Legislature(2019 - 2020)BUTROVICH 205
03/26/2019 01:30 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SJR6 | |
| SJR4 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SJR 6 | TELECONFERENCED | |
| *+ | SJR 4 | TELECONFERENCED | |
| + | TELECONFERENCED |
SJR 6-CONST AM:APPROP. LIMIT; RESERVE FUND
1:33:50 PM
CHAIR SHOWER announced the consideration of SENATE JOINT
RESOLUTION NO. 6, Proposing amendments to the Constitution of
the State of Alaska relating to an appropriation limit; relating
to the budget reserve fund and establishing the savings reserve
fund; and relating to the permanent fund.
He reviewed the committee's work on the bill including that it
was last heard on March 25 when public testimony was taken and
then closed. He noted that written testimony could be submitted
to senate.state.affairs@akleg.gov and will be accepted until the
bill moves from committee. He asked Mr. King to discuss the
additional slides that he prepared in response to earlier
questions and requests for updated information.
1:34:40 PM
ED KING, Chief Economist, Office of Management and Budget,
Office of the Governor, Juneau, directed attention to the
document he prepared that responds to questions the committee
had on the slide presentation. Senator Micciche requested an
alternate graph to those on slides 9 and 10 that adjust the
spending values for inflation. The first graphic shows the
inflation adjusted unrestricted general fund spending for FY75-
FY19 reported by legislative finance. He moved to the next page
of the handout that shows slide 10 updated to include inflation
adjustments. It shows that government spending increased
significantly in the early 1980s when oil first started to flow,
followed by about 20 years when government spending was
relatively flat, which is decreasing when the values are
adjusted for inflation. Then in FY05-FY13 there was another
significant increase in spending.
1:36:05 PM
At ease
1:36:10 PM
CHAIR SHOWER reconvened the meeting. He asked for clarification
about applying inflation to the period of flat spending. He
noted that the slope is downward when numbers are inflation
adjusted.
MR. KING explained that spending was decreasing in real terms
but that isn't considered deflation.
CHAIR SHOWER noted that the percentages changed when the values
were adjusted for inflation.
MR. KING confirmed that the tags were updated to reflect the
inflation adjusted numbers.
SENATOR COGHILL commented that he'd be watching the inflation
aspect.
1:37:30 PM
MR. KING said the next request was from Senator Coghill. He
asked for slides [11 and 12] to be updated to reflect the
proposed spending cap excluding capital expenditures. The
graphic on page 2 of the memo does this, which brings the total
that could not have been spent down to $19 billion from $29
billion.
The first graphic on page 3 of the memo is a hypothetical that
shows what the current fund balances would be if the proposed
cap had been in place. The permanent fund balance would be about
$110 billion rather than the earlier $130 billion when capital
expenditures were included.
MR. KING said Senator Micciche also asked what the Permanent
Fund Principal account balance would be today, if the
legislature had not made special appropriations to the principal
account. [The memo provides the following background]:
As background, all earnings from the Permanent Fund
are placed in a holding account known as the "earnings
reserve account" or ERA. Each year, the legislature
decides what to do with those earnings. They typically
use about half of them to pay dividends and transfer a
portion to the ERA to offset inflation. The remaining
amount has historically been either held in the ERA or
has been transferred to the principal account. When
those additional transfers are made, they are
considered "special appropriations."
He directed attention to the bar graph at the bottom of page 3
of the memo. It illustrates the special appropriations over time
as reported by the Alaska Permanent Fund Corporation. The fund
was capitalized initially and then there was a large deposit
into the principal account in 1987. After that there were no
real deposits until 1996 when the legislature swept the ERA into
the principal account. Since then there have been just three
significant deposits in addition to inflation proofing from the
earnings reserve to the principal accounts. The last was in
2003. He noted that the graph on page 4 of the memo shows the
historical balance of the ERA. He highlighted that the earnings
reserve account balance typically was about $1 billion through
about year 2000. Then the legislature changed course and
retained the additional earnings in the earnings reserve instead
of moving it to the principal account. He said the result is
that the earnings reserve balance has increased substantially
over the last 5-6 years.
CHAIR SHOWER asked what happened in 2000-2004 and 2008-2010 to
draw down the earnings reserve account.
MR. KING said there were market corrections then and in the 2009
timeframe. The entire fund lost value and the earnings reserve
balance was depleted to almost zero. There were no earnings to
deposit yet money was still flowing out based on the five-year
averaging for the permanent fund dividend. He noted that the ERA
has recovered since then and now has a balance in excess of $18
billion.
