Legislature(2019 - 2020)ADAMS ROOM 519

05/01/2019 09:00 AM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
09:00:18 AM Start
09:00:42 AM HB131
10:16:43 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
                  HOUSE FINANCE COMMITTEE                                                                                       
                        May 1, 2019                                                                                             
                         9:00 a.m.                                                                                              
9:00:18 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Wilson called the House Finance Committee meeting                                                                      
to order at 9:00 a.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Tammie Wilson, Co-Chair                                                                                          
Representative Jennifer Johnston, Vice-Chair                                                                                    
Representative Dan Ortiz, Vice-Chair                                                                                            
Representative Ben Carpenter                                                                                                    
Representative Andy Josephson                                                                                                   
Representative Gary Knopp                                                                                                       
Representative Bart LeBon                                                                                                       
Representative Kelly Merrick                                                                                                    
Representative Colleen Sullivan-Leonard                                                                                         
Representative Cathy Tilton                                                                                                     
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Ed King, Chief Economist, Office of Management and Budget;                                                                      
Representative   Steve   Thompson;   Representative   Louise                                                                    
HB 131    APPROPRIATION LIMIT                                                                                                   
          HB 131 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
Co-Chair Wilson reviewed the meeting agenda.                                                                                    
HOUSE BILL NO. 131                                                                                                            
     "An Act relating to an appropriation limit; relating                                                                       
     to the budget responsibilities of the governor; and                                                                        
     providing for an effective date."                                                                                          
9:00:42 AM                                                                                                                    
Co-Chair Wilson  relayed that  she had  asked the  Office of                                                                    
Management  and Budget  (OMB) to  testify on  the bill.  She                                                                    
wanted the committee  to see the many  different outcomes of                                                                    
a sending cap.                                                                                                                  
9:01:24 AM                                                                                                                    
ED KING,  CHIEF ECONOMIST, OFFICE OF  MANAGEMENT AND BUDGET,                                                                    
stated his understanding of the  discussion. He did not have                                                                    
prepared materials.  He offered  to provide  an introduction                                                                    
on  the   levers   and options  available  when  creating  a                                                                    
budget spending cap.                                                                                                            
Mr.  King  offered that  three  levers  were available  when                                                                    
considering a  spending limit. The limit  should include all                                                                    
funding that  an appropriating body wanted  to restrict. The                                                                    
current  limit in  the constitution  and other  spending cap                                                                    
proposals all  excluded federal funds.  There was  no desire                                                                    
to  restrict the  amount of  federal funds  received by  the                                                                    
state.  He  reiterated  that  all  the  appropriation  limit                                                                    
proposals excluded federal funds.  He mentioned that some of                                                                    
the  proposals excluded  the Permanent  Fund Dividend  (PFD)                                                                    
and some did not. He  maintained that exclusion or inclusion                                                                    
was a  matter of political  philosophy; either include  as a                                                                    
budget item or exclude the funds  outside of the limit so it                                                                    
did not compete with other  budget items. He stated that the                                                                    
other   significant  issue   to  exclude   or  include   was                                                                    
designated general  funds (DGF) versus  undesignated general                                                                    
funds (UGF).  He indicated that some  proposals included all                                                                    
general funds (GF). He exemplified  raising state park fees;                                                                    
if  DGF was  included in  the  limit it  would restrict  the                                                                    
ability to increase the fees.  He noted that HB 131 excluded                                                                    
Co-Chair  Wilson  asked  whether the  constitution  excluded                                                                    
DGF. Mr.  King answered  that the constitution  included all                                                                    
GF except for public  corporate receipts that were excluded;                                                                    
e.g.,  University   of  Alaska   (UA)  tuition   and  Alaska                                                                    
Industrial   Development   and  Export   Authority   (AIDEA)                                                                    
Co-Chair  Wilson   determined  that  if  a   state  tax  was                                                                    
implemented  and the  revenue  was included  in  the cap  it                                                                    
would keep spending  consistent and if the  tax was excluded                                                                    
government could  grow. She  thought that  taxes were  a big                                                                    
lever either inside  or outside of a cap.  Mr. King answered                                                                    
that  all spending  limit  caps  were tied  to  the uses  of                                                                    
funds, not  the sources  of funds. Raising  a tax  would not                                                                    
change anything  in the limit,  but how the taxes  were used                                                                    
would. However,  if a  sales tax was  used for  a designated                                                                    
purpose  there would  be no  check on  the amount  of growth                                                                    
that could occur.                                                                                                               
Vice-Chair  Johnston  wondered  whether  the  Department  of                                                                    
