Legislature(1997 - 1998)

04/04/1998 01:15 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
             HOUSE FINANCE COMMITTEE                                           
     April 4, 1998                                                             
                           1:15 P.M.                                           
TAPE HFC 98 - 90, Side 1.                                                      
TAPE HFC 98 - 90, Side 2.                                                      
TAPE HFC 98 - 91, Side 1.                                                      
CALL TO ORDER                                                                  
Co-Chair Therriault called the House Finance Committee                         
meeting to order at 1:15 P.M.                                                  
Co-Chair Hanley   Representative Foster                                        
Co-Chair Therriault   Representative Grussendorf                               
Representative J. Davies  Representative Mulder                                
Representative G. Davis  Representative Moses                                  
Representatives Kohring, Kelly and Martin were not present                     
for the meeting.                                                               
ALSO PRESENT                                                                   
Senator Randy Phillips, (Testified via Teleconference),                        
Anchorage; Representative Mark Hodgins, (Testified via                         
Teleconference), Kenai; Senator John Torgerson; Senator                        
Gary Wilken; Representative Joe Ryan; Richard Cross, Deputy                    
Commissioner, Department of Education; Eddy Jeans, Manager,                    
School Finance Section, Department of Education; Wilson                        
Condon, Commissioner, Department of Revenue.                                   
HB 393 An Act relating to contracts with the state                             
establishing payments in lieu of other taxes by a                              
qualified sponsor or qualified sponsor group for                               
projects to develop stranded gas resources in the                              
state; providing for the inclusion in such                                     
contracts of terms making certain adjustments                                  
regarding royalty value and the timing and notice                              
of the state's right to take royalty in kind or                                
in value from such projects; relating to the                                   
effect of such contracts on municipal taxation;                                
and providing for an effective date.                                           
 HB 393 was HELD in Committee for further                                      
SB 36 An Act relating to transportation of public                              
school students; relating to school construction                               
grants; relating to the public school foundation                               
program and to local aid for education; and                                    
providing for an effective date.                                               
 SB 36 was HELD in Committee for further                                       
SENATE BILL NO. 36                                                             
"An Act relating to transportation of public school                            
students; relating to school construction grants;                              
relating to the public school foundation program and                           
to local aid for education; and providing for an                               
effective date."                                                               
ANCHORAGE, testified that Alaska's public school foundation                    
formula is broken and needs to be fixed this year.                             
Alaska's five largest school districts serve almost 75% of                     
Alaska's students.  These five districts receive 57% of the                    
State general fund support in the foundation program.  The                     
remaining school districts, which serve 25% of school age                      
students, receive 43% of the State aid for operating                           
schools.  At the same time, the five largest school                            
districts contribute approximately 72% of local tax revenue                    
which goes to operating schools in Alaska.  The current                        
formula provides neither education equity for students nor                     
taxpayer equity between school districts.                                      
For the past ten years, State funding for public schools in                    
Alaska has been distributed, based on a formula that                           
provides a disproportionate share of funding to small rural                    
school districts at the expense of larger districts.                           
Senator Phillips pointed out that the current formula makes                    
size adjustments by gathering students into "instructional                     
units" within "funding communities", and makes geographical                    
cost adjustments based on household cost of living                             
differential between school districts.  Alaska is only one                     
of seven states that use instructional units instead of a                      
per student allocation.  In the Alaska School Operating                        
Cost Study (McDowell Report) provided for the Legislative                      
Budget and Audit (LBA) Committee determined that the                           
definition of "funding communities" is not consistent.  He                     
suggested that costs could better be compared at the school                    
level.  SB 36 would adopt the changes recommended in that                      
Senator Phillips stated that there are two major components                    
to the cost of providing school education which must be                        
accounted for in any formula that seeks to provide equity                      
in funding between school districts.  Instructional costs                      
(approximately 70% of spending) consisting primarily of                        
teacher's salaries, vary based on the size of individual                       
schools.  Administrative and non-personal service costs                        
(such as supplies, books, utilities) vary, based on the                        
size of a district, the district's location and the unique                     
circumstances of that district.                                                
Senator Phillips continued, SB 36 distributes school                           
funding based on the actual costs of providing instruction                     
to students and the actual current costs of operating                          
school districts.                                                              
? Funding is allocated based on a per student                                  
rather than an instructional unit value.  The                                  
public is better able to understand a per student                              
than a unit value.                                                             
? Size adjustment in formula is based on individual                            
schools instead of "funding communities".                                      