CHAIR SHOWER asked him to discuss what happened then versus what
could happen now if the legislature continues to take
unstructured draws, and nothing else changes.
MR. KING explained that the earnings reserve balance will
decrease if the legislature draws more out of the ERA than the
fund earns. He said that includes inflation-proofing transfers
from the ERA to the principal account as well as payments to the
general fund or dividend fund. The current balance of the entire
fund is about $65 billion and the expected earnings are about $4
billion per year. As long as the legislature does not draw more
than the earnings, the total account balance will not decrease.
However, if the earnings either don't meet the projection or the
legislature draws more than the earnings, the ERA balance will
decrease.
CHAIR SHOWER asked him to tie that to the percent of market
value (POMV) calculation adopted in Senate Bill 26.
MR. KING said this committee looked at scenarios where the fund
balance could be depleted through excess unstructured draws or
underperformance or both. But as things sit today, he said, as
long as the draws are structured and the performance of the fund
is average or better, the risk of fund depletion is relatively
low.
MR. KING turned to Senator Kawasaki's request for a breakout of
the $5 billion increase in the budget from 2005 to 2013. He
explained that about $2 billion was capital increases, $1
billion was statewide items both through retirement
contributions and tax credit purchases, and about $2 billion was
from increases in agency operations. He directed attention to
the table on the last page of the memo that breaks down the
general fund expenditures in 2005 versus 2013. It shows that
agency operations increased by $1.4 billion more than the rate
of inflation over that period. He noted that agency operations
have reduced with the budget cuts over the last four years but
they are still in excess of what agency operations were in 2005,
even adjusted for inflation.
1:44:42 PM
SENATOR KAWASAKI clarified that he was looking for the FY19
management plan numbers because that would provide a better
snapshot of where things are today. "Just for the record, if we
could get that it would be great," he said.
CHAIR SHOWER suggested Mr. King add a second chart for 2005 to
2019 to show "the reality of where we stand today and why we do
or do not need to make changes." He asked if the expenditures on
the chart are inflation adjusted. He pointed to Health & Social
Services expenditures in 2005 of $490 million versus $1 billion
in 2013.
MR. KING answered no; those are actual expenses in nominal
terms. For Health & Social Services, the increase of $510
million is a 104 percent increase over what spending was in
2005. Over the same period inflation totaled 23.6 percent so the
actual change was about 70 percent more than inflation. He
apologized to Senator Kawasaki for misunderstanding the request
and agreed to provide the information. He noted that from 2013
to the 2019 management plan, almost all the capital growth has
abated and about half the statewide items have decreased but
increases still exist in agency operations.
1:47:01 PM
SENATOR MICCICHE joined the committee.
CHAIR SHOWER asked what would explain the dramatic increases in
the Education and Health & Social Services expenditures from
2005 to 2013.
MR. KING clarified that the chart represents just agency
operations. He then deferred the question to administrative
services directors and analysists.
CHAIR SHOWER said he may prepare a list of questions to ask
another time because this "shows a cautionary tale of why we
have to put appropriate constraints on ourselves."
SENATOR COGHILL pointed out that the chart shows just the agency
operations part of the picture and the rest of the slides show
the whole picture.
CHAIR SHOWER said he understands the point but the cautionary
point is that, in retrospect, the dramatic increase in agency
operations was probably unwise. The salient question, he said,
is whether the legislature needs to make the spending limit more
relevant.
SENATOR KAWASAKI pointed out that this legislation does not
account for how litigation might be treated and that could
potentially jeopardize funding for an entire agency. He noted
that when a lawsuit was settled in 2007-2008, the joint
legislative education taskforce made recommendations that
resulted in significant increases in education spending.
CHAIR SHOWER countered that the lawsuit forced the state to
reset the baseline spending [for education] and if that static
position makes sense today, that should cover the question of
lawsuits going forward.
SENATOR COGHILL noted that the state has lived under a couple of
consent decrees that do not take the budget into account, one of
which was the Kasayulie case. He said "equality" and "adequacy"
are always considerations and if the budget is cut to the point
that one of those is out of balance, another lawsuit is
inevitable.
CHAIR SHOWER said he'd be curious to see what drove the
increases because some expenditures were probably a choice.
He asked if anyone from the Department of Law had data about the
increases in agency operations.
1:53:23 PM
CORI MILLS, Assistant Attorney General, Civil Division,
Legislation and Regulation Section, Department of Law, Juneau,
confirmed that the consent decrees in the Moore and Kasayulie
settlements had monetary provisions that were subject to
appropriation by the legislature, just as in most settlements.
