Legislature(2003 - 2004)
03/16/2004 01:42 PM Senate FIN
| Audio | Topic |
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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
March 16, 2004
1:42 PM
TAPES
SFC-04 # 42, Side A
SFC 04 # 42, Side B
SFC 04 # 43, Side A
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately 1:42 PM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice-Chair
Senator Lyman Hoffman
Senator Donny Olson
Senator Fred Dyson
Senator Ben Stevens
Also Attending: SENATOR TOM WAGONER; SENATOR GARY STEVENS; SENATOR
BERT STEDMAN; SENATOR RALPH SEEKINS; SENATOR HOLLIS FRENCH; BILL
CORBUS, Commissioner, Department of Revenue; MICHELLE PREBULA, Cash
Manager, Treasury Division, Department of Revenue; LUCKY SCHULTZ,
Staff to Senator Fred Dyson; CHERYL FRASCA, Director, Office of
Management and Budget, Office of the Governor
Attending via Teleconference: From an Offnet Site: DR. BARRY
POULSON, Tax/Spending Consultant and Professor, University of
Colorado
SUMMARY INFORMATION
Department of Revenue
Constitutional Budget Reserve Fund Presentation.
The Committee heard from the Department of Revenue regarding the
establishment of a one billion dollar minimum balance in the
Constitutional Budget Reserve Fund.
SJR 3-CONST AM: APPROPRIATION/SPENDING LIMIT
The Committee heard from the bill's sponsor, a tax/spending
consultant, and the Administration. A committee substitute was
adopted and the bill was held in Committee.
Department of Revenue
Constitutional Budget Reserve Fund
Presentation
BILL CORBUS, Commissioner, Department of Revenue, stated that his
power-point presentation [copy on file] would address the status of
the Constitutional Budget Reserve (CBR) and the need to maintain a
minimal balance in that account. A similar presentation that had
included the history of the CBR and information regarding the
volatility of the price of oil had been presented to the Conference
of Alaskans at the University of Alaska in Fairbanks on February
10, 2004. However, the historical and volatility information would
not be presented today, as this Committee is familiar with these
issues. He informed that no major settlements resulting from oil
tax or royalty disputes would be received by the State in the
foreseeable future.
[NOTE: Co-Chair Wilken assumed chair of the meeting.]
AT EASE 1:46 PM / 1:46 PM
Commissioner Corbus stated that historically, the CBR has been
utilized for three purposes: to cover budget deficits; to cover
unexpected budget shortfalls resulting from unexpected downturns in
oil revenues; and to provide cash flow to the general fund (GF). He
noted that Governor Frank Murkowski has announced his desire to
retain a one billion dollar minimum balance in the CBR.
Commissioner Corbus referred the Committee to the graph titled,
"Projected vs. Actual CBR Draws" on which a red line depicts the
forecasted CBR draw that was projected for each year from 1995
through 2004. The actual draws for the years 1995 through 1997 were
below the forecasted amount; however, the actual draw in 1998
exceeded the projection due to a downturn in forecasted oil prices.
Senator Bunde asked whether 1998 was the year that oil prices
dropped to approximately nine dollars a barrel.
Commissioner Corbus pointed out that the average oil prices per
year are depicted on the chart titled "ANS Oil Price Differential,
Change Year-to-Year, FY 1994-2003." There was a $5.04 per barrel
decrease in 1998 as compared to 1997 prices. An additional $3.13
per barrel decrease occurred in 1999.
Commissioner Corbus again referred to the chart titled "Projected
vs. Actual CBR Draws" and noted that in 1999, the decrease in the
price of oil forced an additional $325 million draw on the CBR,
above what was forecast.
Senator Bunde understood from the chart that in excess of one
billion dollars was withdrawn from the CBR in 1999. That fiscal
year's total budget was approximately $2.3 billion budget.
Therefore the draw that was required equated to half of the FY 99
total budget.
Commissioner Corbus noted that less than the forecasted amount was
withdrawn from the CBR in 2000 and 2001; the amount withdrawn in
2002 exceeded the forecasted amount; and the amounts withdrawn in
2003 and 2004 were less than the forecasted amount. The point is
that projecting the price of oil is not an exact science. A reserve
must be available to provide for the years when the price of oil is
lower than forecast.
Senator Bunde asked whether the total amount that has been
withdrawn from the CBR, since its inception, is available.
Commissioner Corbus replied that a total of $5.5 billion has been
drawn.
Senator Bunde stated that according to law, this amount must be
repaid to the CBR.
Commissioner Corbus concurred.
Commissioner Corbus reiterated that the primary purposes of the CBR
are to provide money when there is a revenue shortfall and to
provide cash flow during the year for such expenses as construction
projects for which the State would eventually receive federal
reimbursement. This borrowing process is depicted on the chart
titled "General Fund Cash Sufficiency With CBR borrowing" which
illustrates the bi-weekly general fund borrowings from the CBR for
the fiscal year 1997. The graph titled "General Fund Cash
Sufficiency Without CBR Borrowing" depicts how the balance of the
GF would have fared without the CBR borrowings that year. While the
yearend balance is the same in either scenario due to the fact that
the monies borrowed from the CBR are entirely reimbursed, the GF
balance in the second graph would have reflected a cash deficit
position in the summer and fall months. It is a State policy that
the GF balance not be lower than $100 million dollars. In summary,
these two charts depict how the CBR has been used to provide "a
line of credit to the State" in times when the income deposited
into the GF is less than the money being spent.
