Legislature(1997 - 1998)
04/04/1998 01:15 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
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+ 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.
PRESENT
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.
SUMMARY
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
consideration.
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
consideration.
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."
SENATOR RANDY PHILLIPS, (TESTIFIED VIA TELECONFERENCE),
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
report.
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
living.
? 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
39%.
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
27.9%.
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
education.
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
borough.
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
dollars.
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.
RICHARD CROSS, DEPUTY COMMISSIONER, DEPARTMENT OF
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
program.
? 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
issues.
? 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
net.
? 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
methodology.
? 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
date."
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.
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, stated
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.
ADJOURNMENT
The meeting adjourned at 3:10 P.M.
H.F.C. 13 4/04/98
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