Revenues  (DOR)  fees for  investment would  be part  of the                                                                    
9:07:07 AM                                                                                                                    
Mr.  King answered  that under  current law,  the management                                                                    
fees  for a  corporate  entity were  excluded. He  commented                                                                    
that  the   language  was  similar  in   the  statutory  and                                                                    
constitutional  measures before  the  legislature. He  noted                                                                    
that  it would  ultimately depend  on how  the language  was                                                                    
drafted in the  limit. Mr. King referenced  debt service and                                                                    
other  items.   In  general,  debt  service   payments  were                                                                    
considered  outside the  cap. He  recalled that  in all  the                                                                    
current limit  and all other  proposals they  were excluded.                                                                    
He  noted  that  the  type of  debt  service  mattered.  For                                                                    
example, if  the debt  was a  general obligation  bond (GEO)                                                                    
the  debt was  excluded  in all  proposals. However,  things                                                                    
like   school    reimbursement   and   other    subject   to                                                                    
appropriation  bonds would  depend on  how the  language was                                                                    
drafted as to whether it  would be included or excluded. The                                                                    
debt  service  payments not  voted  on  by the  public  were                                                                    
subject to the cap in the current constitutional cap.                                                                           
9:09:27 AM                                                                                                                    
Vice-Chair  Johnston  deduced  that   he  had  answered  the                                                                    
question. She was interested in  whether bonding for oil tax                                                                    
credits and  the unfunded pension obligation  were under the                                                                    
cap. She deemed  that they were included.  Mr. King affirmed                                                                    
her  conclusion.  Vice-Chair  Johnston wondered  if  pension                                                                    
obligation bonds would  be included under the  cap. Mr. King                                                                    
replied in the affirmative.                                                                                                     
Representative  Knopp  referenced  Mr. King's  comment  that                                                                    
federal funds  were excluded. He ascertained  that since the                                                                    
federal  funds  needed matching  state  funds,  a cap  would                                                                    
limit  federal funds  since the  state matching  funding was                                                                    
subject to the cap. Mr.  King agreed that the state matching                                                                    
portion would be subject to  the cap and federal funds could                                                                    
be lost. Representative Knopp  remembered that initially the                                                                    
administration wanted  to eliminate the DGF  designation and                                                                    
had combined UGF  and DGF. He determined  that combining the                                                                    
funds would  likely be  an easy  way to  manage a  limit. He                                                                    
asked about whether capital funds were excluded.                                                                                
9:12:19 AM                                                                                                                    
Mr. King  replied that  there were three  types of  DGF. The                                                                    
constitution did not allow the  full dedication of funds. He                                                                    
explained that  one type  of DGF  generated from  a business                                                                    
like   function.  The   current  limit   and  constitutional                                                                    
proposal excluded  that type of  DGF. He pointed  to another                                                                    
type of DGF that involved  business like activities not part                                                                    
of  a public  corporation;  e.g., user  fees collected  from                                                                    
state parks when the funds  were used to maintain the parks.                                                                    
The fees  were included  under the current  constitution and                                                                    
the proposed  constitutional amendment  but was  excluded in                                                                    
HB  131. He  indicated  that the  state  could collect  more                                                                    
revenue from  fees than  needed to  reinvest in  the program                                                                    
and it was a policy call.  The third type of designation was                                                                    
not tied to the program  from which the funds were collected                                                                    
and  could  be  excluded  or  included.  The  administration                                                                    
concluded that the later type  should not be considered DGF.                                                                    
He furthered  that under the  constitution and  the proposed                                                                    
constitutional  amendment, the  PFD was  excluded and  under                                                                    
the bill and senate proposals the PFD was included.                                                                             
9:15:24 AM                                                                                                                    
Representative  Knopp asked  about capital  funds and  noted                                                                    
they  were  typically  UGF.  Mr.   King  answered  that  the                                                                    
constitution included  some unusual language that  had never                                                                    
been triggered.  He relayed that  in all  proposals, capital                                                                    
funding  was included  in the  cap and  had been  amended to                                                                    
provide  some flexibility  with  either a  10  percent or  5                                                                    
percent allowance over the cap.                                                                                                 
Representative  Josephson asked  whether some  states had  a                                                                    
revenue   cap.    Mr.   King   asked    for   clarification.                                                                    
Representative Josephson  explained that Colorado had  a cap                                                                    
on the revenue  the state could generate. He  assumed that a                                                                    
revenue cap  correlated to  ultimate expenditures.  Mr. King                                                                    
responded in  the affirmative and  purported that  the limit                                                                    
on government spending could be  restricted in various ways;                                                                    