Senator Bunde, noting that the CBR is an interest bearing account,
asked whether the funds borrowed from it are paid back with
interest.
Commissioner Corbus replied that interest is not paid on the
borrowings.
In response to a question from Senator Olson, Commissioner Corbus
stated that the short-term borrowings from the CBR are paid back
without interest.
Commissioner Corbus expressed that the argument favoring a one
billion dollar minimum CBR balance is further expressed in the
chart titled, "Should We Set Minimum for CBR," which depicts that
$300 million to $400 million is needed on an annual basis to
provide for fluctuating GF cash flows. The additional $600 million
to $700 million balance would maintain the desired CBR balance were
the price per barrel of oil to decrease by up to ten-dollars. A
one-dollar reduction or increase in the price per barrel of oil for
one year would equate to a loss of or an increase of $65 million to
the State, respectfully. The aforementioned chart "ANS Oil Price
Differential" depicts the year-to-year change in the average price
of oil from 1995 -2003. The 1998/1999 cumulative total loss, for
that time period, was eight dollars price per barrel of oil. This
is one reason to establish a $600 million to $700 million buffer
balance in the CBR.
Commissioner Corbus referred to the chart titled "Should We Set
Minimum for CBR" that presents a forecast for the oil revenue that
the State might receive. Revenue anticipation notes could be sold
based on the projected sources of revenue.
Commissioner Corbus concluded that the State is making a case in
support of maintaining a minimum CBR balance of one billion
dollars, as it would be the "appropriate" amount with which to
provide for the fluctuations in oil prices as well as to provide
the required cash flow for the GF.
Senator Bunde understood that were a one billion dollar minimum
balance mandated and then breached to provide funding for the
fluctuating cash flow, the lone alternate through which to
reimburse the CBR, were insignificant revenue to be received,
"would be for the Legislature to follow the law and repay the CBR
some of the five billion we owe it."
Commissioner Corbus replied that that is a fair analysis. In
addition, the comment opens discussion regarding a "replenishment
plan" which is an issue that has been raised by financial rating
agencies. Another concern raised is that the State does not have an
overall financial plan. This must be in place before a
reimbursement plan could be developed. Absent these, specifying
that the CBR maintain a one billion dollar balance "is better than
nothing."
Senator Hoffman, noting that the presentation highlights the
fluctuating price of oil, asked whether the fluctuating number of
barrels flowing through the pipeline is also an important factor.
This would have a correlating affect on the revenue.
Commissioner Corbus noted that one million barrels a day has been
the norm for production. In the next year, production is projected
to be 996,000 barrels a day and would be sloping off thereafter.
Production is not as significant a factor as price.
Co-Chair Wilken surmised that another factor would be the yield of
a field. The three pieces therefore would be price, production, and
yield.
Senator Olson asked whether there is a penalty for not reimbursing
the CBR for the amounts owed.
Commissioner Corbus stated that there is no penalty.
Senator Olson observed that the chart titled "Should We Set Minimum
for CBR," depicts that revenue would be generated from oil
production in the Arctic National Wildlife Refuge (ANWR) beginning
in approximately 2011.
Commissioner Corbus stated that the chart depicts all "possible"
revenue sources. The Governor Murkowski Administration is very
committed to developing the State's resources.
Co-Chair Wilken asked how fiscal years 2003 and 2004 would look
were a chart similar to the FY 1997 "General Fund Cash Sufficiency
Without CBR Borrowing" chart developed, specifically in regards to
how often the GF balance would have "dipped below the zero line."
MICHELLE PREBULA, Cash Manager, Treasury Division, Department of
Revenue, responded that during the six years she has worked in the
Department, the State has, annually, been required to borrow funds
from the CBR. She noted that the chart was developed based on the
fact that 1997 was a year in which the budget balanced. It
currently appears that FY 04 would have a balanced budget; however,
to date, $300 million has been borrowed from the CBR due to cash
flow demands. This amount would be repaid.
Co-Chair Wilken asked the lowest balance that the GF has attained,
during the past six years, before the CBR funds were accessed.
Ms. Prebula responded that in addition to being able to access CBR
funds, there is a cash flow contingency in place to assure that the
GF balance would not reduce below zero. Therefore, the lowest
balance would be approximately $28 million.
Co-Chair Wilken asked how the GF balance would fare were there not
CBR borrowings.
Ms. Prebula replied that without CBR borrowings, the balance of the
GF would have dipped into the negative territory each year. The
amount would vary by year. FY 04 would have reached a negative $400
million were no CBR borrowings conducted.
Co-Chair Wilken, noting that the CBR is an interest bearing
account, asked whether the Department has a breakout of the
interest earnings on the contributions that have been made to it
for the last five years.
Commissioner Corbus responded that this information is available
and would be provided. As he recalled, the return has been
favorable and could be in the five-percent range.
Senator Hoffman pointed out that this information is located in the
presentation's information titled "CBR History." It specifies that
the "State has deposited $5.6 billion into the CBR and has earned
$1.6 billion in interest on the money."
Co-Chair Wilken asked that a breakout of this information be
provided.
Commissioner Corbus stated that the Department would provide this
information.
Senator Bunde asked whether the interest earned by the CBR is
deposited into the CBR or the GF.
Commissioner Corbus clarified that it is deposited into the CBR.
Co-Chair Wilken stated that after it is deposited into the CBR, it
would be available to the Legislature.
Senator Hoffman, in reference to the request that a minimum one
billion cash balance be specified for the CBR, asked why this high
level is required in these days of such things as electronic
transfers.
