Legislature(2003 - 2004)
01/28/2004 09:05 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
January 28, 2004
9:05 AM
TAPES
SFC-04 # 2, Side A
SFC 04 # 2, Side B
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:05 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Donny Olson
Senator Lyman Hoffman
Senator Ben Stevens
Also Attending: BRUCE TANGEMAN, Fiscal Analyst, Division of
Legislative Finance; DAVID TEAL, Director, Division of Legislative
Finance; CHERYL FRASCA, Director, Office of Management and Budget,
Office of the Governor
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SJR 3-CONST AM: APPROPRIATION/SPENDING LIMIT
The Committee heard from the sponsor, the Division of Legislative
Finance and the Office of Management and Budget. The bill was held
in Committee.
[Note: Audio malfunction at start of meeting, introductory portion
not recorded.]
CS FOR SENATE JOINT RESOLUTION NO. 3(JUD)
Proposing an amendment to the Constitution of the State of
Alaska relating to an appropriation limit and a spending
limit.
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken announced the purpose of this meeting was to
overview the resolution and present concerns. He referenced a
handout titled "Points of Consideration" [copy on file], which
Senator Dyson would speak to. Co-Chair Wilken stated the Committee,
with the assistance of the Division of Legislative Finance and the
Murkowski Administration, would develop arguments for and against
the points outlined in the handout. He added that additional issues
could be added as they arose.
Senator Dyson, sponsor of this resolution, presented the bill. He
informed that a constitutional spending limit was adopted in 1981,
although it "appears to not work. He told of earlier efforts to
rectify this, including previous legislation sponsored by former
Senator Dave Donley.
Senator Dyson informed that at the start of the twenty-third
legislative session he subsequently reintroduced the resolution
authored by Co-Chair Donley.
Senator Dyson outlined the aforementioned handout, which he
characterized as identifying policy issues the Committee could
address, beginning as follows.
1. What factors should be used in the formula to determine
the allowable change (increase or decrease) to be applied to
the appropriations or expenditures?
A. Tied to population increases or decreases?
We need to answer the question: "What portions of the
state's budget change directly when the population grows
(or decreases)? The school foundation formula and people
seeking government assistance and the PFD do increase
linearly with population. What portions of the operating
budget are impacted by changes in population, and how
much? How does this tie to our aging population or
increases (or decreases) in school age children?
Senator Dyson pointed out that new resents of school age would
affect the State's education foundation funding formula and
"medically fragile" and disabled new residents would affect the
need for medical services.
B. Tied to per capita income?
Should growing wealth equate to expanding government?
What are the components of government that remain fixed
regardless of citizen personal income? Do people need
more government assistance when their income decreases?
Does the need for more government decrease with more
personal wealth, and if so, by how much?
He relayed that the Governor has suggested that per capita income
be utilized as a factor in determining appropriation limits. He
noted this method has been "popular" in other states that operate
with spending limitations. However he argued that each of those
states also has an income tax and therefore the amount of personal
income earned by residents affects the amount of revenue collected
by that state. He also questioned the need for increased government
services proportionate with increased personal income.
C. Budget increases tied to Consumer Price Index
(CPI)?
If tied to CPI, how reasonable is it to use what OMB
calls the "CPIU Anchorage" (Consumer Price Index for all
urban consumers for the Anchorage metropolitan area
compiled by the Bureau of Labor Statistics, United States
Department of Labor)? We should answer the question:
"What portions of the operating budget are affected or
unaffected by inflation, and how are such portions
affected? Leases, long term contracts, etc. are
typically not affected by yearly inflation.
Senator Dyson stated that some expenditures would be unaffected by
inflation, such as long-term leases that do not contain an
inflation escalator and long-term contracts.
D. It's the opinion of Legislative Finance that all of
these factors have advantages and disadvantages. We need
to understand these factors, perhaps consider other
factors, and craft the most valid and reasonable formula.
Senator Dyson expressed the need to clarify whether to limit the
growth of appropriations or to base future appropriations on
current year real expenditures. He explained that some unexpended
funds carry-forward or are transferred to cumulative accounts.