She talked about not binding the hands of the legislature when
it comes to appropriations and that departments work within the
constraints they're faced with in that regard.
CHAIR SHOWER asked if SJR 6 ensures that the state will be able
to continue to meet its obligations or if it increases the
likelihood of a new court case. "Where does that baseline put
us, above or below that threshold?"
MS. MILLS said the state can always be sued, but the litigation
in the Moore and Kasayulie cases is over. The consent decrees in
both cases were satisfied. It's not clear what new issues may
arise, she said.
CHAIR SHOWER clarified that he was curious about whether this
spending cap would meet those past obligations.
1:56:06 PM
MR. KING responded that if SJR 6 were to pass in its current
form, a restriction to the average of the last three years
spending would be required. If the resolution were to pass
without any budget cuts, the legislature would have the capacity
to maintain the same level of spending as today. If there were
significant reductions to spending, that would set the limit
lower. If there were future settlements or agreements that
require appropriations, those appropriations would have to live
within that cap.
CHAIR SHOWER commented that he heard the answer to be "maybe."
SENATOR MICCICHE pointed out that if inflation were factored in
the numbers would be reduced by the difference between two
percent and whatever actual inflation was each year.
MR. KING agreed and added that as written, the resolution
provides that the allowable annual increase in the budget is
lower than the anticipated rate of inflation.
1:57:37 PM
SENATOR MICCICHE commented that it's creative to look at agency
spending through just 2013 (the highest spending year) but it's
not very helpful with actuals because the growth rate is
significantly lower if the data for the five years after that is
also included. He asked Mr. King if he could provide a chart
that has the expanded data and if the 23.6 percent inflation
over the period reflects the Anchorage consumer price index
(CPI).
MR. KING agreed to provide the expanded data that shows
reductions in the last 4-5 years and confirmed that the
inflation is based on the Anchorage CPI. He clarified that he
highlighted that particular time period to illustrate the type
of growth that was allowed under the constitutional limit.
SENATOR MICCICHE said he assumes everyone at the table knows he
strongly supports an appropriation limit. He was trying to
evaluate the actual growth rate that is required by inflation.
He expressed interest in looking at the additional numbers.
SENATOR COGHILL recalled there was double-digit inflation years
ago and because that could happen again, he didn't know if it
was wise to lock in outside the limits of normal inflation.
CHAIR SHOWER asked Mr. King to discuss the smoothing effect of
the three year averaging.
2:02:03 PM
MR. KING explained that the resolution, as currently drafted,
limits spending increases to no more than one-half of the
combined rate of population and inflation or two percent,
whichever is less. While the maximum rate of growth year-over-
year is two percent, that is based on a rolling three-year
average of actual expenditures that are subject to the cap. He
said the way the numbers work out for what was proposed is
effectively 0.8 percent growth per year, at the given
projections.
MR. KING said the spending cap is intended to help smooth
volatility in oil prices and other revenue so the legislature is
forced to save for the future in high revenue years.
Historically, the legislature has responded to increases in
revenue with increases in spending. This bill is trying to
rectify that, he said.
SENATOR MICCICHE said people need to understand that the 0.8
percent growth trend is 1.9 percent below typical inflation over
the last 10 years. Flat spending (like was seen in the 1990s) is
controllable in the short term as the legislature is looking to
get to an efficient baseline, but when spending is flat too long
legitimate needs do pop up.
CHAIR SHOWER said the next committee of referral will continue
looking for potential modifications to make the spending limit
that is already in the constitution more relevant.
2:05:35 PM
SENATOR KAWASAKI noted that in addition to the base agency
operations for education, the Moore and Kasayulie cases also
added funds for school construction.
MS. MILLS said that's correct; the Kasayulie case in particular
was primarily about building schools. The Regional Education
Attendance Area (REAA) fund was created at that time to ensure
equity between urban and rural schools.
SENATOR KAWASAKI asked what would happen if there was a
"Kasayulie II" case and it specifically talked about the REAA
school construction and maintenance fund.
MS. MILLS replied that without a specific set of facts she could
not say what a claim might be. Her understanding of Kasayulie is
that it had to do with equity between urban and rural schools so
the question would be is there an inequity or is there another
claim being brought forward.
SENATOR KAWASAKI discussed the tax cap in his city and the
process the city uses to handle disagreements. He described it
as a way to get around the tax cap and acknowledged that it
hasn't been very successful. The state wouldn't want to use that
process, he said, but there should be some sort of a relief
valve to pay for litigation. He cautioned against putting the
proposed constitutional spending limit in place because it's
already low and even declining with inflation. A legislature in
the future could find itself in a bad situation, he said.
