                       
CHAIR  STOLTZE  pointed  out   that  Attorney  General  Richards'                                                               
positions and opinions become law.                                                                                              
ATTORNEY  GENERAL RICHARDS  replied  that his  opinions do  under                                                               
rare circumstances, but not on  the subject that he was currently                                                               
9:59:19 AM                                                                                                                    
BILL  MILKS, Assistant  Attorney  General,  Alaska Department  of                                                               
Law, Juneau,  Alaska, explained that the  Power Cost Equalization                                                               
(PCE)  fund sort  of fits  exactly with  the Department  of Law's                                                               
view  regarding an  ERA sweep.  He specified  that Section  17(d)                                                               
[Article  9  of  the  Alaska   Constitution]  regarding  the  CBR                                                               
specifically  identifies  funds that  were  subject  to sweep  as                                                               
funds in the  general fund. He set forth that  the Alaska Supreme                                                               
Court decision  in Hickel v.  Cowper specifically says  there are                                                               
funds  which  are  general  fund or  other  funds  available  for                                                               
appropriation. He  asserted that the court  specifically said the                                                               
17(d) sweep or  payback provision was for  general fund accounts,                                                               
not other  funds. He said  the ERA was  a specific example  of an                                                               
account available for appropriation, but  not subject to a sweep.                                                               
He pointed  out that the  PCE fund was  a fund within  the Alaska                                                               
Energy  Authority that  the Legislature  decided statutorily  for                                                               
the  fund not  to  be in  the  General fund.  He  noted that  the                                                               
Supreme  Court ruling  in  Hickel v.  Cowper  commented that  its                                                               
position or role  was not to change words in  the constitution or                                                               
suggest  other  ways  the   constitutional  provisions  could  be                                                               
written.  He  said  the   Supreme  Court  specifically  addressed                                                               
general fund accounts subject to  sweep and non-general funds not                                                               
subject to  sweep. He set forth  that the ERA was  not subject to                                                               
the sweep based on the decision  from the Supreme Court saying it                                                               
was not.                                                                                                                        
MR. MILKS said  a concern was raised that the  court would change                                                               
its mind  because SB 128 would  change the ERA where  the account                                                               
would be used for general  government appropriations. He remarked                                                               
that  that the  posed  issue could  be raised  on  any bill  that                                                               
started to  use the ERA  for general appropriations. He  said the                                                               
Department of Law does not think  the court would change its mind                                                               
because the  statute had not been  changed and the ERA  was not a                                                               
general fund account.  He summarized that the  Supreme Court knew                                                               
exactly in Hickel  v. Cowper when it said that  the ERA was fully                                                               
available  for  legislative  appropriation  and  not  subject  to                                                               
10:02:40 AM                                                                                                                   
He said  a second issue was  raised that SB 128  would change the                                                               
ERA into  a general fund  account because oil and  gas production                                                               
taxes and additional royalties would  be put into the account. He                                                               
set forth  that SB 128 does  not change the statute  that the ERA                                                               
is a  non-general fund account.  He specified that  the expressed                                                               
language in  the constitution says  "general fund" and  without a                                                               
statute change, the ERA was not  in the general fund. He remarked                                                               
that  the Hickel  case reaffirmed  that the  courts are  going to                                                               
analyze  the CBR  language in  the constitutional  provisions. He                                                               
said the Department of Law does  not think the court would change                                                               
its mind  based on the theory  that additional monies put  into a                                                               
non-general account can be captured  and brought back in a sweep.                                                               
He  concurred with  Attorney General  Richards that  sweeping the                                                               
ERA would mean the PCE fund  and pensions could be swept as well.                                                               
He said  the ERA was a  statutory state savings account  that the                                                               
legislature  has the  full  constitutional  power to  appropriate                                                               
from, to the general fund  and other accounts. He summarized that                                                               
making the ERA a de facto  general fund account for legal reasons                                                               
was very problematic.                                                                                                           
10:06:39 AM                                                                                                                   
CHAIR STOLTZE  responded that he  would go the opposite  way than                                                               
Mr. Milk did.  He remarked that having both  the attorney general                                                               