either  restricting   the  ability  to  raise   revenues  or                                                                    
restricting appropriations.  He agreed  that Colorado  had a                                                                    
restriction  on the  revenue it  could  generate, and  other                                                                    
states  made it  difficult for  a state  to implement  a new                                                                    
tax;  therefore, limiting  the ability  to grow  government.                                                                    
Representative Josephson  contended that part of  the reason                                                                    
for  the proposed  development of  Alaska National  Wildlife                                                                    
Refuge  (ANWR) was  that  Alaskans wanted  to  get rich.  He                                                                    
deduced  that  Alaska could  implement  a  spending cap  but                                                                    
still  get rich.   He did not view revenue  generation and a                                                                    
spending  cap as  a correlation.  Mr. King  answered in  the                                                                    
affirmative.  He   agreed  that  revenues  could   exceed  a                                                                    
spending limit  especially in a   resource-rich  state where                                                                    
the imbalance  was typically  temporary. He  advised against                                                                    
increasing spending with volatile revenue sources.                                                                              
9:19:16 AM                                                                                                                    
Representative  Josephson   used  Mr.   King's  hypothetical                                                                    
example of DGF  that was derived from a source  like a sales                                                                    
tax and  used for a  specific purpose. He surmised  that the                                                                    
funds would be  designated, not dedicated and  each year the                                                                    
money could be rerouted to  another purpose. He believed his                                                                    
scenario was  fundamental  to  the states  constitution. Mr.                                                                    
King replied  that the  exclusions from  the limit  were not                                                                    
dedications  of the  funds.  He added  that  revenue from  a                                                                    
sales  tax  that  was  designated  for  a  purpose  was  not                                                                    
dedicated but  it would  be excluded  from the  formula that                                                                    
calculated the cap.                                                                                                             
Vice-Chair Ortiz  asked whether  the Department of  Fish and                                                                    
Game  (DFG) fees  and taxes  would be  included or  excluded                                                                    
from the  cap. Mr. King answered  that under HB 131,  if the                                                                    
fees or taxes  met the definition of  program receipts under                                                                    
AS  37.05.146,  they  would be  excluded.  Vice-Chair  Ortiz                                                                    
asked about the Alaska Marine  Highway System (AMHS) fees or                                                                    
fares.  Mr.  King replied  the  same  exclusion would  apply                                                                    
under HB  131. However, it would  not be the case  under the                                                                    
proposed constitutional amendment -  DGF would be subject to                                                                    
the cap and changed the  dynamics of how the legislature may                                                                    
be able to  alter what was under the cap  or not. Vice-Chair                                                                    
Ortiz  noted that  the state's  revenues fluctuated  greatly                                                                    
from  year   to  year.  He   advised  caution   regarding  a                                                                    
constitutional revision  because it  would be hard  to adapt                                                                    
to changing revenue situations.                                                                                                 
9:22:45 AM                                                                                                                    
Mr. King  agreed that regardless of  revenue volatility, the                                                                    
constitution  was   difficult  to   change  and   should  be                                                                    
addressed   with   caution.   He  addressed   the   original                                                                    
constitutional spending limit proposed  in 1982 and reported                                                                    
that  the reasoning  at  the  time was  to   smooth out  the                                                                    
volatility   in  revenue  and  not  increase  spending  when                                                                    
revenue  increased.   He  judged   that  a   spending  limit                                                                    
stabilized  government spending,  which  was the  governor's                                                                    
reason for proposing the limit.                                                                                                 
Co-Chair  Wilson reasoned  that the  current spending  limit                                                                    
had never really  come into effect because it  was too high.                                                                    
She wondered  whether there  was some  merit in  putting the                                                                    
cap in  statute initially, to  determine how it  was working                                                                    
versus  putting  the  cap  in  the  constitution.  Mr.  King                                                                    
confirmed that  there should  be significant  thought before                                                                    
putting  something into  the constitution.  He offered  that                                                                    
there were ways  to ensure the limit would  be effective and                                                                    
durable over  time. In 1982,  when the amendment  had passed                                                                    
the  first  time, it  had  automatically  gone back  to  the                                                                    
public for  a vote  in 1986.  The vote  meant to  ensure the                                                                    
limits  efficacy. Co-Chair Wilson  countered that it had not                                                                    
been  working  because  it  never   went  into  effect.  She                                                                    
wondered whether  doing something  like that and  going back                                                                    
to voters  every four years  was better than a  statute that                                                                    
required the legislature to test  and adjust every year. Mr.                                                                    
King  noted that  the  governor  desired the  constitutional                                                                    
amendment.   Co-Chair   Wilson  favored   a   constitutional                                                                    
amendment but was  trying to ensure the cap  would work. She                                                                    
wondered if the limit should  be a statutory change at first                                                                    