Ms. Prebula responded that this amount would be required to insure
that sufficient GF cash flow monies would be available in order to
prohibit the GF balance from falling below a zero balance. She
stated that the State's accounting system would not allow a
transaction to be processed were it to have the affect of making
the GF balance to fall below zero. Even with electronic funds
transfers, it could be possible that several large transactions
might occur on the same day as such things as State payroll, that
amounts to approximately $75 million, might be being processed.
Were that to occur, a "tight" balance would result that could
prevent a transaction from occurring.
Senator Hoffman pointed out that, with CBR borrowings, the GF
balance depicted for FY 97 had sufficient cash funds well above a
$100 million dollar level and even approached the $200 million
level. This "appears to be quite a large buffer."
Ms. Prebula expressed that the Department strives to retain a GF
balance with $100 million as the floor and $200 million as the
ceiling. Were the cash balance projected to exceed $200 million for
more than a 30-day time period, the CBR would be repaid.
Senator Seekins shared that while the concern is that the CBR
balance would be eventually be reduced to zero, in reality, that
"zero amount" would be in the $400 million or $500 million range
due to the GF cash flow demands. That would be the point where the
account would cease to be a CBR and would become primarily "a cash
management account."
Commissioner Corbus stated that the forecast is that the CBR would
be exhausted by May 2007. However, the Office of Management and
Budget recently suggested an earlier date might occur were a $100
million minimum GF balance factored in.
Senator Seekins stated that there are two issues that must be
considered. One is that, because the Legislature could not
appropriate a deficit budget, it would depend on the CBR to provide
funding for a budget. Second, it is also a dual-purpose management
tool in that it serves as a cash flow account for the GF.
Commissioner Corbus agreed.
Senator Seekins opined that the balance of the CBR, in its role as
a cash management account, must maintain approximately a $400
million or $500 million balance in order to provide for oil price
fluctuations and the cash flow.
Commissioner Corbus supported there being $300 to $400 million for
cash management purposes and $600 to $700 million for oil price
fluctuations.
Senator Seekins asserted that it would be irresponsible of the
Legislature to allow the CBR balance to fall below $400 million, as
that would negate its ability to provide for cash management.
Commissioner Corbus stated that that level would not provide
sufficient funding to allow for the unexpected fluctuation of oil
prices.
Senator Bunde surmised, therefore, that a $400 million CBR balance
should be viewed as a zero balance.
Commissioner Corbus voiced agreement with that concept.
Senator Hoffman asked what cash management funding mechanism was
utilized prior to 1989 when the CBR was established.
Ms. Prebula understood that prior to the creation of the CBR, a
budget deficit was not an issue.
Co-Chair Wilken surmised that were the CBR to disappear tomorrow,
there would be alternate funding options. The Legislature could,
overtime, establish a GF balance and, as a matter of policy,
prohibit it from falling below $400 million. The State could
establish a line of credit from the Alaska Housing Finance
Corporation or a financial institution. He acknowledged that while
it is nice to have the CBR, were it to dissipate, the State would
have other options available to it.
Mr. Corbus responded that the only problem with Co-Chair Wilken's
observation is that it does not take into consideration the
possibility that a downturn in oil prices might occur. Speaking on
behalf of the "conservative side of the State" he "would prefer not
to do business that way."
Co-Chair Wilken acknowledged; however, stated that with $30 billion
dollars in the bank, the State would have the ability to secure a
line of credit.
Co-Chair Green asked how other states manage their cash flow
situations.
Commissioner Corbus informed that other states are also "wrestling
with this issue." However, while Alaska is unique in that 80-
percent of its revenue comes from one industry, other states, "have
a better balance and more predictable revenue sources."
Co-Chair Wilken noted that the State could learn from how local
borough governments operate in that, while they might borrow from
their fund balance, they always reimburse it.
Senator Olson recalled that when the price of oil declined in the
mid 1980s, the Administration quickly addressed it by developing
some very creative funding alternatives as well as some "deep
cuts."
Commissioner Corbus stated that the Department would develop a
report depicting how the State funded its cash flow needs prior to
the establishment of the CBR.
Co-Chair Wilken characterized the 1980s revenue decline as a period
that was "not very pretty."
Senator Bunde exclaimed that the actions of the State at the time
resulted in a serious depression: a lot of people lost their homes
and numerous businesses closed.
Co-Chair Wilken voiced that this subject is worthy of the
discussion as the CBR is "our cushion." He thanked Commissioner
Corbus and the Department of Revenue for the presentation.
AT EASE: 2:25 PM / 2:38 PM
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 second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken explained that this legislation would establish in
the State's Constitution a spending limit based on the sum of the
Anchorage Consumer Price Index (CPI) and the change in the State's
population. The State's budget could exceed the spending limit were
it determined by the Governor, with concurrence of a two-thirds
vote of the Legislature, that an emergency warrants it.
AT EASE: 2:40 PM / 2:41 PM
Co-Chair Green moved to adopt the Version 23-LS0296\X committee
substitute as the working document.
There being no objection, Version "X" was adopted as the working
document.
Senator Dyson, the bill's sponsor, apologized for the laborious
process involved in the development of this bill. This version of
the bill was just completed. The Department of Revenue has directly
participated in the process and has conducted quality work in its
regard. He stated that the Committee's review of this committee
substitute would lend to the development of a better bill.
Co-Chair Wilken communicated that the Committee recognizes that the
development of this type of legislation "is no small task."
