Legislature(2023 - 2024)ADAMS 519
05/08/2023 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HJR2 HB38 | |
| HB21 | |
| HB112 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 112 | TELECONFERENCED | |
| + | HB 21 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HJR 2 | TELECONFERENCED | |
| += | HB 38 | TELECONFERENCED | |
HOUSE JOINT RESOLUTION NO. 2
Proposing amendments to the Constitution of the State
of Alaska relating to an appropriation limit.
HOUSE BILL NO. 38
"An Act relating to an appropriation limit; relating
to the budget responsibilities of the governor; and
providing for an effective date."
1:35:48 PM
Co-Chair Foster invited questions on HJR 2 and HB 38.
Representative Coulombe asked if revenue put into accounts
such as the Permanent Fund Earnings Reserve Account (ERA)
would be included in the spending cap.
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
responded that one of the exclusions to the cap was any
appropriation to the Permanent Fund. Any appropriation to
the fund was permitted to exceed the cap. In addition, the
Legislative Finance Division (LFD) would not include any
appropriations in its calculations of the limit that would
require further appropriations to spend. For example,
putting money into the Statutory Budget Reserve (SBR) would
not qualify as an appropriation towards the limit.
Representative Coulombe asked if monies put into the higher
education fund by the legislature would be subject to the
cap.
Mr. Painter responded that the situation would invoke the
cap because the monies would have to be appropriated out of
the fund in order to be spent. Appropriations into the fund
would not be subject to the cap but appropriations out of
the fund would be subject to the cap.
Representative Ortiz asked whether the spending cap
included the Permanent Fund Dividend (PFD) and the capital
budget.
Mr. Painter responded that the cap would not include the
PFD, but it would include the capital budget; however,
there was the ability to exceed the statutory
appropriations limit for capital expenditures with a two-
thirds vote.
Representative Ortiz asked if it was safe to say that the
impact of the constitutional and statutory limit on
spending was a limit on the operating budget on its own.
Mr. Painter responded, "to some extent, yes," but it would
require a two-thirds vote to exceed the limit.
Representative Ortiz asked if the bill could still act as
an effective spending limit without including the PFD,
which was the most significant spending item.
Mr. Painter responded that it would act as a limit on
expenditures for all other items, but it would not limit
how much money could be spent on the PFD.
1:40:12 PM
Representative Galvin commented that the state has
essentially used the Base Student Allocation (BSA) as a
regular formula and oftentimes funds outside of the formula
had been incorporated in order to cover costs. She
understood that the limit was calculated by looking at the
past five years of inflation and averaging the increases.
She asked what would happen if there was a significant bump
in education costs and wondered if there would need to be a
two-thirds vote to increase spending.
Mr. Painter responded that the limit was calculated based
on a five-year average of gross domestic product (GDP)
adjusted for inflation. If there was a spike in inflation
in the current year, it would be captured in the inflation
adjustment and would impact the prior year's figures. For
example, the current year would use the prior year's
inflation rate, which was 8 percent. By using prior year
inflation, the calculation could be made using a known
amount, which was the approach proposed in the legislation.
If it was based on projected inflation, the calculation
could adjust every minute depending upon what was happening
in real time; however, the number would be an estimate as
opposed to a known number. There was an inherent tradeoff:
the calculation could be based on inflation in the current
year but could only be an estimate, or the calculation
could be based on the inflation rates in the prior year and
be a known number.
Representative Galvin understood that the state was not
keeping up with inflation rates, particularly in education
spending. She wondered what would happen if the numbers
were based on figures that were not accurate. For example,
she wondered if the state would be at a disadvantage if the
increase was only 2.5 percent as it would still not match
inflation rates.
Mr. Painter responded that it was a policy call.
Representative Galvin asked if Mr. Painter would agree that
there had not been incremental increases in the last seven
years that would have kept up with inflation.
Mr. Painter responded that the BSA had increased by $30 in
the present year which was the first increase since 2017.
Representative Galvin asked what percentage would be
represented by the $30 increase.
Mr. Painter responded that it was about half a percent.
Representative Galvin asked for clarity that it was a 0.5
percent increase.
Mr. Painter responded in the affirmative.
Representative Galvin noted that the percentage floor was
important when it came to education.
1:45:33 PM
BERNARD AOTO, STAFF, REPRESENTATIVE STAPP, responded that
the five year trending average when applied to the current
year would total $21 billion. He explained that the 11
percent figure represented the floor, which would equal
about $4.9 billion as proposed by HB 38 and about $5.1
billion as proposed by HJR 2. The floor could be adjusted
according to the percentages.
