Legislature(2019 - 2020)ADAMS ROOM 519
03/04/2019 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Consideration of Governor's Appointee: Bruce Tangeman, Commissioner Designee, Department of Revenue | |
| Presentation - Legislative Finance Division: Education Funding | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 4, 2019
1:34 p.m.
1:34:50 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:34 p.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
None
ALSO PRESENT
Bruce Tangeman, Commissioner, Department of Revenue; Alexei
Painter, Analyst, Legislative Finance Division; Michael
Partlow, Fiscal Analyst, Legislative Finance Division.
SUMMARY
CONSIDERATION OF GOVERNOR'S APPOINTEE: BRUCE TANGEMAN,
COMMISSIONER DESIGNEE, DEPARTMENT OF REVENUE
PRESENTATION - LEGISLATIVE FINANCE DIVISION: EDUCATION
FUNDING
Co-Chair Foster reviewed the meeting agenda. He handed the
gavel to Co-Chair Wilson.
^CONSIDERATION OF GOVERNOR'S APPOINTEE: BRUCE TANGEMAN,
COMMISSIONER DESIGNEE, DEPARTMENT OF REVENUE
1:36:12 PM
Co-Chair Wilson invited Mr. Tangeman to the table.
BRUCE TANGEMAN, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself and thanked members of the committee for
their time. He had lived in Alaska since 1991. He
highlighted his diverse career in Alaska. He shared that he
grew up in Indiana and recalled his high school graduating
class of 1970. He detailed that he had earned his Eagle
Scout award at the age of 14 or 15. He attended Indiana
University and studied public finance and economics. He met
his wife, Betty, in 1987 at university. He provided further
detail about graduating from college and getting married.
He worked as much as possible to get through school.
Commissioner Designee Tangeman shared that he worked for
the Boy Scouts of America after college graduation. His
wife had a degree in criminal justice and one in East Asian
languages. He discussed his work background. He managed the
airport parking lot when he moved to Juneau at the age of
22. He went into state service in 1996 working in
accounting for the Department of Corrections (DOC). He
became a budget analyst for DOC and for the Department of
Health and Social Services (DHSS). He worked for the
Legislative Finance Division (LFD) before moving to
Anchorage to work for the Alaska Railroad as the corporate
budget officer. He returned to the the private sector in
2008 and moved to Fairbanks. He provided detail about his
position as chief executive officer for Doyon Utilities.
The U.S. Army had been privatizing facilities across the
country. He explained the desire of the Army for one
company to own everything. His company became the third
largest utility in the state owning 12 utilities. He spoke
of the advantages of the size of the utility.
1:44:40 PM
Commissioner Designee Tangeman continued to share
information about the utility company. He mentioned that
they replaced the electrical system at 3 bases in the first
5 years of his tenure. He worked for the company for four
years prior to going back to Anchorage. He worked as deputy
commissioner for the Department of Revenue (DOR) after that
time. He provided detail about working on the Alaska
Liquified Natural Gas (AKLNG) project and the TransCanada
buyout. He hoped the issues they had worked on at the time
would pay out dividends in the future.
Commissioner Designee Tangeman detailed that he had worked
with the Alaska Gasline Development Corporation (AGDC), and
in May 2014 he started with AGDC as a vice president of
finance. He acquired a significant amount of experience
working for Dan Fauske. He learned that the work was about
finding a solution and being prepared with an idea on how
to fix a problem prior to bringing it to a superior. He
assisted in the hiring process for AGDC. He shared that his
wife worked as a probation officer for 20 years. In 2016,
he and his wife went on a four-month road trip. Following
is trip he worked for former Senator Pete Kelly and the
Senate Finance Committee. He highlighted his well-rounded
background.
1:51:25 PM
Commissioner Designee Tangeman continued to address his
work history. He stated it was too early to retire and was
offered the position of commissioner of DOR. He looked
forward to working in the position. He made himself
available for questions.
Representative Sullivan-Leonard asked for Commissioner
Designee Tangeman's view and mission for the department.
She asked how he saw things going forward, especially in
light of current challenges.
Commissioner Designee Tangeman detailed the department had
4 primary divisions including the Tax Division, the
Treasury Division, the Permanent Fund Dividend Division,
and the Child Support Division. He addressed the issue of
constrained revenue. He thought it was a critical time for
the state. Oil production was at 500,000 barrels per day.
He spoke of the potential for further development of oil.
The Constitutional Budget Reserve (CBR) currently had a
balance below $2 billion, which was a concern. He thought
the percent of market value (POMV) approach in statute
allowed the state to access a nice revenue stream. He
believed the state and the department had many good
building blocks in place, but stability on the revenue side
would be a challenge in the future. Production was
forecasted to be stable over the next 10 years, with a 5
percent decline over that period. He thought the revenue
was as good as it could be presently. He added that 2 of
the state's revenue streams appeared stable.
1:56:15 PM
Vice-Chair Ortiz referenced Commissioner Designee
Tangeman's mention that he was not arriving to the position
in an economic upswing. He asked if good times would be
arriving soon or whether significant diversification was
needed.
Commissioner Designee Tangeman replied that he viewed the
environment as fairly stable and competitive. As the state
went through a series of tax changes, the need for Alaska
to compete became clear, which he believed had been done
over the past 5 years. He thought the state had other
revenue resources to get through the hard times. He
asserted that a reduction in the budget was required to
make ends-meet. The disparity between the available
revenues versus the budget seen in the previous couple of
years did not work. The state would have to tap additional
revenues from the Permanent Fund Earnings Reserve Account
(ERA). He did not see the need for any new taxes or
revenues in the foreseeable future. He thought the need for
additional taxes could be a decade away.
Vice-Chair Johnston believed she and Commissioner Designee
Tangeman had first met when discussing landfill gas. She
appreciated all of his work stabilizing oil and gas taxes
and helping to develop structure with the Permanent Fund.
She valued his comments on the importance of both. There
were some bills that might come before the committee that
would go beyond the structured draw of the ERA. She
emphasized that there was an issue regarding the structured
draw. She was relieved to hear the commissioner speaking in
favor of it. She asked if Commissioner Designee Tangeman
was on the board of Alaska Industrial Development and
Export Authority (AIDEA). Commissioner Designee Tangeman
answered in the affirmative.