and judiciary declaring  that the legislature had  broad power to                                                               
create de facto dedicated funds was unusual.                                                                                    
ATTORNEY GENERAL  RICHARDS replied that an  important distinction                                                               
exists between a  dedicated fund and one that was  subject to the                                                               
CBR fund.                                                                                                                       
CHAIR STOLTZE specified that he said de facto dedicated fund.                                                                   
ATTORNEY  GENERAL RICHARDS  explained that  a dedicated  fund was                                                               
essentially one that does not go  to the general fund and was not                                                               
subject to  regular appropriation by the  legislature. He pointed                                                               
out that  the dedicated  fund prohibition  long predated  the CBR                                                               
rule in the constitution and was separate and distinct.                                                                         
10:08:12 AM                                                                                                                   
CHAIR  STOLTZE  stated  that the  Permanent  Fund's  premise  was                                                               
predicated on making an exception  to the dedicated fund rule for                                                               
making  appropriations. He  remarked  that he  had  not seen  the                                                               
Attorney General's office and the  Department of Law get together                                                               
and want to expand legislative power as was asserted.                                                                           
MR. MILKS specified  that the Permanent Fund's  principal was the                                                               
exception to  the dedicated  fund and  could not  be appropriated                                                               
from; however,  voters approved  a constitutional  provision that                                                               
provided  the legislature  with wide  flexibility to  appropriate                                                               
from the  Permanent Fund's income,  resulting in  the legislature                                                               
establishing a separate statutory account, the ERA.                                                                             
10:10:55 AM                                                                                                                   
MEGAN  WALLACE,  Attorney,  Legislative  Legal  Services,  Alaska                                                               
State  Legislature,  Juneau,  Alaska,  stated  that  the  ERA  is                                                               
composed solely of income generated  from the Permanent Fund. She                                                               
said  SB  128,  along  with  the  governor's  proposed  operating                                                               
budget,  seeks   to  add  additional   revenue  to  the   ERA  by                                                               
transferring the balance of the  CBR fund to the Statutory Budget                                                               
Reserve (SBR)  fund and then  appropriate $3 billion to  the ERA.                                                               
She  said  Legislative  Legal  Services'   opinion  is  that  the                                                               
proposed change in composure of  the ERA creates potential issues                                                               
pertaining to the  sweep under Article 9, Section  17(d). She set                                                               
forth  that   the  question  was  whether   the  legislature  can                                                               
purposely  put  general  fund  money   into  the  Permanent  Fund                                                               
temporarily  to avoid  a separate  constitutional mandate  and by                                                               
doing that whether they can  retrieve that money that is supposed                                                               
to be  held temporarily in the  Permanent Fund. She said  the ERA                                                               
is a  statutory account  in the Permanent  Fund. She  pointed out                                                               
that  Article  9, Section  15,  relating  to the  Permanent  Fund                                                               
provision, only mentions two things:  principal and income of the                                                               
Permanent  Fund.  She  asserted  that the  constitution  and  the                                                               
amendment that  established the Permanent Fund  did not expressly                                                               
take into  the adding of  additional funds to the  Permanent Fund                                                               
and the Supreme Court did not  address the issue in the Hickel v.                                                               
Cowper case.  She added that  the Office of the  Attorney General                                                               
had previously  issued opinions that the  placement of additional                                                               
monies  into   the  Permanent  Fund  was   not  retrievable.  She                                                               
summarized  that an  issue may  arise if  additional revenue  and                                                               
general fund monies were eventually transferred into the ERA.                                                                   
10:14:28 AM                                                                                                                   
CHAIR  STOLTZE  stated  that  there   was  a  discussion  by  the                                                               
assistant attorney  general about a  dissection of the  intent of                                                               
the  voters. He  said he  did not  recall if  there was  specific                                                               
debate amongst  voters regarding  earnings and  sub-accounts, the                                                               
focus  was  on  saving  money.  He asked  if  the  Supreme  Court                                                               
actually  dissects  what  voters  said  and  meant  or  just  the                                                               
MS. WALLACE replied that she was  not sure that the Supreme Court                                                               
reached the level  of discussion that addressed  what voters said                                                               
or  meant.  She surmised  that  the  Supreme Court  may  consider                                                               
legislative history and voting record.                                                                                          
