Legislature(2005 - 2006)
04/01/2005 08:34 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HJR12 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 1, 2005
8:34 A.M.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
MEMBERS ABSENT
Representative Carl Moses
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 12
Proposing amendments to the Constitution of the State of Alaska
relating to the repeal of the budget reserve fund.
- HEARD AND HELD
OVERSIGHT HEARING OF THE SALES TAX
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HJR 12
SHORT TITLE: CONST. AM: BUDGET RESERVE FUND REPEAL
SPONSOR(S): REPRESENTATIVE(S) HARRIS
02/18/05 (H) READ THE FIRST TIME - REFERRALS
02/18/05 (H) W&M, STA, JUD, FIN
04/01/05 (H) W&M AT 8:30 AM CAPITOL 106
WITNESS REGISTER
REPRESENTATIVE JOHN HARRIS
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as the sponsor of HJR 12.
TOMAS H. BOUTIN, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Offered information on HJR 12.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:34:41 AM. Representatives
Weyhrauch, Samuels, Seaton, and Wilson were present at the call
to order. Representatives Gruenberg and Rokeberg arrived as the
meeting was in progress.
HJR 12-CONST. AM: BUDGET RESERVE FUND REPEAL
8:35:16 AM
CHAIR WEYHRAUCH announced that the first order of business would
be HOUSE JOINT RESOLUTION NO. 12 Proposing amendments to the
Constitution of the State of Alaska relating to the repeal of
the budget reserve fund.
8:35:36 AM
REPRESENTATIVE HARRIS, Alaska State Legislature, speaking as the
sponsor of HJR 12, related that he introduced HJR 12 out of
frustration. Over the past few years the legislature has
attempted to develop a fiscal plan for the state, but there have
been stumbling blocks. One of those stumbling blocks is the
constitutional budget reserve (CBR), which provides the state
something to fall back on in times of need. The CBR was
developed to absorb monies from oil industry lawsuits and
royalties and in order to prevent [frivolous] dispersion of the
funds it has a three-quarter constitutional vote requirement.
However, when the legislature has been short of funds it has
dipped into the CBR and utilized the three-quarter mechanism.
He related his understanding that no other state, including the
federal government, uses a three-quarter vote mechanism to pass
a budget. He opined that no matter the party that's in the
majority, it will use the CBR for its own reasons. In order for
the legislature to predict revenues in the future, there has to
be a stable method of doing so. However, the CBR diminishes the
ability to do so because it's easy to utilize the CBR.
Therefore, HJR 12 asks the public if they would like the CBR to
be eliminated and any funds in the CBR deposited into the
permanent fund. Still, the earnings from the permanent fund are
available for the legislature to use with a 51 percent vote of
both bodies.
8:39:48 AM
REPRESENTATIVE SAMUELS inquired as to the sponsor's thoughts
about depositing the CBR into fund types other than the
permanent fund.
REPRESENTATIVE HARRIS replied that he is not opposed to
depositing the CBR into other funds, However, he said he is
opposed to the legislature having the ability to easily fall
back on some other mechanism rather than address what will
happen when there are no funds left in the CBR. As the base of
the budget increases and the price of oil decreases, which he
predicted as an eventuality, to $35 per barrel, the legislature
will be forced to dip into the CBR substantially, or obtain
revenues from somewhere else, or cut the budget to balance. He
said:
If that mechanism isn't available than we have to
truly look at taking the interest of Alaskans into
account. Do you want to spend some of the earnings of
the permanent fund to balance the budget, do you want
to have income taxes or sales taxes to balance the
budget, or do you want to reduce the budget to balance
the budget? And those are choices Alaskans ... will
make ... by who they elect to the legislature not
based upon the fact that we can fall back on this
crutch of the three-quarter vote or of the CBR.
8:41:44 AM
REPRESENTATIVE WILSON related that she agrees with the concept
of HJR 12. However, she expressed concern with the funds being
inaccessible in the case of a national emergency such as [the
terrorist attacks of September 11, 2001] or a catastrophe. She
related her belief that the CBR should only be used in the
instance of an emergency.
REPRESENTATIVE HARRIS related that the earnings reserve of the
permanent fund is available by a simple majority vote.
Furthermore, the legislature has the ability to borrow. He
related his belief that Alaska's access to money is probably the
best in the nation. He said the issue is whether or not the
state wants a fiscal plan and in order to achieve such, the
crutch of the CBR has to be removed.