Senator Dyson commented that while a spending limit has been
incorporated in the State's Constitution since 1981, it really has
not accomplished what it was intended to do. Previous Legislators
have struggled to address this issue with no resolve. Amending the
State's Constitution should be conducted in a very careful manner,
as it is one of the better Constitutions in the United States.
Senator Dyson explained to the Committee that since 1976, 31 states
have introduced legislation dealing with spending limits. This
information is included in a Legislative Research Report, Report
Number 03.100, dated February 11, 2003 [copy on file]. Alaska is
unique in that it receives little income from broad-based taxes as
the majority of its income is derived from oil royalties. One of
the changes incorporated into Version "X" is that the base year for
the formula is specified as being two-year's prior due to the fact
that the immediate year's appropriation information is incomplete
until after the year is concluded.
SFC 04 # 42, Side B 02:43 PM
Senator Dyson continued that, in addition, to specifying the
beginning base year, the formula would be calculated as the average
of that year and the two-years prior to that in order to provide a
smoothing affect. Another factor in determining the spending limit
would be the number of people who must be served and the change in
the cost of providing services to that population. This cost factor
could be likened to an inflation and CPI factor. He pointed out
that resulting from the fact that the population and cost of
services do not align with each other, Version "X" would determine
this calculation based upon 90-percent of the CPI and 75-percent of
the population. While he acknowledged that this assumption might
not be easy to defend, what would be "easy to defend" would be the
fact that the cost of providing services does not rise in unison
with inflation. For example, many of the State's operations are
based on long-term contracts and fixed prices that are not affected
by inflation. Similarly, it could be argued that each person moving
into the state does not increase the State's cost of doing
business. The exception to this might be the young and the elderly.
He was convinced that a one-to-one relationship in these components
would not adequately portray the true affect. A spirited discussion
in regard to this percentage theory would be welcome.
Senator Dyson noted that the components that would be exempted from
the spending limit are identified in Section 1, subsection (c) on
page two, beginning on line ten. Language in Section 1, subsection
(d) on page two, beginning on line 22 would allow the Governor to
declare an emergency and expend money beyond that specified in the
spending limit, provided it were to receive an affirmative vote of
at least two-thirds of the members of the Legislature. He noted
that he might propose an amendment that would replace the word
"emergency" with the words "extraordinary circumstance" as is
incorporated into the State of Connecticut's Constitution. Also,
not included in this version is language that was previously
considered in similar legislation proposed by Senator Dave Donley,
in that the amount that could be provided in this manner could be
up to two percent of the budget more, were it approved by a three-
quarter vote of the Legislature.
Senator Dyson also noted that this legislation would eliminate the
Constitutional mandate that one-third of the budget be designated
to support capital projects. In addition, Version "X" would require
that any money above the appropriations limit be deposited into the
Constitutional Budget Reserve (CBR) fund.
LUCKY SCHULTZ, Staff to Senator Dyson, explained that currently, in
regards to the CBR, the Constitution specifies that any withdrawals
from the CBR must be repaid. The language in the Version "X"
committee substitute specifies that any excess funding would be
deposited into the CBR regardless of whether any withdrawals are
owed or not.
Senator Dyson noted that the Department of Law and the Governor
Frank Murkowski Administration "take exception to" language in
Section 1, subsection (e) on page two, line 27. Therefore he
assumed that this language would be eliminated, as the concern is
that this language would allow the Legislature to appropriate
whatever amount they desired. This would make the Governor "the bad
guy" by requiring him to eliminate items in the budget. Removal of
the language would require both the Governor and the Legislature to
share in the budgeting responsibility. In addition, its removal
would eliminate the Legislature's jeopardy "in the Bess Omar
challenge."
(e) If appropriations for a fiscal year exceed the amount
validly appropriated under this section, the governor shall
reduce expenditures by the executive branch for its operation
and administration to the extent necessary to avoid spending
more than the amount validly appropriated.
Co-Chair Wilken asked whether the sponsor would like to entertain
an amendment to this effect.
Senator Dyson preferred to delay action in this regard until after
the Administration has presented its testimony.
Senator Dyson noted that Dr. Poulson, who is recognized as one of
the nation's foremost authorities on governmental taxation and
spending limit concepts, would now present testimony. Dr. Poulson
was instrumental in the development of Colorado's "Taxpayers Bill
of Rights" (TABOR), which has been recognized as a national
taxation/spending model. Furthermore, Dr. Poulson is "uniquely
qualified" to answer Members' questions on policy matters and what
concepts have or have not proven successful.
Co-Chair Wilken re-capped, for Dr. Poulson's benefit, that the
Committee is conducting a weeklong focus on fiscal planning and
methods through which to incorporate the State's assets in long
term fiscal budget planning. The bill being discussed would
implement a Constitutional spending limit as a method through which
to address long-term budgeting needs.
DR. BARRY POULSON, Tax/Spending Consultant, and Professor,
University of Colorado, testified via teleconference from an offnet
site in Colorado and stated that he would share some of the
experiences that other states have had in the development of tax
and spending limits; would discuss Colorado's TABOR amendment;
would provide his recommendations for a well-designed tax and
spending limit would entail; and provide comments regarding SJR 3.