Vice-Chair Johnston stated that the administration was
looking at using AIDEA funds for the oil and gas credits
and for the capital budget. She asked if the AIDEA Board
had weighed in on the use of the funds and what AIDEA would
be able to do without them.
Commissioner Designee Tangeman answered that the board was
looking into the idea. The agency had over $400 million in
liquidity of which the administration was proposing to use
just over half. He viewed the situation as a cash flow
issue for the state. He thought if there was a large enough
resource that could be used to pay down some of the state's
debt, it was a reasonable approach. The bulk of the money
would be used to pay the majority of the outstanding tax
credits. He clarified that the money would not be used to
pay the 3 larger oil companies. Rather, it would be used to
pay off tax credits for investments that companies made
under PPT, Alaska's Clear and Equitable Share (ACES), and
SB 21. The tax credits were originally put into place to
bring more companies to Alaska. In retrospect, he found
that some companies had the balance sheet and experience to
work in the state. He cited Hilcorp as an example. He
reported that not all companies had money to invest or were
in a position to do business in Alaska. The one-time use of
AIDEA funds would be used to pay off the existing credits.
The Alaska Industrial Development and Export Authority
funds would not be an ongoing revenue stream. He spoke to
the importance of paying down the state's debt and getting
Alaska on a better footing with potential investors.
2:03:31 PM
Vice-Chair Johnston asked Commissioner Designee Tangeman if
he believed the use of funds fit AIDEAs mission.
Commissioner Designee Tangeman answered that the
administration was not asking AIDEA to participate in the
tax credit program. The administration was asking to use
the resources AIDEA had to assist the state in paying down
its debt. Going forward, he thought the plan for AIDEA
would be a different discussion. He mentioned the Ambler
Road project. He thought the use of funds helped the agency
focus on its priorities.
Vice-Chair Johnston wondered if AIDEA would be more
efficient with less money.
Co-Chair Wilson brought the discussion back to the
confirmation.
Representative Josephson spoke in support of Commissioner
Designee Tangeman's appointment. He was struck by the
passivity of Commissioner Designee Tangeman's comments
about revenue. He had used the phrase, "If revenues do
materialize." He discussed that the previous
administration, which he broadly supported, wanted to steer
the states ship with the help of the legislature and had
asked for direction. He referenced Commissioner Designee
Tangeman's statement that he did not see the need for a tax
in the next decade. He stressed that the public was
incredibly alarmed by the cuts and was pleading for new
revenue. He asked if there was a point, notwithstanding
promises that had been made, that new revenue would need to
be revisited.
Commissioner Designee Tangeman replied that the question of
taxes was currently being debated. He noted that there had
been 700 people at a recent town hall meeting, which was a
record. He suggested the question was about whether the
size of government was appropriate. If it was, he wondered
how it would be funded. He noted there was a limited amount
of savings including the Permanent Fund Dividend (PFD), the
Earnings Reserve Account (ERA), and the Constitutional
Budget Reserve (CBR). The Constitutional Budget Reserve was
fairly depleted. He clarified that when he referred to
revenues materialized; he was speaking about future
potential production. The state had experienced a great run
over the past few decades. Alaska had been the envy of many
states, as it had no income or sales taxes. The problems
the state was dealing with presently were tremendous.
However, Alaska was still positioned better than most
states. Using a percent of market value (POMV) structure to
bring in a revenue stream had helped with the credit rating
agencies and put Alaska on the right path. He thought the
current discussion should be about what size government was
needed. People were being forced to prioritize. The
discussion was necessary, as the current model was not
sustainable. He argued that the state could not extract
enough revenue from the private sector to fund the delta it
faced.
2:10:09 PM
Representative Josephson thought about members of the
cabinet and the governor flying to the Lower 48 to attend
conferences with 49 counterparts. He was curious what the
conversations were like reporting that the state was
scheduled by statute to give every Alaskan $3,000 (which
the state could not really afford), thousands of people
were going to lose their jobs, and the state did not have a
broad-based tax. He asked how they explained the situation
to other states.
Commissioner Designee Tangeman replied that he had not had
discussions with his counterparts in the Lower 48 on the
particular topic. He recalled some conversations when he
worked at LFD in meetings with other states who did not
offer Alaska the opportunity to participate because, in
their minds, the state did not have any problems. Looking
from the outside in, other states viewed Alaska as a state
sitting on a balance of $65 billion in the Permanent Fund.
They wondered what the problem was. He was not going to
weigh in on the dividend side. However, he felt strongly
that the past size of government was unsustainable. He
acknowledged that the proposed cuts were extreme, but the
administration understood the legislature would weigh in on
the cuts.
Representative Josephson was concerned that with the
administration's plan, costs would be shifted to local
governments. He thought the budget was being hoisted or
pushed off. He believed the budget protected the state's
interest as a political entity but was not a statewide
solution favoring Alaskans. He asked the commissioner
designee to comment. Commissioner Designee Tangeman
answered that the issue might be better addressed by the
Office of Management and Budget (OMB). He offered that it
forced a discussion at both state and local levels. Not all
communities had a sales tax or property taxes.
2:14:04 PM
Co-Chair Wilson reminded committee members they were
interviewing Commissioner Designee Tangeman for the
position of commissioner for DOR, not for governor.
Representative Carpenter asked in what ways Commissioner
Designee Tangeman would work to improve the department and
reduce its footprint.
Commissioner Designee Tangeman answered that the Treasury
Division was a large part of DOR. He took a more
conservative approach to investing in his own personal
life. He suggested he would use the same approach with the
department. He argued that the department had to be careful
with its revenues. It was managing to a lower level because
every dollar was critical. He mentioned that the Tax
Division was making tremendous progress as it worked
through its audits. He spoke of reducing the time it took
to complete them. He did not have an army of auditors to do
the work the division had experienced significant
challenges performing audits under a different tax
structure. He commended the auditors for their work to
complete the last of the Alaska's Clear and Equitable Share
(ACES) years. From 2014 through 2019, the state had
essentially been under the same tax structure. Catching up
with the audits gave the department the opportunity to look
ahead instead of behind. He believed efficiencies would
evolve. He mentioned that a new management system was in
place. The department had not had to request any new
positions and was fairly stable. He relayed that there
might be a discussion about redeploying assets in work down
the road.