with the idea of a constitutional amendment in the future.                                                                      
9:28:30 AM                                                                                                                    
Vice-Chair  Johnston noted  that in  1986 the  cap had  been                                                                    
voted on immediately  prior to a drop in oil  price. She had                                                                    
voted for both caps.                                                                                                            
Co-Chair  Wilson interjected  and wondered  if the  vote had                                                                    
come a couple  of years after the drop, would  the vote have                                                                    
passed.  Vice-Chair Johnston  speculated that  "the tax  cap                                                                    
had  been the  last thing  on peoples'  minds because  there                                                                    
were so many  other things going on." She  believed that the                                                                    
portion  of   citizenry  that  were  interested   in  fiscal                                                                    
sustainability and  clambering for a fiscal  plan would have                                                                    
engaged and a  robust discussion would have taken place.                                                                        
Mr.  King  opined that  in  1977,  oil started  flowing  and                                                                    
revenues had started significantly  increasing. As a result,                                                                    
the government had started to grow  and by 1986 to 1988 when                                                                    
revenues  fell,  and    the  problem   regarding  government                                                                    
growth  had gone  away,  it  had stayed  that  way for  many                                                                    
decades  until 2005  when the  prices spiked.  Many realized                                                                    
that the limit put in place in 1982 was ineffective.                                                                            
9:31:26 AM                                                                                                                    
Vice-Chair Johnston  followed up  on an earlier  question by                                                                    
Representative  Knopp related  to  the  capital budget.  She                                                                    
stated that  the cap would  exclude debt and if  the capital                                                                    
budget was funded via a GEO  bond, the debt payment would be                                                                    
excluded. Mr. King replied in the affirmative.                                                                                  
Representative  Sullivan-Leonard   asked  for   an  overview                                                                    
regarding the  existing budget reserve fund  compared to the                                                                    
governor's proposal that included a savings reserve fund.                                                                       
Co-Chair  Wilson asked  what  fund Representative  Sullivan-                                                                    
Leonard  was  referencing.  Representative  Sullivan-Leonard                                                                    
explained that reserve  funds were part of  the spending cap                                                                    
conversation and   wanted a comparison of  the idea proposed                                                                    
in  HJR 7-Const  Am:Approp.  Limit; Reserve  Fund. Mr.  King                                                                    
answered that  HJR 7- Const. Am.: Permanent Fund  & Dividend                                                                  
and its  companion bill SJR 6,  contemplated situations when                                                                    
the state  had more revenues  than it was allowed  to spend.                                                                    
He elaborated that  under current law, Article  9, Section 7                                                                    
and Section 16,  provisions existed for a cap  and a savings                                                                    
fund    the  Constitutional  Budget Reserve  (CBR). The  CBR                                                                    
held  money   from  oil  settlements  and   litigation.  The                                                                    
legislature had the ability to  borrow from the CBR with the                                                                    
understanding that  the money  would be  repaid to  the fund                                                                    
when  revenues  were  sufficient.  The  proposed  resolution                                                                    
would change the concept slightly  - rather than paying back                                                                    
what was  owed to the  CBR it  would always hold  one year's                                                                    
worth in funds  to act as a buffer. The  fund was renamed as                                                                    
the Savings  Reserve Fund in HJR  7. He added that  if there                                                                    
were  additional   funds  available,  rather   than  holding                                                                    
significant  amounts   in  the   CBR  the  funds   would  be                                                                    
automatically  deposited into  the corpus  of the  Permanent                                                                    
Fund (PF).                                                                                                                      
Co-Chair Wilson asked where the  money to initially seed the                                                                    
savings account with  one years  funding would  come from if                                                                    
revenue was  insufficient. She  speculated that  the funding                                                                    
would  come  from  the  ERA.  Mr.  King  answered  that  the                                                                    
resolution  in front  of the  legislature required  spending                                                                    
cuts  to meet  the limit  or finding  additional revenue.  A                                                                    
withdrawal from the ERA would be a legislative decision.                                                                        
9:36:35 AM                                                                                                                    
Co-Chair  Wilson  thought that  the  limit  could force  the                                                                    
state into a taxation.                                                                                                          
Vice-Chair Ortiz  asked whether moving forward  with HB 131,                                                                    
which did not include the PFD  as part of the spending cap -                                                                    
if it  by necessity negated  SB 26-Approp Limit &  Per Fund:                                                                    
Dividend;  Earnings [CHAPTER  16 SLA  18 -  06/13/2018] that                                                                    
used part of  the Earning Reserve Account (ERA)  draw to pay                                                                    
for  the   dividend  and   government  services.   Mr.  King                                                                    
corrected that  HB 131 included  the dividend in  the limit.                                                                    
He believed that Vice-Chair Ortizs   broader point was sound                                                                    
and the  limitation on the  amount that could be  drawn from                                                                    
savings impacted  the amount of expenditure.  He agreed that                                                                    
a strict appropriations limit would  preclude the ability to                                                                    