Dr. Poulson stated that his conclusion is that spending limits are
effective and, "if properly designed," would positively affect
fiscal policy. Some policies have effectively restrained the growth
of government, which is of particular importance in times of
economic recession. "States that have effective tax and spending
limits have had to rely less on tax increases as a way to offset
revenue shortfalls." The crucial element is the design of the tax
and expenditure limit (TEL): some states have poorly designed
spending limits and others have well-designed limits that have been
eroded due to Legislative action or Court interpretations of the
limit. An example of a poorly designed spending limit is one that
would return any fiscal year's monetary surplus to the general fund
as it serves to negate any funding constraints in the long run.
Another example would be that special interest groups might
influence the process and have certain funding earmarked and
exempted from the spending limit in order to benefit their cause.
Therefore, in order to effectively design a spending limit, the
requirements are that the language must be included in the
Constitution rather than in statutory provisions; the limit itself
must be defined in terms of the sum of population and inflation; if
surplus revenue above the limit is generated, it should be
immediately refunded to taxpayers; and TEL would be most effective
when linked to other budgetary rules such as balanced budget
provisions and budget stabilization funds.
Dr. Poulson explained that TABOR was initially introduced in
Colorado in 1992 and was enacted in 1997. "TABOR is regarded as the
most effective tax and spending limit in the country," and many
states are using it as a model. It has served to restrain the
growth of government spending in Colorado. In the years between
1997 and 2000, the limit was met and more than three billion
dollars was rebated or refunded to Colorado's citizens. Some
problems that are being addressed include developing a mechanism
through which to stabilize the budget over a business cycle.
Another thing that has served to erode TABOR is the legislature's
decision to rebate one year's surplus revenue the following year.
Unfortunately that was a year in which the State experienced a
revenue shortfall. This served to exacerbate the state's fiscal
crisis. Several interest groups have also influenced modifications
to TABOR "in ways that way eroded its effectiveness," as while,
currently most of Colorado's surplus revenue is generated from
broad-based sales and income taxes, legislation has been introduced
that would provide rebates to special interest groups.
Dr. Poulson concluded that TABOR has served to align the growth of
state government in Colorado with the state's economy. California,
on the other hand, "gutted" their TEL in the late 1980s and allowed
state government spending to grow in double-digit rates in the
1990s. As a result, when California experienced its recession and
revenue shortfalls, it was forced to make "really draconian cuts"
or to borrow $20 billion dollars." Colorado has been able to "avoid
that kind of catastrophe," and in that aspect, TABOR has been an
important component of the state's policy.
Senator Hoffman asked regarding Colorado's growth rate in the
1990s.
Dr. Poulson responded that the growth rate average exceeded eight
percent after 1992, and some years experienced double-digit growth.
Co-Chair Wilken asked for clarification whether that was eight
percent growth per year.
Dr. Poulson concurred that that was the average for total income.
Dr. Poulson noted that he has been working in conjunction with the
American Legislative Exchange Council to develop a model TEL. In
addition, he has worked with Senator Dyson on this legislation. The
next generation of TEL should include the following "critical"
provisions: it should be a Constitutional provision; must be
defined on the sum of inflation and population growth; the broader
the base utilized in determining the spending limit the better as
it would curb the ability of special interest groups to erode the
base and "carve out privileged positions" by having their spending
exempted from the limit; the use of actual and historical measures
of expenditures and revenues rather than projected or estimated
amounts; and to link the TEL to both a balanced budget provision
and a budget stabilization fund. The idea being that a portion of
any surplus revenue would be either rebated or placed in a reserve
fund. The reserve fund could be utilized to offset any revenue
shortfalls in periods of recession. "The objective is not to
restrain the growth of government but to stabilize the budget over
the business cycle."
Dr. Poulson opined that the committee substitute Version "X"
embodies these concepts and is a good TEL. In addition, the
committee substitute provides for spending above the limit were an
emergency situation to occur. In addition, it provides that any
money spent from the reserve fund must be repaid. The goal is to
arrive at an "optimum tradeoff between constraining government and
stabilizing the budget over the business cycle."
Senator Bunde, noting that he is supportive of this bill, commented
that rather than this being a tax and spending limit bill, this is
a spending limit bill, as the State does not have a broad general
tax base.
Dr. Poulson responded that the bill is appropriately titled, as the
limit refers to the total amount that could be spent as determined
by a formula that is tied to the previous year's appropriation.
Given Alaska's recent pattern of spending, the bill would provide a
"more stable growth in spending and certainly constrain the growth
"as compared to the spending that occurred in the previous decades.
Co-Chair Green asked for further information regarding the term
"rebate."
Dr. Poulson explained that between the years 1997 and 2000,
Colorado experienced revenue above the TABOR limit. TABOR requires
that this surplus must be refunded to taxpayers either in the form
of tax cuts or tax rebates. Reducing the state's income tax rate
from five-percent to four-point-six-seven percent lowered the
amount of the surplus; the state's sales tax rate and business
personal property tax rates were lowered; and a rebate in the form
of a check was sent to taxpayers based on a person's income.
Therefore the three-point-two-five billion dollars of surplus
revenue that was refunded to taxpayers was comprised of both tax
cuts and rebates.
Co-Chair Green asked whether Alaska's CBR would equate to the
budget stabilization fund presented in the testimony.
Dr. Poulson responded that one criticism of the Colorado TABOR is
that it does not have a true budget stabilization fund but rather
has established numerous funds such as a Medicaid reserve fund and
an emergency reserve fund that could only be accessed in the case
of a natural disaster. Efforts are underway to establish a true
budget stabilization fund to which a portion of any surplus revenue
would be allocated in addition to the tax cuts and rebates.