2:18:19 PM
Commissioner Designee Tangeman addressed growth in the
department and relayed that it had been stable throughout.
Child Support Services had about 200 employees and had not
asked for an increment. Treasury had also been fairly
stable.
Representative LeBon believed Commissioner Designee
Tangeman was very qualified and he supported his
nomination. He thanked Vice-Chair Johnson for asking his
questions related to AIDEA. He was concerned about the
percent of market value (POMV) approach. In his banking
world a realistic draw rate of 4.25 percent was the
industry standard. His concern was about what effect it
might have on the future value of the Permanent Fund. He
asked the commissioner designee whether he had an opinion
on the POMV draw rate.
Commissioner Designee Tangeman answered that over the past
couple of years there had been substantial stress testing
done. He recollected that the director of the Alaska
Permanent Fund Corporation had appeared before the
committee several times when the POMV was being discussed.
The legislature settled on 5.25 percent for the first 3
years with a step-down to 5.0 percent. At the time the
board and the director felt comfortable with the amount but
was uncomfortable with anything above 5.25 percent. The
expected returns were 6.55 percent. The state was
approaching new territory because it would be using
earnings from the fund for government use. It put things in
a different perspective as far as what the appropriate
level was to grow the fund, to produce a dividend, and to
provide revenue for government. The fact that the board and
director were comfortable with 5 percent gave him the
comfort he needed.
Co-Chair Wilson remarked on the Permanent Fund corpus.
2:21:22 PM
Vice-Chair Ortiz believed the committee agreed that
revenues needed to match expenditures. He asked if
Commissioner Designee Tangeman had done any analysis on the
impact of further reductions in government spending versus
a reduction in the PFD. He asked if there had been a study
on the impact to the economy.
Commissioner Designee Tangeman had not personally evaluated
the economics, but he had been a witness to several
analysis over the past couple of years by various smart
economists. There would be a presentation on Wednesday
about the topic. He suggested that everyone was waiting to
see what the impacts would be to the economy by infusing it
with a $3,000 dividend or taking money away from the
economy. He thought that money would be infused through the
dividend, or it would be extracted through a revenue
measure like an income tax or a sales tax. Unfortunately,
there would not be a definitive answer - there would be
many two-handed economists. Personally, he had not done any
economic modeling. He was concerned with the extraction of
revenue from a small tax base. He did not believe it was
possible to generate enough revenue to support the current
size of government for a sustained period. He was concerned
about what was sustainable. He stressed the need to be
careful about the tax base and the private sectors
reaction.
2:24:20 PM
Vice-Chair Ortiz noted his question had not pertained to
additional revenue. He asked for clarification about what
the commissioner meant regarding additional revenues. He
wondered if he meant extracting additional revenue by
potentially reducing the PFD amount. Commissioner Designee
Tangeman replied "In a way." He thought the discussion
would move in the direction of a reduced dividend amount in
both bodies of the legislature. The current administration
believed that putting the money into Alaskans hands to
spend and reducing the budget was the appropriate course of
action. He realized it would not be the end of the
discussion. He viewed it as an injection of funds into the
economy as opposed to a withdraw of money.
Representative Knopp supported his nomination. He asked if
the Child Support Division had 200 employees. Commissioner
Designee Tangeman replied in the affirmative.
Representative Knopp stated that in Commissioner Designee
Tangeman's role he managed 4 divisions and several people.
He asked if the commissioner would recommend changes to
divisions such as the Child Support Services Division
(CSSD) which had 200 employees and cost the state an
average of about $100,000 per employee. The total cost for
salaries and benefits was about $20 million per year. He
asked the commissioner whether he would recommend changes
if the division was not self-supporting. He wondered if the
commissioner would look at his own department and programs
for cuts. He also noted forecasting.
2:28:07 PM
Commissioner Designee Tangeman did not plan on making any
changes to any of the department's divisions at present.
The Child Support Services Division was the division he
knew about the least. He spoke to the difficulty of the
nature of CSSD jobs and positions. He noted that for every
dollar the state contributed in general funds to the
division, the federal government pitched in $2, a two-
thirds match. In terms of making changes or expectations
from CSSD, he did not have an answer. He was aware there
was a significant amount of turnover within the division.
Commissioner Designee Tangeman responded to Representative
Knopp's comments regarding forecasters. The economic
research group performed many duties. They took the lead on
the Revenue Sources Book and produced several reports.
There were about eight employees in that particular group.
He was interested in exploring the reports that would be
nice to have, the reports that have always been produced,
and the reports that were required. He was not of the
mindset that something had to continue being done just
because it had always been done in the past. He was willing
to take any criticism for making certain decisions and
thought all commissioners would have to start making some
changes based on the state's fiscal reality.
Co-Chair Wilson asked if Commissioner Designee Tangeman
would participate in the subcommittee process. Commissioner
Designee Tangeman did not believe he would be
participating. The administrative services directors would
be leading the charge. The directors of each of his
divisions would be available for questions. He believed the
process would be more focused on projects and programs. He
did not believe he would be participating unless instructed
to do so.
Co-Chair Wilson hoped there would be an instruction for
that to happen. She thought it would be very helpful. She
thanked Commissioner Designee Tangeman.
Representative Josephson shared that the Bradner Report had
conveyed that AIDEA did not object to the transfer of
receipts.
Co-Chair Wilson reminded the committee that signing the
report regarding the appointment of Commissioner Designee
Bruce Tangeman in no way reflected an individual's approval
or disapproval of the appointee. The committee's report
accompanied the nominations which would be forwarded to the
full legislature for confirmation or rejection. In
accordance with AS 24.60.130 the House Finance Committee,
having reviewed the qualifications for the commissioner of
DOR, moved his name to the full legislature for
confirmation. She handed the gavel back to Co-Chair Foster.
2:32:55 PM
AT EASE
2:33:29 PM
RECONVENED
^PRESENTATION - LEGISLATIVE FINANCE DIVISION: EDUCATION
FUNDING
2:33:40 PM
Co-Chair Foster asked Mr. Painter if he would like to hold
questions until the end.