Representative Galvin asked Mr. Aoto to translate the
figures to BSA dollars.
Mr. Aoto responded that a 1 percent increase to the limit
would be about $475 million. The proposed $680 increase to
the BSA would equal to about a $175 million increase. He
suggested that a 1 percent increase would allow for more
money to be spent on the BSA.
Representative Galvin understood that instead of there
being a $175 million incremental increase, there would be a
$475 increase if the legislation were to pass. She asked if
her understanding was correct.
Mr. Aoto responded that the increase in the percentage
would increase the allotted spending amount to about $475
million. The legislature would need to make a policy call
on how to spend the money.
Representative Galvin understood there would be $475
million available, but the legislature would choose the way
in which the money would be spent and whether the money
would be incorporated into the spending floor for
education.
Mr. Aoto replied that the legislature had the power of
appropriation.
Co-Chair Foster suggested that the bill's sponsor respond
to the questions.
Representative Stapp commented that any type of
appropriation limit had to be tied to something. The
existing appropriation limit was tied to a "hard number"
while the bills before the committee were tied to a percent
of the state's gross economic output. He suggested that if
the percentages were changed upwards that there would be
more space created in the budget to appropriate money for
operating and capital expenditures. If the statutory limit
in HB 38 was increased, capital expenditures could
theoretically fall underneath the appropriation.
1:49:54 PM
Representative Josephson recalled the figure $5.4 billion.
He understood neither HB 38 nor HJR 2 required a division
between capital and operating.
Mr. Aoto responded that the 11 percent figure under HJR 2
would be $4.8 billion, and 13 percent would be $5.1
billion. He clarified that the figures represented the
dollar amounts if the legislation was implemented by FY 24.
Representative Josephson commented that regardless of
whether HJR 2 or HB 38 were to pass, the capital and
operating expenses would not be divided. Both pieces of
legislation proposed a single and unified limit.
Mr. Aoto responded that there was a singular limit but
there was a provision on page 2, line 4 of HJR 2 stating
that a two-thirds vote would be required for the
legislature to appropriate an additional amount for capital
improvements in excess of the limit.
Representative Josephson asked what was anticipated for
capital expenditures when the 11 percent and 13 percent
figures were decided upon.
Representative Stapp responded that the 11 and 13 percent
numbers were amended downward in the previous committee of
referral [House Ways and Means Committee]. He thought that
while it was important to have an appropriation limit, he
did not want to implement legislation that would incumber
the legislature's ability to make investments in the state.
He thought a happy medium could be achieved if the
percentages were amended upwards.
Representative Josephson thought Representative Stapp must
have had a target dollar amount. He clarified that he
wanted to know the size of the capital budget under HJR 2
in the event that a two-thirds vote was not achieved.
Representative Stapp responded that it would be any type of
appropriation that fell within the statutory limit of the
bill. He noted that it could be amended. He deferred to his
staff to elaborate.
1:53:34 PM
Mr. Aoto responded that the total would be about $4.8
billion. The operating budget plus the capital budget would
need to equal $4.8 billion if the legislature did not
achieve a two-thirds vote.
Representative Josephson asked if a legislature could
"suffocate" the capital budget and supplant and grow
operating budgets.
Representative Stapp understood that Representative
Josephson was asking if the legislature could effectively
spend the entirety of the operating budget up to the
spending cap and not have a capital budget. He asked if his
understanding of the question was correct.
Representative Josephson replied in the affirmative. He
wanted information on the de minimis match, which was
around $100 million.
Representative Stapp responded that it could theoretically
be done if there was enough revenue. He did not think the
legislature would ever intentionally suffocate the capital
budget and argued that the legislature already had the
ability to do so if it wanted.
Representative Josephson understood that the administration
of past Governor Sean Parnell saw revenue that could have
"floated all boats." There was $95 million designated to
the Susitna-Watana Dam two years in a row under the Parnell
Administration. If a similar circumstance occurred in the
present day and an individual was advocating for a BSA
increase, the individual would be at odds with people who
wanted a larger capital budget. He understood that there
would be plenty of money to satisfy the capital budget and
the public school advocate, but the two parties would be
battling for space. He asked if his understanding was
correct.
Representative Stapp responded that Representative
Josephson's description was one way to articulate the
situation. He would argue that there was already a battle
going on. He thought that a threshold to achieve a capital
budget was a more equitable solution for the bulk of the
legislature and he would hope that it would be more likely
that the legislature would be in favor of a more robust
capital budget that met the needs of the entire state
rather than a limited amount.
