Legislature(1999 - 2000)
02/09/2000 01:45 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 9, 2000
1:45 P.M.
TAPE HFC 00 - 30, Side 1
CALL TO ORDER
Co-Chair Therriault called the House Finance Committee
meeting to order at 1:45 p.m.
PRESENT
Co-Chair Therriault
Vice Chair Bunde Representative Grussendorf
Representative Austerman Representative Moses
Representative J. Davies Representative Phillips
Representative G. Davis Representative Williams
Co-Chair Mulder and Representative Foster were absent from
the meeting.
ALSO PRESENT
Representative Lisa Murkowski; Mike Tibbles, Staff,
Representative Gene Therriault.
TESTIFIED VIA TELECONFERENCE
Jim Lynch, Interim Vice President of Finance, University of
Alaska, Fairbanks; Bob Manley, State Planning and Tax
Attorney, Anchorage.
SUMMARY
HB 191 An Act relating to charter schools; and providing
for an effective date.
CS HB 191 (FIN) was reported out of Committee on
2/07/00, with a "do not pass" recommendation and
with a fiscal note by the Department of Education
and Early Development.
HB 268 An Act relating to the Alaska Higher Education
Savings Trust; and providing for an effective
date.
CS HB 268 (HES) was REPORTED out of Committee with
a "do pass" recommendation and with fiscal impact
note by the University of Alaska.
HOUSE BILL NO. 191
"An Act relating to charter schools; and providing for
an effective date."
Co-Chair Therriault provided the Committee with information
regarding previous action taken by the Committee on HB 191.
He noted that the Committee on 2/7/00 adopted conceptional
Amendment 5. Members were provided with suggested by the
legislative auditor and legislative legal counsel to
implement Amendment 5:
AS 14.03.260 is amended by adding new subsection to
read:
(e) If a school district intends to charge a charter
school for services provided, then the school district
shall itemize the services provided to charter schools
in the district. The cost of the itemized services
shall be identified separately. The portion of costs
related to the charter school shall conform to the cost
principles as defined in United States Office of
Management and Budget Circular A-87 or be determined
using a cost allocation method mutually agreed to by
the school district and the charter school. In addition
to administration, services provided by a local school
district may include audio-visual services, curriculum,
staff development and training, special needs and
intensive services, transportation, procurement,
facility rental and other services that are agreed to
between the local school district and charter school.
Except for administration services, those services
required by law and other services with benefits that
are inseparable between the charter school and the
school district, a charter school may elect not to
receive services provided by a local school district.
MIKE TIBBLES, STAFF, REPRESENTATIVE THERRIAULT explained
that the conceptual language in Amendment 5 attempted to tie
the list of exceptions to federal guidelines. The intent was
that the list of exceptions not be so specific that they run
counter to the federal guidelines. The amendment was
expanded to incorporate this intent. He summarized the
Amendment 5 as drafted by legal counsel. The amendment
would:
· Require itemization only if the district intends to
charge the charter school for the service. If the school
district has an extra room they could agree to let the
charter school use the room without accounting.
· Require the cost of the itemized services to be
identified separately.
· Require a cost allocation method that conforms to the
cost principles as defined in US 0MB Circular A-87 or
based upon a mutually agreed method between the charter
school and the school district. There may be a
methodology that is not included in the OMB Circular A-87
that the charter school and the school district can agree
on. The OMB Circular A-87 requires that services be
accounted for by the hour. School districts may use a
different system
· Clarify that administration is a service that a charter
school must receive.
· Replace language "district wide programs" with "services
with benefits that are inseparable between the charter
school and the school district" in list of services that
a charter school must receive. This language more
appropriately addresses the intent. If a charter school
is in a school facility the electric bill will be
inseparable.
CS HB 191 (FIN) was reported out of Committee on 2/07/00,
with a "do not pass" recommendation and with a fiscal note
by the Department of Education and Early Development.
HOUSE BILL NO. 268
An Act relating to the Alaska Higher Education Savings
Trust; and providing for an effective date.
BOB MANLEY, STATE PLANNING AND TAX ATTORNEY, ANCHORAGE
testified via teleconference in support of HB 268. He
observed that clients have sent money out of Alaska to other
state college savings plans. He noted that section 529 plans
are authorized under IRS Code 26 USC 529. Forbes Magazine
calls section 529 plans the sleeper tax break of the 1997
Tax Act. While each state can setup its own plan there is no
requirement that the beneficiary use the funds in the state
in which the fund was setup. It allows savings for education
and works like an IRA, except that there is not an income
tax deduction at the time of contribution. Taxable income
from the plan is deferred at accumulation. It would be
subject to income tax at the time of withdraw. Students
generally have a lower income tax than the contributor does.
Additionally, there are proposals in Congress that would
make section 529 funds totally tax free, providing the funds
are used for qualified higher education.
Mr. Manley further noted that section 529 plans allow a
contributor to make a completed gift and still maintain some
parental control. Completed gifts are important because that
is how "you get your $10 thousand dollar per recipient per
year exclusion from gift taxes." Five years worth of
exclusion can be placed in one lump sum. Husbands and wives
can each contribute. Money put away for a child's college
tuition would be out of the contributor's estate for tax
purposes. The total amount of contribution is uncertain.