8:44:11 AM
REPRESENTATIVE SEATON asked how this resolution would impact the
CBR's ability to maintain a minimum balance for the purpose of
cash flow ability and the use of balancing revenues.
8:44:48 AM
REPRESENTATIVE HARRIS replied that if the legislature spends the
full amount of the CBR no balance will be left. He asked if the
legislature wants 26 percent or 51 percent, like every other
state, of a body determine how to spend the budget. Again, he
highlighted that there are more than enough funds in the
earnings reserve account. Although it's such a politically
volatile account that no one wants to talk about it, he said
that he wasn't so concerned because the only reason the
permanent fund is as large as it is at this point is because the
legislature deposits into it. Representative Harris
acknowledged the need to have some funds available as a backup,
but he pointed out that most other states have statutory
deposits for backup accounts that are available by a simple
majority vote.
8:46:34 AM
REPRESENTATIVE SEATON asked if this resolution eliminates the
state's cushion.
REPRESENTATIVE HARRIS replied that $1 billion could be taken
from the CBR and placed into a statutory account to only be
accessible for specific budget purposes, such as education, in
the instance that no other funding is available. Other states
utilize the aforementioned account types and it has worked for
them.
8:48:38 AM
REPRESENTATIVE SAMUELS noted that he agreed with Representative
Harris philosophically, politically, and practically. He said
the job of the majority is to set the agenda and pass the
budget. Representative Samuels said that he prefers the concept
of going into a capital account. He highlighted that the
governor warns that dipping below $1 billion effects the
financial bond rating of the state.
REPRESENTATIVE HARRIS replied that the aforementioned effect is
due to the notion that the people of the state of Alaska don't
support any use of the earnings of the permanent fund. He
reiterated that eventually the CBR will be gone. If the CBR
isn't available and the legislature is unwilling to tax the
people or use the permanent fund [earnings], then what will the
state do, he asked. He characterized it as a political decision
and emphasized that the state isn't broke and the bond people
know that. In fact, Alaska has a small bond indebtedness
compared to most other states, but there's basically one source
of revenue which is oil and gas. He recalled that the chief
economic driver in Alaska used to be fishing and timber. He
opined that the state is so dependent on oil that if the volume
or the price of it drops, the state will be in crisis unless a
fiscal plan is developed. He acknowledged that a fiscal plan
will certainly hurt some people; many people oppose a fiscal
plan because they believe it diminishes the value of the
dividend. Representative Harris pointed out that the majority
of the state's budget lies in healthcare and education, and
therefore the public should realize that perhaps cutting the
dividend or not instituting an income tax is better than cutting
these programs. The time to develop a fiscal plan is now due to
the surplus from oil, he added.
8:54:00 AM
CHAIR WEYHRAUCH said:
One of the proposals we have had before us ... is ...
to take half the earnings of the earnings reserve
account of the permanent fund and half the
constitutional budget reserve anytime there is a gap
between income and expenses; and to use that to extend
out the way we address our fiscal gap as a policy
matter and then that assumes then that given resource
development through ANWR [Arctic National Wildlife
Refuge], Stranded Gas Act, and ... reserves income
stream to the state, that we won't have to implement
any taxes just given those two pots of money and ...
then will be saved by this future revenue stream from
oil and gas development, even with increased budgets
every year from approximately 2 percent .... This
sort of transition ... relates to that, in that you're
essentially transitioning out of the budget reserve
fund one way or the other: either ... immediately or
... through a transition .... How does this
resolution relate to that sort of philosophic
statement and really that bill was only a philosophic
position, it wasn't specific.
REPRESENTATIVE HARRIS said although he didn't know the specifics
of the aforementioned proposal, using both the earnings from the
permanent fund and CBR would seem to complicate the budget. The
legislature would need the three-quarter vote required for the
CBR usage and have to deal with those opposed to using the
earnings.
8:56:06 AM
CHAIR WEYHRAUCH surmised then that this resolution essentially
gets "rid" of the political issue related to the use of the CBR.
REPRESENTATIVE HARRIS replied, "That's right." This resolution
takes away the "political problem" of the three-quarter vote
holding the budget hostage, he added.
8:57:27 AM
CHAIR WEYHRAUCH indicated his understanding that the public
elects the legislature to make the decision [about spending].
He asked if this resolution plays into the mission of addressing
alternative sources of revenue in order to gain long-term fiscal
stability.