Mr. Aoto added that the financial situation the legislature
was presently in was not because of a cap, but because of a
lack of revenue.
Representative Josephson understood that if the legislation
were to pass, the legislature could have all the revenue it
wanted but could not spend beyond the cap to solve
identified problems.
Mr. Aoto responded that there was a list of exceptions in
which the legislature could appropriate beyond the cap,
such as a disaster declaration. The instances that would
qualify as exceptions to the limit were subject to the
opinion of the legislature.
1:58:03 PM
Co-Chair Johnson asked if the green section of slide 12 [in
the previously presented PowerPoint presentation titled
"HJR2 GDP Based Spending Cap" (copy on file)] represented
the full amount of the percent of market value (POMV)
revenue that would be drawn. She wondered if the amount was
split out in any way.
Mr. Painter responded in the affirmative. The entire POMV
draw was shown as unrestricted general fund (UGF) revenue
and the PFD was shown as the unfunded expenditure.
Co-Chair Johnson understood that some were concerned about
there being taxes without a spending limit and that the PFD
was not subject to the limit. She did not think the PFD was
being considered in the equation if 50 percent of revenue
was not taken out for the PFD. She asked Representative
Stapp to expand on the contradiction that some individuals
did not want any new taxes unless there was a spending
limit, but the PFD was not subject to the spending limit.
She asked him to elaborate on the way in which the PFD's
exclusion would impact taxes and the spending limit.
Representative Stapp responded that slide 13 of the
presentation addressed the question. The slide showed the
governor's proposed 15 percent constitutional limit on GDP.
The constitutional limit would effectively put all
available revenue within the spending cap. The proposed 15
percent of GDP constitutional limit could theoretically
allow for all money to be appropriated through government
expenditures if there was a $0 PFD. He recognized that the
PFD was the largest appropriation the legislature made. If
half of the POMV was appropriated towards the PFD, there
would not be enough revenue to reach the current limits
unless new revenues were added.
Co-Chair Johnson understood that excluding the dividend
from the cap would have a different effect because it was
tied to GDP. She thought information was being conflated
and wanted to ensure that it was noted that it was tied to
GDP and was not based on traditional elements of the
spending cap.
2:03:04 PM
Mr. Painter commented that appropriations were often
constrained by revenue and any spending limit would not be
as important when revenue was the constraint. A situation
in which a spending limit would have made a difference was
in the prior year's session because revenue was not as much
of a constraint. Instead of a revenue constraint, the
constraint was the desire to not spend all of the money. A
spending limit would serve to cap the years with high
revenue. There could also be a cap set on oil which would
provide a different constraint.
Mr. Aoto responded that the value of using a GDP-based
spending cap was that it would capture a number of
different aspects of the economy that should be monitored
by the legislature, such as general population and
inflation. It also would allow the legislature to factor in
elements such as consumer spending, business spending, net
imports, and net exports when deciding how to appropriate
funds. There were previous iterations of spending caps that
tried to use one aspect of population inflation that
resulted in a more draconian and restrictive spending cap
than the one proposed by HJR 2.
Co-Chair Johnson asked if a floor was not needed because of
the existence of the POMV. She did not want to craft a
situation in which the spending cap would force austerity
on the state. She understood that the Permanent Fund draw
would always provide the needed funds if it were based on a
balanced budget. She asked if there was ever a time in
which the GDP spending limit would be so low that the
legislature would not be able to meet the needs of
Alaskans.
Representative Stapp responded that in the event of a
fiscal disaster in which there were multiple years of
declining GDP growth, it would be more likely that there
would be a revenue limit and not a spending limit. If there
was a serious drop in GDP over a five-year period, there
would also be a significant drop in the spending limit and
there would be an increase in out-migration from the state.
The government adjusted its spending downward when there
was a major out-migration in state in the 1980s and he
thought the same strategy could be implemented if the
situation were to happen again. He thought it would be wise
to reevaluate spending levels if there was another surge in
out-migration. He did not foresee the scenario occurring
but suggested that Mr. Painter elaborate on the question.
Mr. Painter commented that when the limit was set in FY 83,
expenditures were close to the limit in the first few years
and then spending was flat for nearly two decades;
therefore, the limit was not a meaningful factor. A similar
situation could occur with a GDP limit, but the limit
likely would not have grown as quickly as the figure
representing population plus inflation because GDP would
have also been impacted. In the 1980s, revenue was the
reason for the state's limited expenditures.
2:09:11 PM
Representative Hannan wanted more information about the
idea of excluding the PFD from the spending caps. She
understood the thought process in comparison to the current
spending cap; however, the proposed spending cap seemed to
be higher than some of the state's constitutionally
mandated spends. She asked for more information on the
reason for holding the PFD outside of the spending cap.