Co-Chair Green asked how to prevent the manipulation of statistics
for the purpose of attaining a specific goal.
Co-Chair Green also questioned the assumption that leases would not
be affected by inflation.
Senator Dyson stressed that lease payment amounts would not
increase, nor would terms of four-year contracts with employee
bargaining units.
Co-Chair Green countered that "catch up" would be necessary at the
conclusion of the contract to adjust for inflation that occurred
over the term of the original agreement.
Co-Chair Wilken stated this issue should be noted for further
review.
AT EASE 9:17 AM /9:17 AM
Co-Chair Wilken called upon Division of Legislative Finance staff
to join the discussion.
Senator Hoffman spoke to increases and decreases resulting from
federal mandates, cautioning that if the State did not meet the
amended obligations, federal funding would be lost. He asked how
this proposal addresses the situation.
Co-Chair Wilken clarified that if the federal match ratio
requirement increased, the State would be required to contribute a
larger portion of funding for a program or project to be eligible
to receive the federal portion, thus increasing the budget of the
affected State agency.
Senator Dyson noted Co-Chair Donley addressed this issue by
providing that if there was need for an increase due to extraneous
circumstances beyond the amount allowed in the appropriation
formula, the legislature could vote to increase the operating
spending limit. He commented that the decision must be made as to
whether a simple majority, two-thirds majority, or super majority
vote would be required to make such allowances.
Senator Hoffman opined that the allocation limit should be "lifted"
or increased accordingly, in those instances to accommodate the
changed federal requirement.
Co-Chair Wilken added this issue to the matters requiring
consideration.
2. We'd like to make the formula state that the limit will
be based on the previous appropriation or actual expenditures,
whichever is less.
A. Legislative Legal staff says that actual
expenditures would always be less because not all
appropriations are spent by the end of the fiscal year.
B. Some moneys are put in trust and are not expended.
C. Some moneys go to purposes that do not lapse at the
end of the year.
D. How can we delineate or define such "expenditures"
so that we can incorporate this concept?
Senator Dyson noted that two years could be required to secure
accurate expenditure data. He added that a two or three-year
average formula were other options.
3. What exemptions should be made? The Office of Management
and Budget are recommending that we eliminate the following
that were in the Donley Constitutional Amendment:
A. Railroad? On the one hand it increases the overall
appropriation, thereby increasing the amount represented
by the limit calculated. On the other hand, to exclude
it may mean they aren't limited like those Government
exemptions who are not exempted and are thus not
subjected to the same constitutional discipline.
B. University and Alaska Vocational Technical Center?
Only a portion of their funds come from state
appropriations. Some of their revenue comes from
tuitions and other sources. Should the general fund
contributions to these institutions be limited like other
state government functions, and if so, how?
Senator Dyson noted Co-Chair Donley proposed several exemptions
that would not be included in the appropriation limitation;
however, the Office of Management and Budget suggested the
aforementioned three be excluded from the list of exemptions. He
emphasized these are policy decisions.
Senator B. Stevens asked if the spending limitation would apply
only to the State portion of the funding for these organizations or
to their entire budgets.
Senator Dyson responded this was a matter to be addressed.
BRUCE TANGEMAN, Fiscal Analyst, Division of Legislative Finance,
relayed that Co-Chair Donley's proposal and subsequent versions of
similar resolutions have excluded federal funds and included non-
duplicated funds in appropriation limitations. Therefore, he
concluded that interagency receipts would not be "counted".
Senator B. Stevens asked if the appropriations limit would include
authorization to expend freight and passenger receipts and asked
whether this would limit the growth of those functions.
DAVID TEAL, Director, Division of Legislative Finance, informed
that the Legislature appropriates no State funds to the Alaska
Railroad Corporation and has no oversight in the budgeting and
operation of the agency. He explained that if the railroad were
included in the appropriation limitation, and permitted to continue
to determine fund expenditure, any increased expenditures would
affect the State's overall appropriation and thus other budgets
must be reduced accordingly. Conversely, he noted, that reduction
in spending by the railroad or the University would allow for
increased appropriations elsewhere in the State budget. He
emphasized that the inclusion or exemption of the Railroad,
University and Alaska Vocational Technical Center (AVETC) would be
a policy call to be made by the Legislature.
