Legislature(1995 - 1996)
03/09/1995 09:40 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
MINUTES SENATE FINANCE COMMITTEE March 9, 1995 9:40 a.m. TAPES SFC-95, #13, Side 1 (000-462) (Defective Tape #13, stopped halfway through side 1) SFC-95, #15, Side 1 (000-423) CALL TO ORDER Senator Rick Halford, Co-chairman, convened the meeting at approximately 9:40 a.m. PRESENT In addition to Co-chairmen Halford and Frank, Senators Donley, Phillips, Rieger, and Zharoff were present. Senator Sharp arrived soon after the meeting began. ALSO ATTENDING: Senator Salo; Randy Welker, Legislative Auditor; Duane Guiley, Director, School Finance, Dept. of Education; Jack Fargnoli, Office of Management and Budget; Jerry Burnett, aide to Senator Phillips; and aides to committee members and other members of the legislature. SUMMARY INFORMATION SB 19 - LEGISLATIVE SESSIONS TO BE IN ANCHORAGE CSSB 19 (Fin) was REPORTED out of committee with eighteen new fiscal notes. (See page 7 of these minutes for listing of fiscal notes.) SB 36 - BRINDLE SCHOLARSHIP LOANS SB 39 - MEMORIAL SCHOLARSHIP LOANS SB 36 was merged into CSSB 39 (Fin). The bill was then REPORTED OUT of committee with zero fiscal notes from the Dept. of Public Safety and Dept. of Education. SB 37 - END PERMANENT FUND DIVIDEND HOLD HARMLESS A draft CSSB 37 (Fin) dated 2/17/95 was ADOPTED in lieu of an earlier 2/15/95 draft. Co-chairman Frank MOVED to tighten the title, and the bill was HELD in committee pending receipt and review of new title language. SB 40 - APPROP: AHFC TO GENERAL FUND Testimony was presented by Legislative Auditor Randy Welker. An AMENDMENT was ADOPTED increasing the appropriated amount from $335,000,000 to $400,000,000. The bill was HELD in committee pending incorporation of the amendment within a draft CSSB 40 (Fin) for review by members. SB 70 - PUBLIC SCHOOL FOUNDATION PROGRAM Information was presented by Jerry Burnett and Duane Guiley. The bill was then HELD in committee for further discussion. SB 84 - APPROP: TO PERMANENT FUND PRINCIPAL Testimony was presented by Jack Fargnoli of the Office of Management and Budget. A draft CSSB 84 (Fin) (version C) was ADOPTED and REPORTED OUT of committee. SENATE BILL NO. 36 An Act relating to interest on and repayment of A. W. Brindle memorial scholarship loans; and providing for an effective date. SENATE BILL NO. 39 An Act relating to memorial scholarship loans. Co-chairman Halford directed that SB 39 be brought before committee and referenced a draft CSSB 39 (Fin) (9-LS0442\C) which he advised contains the contents and provisions of both SB 36 (BRINDLE SCHOLARSHIP LOANS) and SB 39. He then called for questions from members. None were forthcoming. Senator Zharoff MOVED that CSSB 39 (Fin) pass from committee with individual recommendations. No objection having been raised, CSSB 39 (Fin) was REPORTED OUT of committee with zero fiscal notes from the Dept. of Public Safety and Dept. of Education (Postsecondary). All members signed the committee report with a "do pass" recommendation. SENATE BILL NO. 84 An Act making a special appropriation to the principal of the permanent fund; and providing for an effective date. Co-chairman Halford next directed attention to SB 84 and noted two draft Senate Finance committee substitutes. He explained that one version creates a continuing appropriation while the other leaves $250 million within the earnings reserve account so there is no question about the implication in any combination of interest rates with regard to the permanent fund. The appropriation would also "count against any use by a simple majority in the constitutional budget reserve." The Co-chairman then voiced a preference for version (9-LS0639\C, 2/23/95) instead of (9-LS0639\G, 2/28/95). JACK FARGNOLI, Office of Management and Budget, came before committee. He referenced earlier noted concerns regarding the original bill and advised that the proposed CSSB 84 (Fin) changes only one item in that list of concerns. He then voiced his understanding that the proposed Finance committee substitute would hold the dividend harmless "by leaving $250 million in the reserve account balance." That does not reach other concerns such as the majority or three- quarter vote on releases from the budget reserve, potential adverse impact on the state bond rating, removal of reserves without a plan or provision for a fiscal emergency, etc. Further, by removing a large amount of money, it preempts a good part of the mandate of the fiscal planning commission. Use of a well articulated and reasoned reserve policy would seem to be a key part of any fiscal plan in both the short and long term. (Senator