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
replied he was happy to take questions during the 45-minute
presentation. He addressed a PowerPoint presentation titled
"Overview of K-12 Funding Formula," dated March 4, 2019
(copy on file). He began on slide 2 and addressed the FY 20
K-12 budget. He reported having been the legislative
analyst for the Department of Education and Early
Development (DEED) for the previous 4 years. Mr. Partlow
was taking it over. He would be providing back-up.
Mr. Painter began by reporting the purpose of the
presentation which was to provide an overview of how the
K-12 education funding formula worked as well as how other
funds flowed from the legislature to public schools in
Alaska. The Legislative Finance Division (LFD) also
published a white paper the previous fall entitled, "The
Citizens Guide to K-12 in Alaska, " which was available on
the division website. It attempted to walk through the
formula in a way that members of the public and the
legislature could understand.
Mr. Painter continued to slide 2, "FY 20 K-12 Budget":
• HB 287 (SLA 2018) appropriated FY19 and FY20 K-12
formula funding.
• The appropriation for FY20 will flow out automatically
absent further action.
• The Governor's FY20 budget proposes repealing the FY20
appropriation for the Foundation Formula and replacing
it with an appropriation for 76.87% of the statutory
amount.
• In SB 142 and HB 287, the legislature also
appropriated $20 million outside the formula for FY19
and $30 million for FY20.
• All of this funding has already been appropriated and
cannot be vetoed or withheld by the Governor.
Legislative
action is necessary to alter or remove it.
Mr. Painter advanced to slide 3 outlining the organization
of the Alaska School Districts. He read the slide:
Organization of Alaska School Districts
• School districts in Alaska do not have taxing
power they get funds from the federal, state,
and municipal governments
• Alaska has 53 school districts
• 34 in organized areas, with boundaries
corresponding to that of local governments
• 19 Regional Educational Attendance Areas
(REAAs) in the unorganized borough
• Mt. Edgecumbe High School is run by the
state and is not in a district
Mr. Painter turned to a pie chart on slide 4 showing FY 19
funding sources for school districts. He reported that
school districts in Alaska received about $2 million total
in FY 19. In addition, the state provided another $300
million of indirect funding for educational purposes. The
largest source of funding for school districts was the
foundation formula totaling $1.2 billion. The funding came
from a variety of sources including state, local, and
federal dollars.
Mr. Painter moved to slide 5: "Foundation Formula - How It
Works." He explained that both the foundation formula and
the pupil transportation formula were not appropriated
directly to the school districts. The money was deposited
into the Public Education Fund and flowed out without
further appropriation. The path he described was initially
established in order to enable forward funding which the
state had done for several years. He further explained that
instead of putting money in the fund that would flow out
the same year, the state put money in that would flow out
the following year. The practice of forward funding ended
in FY 15 and FY 16. There was no longer a balance in the
Public Education Fund. Rather, the state would appropriate
the amount necessary to fund the formula. The state did not
necessarily need the Public Education Fund for its original
purpose. The fund remained on the books and was used as a
mechanism. The foundation formula monies for the department
went into the Public Education Fund as designated in the
language section of the budget.
2:39:25 PM
MICHAEL PARTLOW, FISCAL ANALYST, LEGISLATIVE FINANCE
DIVISION, indicated that before he started talking about
the mechanics, he wanted to bring up 2 points. He would be
talking about a fairly complex system made up of a
significant amount of statutes, regulations, and
mathematical calculations. For the purpose of the
presentation he would be simplifying it down to the bare
bones of the process to be able to more easily talk about
concepts. He suggested that for further detail the
department was a great resource. He also wanted to address
the question of why there was a formula. He reported that
previous legislatures had recognized a difference in
funding costs for students depending on a variety of
factors in Alaska such as location, the type of education,
and the size of a school. The foundation formula was set up
as a way to more fairly distribute money in Alaska for
education in different communities.
Mr. Partlow moved to slide 7 and continued to discuss how
the foundation formula worked. He suggested that when
coming up with a formula a starting point was needed. The
student count, students in Alaska by district, was based on
an average daily membership (ADM). Once a student count was
determined, the number would be put into a formula that had
factors for 6 separate things that differed by district and
helped the state to reach an adjusted average daily
membership (AADM). Next, the ADM was multiplied by the base
student allocation (BSA). The equation (the adjusted daily
membership multiplied by the BSA) resulted in the basic
need.
Mr. Partlow continued that the ADM was based on a student
count that occurred in October every year. The count was
based on the last 20 days of the month. A wider net was
cast to capture not just 1 day in a year but several days.
It helped to capture the full breadth of the student
population in Alaska. He reported that the ADM had been
calculated at least since FY 98 when the modern formula was
established. The average student count in the state was
around 130,000 students. He explained that in FY 20, it was
projected to be about 128,000 students. Once the
calculation was made, working with all of the districts to
come up with a number, the 6 factors were applied to
determine the AADM.
Mr. Partlow advanced to slide 8 and highlighted the first
of the factors - school size. School size was included to
recognize that there were economies of scale that came with
having small schools or very large schools. The basic
principle was that a classroom was needed, whether it was
filled with 30 students or 10 students, and a teacher was
needed. He suggested there were fixed costs whether
spreading the costs over 10 or 30 students. It provided an
economy of scale. He continued that the second factor was
the district cost factor. It was a multiplier that adjusted
for the different costs across the state. Each district had
its own multiplying factor. The base was Anchorage. The
Anchorage area was the least expensive area in Alaska to
provide education on a per-pupil basis. Each district,
other than Anchorage, had a different calculation above 1.
He would provide an example on the following slide.
2:43:52 PM
Representative Sullivan-Leonard mentioned the special needs
factor and special education intensive student factor. She
wondered why they were not combined into one factor.
Mr. Partlow replied that special needs covered students
with reading disabilities to gifted and talented students.
Whereas, special education intensive students needed
extensive assistance in order for them to receive their
education. The districts had dedicated staff and equipment.
The special needs factor was a grant that went out to every
school district. It was about 20 percent of additional
funding. The added amount covered the basic needs of
special needs students. The special education intensive
student factor encompassed children in Alaska that had a
significant amount of special needs. The factor tried to
account for a certain population.
