Legislature(2003 - 2004)
03/30/2004 09:04 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
CS FOR SENATE JOINT RESOLUTION NO. 3(JUD)
Proposing an amendment to the Constitution of the State of
Alaska relating to an appropriation limit and a spending
limit.
This was the sixth hearing for this bill in the Senate Finance
Committee.
Senator Dyson informed the Committee that the appropriation and
spending limit formula that has been developed was based on State
budgets that had been adopted for the past several years.
Unfortunately, due to the fact that these budgets were relatively
flat, when the formula was applied, the unintended result is a
flatter budget than is practical for State operations. The Office
of Management and Budget would further explain this situation.
Co-Chair Wilken clarified that the working document is committee
substitute Version 23-LS0296\B, as amended by Amendments #1 and #4.
Following action on some forthcoming amendments, a new committee
substitute would be developed.
CHERYL FRASCA, Director, Office of Management and Budget (OMB),
Office of the Governor, informed the Committee that with the
assistance of the Division of Legislative Finance, OMB has
developed a spreadsheet titled "CS SJR 3" [copy on file] that
depicts the outcome of the currently drafted formula.
BRUCE TANGEMAN, Fiscal Analyst, Legislative Finance Division
pointed out that the formula results are depicted beginning on line
"9" which is titled "Avg Growth (existing base yrs)".
Ms. Frasca expressed that the information specifies that for fiscal
years 2007, 2008, and 2009 there would be zero annual growth, a
slight increase in FY 10 and then marginal growth in the subsequent
years. She noted that while the State has been able to control
expenses for such things as Medicaid in the near term, it is
unlikely that this would be possible in future years. A realistic
growth level for Medicaid and K-12 spending in the future would be
approximately $100 million.
Co-Chair Wilken understood therefore that the aforementioned
section of the chart depicts the outcome of the formula as
currently drafted, using an annual inflation rate of three percent
and a one percent population growth rate. In FY 06, the State would
be projected to experience an additional general fund growth of
$428 million dollars with no further gain until FY 10.
LUCKY SCHULTZ, Staff to Senator Dyson, affirmed that is correct
with the exception being that the $428 million would reflect total
appropriations minus exemptions rather than being specifically
general funds.
Mr. Shultz stated that the reason the annual growth is reflected as
zero in several of the fiscal years is that this Senate bill
contains "a no ratchet down provision." The House version of the
bill does not include this provision.
Ms. Frasca stated that the Administration is offering for
consideration the formula beginning on line 23 of the spreadsheet
titled "2 yr growth (adjusted base yrs)". This formula reflects a
$56 million increase in total appropriation growth in FY 06 and an
average of approximately $105 million going forward.
Co-Chair Wilken noted that the spreadsheet depicts four different
scenarios.
Ms. Frasca stated that in addition to the four scenarios being
depicted in a line item format section, there is a corresponding
chart format at the bottom of the spreadsheet.
Senator Hoffman understood that the Public Employees Retirement
System/Teachers Retirement System (PERS/TRS) obligation would be
approximately $56 million in FY 06. In that case, the proposed
formula would reflect flat growth. Therefore, a detailed analysis
of the PERS/TRS obligation projections should be developed in order
for the Committee to understand its impact. Particularly as the
number of retiring State employees is expected to increase in the
next few years.
Ms. Frasca stated that the numbers presented on the chart "are not
the result of an analysis of what spending could be … in terms of
spending pressures." For example, in the FY 05 budget, the
Administration covered the increase in PERS/TRS expenses by
absorbing the expenses through reductions in other areas.
Acknowledging that a formula would specify a spending limit, she
stated that the budget would continue to be under pressure and
choices would be required. This bill is not intended to allow for
uncontrolled spending, but rather would require the State to
examine how its money would be spent. There would "always be
competing wants and competing needs. This would be the challenge
going forward."
Co-Chair Wilken understood that the PERS expectation for FY 06
would be approximately $100 million.
Ms. Frasca responded that that would be the amount including school
district and local government expenses, in addition to Executive
branch expenses. She agreed that these costs would continue through
the next five years unless the State's financial market investments
were to rebound.
Co-Chair Wilken informed that a detailed PERS/TRS presentation is
scheduled for April 6, 2004.