REPRESENTATIVE HARRIS emphasized that this resolution forces a
long-term fiscal solution. If the legislature no longer has the
CBR as a "crutch," it forces the legislature to figure out how
to fund the proposed increases in the operating and capital
budgets. [This resolution imposes] a basic balancing economic
act in which revenues match expenditures, he noted. Currently,
there is no obligation to balance the budget in the statutes or
constitution. Therefore, the legislature has not been balancing
the budget from reliable sources, but rather it has dipped into
its savings annually. He related that, with the exception of
this year, the legislature has essentially borrowed money to pay
debt and the cost of government. He opined that many states
don't have the aforementioned "luxury," and therefore have had
to raise the revenue in order to balance the budget. Alaska has
avoided that.
9:00:11 AM
REPRESENTATIVE SAMUELS posed a situation in which HJR 12 is
placed on the ballot in 2006 and passes, and inquired as to the
effective date for the repeal of [Article IX] Section 17 [of the
Alaska State Constitution]. He opined that during 2006 through
2008, if a special election is held for the purpose of a
constitutional amendment adding the POMV methodology, the state
couldn't tax enough to bridge the fiscal gap during that period.
REPRESENTATIVE HARRIS offered that one solution is to take $1
billion from the CBR and place it in a statutory fund which can
later be accessed by POMV. After the transition period is
complete, the aforementioned statutory fund could roll into
"whatever" fund the legislature decides to appropriate it, he
added.
9:02:30 AM
REPRESENTATIVE WILSON asked whether a public vote or legislative
action would be required if the funds from the CBR are placed
into the education fund.
REPRESENTATIVE HARRIS replied statutorily it takes a two-thirds
vote by the legislature to access the CBR, which is supposed to
be paid back. Currently, the government owes the CBR
approximately $5 billion. "The point of the matter is that's
why we do the reverse sweep every year and the sweep provisions
... in the budget," he stated. He explained the CBR could go
into the education fund but the aforementioned fund only allows
a specific amount to be deposited in the foundation formula.
CHAIR WEYHRAUCH, in response to Representative Wilson, said the
education fund is called the Public Education Fund.
9:03:50 AM
CHAIR WEYHRAUCH highlighted that it's important to understand
that HJR 12 is a constitutional amendment, which needs to pass
both bodies with a two-thirds vote and then it would be voted on
by the public. He also highlighted that HJR 12 has four
committees of referral. He alluded that there is enough
resources in the CBR through bonding to fund projects and
programs in the state for a long time to come. "This certainly
could be considered seed money for that," he related.
9:05:45 AM
REPRESENTATIVE WILSON recalled that five years ago the state's
deferred maintenance totaled over $1 billion and it has
continued to grow. There's definitely a need to take care of
capital needs, she opined. Therefore, she suggested that HJR 12
should transfer the CBR into a capital construction and
maintenance fund.
CHAIR WEYHRAUCH advised the committee to bring amendments
forward during the next meeting.
REPRESENTATIVE HARRIS offered he is currently in the process of
presenting a concept similar to a capital construction fund in
the committee substitute (CS).
9:09:00 AM
TOMAS H. BOUTIN, Deputy Commissioner, Department of Revenue,
informed the committee how the Department of Revenue utilizes
the CBR in the following manner: as a cash flow buffer; as an
indicator to credit rating agencies that, despite the volatility
in Alaska's revenues and lack of a fiscal plan, the state
deserves a AA credit. He added that the state deserves a AA
credit rating because of the state's liquidity, which can
largely be attributed to the existence of the CBR. He relayed
that the state uses the CBR as a cash source to balance the
budget and thus approximately $6 billion has been withdrawn from
the CBR and not repaid.
9:13:12 AM
CHAIR WEYHRAUCH asked if the state also relies on the earnings
reserve account to bolster the state's AA credit rating.
MR. BOUTIN answered ratings include the earnings reserve in the
permanent fund as well as the balance in the CBR. He explained
that the credit agencies watch the state's financial policies
closely and anticipate that eventually a fiscal plan that will
match reoccurring revenues with expenditures will be adopted.
In fact, one of the credit rating agencies so strongly believed
in Governor Murkowski's plan to do so, it spoke about POMV at
the Conference of Alaskans.
9:15:25 AM
CHAIR WEYHRAUCH asked whether the state's credit rating would be
negatively effected if HJR 12 is adopted into law.
MR. BOUTIN related that HJR 12 is part of a process. If the
state didn't have the liquidity it has with the CBR, then there
would be severe consequences in both cash flow and the state's
credit rating. Mr. Boutin agreed with earlier remarks that
absent some change, the CBR will eventually be depleted and thus
will negatively effect the state's credit rating.