Representative Sullivan-Leonard asked if the state received
additional revenues associated with each special needs
students. Mr. Partlow answered in the affirmative.
Vice-Chair Johnston shared that the special education
intensive student factor came into play about 7 to 8 years
back when there was a number of students with medical needs
coming into Alaskas urban areas. Numerous students were
costing districts $70,000 to $80,000 per year. She asked if
the 20 days in October were set out in statute. Mr. Painter
replied in the affirmative.
Vice-Chair Johnston noted he had mentioned Anchorage being
the base. She asked when the last cost study had been
conducted. Mr. Painter replied that the cost study the
state was currently using was conducted by the Institute of
Social and Economic Research (ISER) in 2005 and had not
been updated since then. The original formula went into
effect in 1998 and was adjusted by ISER.
Mr. Partlow continued addressing slide 8. The next factor
was the career and technical education (CTE) factor. It was
also a block grant, though for a smaller percentage than
the special needs factor. After the previous factors were
applied, the student count was multiplied by 1.015 equal to
an increase of about 1.05 percent based on the student
count above it. It covered vocational and technical
education.
2:47:24 PM
Representative Knopp asked if districts received Technical
Vocational Education Program (TVEP) funding for career and
technical education. Mr. Painter replied that they did not
receive direct funding, although there were grant programs
administered by the department that were provided to
certain districts.
Vice-Chair Ortiz asked about the career and technical
education factor. He asked if schools had to provide
technical education to receive the funding. Mr. Painter
replied that districts had to offer some sort of career and
technical education. However, he did not believe the
statute specified a special course or a portion of another
course. The statute also specified that the grant money
could not be used for the administration portion, only for
education. Some small districts might not offer a
specialized class but could integrate it into another
course.
Mr. Partlow continued with slide 8 addressing the special
education intensive student factor. Each individual student
was identified by the district, and the resulting number
was multiplied by 13.
Mr. Partlow explained the final adjustment factor, the
correspondence multiplier. At the very beginning of the
process when doing student counts in school districts, the
correspondence students were identified and removed from
the process for a time. The step recognized that
correspondence students were not physically located in the
schools so that school size did not have an effect. The
final step was to take the number of correspondence
students and apply the correspondence multiplier of 0.9.
The multiplier took into account that providing education
to a student who was not physically present could be less
expensive for a school district.
Representative Josephson asked what kind of cash parents
received for correspondence. Mr. Partlow responded that he
did not know. It was likely specific to each district.
Vice-Chair Ortiz noted that his wife was a correspondence
coordinator for the Ketchikan School District. He was aware
that the amount varied depending on the sponsor of the
correspondence program. He asked if his answer made sense.
Representative Josephson responded affirmatively.
Mr. Partlow pointed to an example on how the foundation
formula worked on slide 9. He used the Fairbanks North Star
Borough as an example. The start of the process occurred
with the student count in October taking an average over 20
days. The district had an average of about 13,290 students.
The next step was to identify the number of correspondence
students taking that number out of the process for a
duration. About 291 students were identified in the
Fairbanks North Star Borough. The following step was to
apply the school size factor looking at the specific size
of the school that each of the students in the Fairbanks
North Star Borough were attending which equaled about
15,000. The next step was to apply the district cost
factor. Each district in the state had a number associated
with it. The Fairbanks North Star Boroughs number was 1.07
which brought the calculation to about 16,000. Next was to
apply the special needs factor of 1.20, which brought the
student count up to about 19,500. Next was to apply the CTE
factor of 1.015 bringing the number of students up to
19,700. The district identified 408 students with special
education intensive needs. The special education intensive
needs number was then multiplied by 13. The resulting
number was 5,304 which was added to the total calculation.
The last step was to add the correspondence students back
in, multiplying the factor of 0.9 to 290 students bringing
the correspondence count up to 261 students. It brought the
total adjusted average daily membership for the Fairbanks
North Star Borough to about 25,281.
2:53:46 PM
Mr. Painter turned to a bar chart on slide 10. The chart
was an attempt to graphically show how the multipliers had
changed over time. Each bar represented an average student
in the state for each of the years. The layers showed the
funding that each factor added. He pointed out that over
time as the factors had been adjusted, the multipliers had
increased. In FY 05, the average student count was about
1.6. In FY 19, it was about 2.1. The amount had changed
primarily due to statutory changes. The cost factors
currently being used came from 2005. Prior to that, the
state had a different set of factors that were lower. The
new factors were phased in over the course of several
school years. He pointed to the green bars that had
increased over time. The largest change was the special
education intensive student factor. The multiplier had been
5, then 9, then 13 for the past several years. The state
had seen quite an increase in funding aimed at special
education intensive students. In addition, the CTE factor
was created in FY 10 and was originally 1 percent then
expanded to 1.5 percent. All of the changes meant that even
if the BSA had been constant over the period, the funding
would have increased. He thought much of the time when
discussions occurred regarding education funding it was
focused on the BSA. However, because of the changes in
factors, the funding had changed substantially more than
what the BSA indicated. He stressed that it was important
to look at the totality of funding.
Representative Josephson noted that Mr. Painter mentioned
the district cost factor had not changed for 15 years but
the green bar had grown. He wondered why. Mr. Painter
answered that the factors that were created in 2005 were
phased in over a 5-year process. The last time it happened
was in FY 09. The bar grew but had remained comparable
since FY 09. He thought the composition of the location of
students in the state had shifted.
Representative Merrick asked if the special education
intensive needs students cost 13 times more than a
traditional student. Mr. Painter replied that the amount
had been set in statute. The special education intensive
needs students were funded at a 13 percent difference, but
the actual cost varied.
Mr. Painter continued to slide 11. He relayed that once the
AADM was determined, it was multiplied by the BSA to get
the basic need amount. In addition, there was a quality
schools grant which was relatively small. The basic need
number was about $1.5 billion currently and was paid for by
three sources including the required local contribution,
deductible impact aid, and state aid. He would address the
first 2 amounts and where they came from. They were payers
that came in before the state. The state picked up
everything that was left.