? Adjustments for geographical cost differences are                            
based on a study of the actual costs of operating                              
school districts instead of the household cost of                              
? The required local contribution for municipal                                
districts is set at four mills of assessed value                               
or 100% of district State support.  Taxpayer                                   
equity would be improved.                                                      
? Categorical funding is set at 20% of State                                   
support plus funding for intensive-need students,                              
which will remove any incentive in the current                                 
formula to identify students as special-ed in                                  
order to qualify for additional funding.                                       
? Funding for statewide correspondence study                                   
programs offered by a district are set at .65                                  
times Average Daily Membership (ADM), the same as                              
the State operated program.  At least one school                               
district has several times as many students                                    
enrolled in their statewide correspondence                                     
program that live in their district.  The                                      
provision is intended to prevent districts from                                
being in the business of providing programs to                                 
finance their operations.                                                      
? Provides reimbursement for district operated                                 
pupil transportation at 90% of actual cost.                                    
Currently, districts that contract for their                                   
school buses are reimbursed 100% of their costs.                               
The Anchorage School District is reimbursed for                                
only 66% of its bussing costs.                                                 
? Districts are required to spend at least 70% of                              
school funding on instructional costs.  The                                    
Education Week "report card" distributed earlier                               
this year, criticized Alaska for spending too                                  
much money on school administration and not                                    
enough on instruction.  In Alaska, approximately                               
70% of public school funding is spent on                                       
instruction.  Some districts spend about 75% on                                
instruction while others are spending closer to                                
Senator Phillips concluded, the changes proposed in SB 36                      
to Alaska's public school foundation formula would benefit                     
school districts that serve 84% of Alaska's children.                          
SENATOR GARY WILKEN provided an overview of a handout, SB
36 - A Proposal to Bring Simplicity & Fairness to the Way                      
Alaska Funds Its Public Schools.  [Copy on File].  He                          
stated that since 1988, State of Alaska General Fund dollar                    
support to the public school Foundation Formula has                            
increased 54.3%.  At the same time, the number of public                       
school students to be educated in Alaska has increased                         
Senator Wilken provided a historical review of public                          
school funding.  In 1985, there was a one-year stopgap-                        
funding scheme adopted.  In 1986, a re-write proved                            
impossible which was another one-year solution.  In 1987,                      
after two years of different stopgap measures, a new                           
proposal was considered.  Then in 1987, as a result of                         
several years of turmoil, a new proposal was adopted, even                     
though that legislation would be a "further setback" for                       
Railbelt taxpayers and students.  In 1998, SB 36 proposes a                    
funding formula that is based on actual school costs and                       
that is fair.                                                                  
Senator Wilken referenced the Alaska Education Survey.                         
[Copy on File].  The survey found that only one in three                       
Alaska voters believes that significant increases in                           
education funding would improve the quality of education.                      