Federal law provides that the maximum amount of contribution
should be the total cost of higher education within the
state that sponsors the program. States have estimated this
amount at $100 to $172 thousand dollars. He reiterated that
section 529 plans allow participant control. Beneficiaries
within a family can be changed or withdrawn. There is a
penalty for money that is not used for higher education. The
penalty can be as low as 10 percent of the earnings. The
penalty goes back to the program.
Mr. Manley observed other advantages of the section 529
plan. Funds are protected from creditors. The university
will be able to receive fees for the administration and
management of the program. The university would also receive
penalties from funds that were not used for higher
education. The program is also good for non-Alaskans because
it is in competition with other states to offer the best
program. The more funds in the program the more efficient
the program will be and the more benefit to the university.
Mr. Manley emphasized that because of Alaska's unique trust
laws; Alaska would offer better credit protection to non-
Alaskans. This would aid in marketing the program outside of
Alaska. section 529 plans can be rolled over from one
program to another like an IRA.
Representative J. Davies asked how the university would
benefit. Mr. Manley explained that the university would
receive requests for proposals from major brokerage houses.
A brokerage house would handle the marketing and
administration expenses and give the university a
percentage. The university would also receive penalties from
funds that were not used for higher education.
Mr. Manley clarified that taxes would have already been
paid on the original funds. Income tax would have to be
paid on the earning increases when the funds are withdrawn.
In response to a question by Vice Chair Bunde, Mr. Manley
noted that the penalty could be as low as 10 percent and as
high as the university wanted to set it. He suggested that
the university would have to consider the penalty with a
mind to make the program marketable.
JIM LYNCH, INTERIM VICE PRESIDENT FOR FINANCE, UNIVERSITY OF
ALASKA, FAIRBANKS explained that the Prepaid Tuition Program
had substantial penalties for withdrawal. The savings
programs that are currently operating are mostly set at the
10 percent level. He emphasized that the market would
establish the rate.
Co-Chair Therriault questioned what the contractor fee would
be. Mr. Lynch explained that the fee would be set through a
competitive public procurement process. He stressed the
importance of a low fee structure. He estimated that there
will be 30 - 40 programs competing in the market place a
year from now. Fees could range from one-half of one percent
to one and a half percent of the main program. New Hampshire
charges one-eight of one percent for its section 529 plan.
This is the total fee charge, which includes the cost of
administration and marketing.
Vice Chair Bunde expressed concern that the university is
entering into the investment business. He maintained that if
the intent of the legislation is for citizens to save money
and not a fundraiser for the university that it should be
revenue neutral.
REPRESENTATIVE LISA MURKOWSKI replied that she would be
happy to work with Vice Chair Bunde to make the legislation
more revenue neutral. She emphasized that the intent is to
encourage savings.
Vice Chair Bunde asked what the program would do to the
permanent fund check off program. Mr. Lynch stated that the
university intends to continue the permanent fund check off
program, Advance College Tuition Program (ACT). The intent
is to build the two programs together. He emphasized that
they serve different purposes. The ACT program was built
with graduation incentives. If earnings were greater than
the cost of the program they would be returned to the
participant in the form of graduation incentives. There are
over 11,000 participants in the ACT program. This represents
a high level of per capita participation. He anticipated
that the Higher Education Savings Trust would rapidly dwarf
the ACT program. Mr. Lynch concluded that the legislation
would make a good match to the ACT program and would not
compete with the private sector.
Representative Austerman assumed that the ACT participants
could roll their funds into the Higher Education Savings
Trust. Mr. Lynch noted that the intent is to allow funds to
be rolled over, but that it would have to be approved by the
IRS.
Representative Austerman expressed concern that the ACT
program is being subsidized by general funds dollars running
through the University of Alaska. He considered attaching a
sunset clause, but indicated that he would not attach a
sunset clause if the program were revenue neutral. Mr. Lynch
noted that the intention is to be revenue neutral and that
excess earnings would be used as incentives for
participants. He stressed that the excess could be used to
encourage graduation or to give an instate premium.
Co-Chair Therriault questioned why there is an issue of
revenues in excess of costs. Mr. Lynch observed the
difficulty of matching revenues to expenses.
Co-Chair Therriault questioned why the revenue from
interest, once fees are subtracted, does not accrue to the
accounts. Mr. Lynch responded that the tax advantage nature
of the program means that higher fees can be paid and the
account could still be better off. He did not think there
would be large excess. He pointed out that it would take at
least $100 million dollars for the program to break even.
Vice Chair Bunde pointed out that the program could be in
place for 20 - 50 years. Mr. Lynch stressed the
responsibility to the participants.
In response to a question by Vice Chair Bunde, Mr. Lynch
noted that if a student graduates within 6 years the student
would receive back an additional percentage of the earnings,
based on revenues, to provide an incentive to graduate
within a specified term.
Representative J. Davies MOVED to report CSHB 268 (HES) out
of Committee with the accompanying fiscal note.
Representative Grussendorf pointed out that participation is
voluntary.
There being NO OBJECTION, CSHB 268 (HES) was Moved from
Committee.
CS HB 268 (HES) was REPORTED out of Committee with a "do
pass" recommendation and with fiscal impact note by the
University of Alaska.
ADJOURNMENT
The meeting adjourned at 1:25 p.m.
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