Sharp arrived at this time.) The Governor's position on both the original bill and proposed Finance committee substitute is "somewhere between opposition and no position, yet." Mr. Fargnoli asked that the committee allow ongoing fiscal discussions in both the administrative and legislative branch to continue. He stressed that consideration of repayment of the constitutional budget reserve, forward funding of education, etc. are linked both in policy and magnitude. Deliberations in the conceptual stage are not sufficiently set to make a decision on any one item and particularly not on the appropriation proposed within SB 84. Senator Rieger asked if the Office of Management and Budget had conducted analysis of the size of an earnings reserve that would be needed to support a five-year-average payout rule, as presently in statute. Mr. Fargnoli responded negatively. Senator Rieger voiced his understanding that the earnings reserve account is to provide a backup for such a payout. Mr. Fargnoli responded by saying that if the question is whether the earnings reserve balance should be used in some proportion for current uses and for other provisions, he would personally agree "that's probably something we should aim at." That has, however, not been articulated or developed. Senator Rieger next advised of his understanding that the payout rule for calculation of dividends is based on a five-year average. It would then seem that in a down year with no moneys in reserve, the program would be unable to pay "on a five-year average." (The five-year average could be higher than performance for a particular year.) Mr. Fargnoli acknowledged that in that situation the "exceptional limit provision" would activate, and the dividend would be limited to "what's in the balance of the reserve account and the current earnings." Senator Rieger asked if it makes sense to have a policy establishing the amount which should be reserved, based on the context of the five-year payout rule. Mr. Fargnoli reiterated that the administration has no policy on the issue. He voiced his personal belief that a policy should be developed within the context of other larger questions involving use of the fund and net income. Senator Zharoff voiced his understanding that in order to ensure that the legislature would not be able to "get into the CBR with a 50% vote," a balance of $500 million is needed in the earnings reserve account. Mr. Fargnoli concurred in that understanding. Leaving $500 million in the balance might effectively hold harmless the requirement of a three-quarter vote. Senator Randy Phillips MOVED for adoption of CSSB 84 (Fin) version 9-LS0639\G, 2/23/95. No objection having been raised, the "C" version of CSSB 84 (Fin) was ADOPTED. Senator Zharoff advised of concern that a balance of $250 million in the earnings reserve would not protect the three- quarter vote on the CBR. He then MOVED to increase the balance to $500 million. Co-chairman Halford referenced testimony from the director of the Legislative Finance Division that something "in the range of $450 million" would be needed. The Co-chairman then advised of his belief that both that need and the "dividend averaging argument, based on the past history of the fund, were red herrings." However, in an attempt to deal with both arguments, it appears reasonable to leave $250 million in the fund. The total amount taken out for averaging over the past fifteen years is "somewhere around $50 million." That argument has thus not proven to be the history of the fund or the dividend or inflation proofing. Speaking to the constitutional budget reserve, Co-chairman Halford said that if the remaining $250 million is added to other reserves, it would add $300 or $400 million to "whatever the budget was." In theory, reducing the earnings reserve down to $250 million would make it easy to "get a little bit out of the constitutional budget reserve, but it wouldn't be enough to do the budget balancing that the Governor is proposing . . . ." The question would still have to be reach by a three-quarter vote to meet the Governor's proposed $450 or $470 million from the constitutional budget reserve. Senator Zharoff reiterated that he would be more comfortable if $500 million remains in reserve. He then voiced his preference for maintaining the earnings reserve account in tact until the fiscal planning commission has done its work and made recommendations. He restated his motion to delete $250,000,000 at page 1, line 4, and insert $500,000,000. Co-chairman Halford called for a show of hands. The motion FAILED on a vote of 2 to 5. Senator Donley concurred in