Senator B. Stevens expressed he would need to be convinced that
agencies that do not receive State funds should be included in
spending limits.
CHERYL FRASCA, Director, Office of Management and Budget, Office of
the Governor, testified the intent was to "narrow" the number of
exemptions. She explained that when exclusions are provided; an
incentive is made to categorize funding into the exempted entities
to allow for increased funding. She asserted that past behavior of
the Legislature has demonstrated this.
Senator Dyson agreed with Senator B. Stevens' point, questioning
why growth should be limited in the event of increased demand for
Railroad or University services, or receipt of increased federal
funding for expansion that would not impact the State's operating
budget.
Ms. Frasca noted the State "invests" over $200 million in the
University. She suggested that if tuition receipts were to be
excluded from the appropriation limitation, this must be specified
to prevent categorization of other funds as university receipts.
She qualified that some federal funding and trust fund incomes must
be expended in specified manners.
Senator B. Stevens noted the Legislature allocates a single line
item appropriation to the University, which the Board of Regents
then expends as it determines. He therefore surmised that a
limitation should only be imposed on the amount of funding provided
by the State.
Co-Chair Wilken understood and shared this concern and included the
issue for further consideration, noting the arguments would not be
debated at this hearing.
Senator Bunde recalled that a handout was distributed to the
Committee the previous year showing the amount of federal funds
received by the State [copy not provided at this time]. He spoke to
complaints about the significant amount of total funds included in
the State budget, although the Legislature does not control a
majority of the funding. He predicted, that despite the
implementation of an appropriation limit, complaints would continue
to be made by uninformed Alaskans, because the total budget would
continue to increase. He supported a spending cap to demonstrate
that the legislators are "good stewards" of the State's funds and
that exemption of federal funds could be confusing.
Co-Chair Wilken added this matter to the issues to be discussed
further.
Senator Dyson agreed with Senator Bunde's observation.
Senator Hoffman asked why the federal Airport Improvement Programs
(AIP) funds were not included as an exemption, suggesting that
limiting airport expansions would limit the number of travelers
able to utilize the facilities and come to Alaska.
Co-Chair Wilken noted this would also be included as a topic of
discussion.
Senator Dyson also pointed out that expenses incurred to pay off
bonds for capital projects are exempted in this legislation.
Senator Hoffman stressed that additional operating expenses are
necessary to maintain and operate expanded facilities. He remarked
that a two percent increase, as proposed in this resolution, would
be insufficient.
Senator Bunde commented that the permanent fund dividend program is
the largest single appropriation made each year and must also be
included as an exemption. He asserted that any growth in spending
should acknowledge growth of the Permanent Fund Dividend.
Co-Chair Wilken added this point to the items of discussion.
Senator B. Stevens asked if the exemption would apply to expenses
relating to revenue anticipation bonds or just to general
obligation bonds.
Ms. Frasca replied that the Office of Management and Budget
recommends exclusion of revenue bond debt payment, distribution of
the proceeds, and general obligation bond proceeds; however debt
service for general obligation bonds, school reimbursement and
certificates of participation would not be excluded from the
appropriation limit. She reiterated that any exclusion would create
an incentive to "exhibit that behavior," and would encourage future
legislators to incur debt for capital projects and discourage cash
payment for such projects. This, she stated, is because cash
appropriations would be subject to the spending limit, although
revenue would be required to fund the projects regardless of
whether bonds were issued.
Co-Chair Wilken added this topic to the list of talking points to
illustrate different types of bonds and how they would be addressed
under the proposed appropriation limit.
Senator Dyson furthered that a determination should be made as to
acceptable operating funding increases in the event of expanded or
new facilities.
Ms. Frasca argued that the opening of a new facility does not
necessarily generate increased revenue. She exampled the recently
opened Kenai Peninsula Juvenile Facility and the need to reduce
funding elsewhere to provide funding to operate this new facility.
She stated that new and expanded facilities therefore "compete for
dollars" with existing facilities to cover operating expenses.