Representative Stapp opined that the PFD was a separate
political issue that warranted its own resolution. He
thought that if the percentages of the cap were to be
amended to 14 percent or 15 percent, it would include all
available revenue. He thought it was interesting to note
that the PFD had been subject to a significant swing in
variation of appropriation. If a hard limit was fixed in
the bill, it would effectively require a policy call on the
dividend within the spending cap. If all available revenue
fell under the cap, a dividend amount could be inferred
within the cap.
Representative Hannan asked if Representative Stapp found
any jurisdictions in which a spending cap was separate from
a taxation policy. She acknowledged that there were no
individual taxes implemented in Alaska and that most states
that had taken on a spending cap did so in order to govern
a sales tax, income tax, or property tax. She wondered if
Representative Stapp's research found any jurisdictions
where revenues and spending caps were separate.
Representative Stapp asked for clarification on whether
Representative Hannan was asking if had found a spending
cap in his research that was divorced from taxation.
Representative Hannan responded in the affirmative.
Representative Stapp replied that the current spending cap
in the state had no bearing on taxation and any variation
in spending caps that were indexed at population and
inflation had no impact on tax policy. He thought GDP was a
better metric to use when coordinating a tax policy because
if there was a more robust private sector, there would be a
better base upon which to implement taxes.
Representative Hannan suggested ignoring Alaska as the
state was the exception and not the rule. She offered
Colorado as an example and explained that an implemented
spending cap was immediately followed by tax increases. She
asked if there was any state apart from Alaska that had set
a spending cap without also addressing taxation policy in
the state.
Representative Stapp responded that unlike every other
state, Alaska did not have a broad based tax. The concept
behind the limit was to encourage responsible government
appropriations. He could not think of an example of another
state apart from Alaska that had implemented a spending cap
withing addressing taxation policy because Alaska did not
have a broad based tax.
2:14:13 PM
Representative Galvin wondered whether a spending cap would
bring about more transparency, accountability, and
responsiveness, which is what she thought Alaskan voters
wanted. She was aware of a paper by the Economic Policy
Institute that argued that spending caps were not
necessarily beneficial in achieving the goal of
transparency. When there was a shock to the economic system
such as the 2008 recession, Alaska was not impacted as
strongly as other states because Alaska was able to quickly
invest. She recalled that in 2008, Alaska invested around
25 percent into the nation's economy and saved over 700,000
jobs. She asked Mr. Painter to speak about the ways in
which the state would be impacted if there was a similar
event in the future, but the state had implemented a
spending cap. She also asked how a disaster would be
defined and how it was determined that a situation was dire
enough to warrant spending beyond the cap.
Mr. Painter responded that the definition of disaster was
in statute and the governor had the power to declare
disasters in response to natural disasters, diseases, war,
or other similar events. He did not think economic
disasters were included in the definition. He thought that
if the GDP crashed and a disaster was severe enough, a GDP-
based spending limit could potentially mean that Alaska
could not respond; however, it was based on a five-year
average with a lag. If a GDP-based spending limit was in
place during the current session, the data used to
determine the limit would be the previous year's GDP and it
would not necessarily be restrictive. If the statutory
limit was set close to the current expenditures and the
constitutional limit was set higher, the expenditures for
economic disasters would likely be capital spending, which
was the case in 2008. The capital funds could be spent with
a two-thirds majority under the spending cap. It could
become problematic if there was a significant long-term
disaster, but the state would have had to have significant
savings in order to spend the funds in the first place. The
spending limit would not be the limiting factor if there
was a multi-year depression. The statutory limit could also
be amended by future legislatures with a simple majority
vote of both bodies.
Representative Galvin asked how long the recession in 2015
lasted in Alaska.
Mr. Painter responded that he did not know as far as a
formal definition of recession from a macro-economic
perspective. There were deficits from FY 15 through FY 21,
but that alone did not necessarily qualify the time period
as a recession.
Representative Galvin asked if Alaska was sensitive to
extreme fluctuations.
Mr. Painter responded that the economy in the state was
more volatile than most states. It was also not necessarily
correlated to the nation's economy. Alaska had a relatively
volatile economy because of its dependence on a volatile
resource.
2:20:33 PM
Representative Josephson asked what the current
constitutional limit from 1982 would be as a percent of
GDP.
Representative Stapp responded that he would guess it would
be around 25 percent or 26 percent. He deferred to Mr.
Painter.