He noted that the survey indicated that 81% of voters                          
believed that the State's method of funding schools should                     
be simplified and that 73% of voters support funding                           
education based on an amount per student, with additional                      
amounts added for special needs, rather than the current                       
method used addressing the instructional unit.  He pointed                     
out that the Governor acknowledged this need and submitted                     
SB 85, introduced 2/12/97.  Page 5 of Handout #1 provides                      
an analysis of SB 85 and SB 36.                                                
Senator Wilken stated that SB 36 would consist of three                        
major efforts:                                                                 
? Bases the formula on the actual cost of operating                            
a school.  (McDowell Study)                                                    
? Converts from an "instructional unit" basis of                               
funding to a "student dollar".                                                 
? Would define a "fair share" for the organized                                
areas of the State.  (4 mills or 100%)                                         
SB 36 would address simplicity, fair share contribution,                       
categorical definition without verification and classroom                      
funding priority.  Senator Wilken pointed out that the                         
legislation would not address the unorganized areas of our                     
State Rural Education Attendance Area (REAA) contribution                      
toward education.                                                              
Senator Wilken defined "fair share" as equal funding                           
participation by all districts based on assessed value of                      
an organized area.  The assessed value would be used as it                     
provides an "arms length" relative evaluation of the wealth                    
or lack of wealth in a community; validated by an objective                    
civic and judicial process at no cost to the State.  It                        
would be readily available from organized governments and                      
it could rise and fall annually.                                               
Senator Wilken continued, Page 23 illustrates REAA wages                       
and employment with a total estimated wage around $460                         
million dollars.  The 1996, State support to REAA's was                        
$135 million dollars.  He suggested that was 28% of the                        
budget for 8% of the students.  Senator Wilken urged that                      
those people be required to make a contribution toward                         
Page 25 addresses categorical funding, i.e. monies                             
identified through the foundation formula for special                          
education needs such as gifted and talented, bi-lingual,                       
bi-cultural, and vocational education.  In the current                         
formula, the school districts define and count funding                         
needs, creating the instructional unit.  That unit is then                     
funded, although, audits are minimal and districts are not                     
required to spend the money for categorical needs.  Senator                    
Wilken distributed a copy of an additional handout, The                        
Result of the Legislation.  [Copy on File].  He                                
acknowledged that the makers of the legislation do                             
recognize that there are different costs associated with                       
educating children in different parts of the State.                            
SENATOR JOHN TORGERSON spoke to the 70% instructional unit                     
cap contained in the bill.  SB 193 was introduced, which                       
placed a cap on the amount to be spent in both district and                    
for school administrative costs.  The calculated average                       
was $950 dollars per student, a cost which was multiplied                      
by the area cost differential.  That legislation would                         
switch approximately $21 million dollars from the                              
administrative area back into the classroom.                                   
When the McDowell Report was issued, they recognized that                      
70% of the cost was being used for instruction and that an                     
area cost differential did not exist for that particular                       
segment of the budget.  Senator Torgerson recommended that                     
school districts be consolidated and that administrative                       
costs be reduced.  An administrative cap could control the                     
amount of money used for student allocation.  The 70%                          
amount became the final number agreed upon through                             
recommendation by the McDowell Report.                                         
Senator Torgerson pointed out that 92% of the Alaskan                          
people who pay for education receive 79% of those monies.                      
The 8%, who do not pay, receive 21% of the education money.                    
The question posed is how to require that 8% to pay.  Many                     
considerations have been proposed in how to make the non-                      
paying areas contribute.                                                       
He advised that the Senate Leadership has decided to                           
proceed with SB 337, the mandatory borough issue, which                        
will make it mandatory in the formation of third class                         
boroughs, leaving out the single sites to require a local                      
contribution to education similar to that made by the                          
Senator Wilken acknowledged that there continues to be a                       
few concerns regarding the proposed legislation.  The                          
Department of Education (DOE) needs to help define what a                      
"school" is; also, the North Slope Borough concern must be                     
addressed.  He urged the Committee's cooperation to help                       
move the education concern beyond the status quo.                              