Dr. Poulson understood that the Version "X" committee substitute
would allocate any surplus revenue into the CBR, and that any money
removed from that fund must be repaid. Therefore, as currently
defined, the CBR could not be used as a budget stabilization fund
when there is a period of a decrease in revenue, but would rather
require budget reductions to be made.
Co-Chair Green asked whether Colorado's reserve funds could be
accessed by a simple-majority.
Dr. Poulson responded that the rules of how to access money from
the budget stabilization funds vary from state to state: some
authorize it to be at the discretion of the legislature and some
have formulas that are triggered by various factors that would
allocate the funds in a variety of manners.
Senator Dyson stated that one of the criticisms of the formulas
presented in this bill is the belief that recent spending has not
provided an acceptable or appropriate level of basic services.
Dr. Poulson responded that in 1992, the argument in Colorado was
that the TABOR amendment would result in draconian reductions at
both the state and local level. In reality, that has not occurred.
An important provision in the Colorado TABOR amendment is that,
were the legislature to determine that the TEL is too low to
support services, the issue could be presented as a ballot
initiative to the people either to approve a tax increase or to
approve spending above the limit. A tax increase was turned down by
the voters in 1992 and the fact that none has been approved since
is a good indicator that the public accepts the current TEL. Recent
surveys indicate that people approve of the TABOR amendment. A
proposal to increase the spending limit was placed on the ballot in
1997 and voters, also, rejected it. Were the State to include in
this legislation, the ability to place taxation and spending limit
issues on a statewide ballot, the voters could provide the answer
as to whether the limits were appropriate.
Dr. Poulson noted that Colorado's TABOR amendment also limits local
government TAL. They have been more successful in acquiring voter
approval of local taxation or spending limit increases. The smaller
the government, the more likely voter approval of taxation or
spending increases. In summary, he stated that TEL "returns direct
democracy to citizens in deciding how much taxes they are willing
to pay and what levels of revenues and spending they are willing to
see at both the local and state level."
Senator Bunde understood that economists "generally" believe that
taxation and spending limits are "inappropriate or bad for the
economy."
Dr. Poulson shared that one of the nation's leading economists,
Richard Bedder of Ohio State University, has compared states that
have successful TEL programs to states that have not implemented
successful ones and found that the successful states are out-
performing the others. They are more successful in terms of
attracting business and in-migration. Therefore, the best economic
analysis suggests that TEL could be "a very important part of your
fiscal discipline."
Senator Dyson originally thought that the formula should work in
reverse, in that were there a net decrease in population or
deflation it "would ratchet down the State's spending." However, he
negated that approach as he realized that the State might be
required to increase services in the event of a downturn. Therefore
the ratchet down factor was eliminated.
Dr. Poulson agreed that when a recession is being experienced,
providing the legislature with sufficient flexibility with which to
offset some portion of the revenue shortfall funds from the rainy
day or reserve fund would be desirable. He stated that Colorado's
"TABOR amendment is pretty stringent in that it does ratchet
revenue and spending down" as the limit is required to be the lower
of either the limit set by inflation and population growth or
actual revenues. In recent years, the state's revenues and
expenditures have been ratcheted down approximately 19-percent due
to revenue shortfalls. One of the changes being considered in
Colorado is that in times of a revenue shortfall the limit should
either be suspended or remain constant until such a time revenues
exceed the level that occurred prior to the shortfall. This would
assist in stabilizing the budget over the business cycle.
Dr. Poulson stated that the proposed legislation contains two
provisions, not included in the TABOR amendment: the first being
that Alaska has a no ratchet down provision and the second being
that Alaska has a CBR whereas Colorado does not.
Senator Dyson noted that Version "X" contains language that would
allow for exceeding the spending limit in the case of an emergency.
Consideration is being given to changing the language to
"extraordinary circumstance" in order to expand spending in
situations in which the State should expend a large amount of
money, such as in support of an Alaska gas-line. In that case, it
might take a few years to regain sufficient funds with which to
repay the rainy day account.
Dr. Poulson stated that Colorado approaches this in a different
manner as the TABOR amendment specifies that, upon voter approval,
a tax increase or an amount exceeding the spending limit could be
implemented in a given year. He expressed that a vote might result
either by a citizen or legislative initiative. In one instance, an
amendment to the constitution was adopted that specified that some
spending for K-12 education would be exempt from the spending
limit. Therefore, numerous options are available to address
specific needs. The state of Michigan has established a system in
which surplus money is deposited into a rainy day account, which
could be accessed to fund an emergency. He preferred the Colorado
mode of providing emergency funding, because rather than a decision
being made by the Governor with support from the Legislature, it
would also require the State's citizens' approval.
Senator Dyson shared that the Administration has suggested that a
termination or re-ratification date be included in this
legislation.
Dr. Poulson voiced support for this suggestion, for, in the case of
Colorado, citizen approval has increased over time. In addition,
local governments in the state have approved provisions that would
allow some components of the spending limit to exceed it on a
permanent basis.
Senator Dyson asked whether there is any method through which to
prohibit state government from downloading responsibility to lower
governments in order to allow the state government to spend money
is a desired fashion.
Dr. Poulson responded that Colorado and other state's TELs contain
provisions that preclude this from occurring in that, were the
state to impose mandates that would require local governments to
increase spending, the State must provide the additional funding.
For example, when Colorado lowered its business personal property
tax, the action negatively affected local revenues. TABOR required
the State to "backfill that loss of revenue" with State general
fund revenue. This provision "has been successfully upheld in the
courts." It is important that the state not shift the burden of
programs to local governments.