draw from the POMV.                                                                                                             
Co-Chair  Wilson   interjected  that   the  PF   corpus  was                                                                    
9:38:21 AM                                                                                                                    
Vice-Chair  Johnston referenced  the  newly defined  savings                                                                    
account. She  asked if  a  temporary  sweep  of  funds would                                                                    
exist  in  that situation.  Mr.  King  answered that  HJR  7                                                                    
contemplated the  elimination of the three-quarter  vote and                                                                    
prohibited the reverse  sweep. He elucidated that  HJR 7 did                                                                    
not require  a full sweep  to repay  the CBR but  required a                                                                    
sweep of  GF known  as the    waterfall   to the  either the                                                                    
corpus or  the CBR. Vice-Chair  Johnston stated that  one of                                                                    
the aspects  of the CBR  was it  acted as a  cash management                                                                    
tool. The fund  would still be used as a  fund balance and a                                                                    
cash  management tool,  but the  resolution required  a full                                                                    
year's  budget balance  as opposed  to merely  a basic  cash                                                                    
management  tool.  She asked  whether  he  agreed. Mr.  King                                                                    
answered in  the affirmative and elaborated  that currently,                                                                    
the  CBR acted  as a  stabilization fund.  The question  was                                                                    
what the balance needed to  be to provide the stability. The                                                                    
current law did not have an  upper limit to the CBR balance.                                                                    
He deemed that  the question was about the  right balance to                                                                    
maintain  in the  CBR and  how  the excess  funds should  be                                                                    
handled.  The general  idea of  HJR  7 was  that one  years                                                                     
worth  of revenue  was adequate  and the  CBR would   truly                                                                     
become a  stabilization fund rather than  a holding account.                                                                    
He recommended that the legislature  further analyzed what a                                                                    
proper reserve amount was.                                                                                                      
9:41:22 AM                                                                                                                    
Vice-Chair Johnston  addressed what  qualified and  what did                                                                    
not regarding  the limit. The  government could  employ  Tax                                                                    
Anticipation Notes  (TAN) that would be  included within the                                                                    
tax cap because  it was debt service. Mr.  King replied that                                                                    
the administration had not talked  about it specifically, he                                                                    
guessed that  it would be under  the cap, but he  would have                                                                    
to follow up.                                                                                                                   
Representative Carpenter cited  page 2, line 8  and read the                                                                    
      of money to a state savings account or fund that                                                                          
     requires a subsequent appropriation from that account                                                                      
     or fund.                                                                                                                   
Representative Carpenter  asked for  an example of  the type                                                                    
of  fund. Mr.  King  answered that  Power Cost  Equalization                                                                    
(PCE)  was the  type of  fund described.  He noted  that the                                                                    
Retirement  Trust   Fund  did   not  require   a  subsequent                                                                    
appropriation.  He  maintained  that  lacking  a  subsequent                                                                    
appropriation  meant that  the money  was already  spent and                                                                    
should be  subject to a cap.  Representative Carpenter asked                                                                    
how  a   fund  requiring  a  subsequent   appropriation  was                                                                    
Mr.  King replied  that  the  type of  fund  was created  by                                                                    
statute.   Representative   Carpenter  surmised   that   the                                                                    
legislature could create  a fund to avoid the  cap. Mr. King                                                                    
clarified  that the  transfer from  GF to  the fund  was not                                                                    
subject   to   the  cap   but   the   subsequent  spend   or                                                                    
appropriation  from the  fund was  included in  the cap.  He                                                                    
maintained that it was not possible to avoid the cap.                                                                           
9:44:27 AM                                                                                                                    
Representative  Josephson spoke  about a  new state  savings                                                                    
account. He  surmised that the  idea was to have  one year's                                                                    
worth of  spending in  the account.  Mr. King  answered that                                                                    
HJR 7  contemplated maintaining one  year's spending  as the                                                                    
upper balance,  which was about  $5 billion in  the account.                                                                    
He  recounted  that  the   administration  did  not  discuss                                                                    
whether  the amount  was adequate.  Representative Josephson                                                                    
discussed  the administration's  goal  to  restore the  full                                                                    
formula PFD from  2016 through 2018 to  residents by drawing                                                                    
from the ERA.  He refenced that Mr. King  testified that the                                                                    
initial  seed money  for the  new savings  account would  be                                                                    
withdrawn from the  ERA. He worried about the  burden on the                                                                    
ERA.  He thought  that the  action would  make it  easier to                                                                    
expend  funds  from  the  new   savings  account.  Mr.  King                                                                    
clarified  that HJR  7 did  not proposed  to withdraw  money                                                                    
from the ERA and deposit it into the CBR.                                                                                       
Co-Chair  Wilson interjected  that it  had been  her comment                                                                    
when  wondering where  the initial  extra  $5 billion  would                                                                    