Senator Hoffman commented that the Alaska Constitution requires
that the Legislature appropriate no more funds that what is
available and therefore questioned the need for this resolution.
Senator Bunde opined that the State has not practiced diligence in
maintaining facilities and surmised that an appropriation
limitation could result in poorer maintenance of new facilities if
adequate funding were not allowed for operating purposes.
4. Should the number of legislators required to approve
exceeding the limit formula be 2/3 or 3/4?
A. If the party in power wants to spend more money
irresponsibly, are we giving enough power to the
responsible minority to stop the spending spree?
B. If we give too much power to the minority, will they
be able to hold the majority hostage and demand personal
or irresponsible special interest pork, when good public
policy would necessitate increased spending to meet
unusual circumstances?
5. Should we keep the second 2% limit in place? Is 2% the
right absolute limit to exceed the formula limited increases?
A. Should it be higher or lower?
B. Under what circumstances would we want to override
the limit so drastically that we would violate the
constitution to do so?
B. Should this limit apply also to capital projects?
Senator Dyson noted Co-Chair Donley's proposal would have required
a three-quarters majority of both houses of the legislature and
would have limited any increase to two percent.
Senator Dyson spoke to times when abundant funding was available
and the subsequent expanded role of state government. He asserted
that as a result, the current legislature must determine which
functions to continue to fund and at what level, with less income
available. He suggested this provision could restrain exponential
growth in the event of future increased revenue.
Senator Olson asked if historically, a provision existed to change
the requirement from a two-thirds majority to a three-quarter
majority in the event of a "super majority."
The existence of such a provision was unknown.
Senator Dyson asked whether the appropriation limitation adopted in
1981 required a super majority to override the limit.
Mr. Tangeman emphasized that the amount of funds available for
expenditure far exceeded the limitation stipulated in the 1981
limit. Therefore, he asserted, the original allocation limit is of
"clearly no use" at the present time.
Ms. Frasca listed that 29 states have a limitation of either
revenues or spending: of those 12 states require a two-thirds
majority to override the limit, two states require three-fifths
majority, seven states require a simple majority, six states have
no provision to allow waivers, and no states require a three-
quarters majority.
Co-Chair Wilken referenced a graph titled, "Draft-Spending Limit
Proposals" provided by the Division of Legislative Finance [copy on
file.]
Mr. Teal explained this graph demonstrates the impacts of various
approaches to a spending limit. He indicated that a cumulative
approach, such as the existing limitation, is unrelated to actual
spending and allows for no self-correction for actual expenditures.
He stated that over time, this results in a limit "far away from
anything resembling reality". He noted the authorized appropriation
amount for FY 04 under the 1981 provision is $6 billion, whereas
actual expenditures would be approximately $2.2 billion. He
suggested this could be remedied by reducing percentages.
Co-Chair Wilken clarified the line on the graph labeled
"cumulative" represents Article IX, Section 16 of the Alaska
Constitution.
Mr. Tangeman added that the cumulative line accounts for most
exemptions contained in the various proposals, such as federal
receipts, dedicated funds, etc., and therefore differs from the
existing constitutional provision.
Mr. Teal pointed out that all of the methods demonstrated in the
graph have been adjusted to account for exemptions in the same
manner. He furthered that the trend demonstrates the pattern for
each method if enacted in 1997.
Mr. Teal next addressed the line item labeled "annual", explaining
it represents the method proposed in Senator Donley's earlier
legislation, SJR 23 and would result in the "opposite extreme" to
that of a cumulative approach. He stated that the annual approach
is based only on actual expenditures and if spending decreased in
one year, future appropriations would be limited to increases based
upon the lower budget, although actual requirements increase and
decrease every year. He suggested adjustments could be made, but
cautioned such actions would be "arbitrary, complex" this would
require continual overrides.
Mr. Teal then spoke of "a number of middle ground options" between
the extreme cumulative and annual approaches. He asked whether the
Governor had a recommended method made public.
Ms. Frasca responded that the Administration chose to make
suggestions to the legislative proposals.