Representative J. Davies questioned if the need would be                       
determined by the assessed valuation.  Senator Wilken                          
agreed that the issue is complicated.  If a community                          
derives revenue from which they support their community,                       
with one tax base, their expenses should also be derived                       
off that same tax base.                                                        
Representative Grussendorf pointed out that the overview                       
does not address "quality" schools.  Senator Wilken replied                    
that the school districts applied pressure to remove that                      
stipulation since it was an unfunded mandate.  He pointed                      
out that language regarding that concern had been                              
reinserted into the bill in the version forwarded by the                       
last Committee's actions.                                                      
(Tape Change HFC 98- 90, Side 2).                                              
Senator Torgerson commented that the total for "quality"                       
school funding was now at $2.2 million dollars, and that                       
Representative Bunde's amendment was for $500 thousand                         
dollars.  Representative Grussendorf responded that the                        
$2.2 million dollars was only enough for development of the                    
plan and would not cover the implementation.  He estimated                     
that the package would cost approximately $23 million                          
Representative Grussendorf questioned the 70% minimum                          
expenditure for instruction.  He suggested that amount                         
could probably work for a larger population area, but with                     
the high fixed costs in rural areas, it would cause                            
problems.  Senator Torgerson replied that the                                  
administrative cap was contained in an additional piece of                     
legislation, accompanied by a waiver requirement to address                    
the 70% issue.  He noted that if the 70% concern could be                      
achieved, it would put $40 million dollars back into the                       
classroom.  The waiver would first need to be submitted to                     
the Board of Education for consideration and then it would                     
move to the Legislative Budget and Audit (LBA) Committee in                    
report form.                                                                   
EDUCATION, referenced a letter written 4/2/98 addressing                       
the Department of Education's (DOE) concerns with the                          
proposed bill relating to the public school funding                            
program.  [Copy on File].                                                      
? Amendment #2 would impose a 3% wage tax for                                  
employment within the unorganized borough.  The                                
Department is seeking direction from the                                       
Committee as to what tax revenue estimates should                              
be used in developing updated spreadsheets                                     
incorporating the amendment.                                                   
? The local contribution requirement has raised                                
issues regarding the taxable full value of the                                 
North Slope Borough (NSB).  The Department of                                  
Community and Regional Affairs (DCRA) is                                       
determining the appropriate and taxable full                                   
value of the NSB to be used in calculating                                     
required local efforts.  Resolution of the issue                               
will impact the amount of funding available for                                
redistribution under HCS CSSB 36 (HES).                                        
? Page 14, Lines 19-31, and Page 15, Lines 1-2.                                
Requires that the Department develop a                                         
comprehensive assessment system.  The requirement                              
mirrors language in the Governor's quality school                              
bill, HB 351/SB 257.  The fiscal note for those                                
bills would amount to $3.6 million dollars to                                  
develop a system and would include an additional                               
$20 million dollars to assist school districts                                 
with the cost of implementing the assessment                                   
? Page 5, Lines 6-9.  Requires districts to have on                            
file with the Department, a plan of service for                                
special education, gifted and talented education,                              
vocational education, and bilingual education.                                 
It is the Department's understanding that these                                
would not be required in order to receive the 20%                              
allocation.  The Department believes further                                   
clarification of this language is needed.                                      
? Page 6, Line 10.  The school size table is very                              
aggressive in applying multipliers for adjusted                                
ADM.  Depending on the definition of "school",                                 
Mr. Cross stated that the table raises many                                    
? Page 6.  The current foundation program has a                                
three year hold harmless for school districts                                  
that experience a drop in enrollment of 10% or                                 
more from one year to the next.  The proposed                                  
legislation does not contain a similar safety                                  
? Page 8, Lines 19-23.  That would require the                                 
Department to adjust district cost factors by the                              
Anchorage Consumer Price Index (CPI) and submit                                
proposed district cost factors to the legislature                              
every other year.  The Department contacted the                                
McDowell group for advice in meeting the                                       
requirement.  The group stated that the Anchorage                              
CPI has no relationship to district cost factors                               
and that inflationary adjustments should occur                                 
elsewhere in the legislation.  The McDowell group                              
also indicated that DOE could not apply the same                               
methodology they used in determining the proposed                              
district cost factors to meet the requirement in                               
SB 36.  The McDowell Report did provide                                        
additional information to the Chairman of the                                  
House HES Committee to suggest alternative                                     
? Page 10, Line 5.  References minimum expenditure                             
for instruction.  Most districts can not meet the                              
requirement due to fixed costs to operate                                      
facilities.  Only school districts with large                                  
student population and the larger schools can                                  
meet that requirement.                                                         
? Page 11, Line 2.  The definition of "instruction                             
component" is inconsistent with the existing                                   
chart of accounts.                                                             
? Page 27, Line 12.  Subsection (b) requires the                               
Department to define "school".  Current                                        
regulation 4 AAC 05.900(5) defines a school as a                               
"program of instruction".  There is a lack of                                  
data to support a consistent definition of                                     
"school".  As the definition is clarified, a                                   
significant reallocation of dollars will occur.                                