concern that the proposed appropriation would severely limit ability of the fiscal planning commission to do its job. Senator Randy Phillips MOVED for passage of CSSB 84 (Fin) with individual recommendations. Senator Rieger said that while he would not oppose movement of the bill, he wished to register concern that it would occur before inflation proofing protection for the permanent fund has been dealt with. Projections by the permanent fund corporation evidence how the earnings reserve account "runs out at some time out in the future," and the principal of the fund is short changed because of insufficient funds to cover the dividend and inflation proofing. He said he would be more comfortable with the legislation if it were combined with a measure "which reprioritized the use of the permanent fund earnings, so that inflation proofing were first." While the proposed appropriation places additional moneys in principal, it could accelerate the date at which "we fail to inflation proof." That is the reservation. No objection having been raised, CSSB 84 (Fin) was REPORTED OUT of committee. Co-chairmen Halford and Frank and Senators Phillips and Sharp signed the committee report with a "do pass" recommendation. Senator Donley signed "should be reviewed by Financial Planning Commission before further consideration." Senator Zharoff signed "same comments as above" in concurrence with Senator Donley. Senator Rieger signed, "Do not pass until inflation-proofing has first priority on annual earnings." SENATE BILL NO. 37 An Act relating to treatment of permanent fund dividends for purposes of determining eligibility for certain benefits; and providing for an effective date. Co-chairman Halford directed that SB 37 be brought on for discussion. He noted an earlier discrepancy in adoption of a draft CSSB 37 (Fin) and asked that it be clarified. Senator Randy Phillips, sponsor of the legislation, MOVED for adoption of CSSB 37 (Fin) (9-LS0449\G, Cook, 2/17/95) in lieu of adoption of an earlier version dated 2/15/95. No objection having been raised, CSSB 37 (Fin), 2/17/95, was ADOPTED. Senator Phillips explained that the new draft "exempts the PFD and the SSI and APA (adult public assistance) people from this bill." Those 8,000 out of 47,500 individuals receiving welfare benefits will receive both the permanent fund dividend as well as benefits under APA and SSI. All others will have to choose between acceptance of welfare benefits or the permanent fund dividend. Speaking to concern that children will be hurt by the proposed bill, Senator Phillips explained that upon reaching their eighteenth birthday, young people can "go retroactive and collect all the permanent fund dividends from the eighteen years prior." Co-chairman Halford clarified his understanding that under the proposed bill, those receiving adult public assistance and SSI would be exempted. Senator Phillips concurred and advised that that category of individuals is generally receiving welfare benefits because of a disability. Those individuals are least able to help themselves. They will thus receive both their permanent fund dividends and the benefits to which they are entitled under APA and SSI. Co-chairman Frank MOVED to tighten the title of the adopted CSSB 37 (Fin) to reflect changes included therein. No objection having been raised, Co-chairman Halford directed that a restricted title be incorporated within the working document. He then announced that further action on the bill would not be taken at this time. CSSB 37 (Fin) was thus HELD in committee. Senator Zharoff asked which groups of individuals would continue to be impacted by the new draft. Senator Phillips advised of those on AFDC, food stamps, and Medicaid (approximately 39,500 people). Co-chairman Halford voiced his understanding that those receiving welfare benefits because of age or disability would continue to receive the dividend. Senator Phillips concurred. SPONSOR SUBSTITUTE FOR SENATE BILL NO. 19 An Act relating to the location of the convening of the legislature in regular session. Senator Phillips asked that SSSB 19 be brought before committee. Co-chairman Halford noted that it had been carried forward on the committee agenda. Senator Phillips then MOVED for passage of CSSSSB 19 (Fin). He further directed attention to a package of eighteen fiscal notes to accompany the bill. He advised that he asked the Legislative Finance Division to analyze fiscal notes from various departments and make appropriate recommendations. The Senator voiced disagreement with legislative analysis on some of the notes and said that the ultimate authority on expenditures associated