CHAIR  STOLTZE asked  Ms. Wallace  to  verify that  based on  Ms.                                                               
Wallace's legal research  that the courts have  not dissected and                                                               
analyzed specific public intent.                                                                                                
MS. WALLACE  answered not  that she  was aware  of. She  said she                                                               
would have to  reread the beginning of the Hickel  v. Cowper case                                                               
to see if the Supreme Court went as far as public intent.                                                                       
CHAIR STOLTZE conceded that sometimes  the public has a different                                                               
opinion  than  what  they  say   and  think  when  testifying  in                                                               
MS. WALLACE noted that part  of the reason that Legislative Legal                                                               
Services raised  an issue as to  whether or not the  placement of                                                               
additional funds  into the  Permanent Fund  through the  ERA were                                                               
retrievable  goes  back to  the  Permanent  Fund section  of  the                                                               
constitution that  states the principal  should be used  only for                                                               
income-producing investments. She said when  more money is placed                                                               
into  the  Permanent  Fund's  principal,  more  income  would  be                                                               
generated  and the  issue  pertains to  not  having an  expressed                                                               
provision that  allows for  the temporary  placement of  money in                                                               
the  Permanent   Fund  to   then  be   used  for   general  funds                                                               
expenditures  or financing  operation costs.  She specified  that                                                               
appropriations out  of the ERA  and what the  appropriations were                                                               
used  was not  an issue.  She  reiterated that  the larger  issue                                                               
pertained to the temporary placement  of funds into the Permanent                                                               
Fund itself.                                                                                                                    
10:17:33 AM                                                                                                                   
SENATOR  WIELECHOWSKI   said  he  appreciated  and   trusted  Ms.                                                               
Wallace's opinion.  He conceded  that no one  knows what  a court                                                               
would  decide, which  creates a  huge amount  of instability.  He                                                               
asked Ms.  Wallace to  verify that the  legislature has  tried in                                                               
the past  to put money  into the  Permanent Fund and  an attorney                                                               
general had been  very clear that money could not  be placed into                                                               
the Permanent  Fund. He  cited an opinion  on the  Permanent Fund                                                               
from  Attorney General  Avrum Gross,  dated August  31, 1977.  He                                                               
asked Ms. Wallace to provide additional historical information.                                                                 
MS.  WALLACE  noted  that  she  had written  a  memo  to  Senator                                                               
Wielechowski regarding  Attorney General Gross's opinion  in 1977                                                               
[addresses  an  extra appropriation  to  the  Permanent Fund]  in                                                               
addition  to other  attorney general  opinions that  affirmed the                                                               
1977 opinion.  She pointed out  that the legislature in  the past                                                               
had loaned  some money  to the Permanent  Fund where  the initial                                                               
intent was  to get the  money back,  but after some  issues arose                                                               
the legislature ultimately forgave the  loan and the money stayed                                                               
in the Permanent Fund and became a part of the principal.                                                                       
10:19:34 AM                                                                                                                   
ATTORNEY GENERAL  RICHARDS pointed out that  the attorney general                                                               
opinion  in   1977  predated  the   existence  of  the   ERA  and                                                               
specifically addressed  how to handle the  Permanent Fund corpus.                                                               
He confirmed  that his  office has  the same  opinion as  in 1977                                                               
that  funds  going into  the  Permanent  Fund principal  are  not                                                               
subject to be  pulled out by general  appropriation. He specified                                                               
that  the ERA  was  created  after the  1977  opinion  and was  a                                                               
creature of statute subject to appropriations.                                                                                  
SENATOR WIELECHOWSKI  asserted that there was  obvious concern in                                                               
Attorney  General Richards'  office about  the transfer  of money                                                               
from  the CBR  to the  Permanent Fund  because the  bill proposes                                                               
that the  money be transferred from  the CBR to the  SBR and then                                                               
to  the  Permanent  Fund.  He  asked why  the  money  was  to  be                                                               
transferred in the proposed circuitous manner.                                                                                  
ATTORNEY GENERAL RICHARDS  replied that until the  issue came up,                                                               
he was  unaware of the  proposed transfer. He disclosed  that the                                                               
transfer process  was a budgetary  decision and was not  one that                                                               
had legal  significance. He remarked  that the  proposed transfer                                                               
was an  artifice of how  the budget was  put together. He  said a                                                               
direct  transfer from  the CBR  to  the ERA  as an  appropriation                                                               