9:16:55 AM
CHAIR WEYHRAUCH asked if, at any point, the CBR is encumbered
for purposes of bonding or future expenses. He pointed out that
[Article XV] Section 30, reads:
Section 30. Budget Reserve Fund Transition. On the
effective date of the repeal Section 17 of Article IX,
the unencumbered, unappropriated balance in the budget
reserve fund (art. IX, sec. 17) is transferred to the
principal of the Alaska permanent fund (art. IX, sec.
15).
CHAIR WEYHRAUCH asked whether the aforementioned provision would
leave a loophole that would require an encumbered portion to
stay in the CBR.
9:17:23 AM
MR. BOUTIN responded the state's warrants are against the
general fund (GF), so the state draws into the CBR as a cash
flow buffer to cover encumbrances in the case of general
obligation debt. The only general obligation debt was
authorized in 2002 and the debt was sold in 2003. Some $480
million of which is outstanding and for which the "full faith
and credit," meaning all of the state's resources, are pledged
to pay that general obligation debt, including the CBR as well
as other funds. He noted that the state's other kinds of debt
include lease debt. While lease debt is subject to
appropriation, if the state didn't appropriate money to make the
lease payment, then its general obligation rating would be
suspended as would the state's ability to issue debt. He noted
that the state also issues debt for which it carries a moral
obligation. Although the state's moral debt hasn't been tested,
if it were and there was a failure to replenish the CBR, the
state's credit rating would be suspended. Mr. Boutin specified
that the aforementioned doesn't fall within the accounting term
"encumbrance," although he wasn't sure whether it would fall
under a dictionary definition of the term.
9:20:25 AM
REPRESENTATIVE SEATON asked how would the state restructure a
buffer account if the CBR didn't exist, and could a capital
account act as the buffer.
MR. BOUTIN said the details of [proposed accounts] are necessary
to address specifics. However, he related his belief that
placing some of the CBR funds into a capital account which would
become the cash flow buffer seems to have a neutral impact. He
opined that eliminating liquidity without addressing the
volatility of revenues and that recurring revenues don't match
expenditures, there will be obvious consequences the extent of
which are dependent upon the extent to which the liquidity is
removed.
9:22:12 AM
MR. BOUTIN, in response to Representative Wilson, clarified that
the state has a AA credit rating from Moody's, Standard and
Poors, and Fitch, which is the highest ratings its ever had.
The Department of Revenue's semi-annual forecast details when
the CBR will be depleted. Should the CBR wind down, the credit
ratings will anticipate its depletion. The Department of
Revenue has the ability to issue revenue anticipation notes as a
short-term measure, however, other states that use short-term
borrowing to meet ongoing expenditures don't have AA credit
ratings. The credit rating agencies prefer to see liquidity
that is only utilized in rare circumstances and reoccurring
revenues that match expenditures. He added that credit rating
agencies also like the POMV methodology. He said that
Michigan's credit rating was lowered by Standard and Poors
because it persisted in using one-time revenues to meet ongoing
expenditures. He reiterated that the state has the ability to
issue revenue anticipation notes as a short-term "band-aid."
9:26:57 AM
REPRESENTATIVE WILSON asked how long would it take to institute
an ongoing source of revenue such as an income or sales tax.
MR. BOUTIN recalled that the Department of Revenue has offered
testimony on the amount of time and funds it would take to
institute various tax types. He offered that he doesn't recall
that information "off the top of his head."
REPRESENTATIVE WILSON opined that any tax type would take awhile
to effect the ongoing revenue.
MR. BOUTIN said it seems like it takes a number of years to have
a fiscal plan adopted by the legislature.
9:29:04 AM
REPRESENTATIVE SEATON asked if a dedicated capital account that
generates interest for capital expenditures could be structured
for use as a buffer account.
REPRESENTATIVE HARRIS replied, "I think you can structure it
that way." He stated the aforementioned proposals intention was
to deposit the balance of the CBR at the time of the election
into constitutionally protected interest earning capital
account. While this resolution takes the CBR balance and
deposits it into the permanent fund. He related his belief that
the public needs to be educated on the intent of the
aforementioned proposals in order to avoid confusion. He
highlighted that the legislature can be instructed for what the
money in a constitutionally protected account can be used. This
is similar to the school fund that was created. Representative
Harris said that he didn't disagree that the state should have a
cash flow reserve, but that's available with the permanent fund
albeit it's cumbersome because it's politically volatile. He
reiterated that the legislature has a fiscal, fiduciary, and
legal responsibility to pay back the CBR, he added. He agreed
that the state needs a buffer, which can be accomplished by
either creating another account or using other mechanisms
available such as the permanent fund.