Mr. Painter replied that he thought it would be approaching
50 percent because the 13 percent level represented about
$5.8 billion and the current constitutional limit was about
$11.3 billion. If the figures were doubled it would total
about 50 percent. He was not certain of the figure and
would return to the committee with a more precise
calculation.
Representative Josephson noted that Representative Stapp
had mentioned a five-year economic downturn. He asked
Representative Stapp to repeat his comments.
Representative Stapp responded that the GDP was based on a
five-year rolling average. If there was a severe economic
downturn for five consecutive years, downward pressure
would be placed on a GDP-based spending limit based on an
average.
Representative Josephson noted that there was an economic
downturn from 1933 through 1938 and the Roosevelt Recession
immediately followed in 1937. He relayed that the response
at the time was a Keynesian approach to prime the public
and get the economy going and to avoid the European
experience of complete political disruption. He noted that
the situation would not occur in the same way in Alaska
because it was a state and not a country; however, given
the countercyclical nature of the state and the fact that
the 2008 recession was a "blip" to Alaska, he asked if
there would be circumstances in which the state was unable
to respond and it would be watching events unfold that the
state could theoretically resolve but could not take
action.
Representative Stapp responded that the big difference was
that the state could control fiscal policy but not monetary
policy. In the event of a recession, the state would be
limited by a collapse in all available revenue and there
would be massive out-migration. He thought that the best
way to prepare for a disaster scenario would be to amend
the percentages upward. He reiterated that he was not
worried about a spending cap having a negative impact on
the state in a disaster because there would be a collapse
in all revenue and the spending cap would be the least of
the state's worries.
Representative Josephson replied that there was a strong
governor model in the state and the legislature would need
a two-thirds vote to override a veto. In a crisis, it was a
limitation on legislative prerogative.
2:25:14 PM
Representative Ortiz wondered if it would be better to
suspend the idea of a spending cap until the question of
revenue was resolved. He thought that revenue was in
essence the current spending cap and that it had been a
successful model. The legislature was able to address
capital projects and deferred maintenance when the state
had more revenue in the prior year. He did not understand
why a spending cap would be tied to GDP when revenue was
not tied to GDP.
Representative Stapp responded that the main issue was how
the state allocated the existing revenue it already had.
He thought the most valuable information from Mr. Painter
on the history of the cap was that both the constitutional
limit and statutory limit for appropriations had been
violated by the legislature on multiple occasions. He
suggested that when a limit existed in statute or in the
constitution that had been repeatedly violated, the
legislature had the responsibility to do its due diligence
to reform the issue and increase accountability to
citizens. It was possible to have a tie in terms of overall
GDP that would allow for future conversations on revenue
and on the PFD amount. The main goal of the bill was to
smooth out the boom and bust cycle that was Alaska's
revenue picture. He argued that the state likely allocated
money in high revenue years such as FY 12 and FY 15 for
good purposes, but he thought the state also wasted a lot
of money.
2:29:28 PM
Representative Coulombe asked how the current spending cap
related to the private sector.
Mr. Painter responded that the spending cap was tied to a
fixed number that grew by population and inflation. The cap
did not directly reference the size of the economy in any
way.
Representative Coulombe asked if the state needed to
respond to the spending occurring within the private
sector.
Mr. Painter responded that the spending cap was based on a
fixed number which grew by population and it did not matter
if the population was employed. However, revenue did
originate from the private sector.
Representative Coulombe asked how the proposed spending cap
would incorporate the private sector into the equation.
Mr. Aoto responded that the cap would use state GDP and
that some of the elements of state GDP were business
expenses, business spending, net imports, and net exports,
which were all directly related to the private sector.
Representative Coulombe commented that many examples had
been brought up during the meeting on what could happen in
extreme situations. She thought that the state's revenue
had been historically volatile, and Alaska was not
financially disciplined in high revenue years. She thought
that there would be fewer emergencies if the state invested
in a more regimented manner. There would be more stability
in the savings accounts to increase education spending and
it would encourage savings and "rainy day" finances. She
liked the idea of a spending cap because it would force the
legislature to think about the future and it would smooth
out emergency spending and big deposits.
Representative Tomaszewski thanked Representative Stapp for
bringing forth the bill and he thought that it was exactly
what the state needed. He thought the state needed the
ability to control spending and the cap would allow for
steady funding and decreased dependence upon digging into
its savings accounts. He commended Representative Stapp for
his responses to the questions of other committee members
and he looked forward to hearing more about the
legislation.
HJR 2 was HEARD and HELD in committee for further
consideration.
HB 38 was HEARD and HELD in committee for further
consideration.