come from.                                                                                                                      
9:46:51 AM                                                                                                                    
Representative  Josephson reiterated  that  he recalled  Mr.                                                                    
King  had stated  that it  would  be necessary  to find  the                                                                    
money and it may come from  the ERA. Mr. King clarified that                                                                    
he stated the  legislature either must turn to  the ERA, cut                                                                    
spending, or  raise taxes if  the CBR was empty  and revenue                                                                    
was insufficient. He did not  intend to say that money would                                                                    
be moved from the ERA to  the CBR. He addressed the question                                                                    
about whether the  money would be easier to  spend and asked                                                                    
whether  the   query  was  still   relevant.  Representative                                                                    
Josephson  deemed  that  changing  the name  of  an  account                                                                    
changed  the way  the public  thought about  it and  how the                                                                    
media  covered it.  Mr. King  supposed  it could  be a  true                                                                    
statement.  He  answered  that   in  terms  of  spending,  a                                                                    
provision prohibited spending  more from the CBR  or SRF (as                                                                    
named in the  proposed resolution) than the  gap between the                                                                    
limited amount  and the  revenue available.  The legislature                                                                    
 did  not get  free access  to the  money.  The  legislature                                                                    
could not  fill the gap  with the  ERA and still  access the                                                                    
CBR.  He declared  that the  provisions did  not allow  easy                                                                    
access to the funds.                                                                                                            
9:49:43 AM                                                                                                                    
Co-Chair Wilson indicated  that Representative Louise Stutes                                                                    
joined the meeting.                                                                                                             
Representative Carpenter  asked if  the change  in inflation                                                                    
adequately reflected the demand in  spending in the event of                                                                    
a population change.  Mr. King referred to  the three levers                                                                    
or  options when  establishing a  spending  limit. He  would                                                                    
answer   Representative   Carpenters   question   after   he                                                                    
addressed the last two levers.                                                                                                  
Mr.  King  continued that  the  second  lever was  what  the                                                                    
limitation  was based  on and  the third  lever was  how the                                                                    
base was  escalated over time.  He expounded that  under the                                                                    
current constitution, the limit had  been allowed to grow at                                                                    
the rate  of inflation and  population as a  cumulative rate                                                                    
over time with the base  set at $2.5 billion. Therefore, the                                                                    
amount  was  about  $10.5 billion  in  current  prices.  The                                                                    
escalation  happened based  on  the  previous year's  limit,                                                                    
which was how  the limit became detached  from spending. The                                                                    
fixed base  was growing at a  variable rate tied to  a fixed                                                                    
value.   He  related   that  the   constitutional  amendment                                                                    
proposed  by the  governor had  an adjusting  base versus  a                                                                    
fixed  base that  was recalculated  each year  based on  the                                                                    
prior   three   years   of   actual   spending.   The   base                                                                    
automatically adjusted  down if  the spending was  below the                                                                    
limit  and  would never  become  detached  like the  current                                                                    
limit.  He  reasoned  that  it might  not  be  necessary  to                                                                    
readjust the  amendment due  to the  nature of  an adjusting                                                                    
base. Rather  than using an  adjusting base, HB  131 changed                                                                    
the fixed values  to $5 billion and grew  at inflation only.                                                                    
He deduced  that the fixed  base still had the  potential to                                                                    
become detached from actual need.                                                                                               
9:53:02 AM                                                                                                                    
Mr.  King  addressed   Representative  Carpenter's  question                                                                    
regarding  whether the  inflation  adjustment was  adequate.                                                                    
He  believed that  it  made sense  to  consider some  amount                                                                    
towards inflation,  it was a  policy call that needed  to be                                                                    
made.  He  considered  whether population  adjustments  were                                                                    
necessary.  He pondered  whether government  services needed                                                                    
to  grow at  that same  rate as  the population  and if  the                                                                    
population  grew by  10 percent  was  the full  proportional                                                                    
rate  necessary.  He  noted   the  large  population  growth                                                                    
between 1990  and 2010.  He delineated  that there  had been                                                                    
significant   population  growth   in   the   past,  but   a                                                                    
significant  increase in  public  services was  unwarranted.                                                                    
The governors  proposal included  half the rate of inflation                                                                    
and in the  amended SJR 6 the Senate included  the full rate                                                                    
of inflation  but eliminated the population  adjustment; the                                                                    
same in  HB 131.  He thought  that the  answer was  a policy                                                                    
call  determined  on  what the  requirements  of  government                                                                    
would be in a future with a different population.                                                                               