2:57:51 PM
Vice-Chair Ortiz asked about slide 11. He requested more
information about deductible impact aid. Mr. Painter
replied that he would provide further detail in a
subsequent slide. The amount was deductible from the
state's contributions. The districts received the money,
but the state deducted it from what it paid.
Mr. Painter turned to slide 12, which showed the BSA as it
had changed since FY 05 in nominal dollars. Slide 13 showed
the same chart in inflation-adjusted dollars. Much of the
time when people focused on just the BSA, they would argue
that funding had declined since FY 07 in real terms.
However, because of the factor changes, it was not how the
funding moved.
Mr. Painter continued to slide 14 which showed nominal
funding since FY 00. The governor's budget for FY 20 was on
the right side of the chart. He pointed out that the BSA
had not changed since FY 17 in nominal dollars.
Mr. Painter moved to slide 15 which showed that if funding
outside of the formula was included, the peak year of
funding was FY 15 in inflation-adjusted dollars since 1998
when the state switched to the current formula.
Mr. Partlow advanced to slide 16 and addressed the required
local contribution, which applied to 34 of the 53 school
districts in Alaska. He relayed that Regional Educational
Attendance Areas (REAAs) did not pay because they could not
levy taxes. He would discuss ways that they contributed.
For most districts the required local contribution was the
equivalent of 2.65 mills of real property value. It was
capped at 45 percent. No school district in Alaska was
contributing more than 45 percent towards education in
their community. There were 4 communities (North Slope,
Valdez, Skagway, and Bristol Bay) that hit the cap which
was caused by high property values compared to low
population levels. The required local contributions by
districts in the state in FY 19 was about $255 million.
Representative Josephson asked if there could be a limit to
local contributions so as to not differentiate areas of the
state too widely. He spoke of a law case to avoid disparity
statewide. Mr. Partlow agreed. He would address the issue
in more detail in the coming slides. He would be discussing
equalization and making sure there was not a substantial
disparity between the best-funded and the least-funded
school districts by AADM.
Mr. Partlow continued on slide 17 and addressed the
deductible federal impact aid funding source. Districts
received federal funding to compensate them for non-taxable
federal property for facilities located in their districts.
There were certain expenses incurred by having federal
facilities in a community such as educating military
children. School districts were not able to collect tax
income from federal property. Therefore, the federal
government had a program, Impact Aid, which was used to
reimburse school districts. The State of Alaska, as a
contributor towards basic need, was allowed by the federal
government to deduct the funding that was going to
districts from the portion that the State of Alaska would
have to pay. They were able to deduct up to 90 percent of
eligible impact aide from its share of the formula. REAAs
were not able to levy taxes and did not contribute to the
required local contribution in the same way as a
municipality. One way that REAAs contributed was that the
vast majority or all of their impact aid was eligible, up
to 90 percent, to go to the state's portion. The state
could deduct 90 percent from its contribution. In FY 19,
the state deducted approximately $98.7 million.
3:03:31 PM
Co-Chair Wilson used the Fairbanks North Star Borough as an
example in which students were educated on [military]
bases. She suggested that about two-thirds of the borough's
property taxes went to schools. She wondered about the
calculation and contribution of the bases and whether the
amount of impact aid was equitable.
Mr. Painter replied that the federal impact aid was even
paid to districts without a local tax. It was not
necessarily based on the local tax rate, rather, it was
based on a federal formula. He did not know the specifics
of the calculation. He explained that in organized areas
far less than 90 percent was deducted. The amount deducted
was based on a proportion of the district's local funding
which was optional rather than required. The more a
district contributed to education, the more it was able to
keep. He further explained that the REAAs that did not
contribute property taxes only kept 10 percent of the
impact aid. In organized areas like Fairbanks, they had a
multiplier that was far below 90 percent. The district kept
the majority of impact aid for organized areas.
Co-Chair Wilson indicated that the borough was starting to
tax some of the housing at Fort Wainwright. She wondered
how the state's share would be impacted. Mr. Painter would
have to follow up with an answer to her question.
Mr. Partlow moved to slide 18: "Federal Disparity Test." He
suggested that in order to deduct federal impact aid as
part of the state's obligation to meet basic need there was
a federal disparity test. The test was used to ensure that
the state's formula was equalized. The test made sure that
the lowest funded school district in Alaska compared to the
highest funded district in Alaska by AADM was not too far
apart. He indicated that the calculation was fairly
complicated. One of the things the federal government
allowed the state to do was to exclude the top 5 percent
and the bottom 5 percent of school districts. The exclusion
prevented a super outlier for funding from making the state
immediately fail the disparity test. The remaining 90
percent could not have a difference from top to bottom of
more than 25 percent in order to be equalized. If the state
failed the test, it could no longer deduct the impact aid.
The money still went to the school districts, but the state
could no longer deduct it towards its portion. In the
example of Fairbanks, they would still receive their $9.7
million in impact aid, but the state would have to pay an
additional $9.7 million. He continued that failing the
disparity test would be very costly to the state in a
single year. It would also be a multi-year process (2 to 3
years) to prove to the federal government that the state
re-equalized its formula, and the cost to the state could
be millions of additional dollars for funding to meet basic
need.
3:08:00 PM
Mr. Painter addressed two pie charts on slide 19 pertaining
to student count and state aid by district. The chart
showed a comparison of the top 10 districts in terms of how
much aid they received. The student count was reflected on
the left pie chart. The right pie chart displayed state aid
by district after the student count had been run through
the formula and the federal and local sources had been
deducted. The top 10 districts had 86 percent of the
students and received 77 percent of the state funding.
Districts like Anchorage, a relatively low-cost district,
would receive less state funding. He noted that because
Anchorage had relatively high property values, the city
paid a relatively high share of the education contribution
compared to other districts. The slide provided an idea of
how the funding was distributed geographically throughout
the state.
Mr. Partlow reviewed slide 20: "Pupil Transportation." In
addition to the foundation formula funding that went out to
districts, the state also supported districts in their
pupil transportation costs. It was only provided to school
districts that had a pupil transportation system. In Alaska
there were 5 school districts that did not have one. Until
FY 03 the funding was paid out by a grant program
reimbursing school districts for their actual costs. In
FY 04 the federal government calculated the FY 03 per pupil
cost and multiplied that number by the non-correspondence
student count for each district. He clarified that whether
a child was getting to school by plane, sled, or other
means, the districts were receiving the same amount of
money through the program. Pupil transportation was
adjusted for inflation periodically but not since FY 13.