Senator Dyson countered, however, that certain programs should be
administered at the local level.
SFC 04 # 43, Side A 03:31 PM
Senator Dyson continued that, while some communities could and
should provide certain services, as long as the State is providing
those functions, the local entity does not assume them. Police
protection is an example of a program that should be managed
locally. Therefore, mirroring the Colorado format might not in the
best public policy for Alaska, particularly as it is a fairly young
State.
Dr. Poulson agreed that local governments best administer some
programs such as law enforcement. He stated that most states are in
an opposite position as the state government has mandated that
local governments provide certain services without providing
adequate funding. He would provide a more thorough answer after
further research.
Senator Dyson agreed that the Alaska has unique situations.
Senator Dyson understood that every state that has TEL has based
its formula on the sum of inflation and population growth.
Therefore, he asked Dr. Poulson's opinion of the proposal to
utilize the sum of 90-percent inflation and 75-percent population
growth as the growth of government and demand for services should
not be on a one-to-one ratio with these two factors.
Dr. Poulson responded that inflation and population growth are
"stringent limits" that have "certainly constrained the growth of
government in states" that utilize these factors in their formula,
particularly the states of Washington and Colorado. In periods of
economic growth, a one to one TEL would serve to hold governmental
revenues and spending below the level of income and the private
economy; however, this might not be true in a time of recession
these factors might permit a growth of government in excess of
private income. He voiced being unsure whether utilizing a
percentage of these factors would be necessary as the one to one
formula is stringent.
Co-Chair Wilken noticed that while Colorado's formula utilizes the
sum of 100-percent of both inflation and population, the spending
is limited to a maximum six-percent increase.
Dr. Poulson stated that at the time TABOR was being voted on by the
state's citizens, the Colorado legislature adopted a separate
general fund statutory spending limit with a maximum growth of six
percent. Therefore the State has a Constitutional spending limit
that is based on population and inflation and a general fund
statutory spending limit of six percent. TABOR implements a
Constitutional spending limit to total revenue and spending. The
six percent statutory limit applies only to the general fund
spending per year.
Co-Chair Wilken asked, therefore, how a half a billion dollars of
federal funding could be utilized were the TABOR amendment in
effect.
Dr. Poulson clarified that federal funds and debt repayments are
both excluded from the provisions of the TABOR formula. With the
exception of exemption of money received in the form of tuition for
the University of Alaska, the other exemptions denoted in SJR 3
mirror that of TABOR.
Senator Bunde voiced that the term "Alaska Disconnect" is defined
as being that the State spends approximately $6,000 per each new
person in the State whereas each citizen generates approximately
$5,000 in income. New research conducted by the University of
Alaska indicates that each new job in the State costs the State and
local governments approximately $6,300 while it generates $5,200 in
tax and revenue. This is the Alaska Disconnect. He voiced being
unsure whether this information supports the percentages of
inflation and population growth proposed in the bill.
Co-Chair Wilken referenced language in Section 1, subsection (a)(1)
on page one, beginning on line ten that reads as follows.
(1) the lesser of
A) ninety percent of the average annual percentage rate
of change in the Consumer Price Index for all urban consumers
for the Anchorage metropolitan area compiled by a federal
agency for the second, third, and fourth calendar years
preceding the calendar year during which the immediately
preceding fiscal year began; or
(B) the average percentage of the change in the average
personal income of State residents for the second, third, and
fourth calendar years preceding the calendar year during which
the immediately preceding fiscal year begins; plus
Co-Chair Wilken stated this language would balance the lesser of
(A) which is the CPI against (B) which is the change in personal
income. The sum would result from adding one of those two to the
75-percent of the average annual percentage rate of change in the
State population for those same years. Therefore, he asked
regarding the connection between personal income and State
spending.
Senator Dyson stated that Cheryl Frasca, the Director of Office of
Management and Budget, had suggested that rather than incorporating
an inflation factor, growth in personal income should be
substituted. However, he decided, upon review, that the growth in
personal income would not increase, but would in fact decrease, the
demand or need for government services.
Senator Dyson stated that in a prior draft, the calculation was
that the growth in CPI could not exceed the growth in personal
income. It was his intent that the growth in personal income "would
be a limiter rather than choosing the less of." This would have the
same result. He stated that Ms. Frasca's comments would be
forthcoming.
Co-Chair Wilken, referencing the fact that the legislation
discounts inflation and population, asked Dr. Poulson whether any
other state has done likewise.
Dr. Poulson replied that Washington and Colorado utilize total
inflation and population growth. Other states have incorporated the
less stringent limit of the rate of growth in personal income, as a
state that is experiencing a rapid growth in personal income could
permit a large increase in revenues and spending. He also advised
that this could present the problem as experienced in Florida where
for three years there was a growth in personal income, which
resulted in three years of an increase in revenues and spending.
This period was then followed by a recession and a downturn in the
economy. Therefore, while revenue was declining, spending was not.
He was not supportive of this approach. Therefore the design of a
tax and spending limit is crucial. He voiced support for the
approach being presented in SJR 3.
Senator Dyson conveyed that he was intrigued with the development
of the formula, particularly when he recalled the economic expanse
and decline experienced in the State in the 1980s. He would not
support the inflation portion of the formula driving the limit.
Co-Chair Wilken voiced appreciation for Dr. Poulson's presentation.