9:34:19 AM
CHAIR WEYHRAUCH relayed that there have been discussions of
having tax policies in place that kick-in when revenues don't
meet expenditures.
REPRESENTATIVE HARRIS said the aforementioned is referred to as
a "trigger mechanism." In further response to Chair Weyhrauch,
Representative Harris related that if the public encumbers the
CBR into another fund, where it's unavailable to the
legislature, the legislature has little choice but to create
ongoing revenue elsewhere. He added that ongoing revenue
measures would take a minimum of a year to be instituted, go
through the budget cycle, and receive the revenue. Therefore,
something would need to be in place prior to the any such
institution. He offered that he wants to raise the public's
awareness of this resolution so they understand it.
9:36:22 AM
CHAIR WEYHRAUCH said that at the next meeting the committee can
offer amendments.
9:36:57 AM
REPRESENTATIVE HARRIS, in response to Representative Samuels,
replied the concept of a constitutionally protected capital
account would protect the principal. In further response to
Representative Samuels, Representative Harris explained that as
long as the CBR is on the books, it's provisions have to be
adhered to unless it's taken to the public for a vote.
9:38:12 AM
REPRESENTATIVE GRUENBERG asked why this repeals the CBR.
REPRESENTATIVE HARRIS replied there is no reason for the CBR if
the funds are placed in a capital account or the permanent fund.
In further response to Representative Gruenberg, Representative
Harris replied the CBR or any CBR-type entity could be useful
depending on its intended use. However, currently the CBR is
used as a mechanism to balance the budget annually, which is not
what the public wants the legislature to do. The public wants,
he opined, to elect legislators based upon their social or
fiscal policy platform; Alaska doesn't have that ability because
it has limited imposed taxes on the public. Therefore, the
intention of this legislature should be to develop a sound
fiscal policy and in order to do so it's essential to remove the
"crutch" that has been the CBR, he added.
9:43:43 AM
REPRESENTATIVE GRUENBERG opined that there may be possibilities
for something like a CBR.
REPRESENTATIVE HARRIS responded the he doesn't have a problem
with the concept of a capital fund. However, such should have a
constitutionally protected principal, include the POMV
methodology, and use the earnings, he added. In further
response to Representative Gruenberg, Representative Harris
replied that many states have a statutory fund with a "fence"
around it and such doesn't require a constitutional amendment.
CHAIR WEYHRAUCH added that Nebraska has a statutory reserve
fund.
9:48:37 AM
CHAIR WEYHRAUCH related his understanding that under HJR 12
litigation and royalty settlements that would've been deposited
into the CBR, would be deposited into the GF.
REPRESENTATIVE HARRIS said, "That's correct." He added that if
the legislature so chooses, it could deposit the aforementioned
funds into the permanent fund, a capital account, or whatever.
9:49:06 AM
REPRESENTATIVE WILSON asked whether another cash flow account
needs to be created [were the CBR eliminated].
REPRESENTATIVE HARRIS replied that could easily be accomplished
statutorily.
9:50:14 AM
REPRESENTATIVE ROKEBERG asked what would be used as a cash flow
reserve fund under HJR 12. He said he plans to propose a
resolution that would repeal [Article IX] Section 17(c) which,
is a repeal of the three-quarter vote for the CBR so the CBR
could be drawn on by a simple majority vote.
REPRESENTATIVE HARRIS responded that the aforementioned repeal
of the three-quarter vote would mean that the CBR would still be
available.
REPRESENTATIVE ROKEBERG, in response to Chair Weyhrauch, replied
his resolution would merely change the number of votes required
to make a draw from the CBR.
9:52:11 AM
REPRESENTATIVE SEATON commented that [under Representative
Rokeberg's] resolution the legal obligation the legislature has
to repay the CBR and address the sweep and the reverse sweep
mechanisms will remain.
REPRESENTATIVE ROKEBERG relayed that his resolution plans to
address the aforementioned issue, particularly the sweep and
repayment provisions. He related his belief that given the
pressures on expenditures in the state, the legislature won't be
able to [repay the CBR] unless there is an extraordinary
windfall.
9:53:13 AM
REPRESENTATIVE GRUENBERG added he is part of the small minority
who is a recipient of the three-quarter vote. He noted that
perhaps there should be a CBR provision in the constitution to
include not only the oil settlements but also high oil prices.
He characterized it as a spending limit, or a break on spending.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:54 a.m.
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