CHAIR SHOWER highlighted the safety valve of overriding the
limit with a super majority vote in cases of true emergency. He
acknowledged that getting 45 legislators to agree could be a
problem.
2:09:18 PM
SENATOR MICCICHE said he supports the traditional statutory
dividend, but he wonders why the administration thinks it's a
good idea to increase the rate of growth for the permanent fund
dividend beyond what it is today.
MR. KING said he didn't know the policy intent other than that
the excess revenue would be off limits to the legislature and
the principal account of the permanent fund is the highest
yielding account.
SENATOR MICCICHE asked if the administration considered
isolating the revenue into a separate permanent fund account
that not only would be out of reach of the legislature but also
would not result in accelerated growth of the dividend.
MR. KING said he was not part of the deliberative process, but
his team would be happy to look at any options that might be
proposed.
SENATOR MICCICHE continued to argue in support of isolating the
new account from the traditional calculations because it would
result in such accelerated growth of the dividend.
MR. KING said he'd be happy to work with the committee on any
future ideas.
SENATOR MICCICHE asked if he agrees with the comment that the
current proposal would result in such an accelerated growth of
the permanent fund dividend that it would be outside the
original spirit of the program.
2:14:42 PM
MR. KING said he's be happy to model that, but he agrees with
the concept that putting more money into the account will result
in higher earnings and therefore future PFDs will become larger.
CHAIR SHOWER posited that it was less likely now than in the
past that the dividend would grow dramatically over time.
MR. KING said the opportunity for required sweeps into the
principal account are fairly small at the current price and
production levels. However, at some point in the future it's
likely that oil prices will rise to the $100 per barrel range
and the question is how will the legislature react to the
circumstance of excess revenues. It's also likely that oil
prices will fall to $30 per barrel in the next decade and it's
important that government and the expectations of the people
haven't grown to levels that can't be sustained when that
circumstance unfolds.
2:17:14 PM
SENATOR MICCICHE said what he's trying to protect Alaskans
against is taxing to pay the bills and saving to pay a larger
permanent fund dividend. He clarified that saving the way it's
done today to protect the existing PFD is a different
discussion.
2:18:36 PM
SENATOR COGHILL observed that this proposal is for a hard cap
that doesn't allow any cash flow wiggle room. Under the current
process the legislature can address cash flow issues by drawing
from the CRB. He specifically cited the open-ended Medicaid
budget as an example
MR. KING said the proposed cap has six or seven exceptions but
no other opportunity to exceed the cap. If an additional
appropriation is required, the legislature would need to back
out some other appropriation so as to not exceed the cap. He
clarified that the current resolution does have a provision that
if excess revenues exist, then the CBR is refilled in the amount
of one year's appropriations. There's room to manage volatility
but the resolution would not allow an additional appropriation
for a structural issue.
SENATOR COGHILL mentioned the $100 million supplemental request
last year that was funded at $45 million and pointed out that
that would not be possible under the current resolution. This
means the legislature will need to rethink all the open ended
entitlements, he said.
MR. KING described the statement as accurate.
2:21:25 PM
CHAIR SHOWER noted that there were no proposed amendments and
asked if there was any further discussion on SJR 6.
SENATOR KAWASAKI asked Ms. Mills to comment on the March 23,
2019 memo from Legislative Legal Services and the March 25, 2019
memo from the Department of Law. They both cite the Bess v.
Ulmer case yet they came to different conclusions.
MS. MILLS explained that the Alaska Supreme Court in Bess v.
Ulmer adopted a hybrid approach for looking at the qualitative
and quantitative effect of an amendment. If the quantitative
effect of the proposed change is minimal, the qualitative effect
would have to be greater, and vice versa. She said Legislative
Legal Services laid out a test in the second paragraph of its
memo that describes the test the Florida Supreme Court adopted
whereas the Alaska Supreme Court adopted a test that's closer to
the California approach, which weighs the qualitative and
quantitative impacts of a proposed amendment. The Department of
Law's position is that SJR 6 does not make a foundational change
to the constitution. That's the main difference between the
memos that resulted in different conclusions, she said.
SENATOR KAWASAKI asked what would happen if the Alaska Supreme
Court struck this down before the measure appeared on the 2020
ballot.
MS. MILLS replied it would be up to the court and whether it
struck the amendment down completely or struck just a portion
and put the rest of the measure on the ballot. She said that
happened in Bess v. Ulmer when the court struck one sentence
from the marriage amendment and proceeded to put the rest of the
amendment on the ballot.