Co-Chair Wilson  wondered if  it was  possible to  model the                                                                    
numbers  using a  mathematical equation.  Mr. King  answered                                                                    
that the bill could be  structured in any manner. He offered                                                                    
that it depended on how  reactive the legislature wanted the                                                                    
cap  to be  with changing  circumstances. He  suggested that                                                                    
the limit could be tied to  revenue or various items such as                                                                    
inflation and  population. He  did not  believe there  was a                                                                    
right  answer,  there were  numerous  ways  to approach  the                                                                    
issue. Co-Chair Wilson thought that  the voters did not have                                                                    
the  opportunity  to choose  the  levers  unless there  were                                                                    
several   constitutional   amendments  offered.   Mr.   King                                                                    
responded in the affirmative.                                                                                                   
9:56:38 AM                                                                                                                    
Vice-Chair Ortiz asked  that if the capital  budget was part                                                                    
of the limit  whether there was a way to  factor in existing                                                                    
deferred  maintenance   needs.  Mr.  King  replied   in  the                                                                    
affirmative. He  stated that  deferred maintenance  could be                                                                    
excluded, or  the legislature could bond  for it. Vice-Chair                                                                    
Ortiz  spoke   to  the  benefits  of   bonding  for  capital                                                                    
projects.  He  asked  if  the  dollar  costs  to  the  state                                                                    
increased  through a  bonding  process.  Mr. King  confirmed                                                                    
that  there  was  a  cost associated  with  bonding  but  to                                                                    
consider what the opportunity costs  were. He commented that                                                                    
it was  not clear  cut whether bonding  would be  better for                                                                    
the state or worse.                                                                                                             
Co-Chair  Wilson  asked  about   the  possibility  of  using                                                                    
modeling to  analyze the options  for a spending  limit. Mr.                                                                    
King  responded that  he was  unaware of  available software                                                                    
due to  the unique nature  of Alaska. He suggested  that the                                                                    
Legislative  Finance Division  could develop  some modeling.                                                                    
He offered to help.                                                                                                             
Co-Chair  Wilson  wondered if  the  members  wanted to  have                                                                    
modeling and  comparisons done. If  there were  other things                                                                    
the  committee  wanted to  see  in  a modeling  format,  she                                                                    
invited them  to let  her know. She  favored a  spending cap                                                                    
but wanted to ensure that the spending cap was appropriate.                                                                     
Representative Josephson  understood that  population growth                                                                    
and services  did not warrant a  one to one ratio.  He asked                                                                    
about the  20 year period  from 1990 through 2010  and noted                                                                    
things like school bond  debt reimbursement, law enforcement                                                                    
needs,  and the  lack of  a  state income  tax all  impacted                                                                    
expenditures.  Mr.  King  reiterated that  even  though  the                                                                    
state  experienced large  population growth,  the government                                                                    
did not grow.  He questioned whether population  growth as a                                                                    
factor was necessary in the overall limit.                                                                                      
10:03:31 AM                                                                                                                   
Vice-Chair  Ortiz suggested  that  perhaps there  was not  a                                                                    
need  for  a  limit   and  the  hypothesis  merited  further                                                                    
discussion. Mr. King replied that  if there were no revenues                                                                    
or  savings  the  economics  was   creating  the  limit.  He                                                                    
detailed that  when there  was volatility  (e.g. a  spike in                                                                    
oil price) the  legislature had been a bit slow  to react to                                                                    
the  increase  or  decrease in  revenue.  During  the  prior                                                                    
revenue spikes, he  noted that there had  been some savings,                                                                    
but  also  a  significant  increase in  spending.  He  asked                                                                    
whether legislators  would have passed large  budgets if the                                                                    
legislature  knew that  the price  of  oil would  eventually                                                                    
plummet. He maintained  that if they had  known the downturn                                                                    
was coming, they  would have adjusted the  budget sooner. He                                                                    
believed that a spending limit forced the conversation.                                                                         
Co-Chair Wilson  asked what would happen  if the legislature                                                                    
deposited $12 billion  from the ERA into  the Permanent Fund                                                                    
corpus.  She  thought  that the  action  would  implement  a                                                                    
spending  cap. Mr.  King affirmed  her  statement. He  added                                                                    
that it did  not address a future  circumstance of increased                                                                    
Co-Chair Wilson  thought that the  committee and  the public                                                                    
were learning a significant amount from the conversation.                                                                       
Representative   Carpenter  noted   that  HB   131  excluded                                                                    
designated or dedicated  funds from the cap.  He returned to                                                                    
his  earlier question  about creating  a fund  like PCE.  He                                                                    
determined  that  the appropriation  would  be  DGF and  the                                                                    
expenditure would be excluded from  the cap. He asked if his                                                                    
statement   was  accurate.   Mr.   King   answered  in   the                                                                    