would be fine.                                                                                                                  
10:20:56 AM                                                                                                                   
CHAIR  STOLTZE  noted  previous  testimony  by  Attorney  General                                                               
Richards  and Mr.  Milks  that voters  had  discerned and  parsed                                                               
their opinion on sub-accounts, but  their next testimony was that                                                               
the whole discussion predated [the ERA].                                                                                        
SENATOR  MCGUIRE   remarked  that  based  on   both  the  opinion                                                               
predating the ERA and sound  law, the testimony had narrowed down                                                               
exactly  right where  the issue  was not  the corpus.  She opined                                                               
that the  issue was the ERA,  the definition of income,  and what                                                               
goes into the ERA.                                                                                                              
She explained that when looking at  solutions, she did not have a                                                               
goal  to  entirely  solve  a  gap of  $5.2  billion  because  she                                                               
questioned the size and cost  of government. She remarked that SB
128 was good, but a little  bit risky. She asserted that her plan                                                               
[SB 114]  kept all of  the elements in  place that have  had long                                                               
running opinions, CBR,  and ERA exactly where they  are. She said                                                               
the ERA can be both shared  in dividends and shared in the amount                                                               
going to  the government itself. She  stated that the risk  in SB
128 was not inappropriate, but the  income going into the ERA was                                                               
a novel  issue that would probably  have to be decided  in court.                                                               
She said the committee, Legislature,  and executive branch has to                                                               
decide if  the state  wants to  take on the  risk proposed  in SB
10:23:37 AM                                                                                                                   
ATTORNEY  GENERAL RICHARDS  conceded that  he was  a good  enough                                                               
lawyer to  know that  he "can't  fence a  phantom" and  he "can't                                                               
prove a negative."                                                                                                              
SENATOR MCGUIRE answered right.                                                                                                 
ATTORNEY GENERAL  RICHARDS remarked that someone  can always come                                                               
up with  a legal  theory that  calls into  question what  you are                                                               
trying to  do and the response  is always, "I don't  think that's                                                               
how  the  court would  rule."  He  said  he obviously  could  not                                                               
affirmably say how  the court would rule. He  specified that what                                                               
he was trying  to do was put context around  the decision process                                                               
and why the  administration was not concerned about  the risk. He                                                               
set  forth that  the  same risk  theoretically  applied across  a                                                               
whole  series of  state accounts,  like  the PCE  fund and  other                                                               
pension  funds  where  the  funds were  dealt  with  through  the                                                               
reverse sweep. He  asserted that the custom  around the Permanent                                                               
Fund makes  it more likely that  the reverse sweep would  be used                                                               
as  a mechanism  to protect  the  ERA. He  said in  the very  low                                                               
probability  event that  the ERA  was  not subject  to a  reverse                                                               
sweep,  than   a  court  decision  would   provide  guidance.  He                                                               
summarized that the risk from  such low probability events strung                                                               
together should  not be a  driver in the decision  making process                                                               
because  the Legislature  has shown  a demonstration  and history                                                               
that they are very likely to follow.                                                                                            
10:25:22 AM                                                                                                                   
SENATOR WIELECHOWSKI  noted that David Teal,  Legislative Finance                                                               
Director, has also expressed concern.  He said the combination of                                                               
Mr.  Teal,  Legislative  Legal Services,  and  the  old  attorney                                                               
general opinions made it very clear that there was concern.                                                                     
ATTORNEY GENERAL RICHARDS  replied that he was  not dismissing or                                                               
diminishing  Mr.  Teal's  or   Legislative  Legal's  opinion.  He                                                               
specified that the same expressed  concern exists through a whole                                                               
series  of state  accounts  that  were dealt  with  by using  the                                                               
reverse-sweep  mechanism. He  set forth  that the  administration                                                               
has a high  confidence level that the  reverse-sweep mechanism as                                                               
a threshold matter  would protect the plan for  the decades going                                                               
10:27:14 AM                                                                                                                   
CHAIR STOLTZE  pointed out  that the issue  regarding SB  128 was                                                               
non-partisan and  noted that both Legislative  Legal Services and                                                               
Legislative Finance have spoked out against the bill.                                                                           