? Page 27, Lines 14-17.  Transition for proposed                               
district cost factors, requires the Department to                              
submit to the Legislature, proposed district cost                              
factors by January 15, 2001.  As previously                                    
stated, the McDowell group informed DOE that                                   
their methodology can not be used to update                                    
proposed district cost factors.                                                
? Page 16, Line 12.  This section would remove the                             
requirement to employ a chief school                                           
administrator.  If districts hire a non-certified                              
administrator to run the school district, the                                  
administrator would not be subject to the ethic                                
requirement of the Professional Teaching                                       
Practices Commission (PTPC).                                                   
Mr. Cross concluded his testimony and offered to answer                        
questions of the Committee.  SB 36 was HELD in Committee                       
for further consideration.                                                     
(Tape Change HFC 98- 91, Side 1).                                              
HOUSE BILL NO. 393                                                             
"An Act relating to contracts with the state                                   
establishing payments in lieu of other taxes by a                              
qualified sponsor or qualified sponsor group for                               
projects to develop stranded gas resources in the                              
state; providing for the inclusion in such contracts                           
of terms making certain adjustments regarding royalty                          
value and the timing and notice of the state's right                           
to take royalty in kind or in value from such                                  
projects; relating to the effect of such contracts on                          
municipal taxation; and providing for an effective                             
REPRESENTATIVE MARK HODGINS, (TESTIFIED VIA                                    
TELECONFERENCE), KENAI, explained that last year the                           
Legislature passed HB 250 which enabled commissioners to                       
establish the needs base for HB 393.  The emphasis of the                      
legislation is to advance the development of Alaska's vast                     
supply of North Slope natural gas.  The legislation follows                    
the recommendations put forth by the North Slope Gas                           
Commercialization Team, which was established last year to                     
build a framework to improve the economic feasibility and                      
competitiveness of a North Slope gas project.                                  
The bill authorizes the State to negotiate contracts with                      
project sponsors to improve the economic feasibility of                        
developing stranded gas on the North Slope.  Contract                          
payments would replace some or all of the State's and                          
municipal taxes applicable to the gas project including:                       
? State and municipal ad valorem property taxes;                               
? Production or severance taxes; and                                           
? State corporate taxes.                                                       
The State's royalty share of produced gas would not be                         
subject to that contract.  Contract payments would be                          
designed to improve project economics by "back-end loading"                    
tax liabilities to allow project investors to begin to                         
recoup some of their investment before facing a heavy tax                      
burden.  The contract payments would also be designed to                       
provide the State with an increased share of the project's                     
revenue if energy prices increase or if the sponsors are                       
able to substantially decrease anticipated project                             
construction costs.                                                            
Representative Hodgins stated that it is important to                          
remember that this is a "for profit" project.  The State of                    
Alaska owns resources on the North Slope and would like to                     
see those resources moved to a revenue source.  There are                      
several benefits to the approach authorized in the bill.                       
Fiscal arrangements could be tailored to the specific                          
economics of a gas project.  Contractual payments are more                     
likely to provide predictability for potential investors in                    
a project.                                                                     
Representative Hodgins pointed out that the total cost of                      
the project is not known.  He projected that if the cost                       
were around $12 billion dollars, it would probably move                        
forward; although, noted those variables exist.  While the                     
bill is unique in many respects, there are precedents for                      
the incentive.  For example, the Liquefied Natural Gas                         
(LNG) project on the Kenai Peninsula, which provides                           
significant jobs, production and property tax revenue,                         
benefits directly from the Alaska Industrial Incentive Act                     
which provides tax advantages critical for development.                        