affirmative and  explained that under  HB 131  the exclusion                                                                    
of the designation made the  scenario possible. He furthered                                                                    
that the legislature had the  purview to designate funds any                                                                    
time.  He believed  that it  was a  question that  should be                                                                    
closely  considered  as the  cap  language  was crafted.  He                                                                    
emphasized that  it was not the  creation of a fund  and its                                                                    
subsequent appropriation  it was  the exclusion of  DGF that                                                                    
allowed the scenario.                                                                                                           
10:08:05 AM                                                                                                                   
Representative Carpenter agreed. He  was trying to point out                                                                    
that a spending cap that did  not cap all spending was not a                                                                    
spending cap. Mr. King agreed with the statement.                                                                               
Co-Chair Wilson  used the Division  of Motor  Vehicles (DMV)                                                                    
funds  as an  example that  collected more  revenue than  it                                                                    
needed. She  used a scenario  where departments would  be as                                                                    
self-sustaining as  possible. She  wondered whether  the DMV                                                                    
funds  would be  inside  or  outside the  cap  under HB  131                                                                    
versus the governor's proposal.  Mr. King replied that under                                                                    
HB  131 the  DMV  funds  would be  inside  the  cap. If  the                                                                    
legislature  took an  action to  designate the  funds solely                                                                    
for DMV operations the funds  would move from inside the cap                                                                    
to outside the  cap. The governor's proposal  kept the funds                                                                    
in both scenarios  inside the cap. Co-Chair  Wilson asked if                                                                    
it  would  still  be  possible if  the  DMV  collected  more                                                                    
revenue than  needed for operations. Mr.  King answered that                                                                    
the  spending  limit was  tied  to  the appropriations,  not                                                                    
revenues, any  additional funds  would lapse  to the  GF and                                                                    
the use of the funds would be subject to the limit.                                                                             
Representative LeBon  hypothesized a  fuel tax that  was not                                                                    
designated for  road maintenance.  He asked  if there  was a                                                                    
method short  of changing the constitution  that allowed the                                                                    
tax revenue  to be dedicated  to road maintenance.  Mr. King                                                                    
answered that  the legislature had the  ability to designate                                                                    
the funds that  were subject to yearly  appropriation by the                                                                    
legislature.  Dedicated  funds   required  a  constitutional                                                                    
amendment. Representative LeBon  asked for verification that                                                                    
there was  no proposal by  the governor to designate  a fuel                                                                    
tax  for road  maintenance. Mr.  King was  not aware  of any                                                                    
such proposal.                                                                                                                  
10:11:29 AM                                                                                                                   
Representative Josephson  was thinking about the   merits or                                                                    
demerits of  including designated  funds within the  cap. He                                                                    
returned   to  his   example  about   family  finances.   He                                                                    
questioned why  revenue from a self-sustaining  agency would                                                                    
be  included in  the cap.  Mr. King  reminded the  committee                                                                    
that the expenditure was limited and not the revenue.                                                                           
Representative Knopp  looked at  agency receipts  that often                                                                    
brought in  more revenue than  it expended. He  thought that                                                                    
it was appropriate to include  the revenue in a spending cap                                                                    
and share  the excess  revenue. He  asked for  comments. Mr.                                                                    
King answered that the  governor's proposal contemplated the                                                                    
program receipts as part of  the general fund and subject to                                                                    
the cap.                                                                                                                        
Co-Chair Wilson noted that all  boards and commissions would                                                                    
be under the cap. Mr.  King affirmed the statement. Co-Chair                                                                    
Wilson asked if it  would include statutory designated fees.                                                                    
Mr.  King answered  in the  negative    statutory designated                                                                    
program receipts would  be outside the cap and  were held in                                                                    
a trust.                                                                                                                        
Co-Chair  Wilson  thought  agencies  that  taxed  themselves                                                                    
should  be  able  to  use  the funds  as  they  wanted.  She                                                                    
indicated that she would request modeling from LFD.                                                                             
Co-Chair  Wilson  reviewed  the  agenda  for  the  following                                                                    
Vice-Chair Ortiz asked about the  $5 billion spending cap He                                                                    
wondered where  the figure  was derived  from. Mr.  King did                                                                    
not  know  -  the  bill  had come  from  the  House  Finance                                                                    
Co-Chair Wilson  replied that the  cap was based on  a three                                                                    
year  average and  was a  starting point.  She characterized                                                                    
the base as the most  important lever in building a spending                                                                    
HB  131  was  HEARD  and   HELD  in  committee  for  further                                                                    
10:16:43 AM                                                                                                                   
The meeting was adjourned at 10:16 a.m.                                                                                         

Document Name Date/Time Subjects