ATTORNEY  GENERAL   RICHARDS  agreed   that  there  might   be  a                                                               
difference  of  opinion of  how  the  law  might be  applied.  He                                                               
revealed that  he has not heard  any difference of opinion  as to                                                               
the robustness of the historical practice of the reverse sweep.                                                                 
CHAIR STOLTZE asserted that what was done in the past is not                                                                    
always right.                                                                                                                   
10:29:29 AM                                                                                                                   
SENATOR  MCGUIRE  reiterated   that  Attorney  General  Richards'                                                               
argument was sound and the  risk was not inappropriate. She noted                                                               
a  higher level  of scrutiny  would be  applied and  explained as                                                               
     This issue is going to raise  up to a higher level than                                                                    
     maybe  we've seen  in a  couple of  decades and  that's                                                                    
     where  I am  concerned  about  the potential  challenge                                                                    
     that comes. I think you  are already seeing posts about                                                                    
     starting a  citizens' referendum  on whatever it  is we                                                                    
     do, whether it's  your plan or mine,  or a combination,                                                                    
     so you're  going to have  that factor. You're  going to                                                                    
     have  an extreme  political microscopic  focus on  this                                                                    
     because historically  the Earnings Reserve  Account has                                                                    
     only   statutorily  been   dedicated   to  paying   out                                                                    
     dividends, that's  frankly the  point, and  people when                                                                    
     it concerns their money that's  going into their pocket                                                                    
     they get,  rightly, they become  alert and aware.  So I                                                                    
     think there will be an  unprecedented focus on whatever                                                                    
     it is that  we do and I think every  element of it will                                                                    
     be  critiqued   and  challenged   and  I   think  that,                                                                    
     particularly when  it comes to  the sweep and  the CBR,                                                                    
     because  historically those  are places  where minority                                                                    
     interests  are   protected.  So  it's  almost   like  a                                                                    
     layering of  constitutional issues, in my  opinion. But                                                                    
     I  also  don't want  to  say  too  much on  the  record                                                                    
     because I  will say this  that if  it's the plan  we go                                                                    
     with,  I want  to defend  it fully  because I  want the                                                                    
     state to  be in  a good economic  position. I  do think                                                                    
     that  you  have made  sound  arguments  on the  reverse                                                                    
     sweep  and you  are right,  there's nothing  that we've                                                                    
     said here on the  record that challenges that mechanism                                                                    
     that  has  been,  if  not  articulated  in  custom  and                                                                    
     practice, it's  survived the  test of  time and  it has                                                                    
     even survived  in arguably  dedicated funds  that could                                                                    
     also  be somewhat  controversial when  you think  about                                                                    
     the impact of the PCE,  when you think about the impact                                                                    
     of the  pension fund, those also  have very significant                                                                    
     financial impacts on Alaskans. So  I can see it, I mean                                                                    
     I can see it surviving and  I will leave it at that and                                                                    
     again say continue  to put more and more  on the record                                                                    
     because I  think it  will be challenged  if it  is what                                                                    
10:31:59 AM                                                                                                                   
SENATOR COGHILL  stated that the  retirement system  was probably                                                               
more  constitutionally protected  than  the  PCE, something  that                                                               
probably  was  not  good  based  on Article  12,  Section  7.  He                                                               
conceded that  the state was  probably living in danger  with the                                                               
PCE fund knowing  that it was a dedicated fund.  He said the only                                                               
thing  he was  struggling with  was whether  the ERA  was in  the                                                               
Permanent Fund's corpus. He explained  that his understanding was                                                               
that  the ERA  has been  outside  of the  Permanent Fund  corpus,                                                               
therefore the  ERA was  sweepable. He opined  that the  state may                                                               
have stood in  danger for many years in which  case the state has                                                               
a larger problem of violating the constitution.                                                                                 
MR. MILKS  replied that the PCE  fund was not a  general fund. He                                                               
explained  that  the  constitutional-sweep  provision  identifies                                                               
general funds and the administration  does not have concern about                                                               
the ERA  being subject to  the sweep because  the fund is  not in                                                               