Mr. Teal also suggested that "benchmarks" could be placed to make
periodic adjustments stated that because the two aforementioned
approaches were not viable, a third method is demonstrated on the
graph as "recent growth" and was recommended by the Office of
Management and Budget. He explained that a fixed base would be
established, as with the cumulative approach, although "growth
calculations" would be made to the previous three to five years to
prevent the incremental increases to "get out of control". He
pointed out the data on the graph shows a decrease for FY 97 and FY
98 under this method despite the growth calculations based on
population and personal income, both of which variables had
constant increases. He explained this is because the allowable
spending increase is calculated on the rate of growth.
Mr. Teal expressed that this method itself is not necessarily good
or bad, but dependant upon the various factors to determine
success.
Mr. Teal suggested that "benchmarks" could be placed to make
periodic adjustments noting the information contained on the graph
is based on 1981 expenditures. He listed another option of allowing
the budget to increase by a set amount or certain percentage each
year. However, he recommended development of a theory to adopt a
spending limit based on determined variables, such as the need for
services, cost of providing those services, and available revenue.
Mr. Teal continued that population affects the need for services
and the Consumer Price Index (CPI) is adequate for determining the
cost of services, although not all government services are affected
by population or the CPI. He stated that accommodations could be
made to account for the exceptions.
SFC 04 # 2, Side B 09:53 AM
Mr. Teal spoke to revenue as a component of determining allowable
appropriation amounts. While personal income reflects the state of
the economy, he warned that it is only applicable for states that
impose a broad based tax: either a sales or income tax. He
explained that when personal income rises, revenue generated from
these taxes increases. He noted that personal income is often
reflected in the CPI, and therefore both variables should not be
used.
Mr. Teal further questioned the option of basing appropriations
partly on revenue, saying that a significant portion of Alaska's
revenue is from oil proceeds, and that oil prices are volatile. He
furthered that in those states that base appropriation
authorizations to revenue, residents understand that increased
taxes allow for increased spending and subsequently pass
initiatives restricting tax increases.
Mr. Teal reiterated that many options exist and he was unsure if
the Committee would debate them and amend this resolution,
stressing that the Committee must decide what should occur with
regard to a spending limit. He posed additional considerations,
including determining the importance of stability, contingency in
the event of declining revenue or revenue "spikes" generated from a
natural gas pipeline for example. He also emphasized the need to
address the current structural deficit of $400 million to $600
million each year. He warned that this fiscal gap could not be
maintained indefinitely because the CBR would be depleted. Upon
depletion of the CBR, he noted a spending limit would be
unnecessary because the amount revenue to appropriate would be
limited.
Mr. Teal answered Senator Hoffman's question of why a spending
limit is necessary, stressing that the existence of the CBR equates
to unlimited revenue for current years.
Co-Chair Wilken commented this is a subjective and complex issue.
Senator Bunde cautioned prevention against a hidden incentive to
spend the maximum amount appropriated to various programs and
projects.
Senator Dyson cited the Alaska Constitution Art IX Sec. 16 in
suggesting the basis for a three-quarters majority option. This
section provides that the legislature may exceed the appropriation
limit if the Governor signs such a bill or a gubernatorial veto is
overridden by a three-quarters majority vote. He surmised this
demonstrates historical precedent of a three-quarter majority.
Senator Hoffman disputed Mr. Teal's argument of the necessity of a
spending limit, because a three-quarters majority vote is required
to withdraw funds from the CBR.
Senator Hoffman asked number of states with provisions in the
constitution to limit spending to the amount of revenue generated.
He suggested that limitations of other states should be reviewed.
Senator Olson commented that although other states have spending
limits, many of those states also have fiscal problems considerably
worse than that in Alaska. He attributed some of these situations
to spending limits.
6. This proposal eliminates the current wording that 1/3 of
appropriations should go to capital projects. Do we want to
agree to that?
Senator Dyson characterized this item as a housekeeping matter,
although he encouraged legitimate discussion.
7. Should we keep the requirement that the governor reduce
expenditures as necessary after the legislature approves a 2%
increase over the formula limit?
Senator Dyson noted this issue should be discussed.
Senator Bunde clarified this provision requires that the Governor
veto any legislative action to increase funding above the allowable
two percent.