Mr. Partlow highlighted funding outside the formula on
slide 21. For multiple years the legislature had provided
one-time funding for school districts outside of the
formula. While not always, it typically flowed out
according to the same formula - the ratio of funding that a
school district received from the overall $1.2 billion.
They were also receiving the same ratio of funding outside
of the formula in the given year. In FY 19 there was $20
million appropriated outside the formula as well as another
$30 million for FY 20.
Mr. Partlow continued to slide 22: "Voluntary Local
Contributions". He relayed that another source of funding
for education in Alaska was the voluntary local
contribution. He had mentioned that there was a required
community contribution, but there was also an additional
level which a community could contribute. Typically, most
school districts contributed slightly more that their
required local contribution. The amount was limited to 23
percent of the prior years basic need and was capped at
the equivalent of 2 mills of real estate property value. He
reported 6 districts currently funded additional amounts, 2
of which were very near the cap. He revisited the disparity
test. In order for the state to pass a disparity test the
funding between the highest-funded school district and the
lowest-funded school district in Alaska had to be no more
than 25 percent. It allowed for there to be a 23 percent
difference between the 2 types of school districts. The
funding cap was designed so the state would not fail the
disparity test. He reported that districts budgeted around
$250 million in voluntary contributions in the current
fiscal year. The amount included in-kind services which
were services that the school district would have to incur
if they did not receive funding from local entities or
municipalities. Shared janitorial services or shared office
space were 2 examples.
3:12:25 PM
Representative Sullivan-Leonard recalled Mr. Partlow
reporting that 6 districts were currently providing local
contributions at or near the cap. She suggested that 34
districts were using their property taxes to pay for school
funding. She asked if the other districts were near the
cap. She thought it would be helpful to see a graph that
showed each districts level of contributions in reference
to the cap. Mr. Partlow replied that he would follow up
with the information in a graph. He indicated that it
varied significantly by district.
Representative Sullivan-Leonard asked for the 6 districts
referenced on slide 22. Mr. Painter replied, "Anchorage,
Juneau, Skagway, North Slope, Yakutat, and perhaps Valdez.
He would follow up with the list.
Co-Chair Wilson believed the last school was Skagway. She
noted that the North Slope was slightly different. She
asked Mr. Painter to explain how the North Slope cap was
different from the rest of the state.
Mr. Painter replied that the difference had to do with the
2-mill cap. For school districts whose regular funding was
based on basic need (because of hitting the 45 percent cap)
the local effort cap was 2 mills based on property values.
In the disparity test they were part of the top 5 percent
that the state did not have to count. He continued that
because they were not subject to the 25 percent disparity
test limit, they could contribute a larger percentage. If
their cap was limited to 23 percent of basic need and they
were already contributing 45 percent of basic need, it
would skew the formula.
Co-Chair Wilson understood that the North Slope had the oil
business. She asked about Skagway. Mr. Painter replied that
Skagway had a tourism industry that was proportional to the
population in public schools - very large. About 1 million
cruise ship passengers visited each year and there were
about 400 year-round residents living in Skagway. Skagway's
property value was very high.
Representative Merrick asked which schools were part of the
top 5 and bottom 5 percent. Mr. Painter replied that the
lists varied by year. Generally, the North Slope School
District and Skagway School District were always on the
list of the top 5 percent. He could follow up with a copy
of the most recent disparity test from FY 17. He thought
the FY 18 test would be finalized soon.
Vice-Chair Ortiz understood that if the legislature were to
adopt the governor's suggested budget (which included a 23
percent reduction to the BSA) the cap would be lowered by
23 percent. He asked if he was accurate. Mr. Painter
replied that the statute was ambiguous. Legislative Legal
Services was working on a legal opinion that he would share
with the committee. He noted that an opinion from
Legislative Legal would not stop anyone from challenging
it.
3:17:09 PM
Mr. Painter advanced to a bar chart on slide 23: "State and
Local Education Funding, FY00-FY19 (Nominal Dollars)." He
indicated that the chart was similar to a previous chart
but included local funding. He highlighted that the local
share had increased despite the required local contribution
decreasing. He elaborated that it used to be 4 percent, but
there was a hold harmless provision that became very
complicated. Eventually, it was changed to 2.65 mills. He
noted that local funding had increased, and the overall
picture was similar to what was presented before. He turned
to slide 24 and reported that the peak year was still
FY 15.
Mr. Painter continued to slide 25: "Indirect Funding to
Districts." He had been talking about direct funding to
districts. There was also a substantial amount of indirect
funding to districts spent on things outside of the
classroom. The largest amount was the state's contribution
to the Teachers' Retirement System (TRS) and the Public
Employees' Retirement System (PERS). The state paid a total
of more than $160 million on behalf of school districts
because of the district contribution cap. The contribution
for TRS was capped at 12.5 percent of the TRS payroll and
for PERS it was 22 percent. The state paid for everything
above the cap. Although the money was not going directly
into the class room, if the state did not pay it, the
districts would have to.
Representative Josephson asked which school district
employees received Public Employees' Retirement System
(PERS). Mr. Painter believed some administrative staff were
paid through PERS. Similarly, there were state employees on
TRS. The idea was for people who had employment in multiple
sectors to be able to keep the same retirement system.
Vice-Chair Ortiz noted that any non-certified staff such as
paraprofessionals, cooks, and custodians would fall under
the PERS system.
Mr. Painter pointed to school debt reimbursement on the
list of indirect funding. School debt reimbursement was
about $100 million per year. There was currently a 5-year
moratorium on new debt. The program would return in 2021.
The reimbursement ratio had shifted over the years. It was
originally 80 or 90 percent depending on the project. It
was decreased to 60 percent. In 2021, when the program
returned, it would be either 40 or 50 percent. He explained
how the program worked. Municipalities took out debt with a
vote of the people, and the state agreed to pay a portion.
It was required in statue that voters be told debt
reimbursement was subject to appropriation. The state had
not always paid the full share. He noted that there had
been a veto of the appropriation a couple of years prior.