He noted that oil could be sold on the spot market,                            
whereas, LNG would be contracted over many years.  The                         
project will not go forward without contracts guaranteeing                     
sales of the product.                                                          
Representative Hodgins commented that from results put                         
forth from the mayor's recommendations, an advisory group                      
will be established.  The taxable amount of funds coming                       
into the State would be $12.6 billion dollars.  The amount                     
generated for federal government would be approximately $26                    
billion dollars.  There is room to help increase                               
profitability by not front-end loading the costs.  He                          
proposed that the State should give up no more than 2% in                      
order that the project can move forward.  He pointed out                       
that an important addition to the bill is the confirmation                     
to be given by the Legislature on each contract.  He                           
emphasized the need that the commissioner negotiates                           
contracts with the Legislature.                                                
Representative Hodgins summarized, the Stranded Gas                            
Development Act is a critical step in the efforts to                           
realize the benefits of our gas resources located in the                       
North Slope.                                                                   
that this proposed legislation was originally submitted by                     
the Governor, however, the Special Committee on Oil and Gas                    
made significant changes to it.  The Administration                            
supports the bill as changed by that Committee and the                         
House Resources Committee.                                                     
HB 393 provides a framework for developing a customized                        
proposed fiscal system applicable for the development of                       
stranded gas.  The bill is particularly focused on the LNG                     
process, whereby, gas would be pipelined from the North                        
Slope, liquefied on the southern coast of Alaska, shipped                      
to Asia and sold as LNG.                                                       
The bill acts as framework legislation, designed to                            
instruct the Executive Branch to develop a                                     
proposal/contract which would provide for payments in lieu                     
of some or all taxes imposed on the project by State or                        
local governments.  The bill only authorizes and directs                       
the Executive Branch to bring proposals before the                             
Legislature in the form of such contracts.  Once it is put                     
before the Legislature, they would in turn need to pass                        
enabling legislation.                                                          
Commissioner Condon noted that several issues relate to the                    
contracts.  He replied that it is unknown if the contracts                     
would bind future legislatures.  He proposed that the                          
Legislature should determine if they would want to be bound                    
in that way, which would be a policy call decided when the                     
contract is brought before the entire Body.                                    
The legislation specifies that if someone applies to create                    
a stranded gas project and it meets the criteria of the                        
bill, the Executive Branch is then instructed to develop a                     
proposal in the form of a fiscal contract, which would                         
substitute payments for all State and local taxes.  The                        
contract would then come back before the Legislature so                        
that enabling legislation could be passed.                                     
Co-Chair Therriault pointed out that passage of HB 393                         
would not bind future legislatures to ratify the contracts.                    
Commissioner Condon distributed a flow chart for HB 393.                       
[Copy on File].                                                                
Co-Chair Therriault inquired the requests submitted by the                     
mayors involved.  Commissioner Condon replied that the bill                    
works as follows.                                                              
? The bill provides for the filing of an                                       
application; and                                                               
? Then the contract is negotiated.                                             
Commissioner Condon added, the legislation would provide                       
for the establishment of a Municipal Advisory Group and                        
each affected municipality would provide a member for that                     
advisory group.                                                                
Commissioner Condon touched on the gas to liquid concern.                      
He stated that the bill should provide for a full range of                     
opportunities to commercialize stranded gas in Alaska,                         
although, the fiscal systems would be different.                               
Co-Chair Hanley pointed out that the application deadline                      
would be 2001; if no one submitted an application by that                      
time, it would be over.                                                        
Co-Chair Therriault noted HB 250, which established the                        
North Slope Gas Commercialization team, contained a fiscal                     
note for $230 thousand dollars which was zeroed out.  The                      
effort was paid for out of the Governor's contingency fund.                    
He asked the amount expended on creating HB 393.                               
Commissioner Condon did not know.  He stated that most of                      
the money provided by the Governor's contingency fund was                      
used, although, other resources had also been included.                        
HB 393 was HELD in Committee for further consideration.                        
The meeting adjourned at 3:10 P.M.                                             
H.F.C. 13 4/04/98                                                              

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