Senator Dyson stated that in order to arrive at a workable formula,
"fiddling" with the base numbers has had to occur. He asked that
Ms. Frasca explain the changes that have been made to the base
years.
Ms Frasca pointed out that part of the challenge includes the fact
that the total spending for FY 04 has not yet been concluded, and
that the budget for FY 05 has not been finalized. Therefore,
"crafting a limit for going forward" by utilizing the look-back
mechanism is difficult.
Senator Dyson voiced that it might be that "the fiddled with
numbers" would not be far from reality.
Mr. Tangeman declared that the numbers, as depicted in the current
formula, beginning on line nine of the spreadsheet titled "Avg
Growth (existing base years)," are not too far from what is
expected. FY 06 calculations are based on FY 02, FY 03, and FY 04
appropriations which each reflect $100 million appropriation
reductions. Therefore the first year is based on years of reduced
appropriations. "Plugging set numbers for FY 04 and FY 05" was
conducted "in order to alleviate the question of what might
actually happen at the end of this Session to allow uniform
growth." Therefore, the inclusion of $100 million in appropriation
growth for FY 04 and FY 05 would probably be close to where those
budgets would "end up." This would provide a better idea of where
FY 06 would actually be. The PERS/TRS obligations for FY 04 are
approximately $3.1 billion, and the FY 05 budget submitted by the
Governor calculates that $2.9 billion would be required. This
reflects a substantial decrease. Were an amendment specifying that
the PERS/TRS appropriation for FY 04 and FY 05 be between $3.3
billion and $3.4 billion adopted, it would allow "plenty of
headroom for the PERS/TRS issue going forward" as the current
projection for FY 05 is $2.9 billion. This would allow for
increased growth going forward.
Co-Chair Wilken stated that were a forthcoming amendment adopted
that would repeal this legislation in four years, perhaps
consideration could be given to setting aside the PERS/TRS issue
for a few years.
Senator Bunde pointed out that even were a spending limit
established, the entirety of that money would not be required to be
appropriated. However, he noted that the Legislature "has never
left a dollar on the table," as such things as public pressure
would be ever-present. Therefore, he contended that the upper limit
"would also be the base."
Co-Chair Wilken acknowledged the remark.
Senator Hoffman disagreed. He stated that the State currently has a
spending limit that is substantially higher than what is being
appropriated today.
Co-Chair Wilken pointed out that the State currently has "a huge
deficit and a slush fund that allows us to do that."
Senator B. Stevens declared that were the PERS/TRS obligation to
increase to a level exceeding the limit, the Legislature could
recognize it as an "extraordinary circumstance" and address it in
such a manner "as the situation, which created it, occurred outside
the realm of the control of the Administration or the Legislature,
or control of anybody for that matter." Therefore, he asked whether
the PERS/TRS situation might qualify under the parameters of an
extraordinary circumstance definition.
Mr. Schultz responded that this question had been asked previously,
and that upon investigation, it was discovered that the State of
Connecticut specifically does not define extraordinary
circumstances as they desired the interpretation to be left up to
the Governor and the Legislature. An extraordinary circumstance has
not been invoked in that State since this directive was established
in 1992.
Co-Chair Wilken stated that further discussion regarding the
extraordinary circumstance issue must ensue.
Senator Dyson asked for further Committee feedback regarding the
appropriateness of placing a Statewide ballot measure before the
people that would be "based on numbers that have been adjusted in
order to make the formula work." While the argument is compelling,
the formula must work and be practical into the future without
being less credible. Provided no objection to this approach were
forthcoming, a new committee substitute would be developed that
would encompasses the Administration's proposal. In addition, he
noted his intention to specify a four-year termination date in the
legislation. However, he noted that at the end of this four-year
period, there would be two alternatives: the first being that the
"ineffective spending" limit that is currently in the Constitution
would be re-instituted along with the Constitutional requirement
that specifies that one-third of the budget be appropriated to
support capital projects or that those two components and the
formula terminate in four years. The second choice is his
preference.
Co-Chair Wilken suggested that the Committee consider additional
amendments and then develop a committee substitute.
Senator Bunde, responding to Senator Dyson's request for Committee
feedback, stated that he would prefer a system based on reality
rather than theory. He would also support abolishment of all three
components at the end of four years.
The bill was HELD in Committee for further consideration.
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