There had also been some partial appropriations in the
past. The governor was proposing to eliminate the program
and was not funding it in the budget for FY 20.
Mr. Painter spoke of another indirect funding source. He
explained that organized areas with the power to tax could
take out debt, whereas REAAs could not. The Rural Education
Attendance Area fund was an alternate mechanism. In statute
it was calculated as a percentage of school debt
reimbursement. The amount was about $40 million per year
and went towards school construction and major maintenance
projects across the state. The Department of Education and
Early Childhood Development produced a priority list and
funded projects on the list without further appropriation.
The legislature did not select the projects, the department
obligated the funds. The governor's budget did not make an
appropriation to the fund, but the legislation abolishing
the school debt reimbursement maintained the program in
future years.
3:21:51 PM
Mr. Painter noted that the last couple of slides showed
some broader statistics. Slide 26 showed the per pupil
spending by state in FY 16, the most recent year in which
the US Census Bureau had data. Looking only at state
funding, Alaska ranked fourth in the country. Looking at
total funding, Alaska ranked seventh. Looking at state and
local funding, Alaska ranked eighth. Alaska's position
changed depending on what was included in the ranking. He
pointed out that relative to other states Alaska had a
state-heavy system. On average, the state paid a larger
portion than local communities. Alaska ranked fifth in the
proportion of funding that came from the state. Much of the
state's spending on education was driven by Alaska's split
between state and local funding.
Representative Sullivan-Leonard commented that as she was
looking at the slide, she understood how someone might
notice a sense of disproportionate funding between local
and state government. She suggested that it might be the
reason the governor brought forward the issue of changing
the structure. She wondered how much other oil rich states
(e.g. Texas, Louisiana, South and North Dakota) paid for
education compared to Alaska. Mr. Painter replied that the
Texas education system was heavily funded at the local
level. Aside from local property taxes, Texas had low
state-wide taxes. Local contributions for education in
Louisiana and Wyoming were also high.
Representative Sullivan-Leonard clarified that he did not
need to go state-by-state. She wanted to see a graph. She
thought people would appreciate being able to see where
Alaska stood in comparison to other states. It was
difficult to measure Alaska against other states because of
its oil wealth. However, Alaska could be compared to other
resource rich states like Texas and Louisiana.
3:24:50 PM
Vice-Chair Ortiz asked whether Alaska's ranking had
increased over time. Mr. Painter responded he had only done
the comparison for two years. He reported that from FY 15
to FY 16 the state had not changed in its ranking. However,
he was unfamiliar with the data from prior years. He
offered to look into it further. Vice-Chair Ortiz indicated
it was not necessary.
Representative Carpenter asked why Alaska had a higher
federal portion than other states. Mr. Painter replied that
it mostly had to do with impact aid. Alaska had a high
military population compared to its total population, and
it had a large amount of tribal land within the state. Both
factors contributed to Alaska receiving a large amount of
impact aid. Additionally, Alaska received a significant
amount of federal funding for districts through the federal
e-Rate program. He continued that because Alaska's internet
was relatively expensive and slow the state received more
e-Rate funding than the average state.
Representative Josephson wondered whether the budget would
be short by $250 million if the legislature were to pass a
budget that made no reference to public school funding.
Members would have to recommend or pass new revenue
measures, or the appropriation could be subject to a veto.
In other words, the amount that was funded in May of the
prior year could not be vetoed, and the legislature would
not have to take any further action for the FY 20 school
year. He wondered what would happen if the budget omitted a
discussion of education altogether.
Mr. Painter replied that there was no further action needed
for the foundation formula and the pupil transportation
formula, as they had already been appropriated in the
current year in order for the money to flow out. Other
parts of the department were funded ahead of time.
Representative Josephson suggested that if the state were
to operate off of the governor's budget, the budget would
be short by $200 million to $300 million requiring
additional revenue. He asked if he was correct.
Mr. Painter thought Representative Josephson was saying
there would be a deficit essentially because it was
counted. He confirmed that the legislature would need to
find a funding source to cover the deficit. He suggested
the money could be taken from the Constitutional Budget
Reserve (CBR), additional revenues, or through budget cuts.
The governor's budget did not include a funding source.
Representative LeBon stated that education funding was
heading for a perfect storm of sorts. If Fairbanks
experienced a $30 million reduction in state funding for
education and the borough had a revenue cap, the boroughs
ability to make up the reduction would be limited by
several factors. He asked Mr. Painter what a community
could do to make up for reduced state funding with a
revenue cap and a disparity formula in place for education.
He wondered how much money a borough could raise to offset
a reduction in state funding for education.
Mr. Painter replied that it would depend on the
interpretation of the change to the local contribution. If
the interpretation was that the local contribution was also
reduced, a boroughs ability to make up the difference
would be reduced. If the interpretation was that it was not
reduced, the borough could increase its contribution.
Representative LeBon asked about the timing of the ruling.
Mr. Painter replied that a legal opinion had been
requested.
3:30:16 PM
Mr. Painter concluded that there had been significant
discussion in the current session about how much money was
spent on instruction versus other expenses. The
administration had reported that 54 percent had been spent
on instruction which was shown in the pie chart on
slide 27. He explained that the federal government had a
slightly different chart of accounts than the state. They
counted student activities as instruction that the state
did not count. According to the state's calculations, the
two direct instruction categories would be 56 percent. He
relayed that the state historically had a different method
of calculating instruction. It used to have the 70/30 rule
which meant that 70 percent of spending had to go to
instruction. All of the items in blue were considered to be
instructional expenditures based on the 70/30 rule. Much of
the disagreement about how much went to instruction had to
do with what counted as instruction. Depending on the
definition of instruction the state might be spending
between 56 to 76 percent. He was happy to answer any final
questions.
Co-Chair Foster thanked the presenters. He reviewed the
schedule for the following day.
ADJOURNMENT
3:32:08 PM
The meeting was adjourned at 3:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Bruce Edward Tangeman.pdf |
HFIN 3/4/2019 1:30:00 PM |
Appointee Confirmation Hearing |
| K-12 Formula Presentation.pdf |
HFIN 3/4/2019 1:30:00 PM |
HFIN EDUC FUNDING Overview |