Mr. Tangeman affirmed that in the event the legislature
appropriates more than a two percent increase, the Governor is
required to reduce expenditures through line item veto.
Co-Chair Wilken asked if this would apply in the event the
legislature approves an increase by a three-quarters majority vote.
Mr. Tangeman responded that the requirement of the Governor still
applies.
Senator Dyson pointed out this is the existing provision.
Senator B. Stevens understood page 2 of bill
Senator Bunde remarked this furthered the need for a constitutional
spending limit because one legislature could not bind future
legislatures. He explained that in the event a legislature overrode
such a gubernatorial veto and a cycle ensued, the courts would rule
according to the Alaska Constitution.
Senator Hoffman instead suggested the proposal in item #7 could be
furthered to allow appropriations of greater than two percent in
the event the legislature overrode a gubernatorial veto of such an
action.
Senator B. Stevens was unsure whether the legislature should
relinquish its ability to override vetoes.
Co-Chair Wilken surmised this item needs further review.
Ms. Frasca informed that the Attorney General has advised that this
provision would result in the legislature relinquishing its power
of appropriation and could be unconstitutional.
8. What do we do with excess funds above the two tiered
operating budget limits? What funds do we consider (general
funds, other)?
A. The constitution currently says, "The governor shall
cause any unexpended and unappropriated balance to be
invested so as to yield competitive market rates to the
treasury." [Last sentence of Art. IX, Sec. 16]
B. Should the governor be required to deposit such
funds to the Constitutional Budget Reserve?
C. The constitution says that if funds have been
withdrawn from the CBR (as is currently the case), that
money in the general fund available for appropriation at
the end of the year will be deposited in the CBR. What
about when we have paid back the CBR and no longer "owe"
the CBR? [Article IX, Section 17(d)]
Senator Dyson surmised that depositing unexpended and
unappropriated balances into the CBR would meet the provision of A.
He posed the question as to whether this should be required as
suggested in B. He cited Senator B. Stevens's analogy of the CBR as
a "bridge to the future" and opined that such actions would return
the legislature to the role of "promise keepers" in "rebuilding"
the CBR. He explained C as a consideration that if the balance of
the CBR reached a certain amount whether excess general funds could
be expended for other purposes.
Senator Hoffman recommended discussion of whether funds should also
be deposited to the permanent fund.
Co-Chair Wilken added this to the list of items for consideration.
Senator B. Stevens restated the question as to whether excess funds
should be deposited into the permanent fund before the total amount
of funds withdrawn from the CBR in past years has been "repaid".
Co-Chair Wilken restated other issues added for consideration: #9,
whether federal dollars should be included in a spending limit; and
#10, how different types of bonds would be included.
Senator Dyson also noted points raised about inclusion of permanent
fund dividend payouts, and the escalating cost of operating
expanded and new facilities.
Ms. Frasca indicated she would provide a handout containing a
summary of the appropriation and revenue limits of other states.
Ms. Frasca expressed that in event of revenue "windfall" she wanted
to insure that the size of government would not grow, regardless of
the fund source. She noted several programs she did not consider
essential state services, but are somehow exempt from budget
reductions because they are not funded with State funds. She
remarked it is difficult to justify elimination of State Trooper
positions at the same time funding is increased to a State
corporation.
Senator Bunde speculated on the current size of State government if
such a growth restriction were in place during the 1970s.
Senator Dyson appreciated Committee's patience and anticipated
these efforts would result in a better process. He was "personally
challenged" by the idea that increases in the individual wealth of
Alaskans would reciprocate a lesser demand for government services,
such as public assistance. He analogized his attempts to "set the
guardrails on public policy", to protect against "falling in the
ditch" as a result of poor decisions.
Senator Dyson noted he and Ms. Frasca worked under similar
guidelines in the Municipality of Anchorage with its tax
limitation, which he opined forced "healthy discipline". He
suggested that with proper planning "unfortunate and unintended"
consequences of a spending limit could be avoided.
Co-Chair Wilken requested Senator Dyson address the questions posed
during this hearing. Co-Chair Wilken noted that the House of
Representatives was considering companion legislation.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:17 AM
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