SENATOR COGHILL expressed hope that the judiciary committee
would consider two issues; the inflation formula and a formula
that allows for construction capital.
CHAIR SHOWER called for final discussion on SJR 6.
SENATOR KAWASAKI said he understands there may be an amendment
related to the construction capital issue and he looks forward
to seeing it. He also appreciates the discussion about inflation
and hopes the finance committee looks at that carefully. He
added that he feels the committee missed an opportunity when it
didn't ask legislative finance to come to the committee to
discuss the resolution. Finally, he hopes that the next
committees of referral discuss the litigation issue because
those costs can be significant.
CHAIR SHOWER said he didn't consider having legislative finance
in this committee because they will be part of the discussion
when the finance committee considers the resolution. However,
he'll entertain that in the future.
SENATOR MICCICHE said the clear message is the existing
appropriation limit in the constitution does not work and he
appreciates the administration bringing SJR 6 forward. He
highlighted the growth curve as a pressure relief valve, the
litigation issues, and the cascading of excess dollars, which he
described as probably as important as the other issues moving
forward. He summarized that the State Affairs Committee
addresses the policy of whether an appropriation limit is
needed, the Judiciary Committee looks at the constitutional
issues, and the Finance Committee looks at the numbers and
trends and what the expected gap will be over time.
CHAIR SHOWER found no further discussion and solicited a motion.
2:30:10 PM
SENATOR COGHILL moved to report SJR 6, work order 31-GS1068\A,
from committee with individual recommendations and attached
fiscal note(s).
CHAIR SHOWER found no objection and SJR 6 was reported from the
Senate State Affairs Standing Committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SSTA OFFICIAL AGENDA MEMO.pdf |
SSTA 3/26/2019 1:30:00 PM |
agenda |
| SJR 6 Sponsor Statement.pdf |
SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| SJR006A.PDF |
SJUD 4/1/2019 1:30:00 PM SSTA 3/21/2019 1:30:00 PM SSTA 3/25/2019 5:00:00 PM SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| SJR 6 Slide Show Presentation & Analysis.pdf |
SSTA 3/21/2019 1:30:00 PM SSTA 3/25/2019 5:00:00 PM SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| SJR 6 ver A Sectional 3.21.19.pdf |
SJUD 4/1/2019 1:30:00 PM SSTA 3/21/2019 1:30:00 PM SSTA 3/25/2019 5:00:00 PM SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| SJR 6 Fiscal Note.PDF |
SJUD 4/1/2019 1:30:00 PM SSTA 3/21/2019 1:30:00 PM SSTA 3/25/2019 5:00:00 PM SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| SJR 6 Additional Slides.pdf |
SSTA 3/21/2019 1:30:00 PM SSTA 3/25/2019 5:00:00 PM SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| 3.25.2019 - SJR6 Responses.pdf |
SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| SJR 6 Various Written testimonies.pdf |
SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| 03.27.2019 - SJR6 MORE Responses to SSTA.pdf |
SSTA 3/26/2019 1:30:00 PM |
SJR 6 |
| SJR 4 Transmittal Letter.pdf |
SJUD 4/15/2019 1:30:00 PM SJUD 4/22/2019 6:00:00 PM SSTA 3/26/2019 1:30:00 PM SSTA 3/27/2019 6:00:00 PM SSTA 3/28/2019 3:30:00 PM |
SJR 4 |
| SJR 4 version A.pdf |
SJUD 4/22/2019 6:00:00 PM SSTA 3/26/2019 1:30:00 PM SSTA 3/27/2019 6:00:00 PM SSTA 3/28/2019 3:30:00 PM |
SJR 4 |
| SJR 4 Sectional Analysis.pdf |
SJUD 4/22/2019 6:00:00 PM SSTA 3/26/2019 1:30:00 PM SSTA 3/27/2019 6:00:00 PM SSTA 3/28/2019 3:30:00 PM |
SJR 4 |
| SJR 4 Fiscal Note GOV-DOE.pdf |
SJUD 4/15/2019 1:30:00 PM SSTA 3/26/2019 1:30:00 PM |
SJR 4 |
| SJR 4 Fiscal Note - DLWD.pdf |
SJUD 4/15/2019 1:30:00 PM SSTA 3/26/2019 1:30:00 PM |
SJR 4 |
| Senate State Affairs - SJR 6 Written Testimony uploaded (04-05-19).pdf |
SSTA 3/26/2019 1:30:00 PM |
SJR 6 |