CHERYL FRASCA, Director, Office of Management and Budget, voiced
that Governor Frank Murkowski is supportive of a Constitutional
spending limit. It is difficult to compare Alaska to other states
as they have more revenues generated by taxation. Another challenge
is the expectation "that revenues would automatically increase to
the level approved in the spending limit." This "is not always the
case." As referenced by Dr. Poulson, when a list of exemptions is
developed, there is a tendency to categorize under those categories
and thereby, increase the number of exemptions. In addition, there
is a tendency to exclude funds for special interest groups. Other
than the exemption of tuition for the University of Alaska, the
Version "X" committee substitute does not list specific exemptions.
Some elements that should be considered as additions to the
exemption list would be Trust funds, the inflation proofing of the
Permanent Fund, and dedicated fund sources.
Ms. Frasca echoed Senator Dyson's comments regarding the
Administration's concern about language in Section 1, subsection
(e) on page two, lines 27 through 30 that would require the
Governor to singly make reductions to programs rather than that
being conducted by both the Governor and the Legislature.
Ms. Frasca spoke in favor of the re-ratification language in the
bill. She also voiced that an area of concern in the current
Constitutional spending limit language is that each year it is
ratcheted up dependent on the prior year's limit rather than being
based on actual expenditures. Therefore, consideration should be
given "to making the limit realistic" by basing the limit on the
actual appropriations.
Senator Dyson agreed that this is the problem with the current
Constitutional spending limit. It "accelerates toward infinity." In
contrast, the SJR 3 proposal is based on the average of the prior
three years' appropriations in combination with population and
inflation percentages. Were it strictly based on, for example, a
two-percent population and inflation increase, the growth rate
would equate to four-percent. He agreed that careful consideration
to the formula must occur.
Ms. Frasca reiterated that even though the limit might be increased
five-percent, "the reality is we may only have a one-percent
increase in our budget and so the idea is that the next year's
limit would be based on that one-percent increase not the five-
percent." She stressed that this process should be clearly
understood.
Ms. Frasca stated that in its approach to developing the factors
that would influence a spending limit, the Administration had
considered a fifty-percent change in the rate of personal income
growth as the theory was that were individual Alaskans doing well
in terms of the economy then the State should be able to spend a
little more. Upon consideration, the Administration accepted
Senator Dyson's argument that in times of a recession, there could
be an increase of State program assistance as people's incomes
reduce. In summary, the approach taken by the Administration as
compared to that taken by Senator Dyson is very similar in terms of
the outcome, and that population and inflation factors are
acceptable.
Co-Chair Wilken mentioned that in a memorandum [copy not provided]
he had received from Ms. Frasca, it was mentioned that a drafting
error has been identified in the bill.
Ms. Frasca responded that the error in question was in the Version
"B" committee substitute and has since been corrected. She noted
that the only other Administration suggestion would be that further
consideration be given to providing flexibility in the process of
exceeding the limit. She noted that this State, unlike Colorado,
does not provide its citizens the ability to vote on
appropriations. She also noted that the Municipality of Anchorage
has a limit on the annual percentage increase that could be levied
on all taxes so that its spending is limited to its revenue
sources. Colorado has two limits; one as mandated by TABOR and the
spending limit as reflected in regulation. It should be noted that
in both Anchorage and Fairbanks, when a bond proposal is approved,
the amount of funding needed for maintenance of the project would
be exempt from the limit.
Co-Chair Green asked about language in Section 1, subsection (d),
beginning on page two, line 22.
(d) An appropriation that exceeds the appropriation limit
under this section may be made for any public purpose
identified by the Governor in a declaration of emergency upon
affirmative vote of at least two-thirds of the members of each
house of the legislature. Appropriations under this subsection
may be made only for a fiscal year identified in the
declaration of emergency.
Co-Chair Green noted that this language might be a conflict with
existing statute and suggested that this section be reviewed by the
Department of Military and Veterans Affairs and the Department of
Law.
Ms. Frasca asked for confirmation that the conflict would be in
regard to the process through which the Governor would declare an
emergency.
Co-Chair Green affirmed and stated that another concern would be in
regards to how an emergency would be financed.
Senator Dyson asked the Administration to review this language as
it might pertain to the State undertaking a huge building project
such as a gas pipeline or a road and the efforts that would be
required in advance of that endeavor.
Ms. Frasca concurred.
Co-Chair Wilken asked how this language would effect action in the
case of an emergency such as a major earthquake.
Ms Frasca stated that currently the process through which the costs
of responding to an emergency such as an earthquake is conducted in
via a ratification process, "after the fact." The only difference
is that the two-thirds vote of the Legislature, as specified in
this legislation were the situation to exceed the spending limit,
is not currently required.
Co-Chair Wilken understood that this legislation would require
something akin to "a super supplemental" to be ratified by a two-
thirds vote of the Legislature.
Ms. Frasca confirmed.
Co-Chair Wilken stated that the issues brought forward by the
Administration would be considered.
Senator Dyson stated that he "is encouraged" by the progress of
this legislation.
Co-Chair Wilken noted that Senator Bert Stedman has developed a
"sensitivity analysis" [copy not provided] and noted that a change
in variables does affect funding.
Senator Dyson appreciated Senator Stedman's professional input. In
addition, he shared that comments from the oil industry indicate a
desire that the State strive to develop a stable financial
environment. He stated that this and other industries should be
encouraged that, were the State to experience a new economic boom,
the State's spending would not be extreme. Echoing Dr. Poulson's
comments, he stated that those states that have effective spending
limits have been exceeding the average national growth.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 04:02 PM
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