the general fund.                                                                                                               
SENATOR MCGUIRE agreed  that the ERA was clearly not  part of the                                                               
Permanent   Fund  corpus.   She  concurred   that  the   ERA  was                                                               
statutorial  and  not a  constitutional  creation.  She said  the                                                               
Hickel  opinion has  been unchallenged  and establishes  that the                                                               
ERA earnings are  not sweepable. She set forth  that the question                                                               
regarding  the  ERA pertained  to  comingling  and asked  if  the                                                               
administration agreed.                                                                                                          
10:34:42 AM                                                                                                                   
ATTORNEY GENERAL  RICHARDS answered that he  agreed and specified                                                               
that he did  not agree that the comingling changes  the nature of                                                               
the ERA.                                                                                                                        
SENATOR  MCGUIRE  replied  that   she  understood  that  Attorney                                                               
General Richards did not believe  that the comingling changes the                                                               
nature of  the ERA. She pointed  out that the law  was very sound                                                               
with  respect to  the  distinction  between the  constitutionally                                                               
created corpus,  the ERA,  and the earnings  that have  come into                                                               
the  ERA as  not being  sweepable. She  set forth  that the  next                                                               
level  pertained to  the comingling  of assets  and specified  as                                                               
     The  next level  is this  new creation,  this sovereign                                                                    
     wealth  fund, not  a percentage  of market  value using                                                                    
     existing  structures or  some of  the other  proposals,                                                                    
     the new  idea where you are  comingling assets together                                                                    
     in an earnings structure.  The question that we've been                                                                    
     trying to  get at  is whether  or not  that would  be a                                                                    
     challenge,  the   sweep-ability  of   those  additional                                                                    
     assets that you comingle.                                                                                                  
ATTORNEY GENERAL RICHARDS replied as follows:                                                                                   
     As my final  word, I'm just going to come  back to what                                                                    
     I've said  now several times  which is this issue  is a                                                                    
     matter  of relevance  for  legal  challenge, only  even                                                                    
     arises if we don't do the reverse sweep.                                                                                   
SENATOR MCGUIRE responded right.                                                                                                
ATTORNEY GENERAL RICHARDS summarized as follows:                                                                                
     It's a  pretty low  probability that  we even  ever can                                                                    
     get  to the  legal issue  based upon  the practices  of                                                                    
     this body, in my view.                                                                                                     
10:36:09 AM                                                                                                                   
MS. WALLACE summarized Legislative Legal Services' concerns as                                                                  
     I think  that I  would just  want to  rearticulate that                                                                    
     it's  our office's  opinion that  the risk  is twofold:                                                                    
     it's  not only  that there's  a risk  that some  of the                                                                    
     money that  is transferred or  placed in the  ERA might                                                                    
     be  deemed sweepable  by the  Supreme  Court, but  also                                                                    
     that  the  placement  of that  additional  revenue  and                                                                    
     transfer of money  of the CBR and SBR  when it's placed                                                                    
     into  the  Permanent  Fund  whether   or  not  that  is                                                                    
     retrievable  and it's  our office's  opinion that  that                                                                    
     risk is more  significant than whether you  have to pay                                                                    
     back a sweepable amount or a sweep that didn't occur.                                                                      
10:37:02 AM                                                                                                                   
CHAIR STOLTZE commented that the committee did not get to a                                                                     
decisive conclusion on SB 128, but good information was put on                                                                  
the table.                                                                                                                      
[SB 128 was held in committee.]                                                                                                 

Document Name Date/Time Subjects
SB 127 Sponsor Statement.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Sectional Analysis by Sponsor.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Fiscal Note - DCCED-DOI 02-05-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Backup Document - Credit-Based Insurance Scores Consumer Brochure - American Insurance Association.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Email - Brenda Pearce 2-4-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Email - Bob McVitty 2-9-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Email - Stan Tebow 2-8-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Letter - NAMIC 1-25-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Letter - Win Fowler GEICO 2-5-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Letter - State Farm.pdf SSTA 2/11/2016 9:00:00 AM
SB 127