with the moves rests with the legislature. As an example of concern regarding fiscal note amounts, Senator Phillips cited the $1.4 million to renovate the existing capitol building for alternative office use. He then reiterated his motion for passage of the bill with the eighteen new fiscal notes. Senator Zharoff OBJECTED. He referenced prior testimony against the bill and the recent statewide capital move initiative which failed. Juneau seeks an opportunity to work with government in an effort to bring it closer to the people. That opportunity should be provided. Co-chairman Halford called for a show of hands on the motion. The motion CARRIED on a vote of 5 to 2. CSSSSB 19 (Fin) was REPORTED OUT of committee with the following fiscal notes: FY 96 FY 98 Dept. of Natural Resources 0 0 Legislature 0 2,733.2 Court System 0 - 27.5 Dept. of Corrections 0 59.9 Dept. of Community & Regional Affairs 0 45.5 Dept. of Environmental Conservation 0 86.7 Dept. of Transportation & Public Facilities 0 86.9 Dept. of Public Safety (Admin) 0 8.9 Dept. of Public Safety (Comm.) 0 65.8 Dept. of Fish and Game (LEC) 0 57.9 Dept. of Fish and Game (All) 0 104.8 Dept. of Military and Veterans Affairs 0 0 Dept. of Commerce and Economic 0 78.8 Development Dept. of Labor 0 55.4 Dept. of Health and Social 0 57.1 Services Dept. of Education (PostSec) 0 42.7 Dept. of Education (Ex.Admin.) 0 49.2 Dept. of Revenue 0 128.8 Dept. of Law 0 318.7 Governor 0 755.0 Dept. of Administration 0 51.8 Co-chairman Halford and Senator Phillips signed the committee report with a "do pass" recommendation. Co- chairman Frank and Senators Rieger, Donley, and Sharp signed "no recommendation." Senator Zharoff signed "Do not pass." SENATE BILL NO. 40 An Act making appropriations from the Alaska Housing Finance Corporation revolving fund to the general fund; and providing for an effective date. Co-chairman Halford directed that SB 40 be brought on for discussion. [Note - Recording problem with Tape SFC-95, #13, Side 1. The tape stopped approximately half way through side 1. Attempts to advance and continue recording were to no avail. Minutes regarding SB 40 and the first portion of minutes on SB 70 reflect transcription of shorthand notes.] Senator Sharp advised that he would not ask that the bill move from committee at the present time. He then requested that the Legislative Auditor speak to the bill. RANDY WELKER, Legislative Auditor, came before committee. He noted the cautionary aspect of an appropriation from AHFC in terms of possible impact on the corporation's bond rating. Co-chairman Halford asked that Mr. Welker estimate the amount of bonds AHFC might expect to issue for the remainder of the year as well as what the bonds would be issued for. Mr. Welker said he would provide the information and a cash flow analysis indicating how the corporation intends to raise moneys and use the moneys it raises. Senator Sharp MOVED to amend the bill by increasing the $135,000,000 in Sec. 2 to $200,000,000, thus making the total appropriation $400,000,000. No objection having been raised, the AMENDMENT was ADOPTED. Senator Sharp then requested that the bill remain in committee for further consideration. SENATE BILL NO. 70 An Act relating to the public school foundation program; and providing for an effective date. Co-chairman Halford directed that SB 70 be brought on for discussion. JERRY BURNETT, aide to Senator Phillips, came before committee. He explained that changes to the current foundation formula contained within SB 70 consist of: 1. A change in the instructional unit calculation for large elementary schools to help fund reduced class sizes. 2. More local effort from school districts with low millage rates for school support to increase taxpayer equity throughout the state. 3. Changes in funding levels for very small schools with less then 16 students to encourage consolidation or alternate service delivery. 4. Update of area cost differentials to more accurately reflect the cost of doing business in various regions of the state. 5. Minor changes in law to improve administration of the foundation formula. Mr. Burnett advised that the existing cost differential would be eliminated and a school price index would be established by region and reviewed every two years. Districts with less than 16 students would not have their own school. DUANE GUILEY, Director, School Finance, Dept. of Education, came before committee, voicing concern that the proposed bill represents a significant shift of revenue from rural to urban districts. [The remainder of the minutes reflect transcription from Tape SFC-95, #15, Side 1] End: SFC-95, #13, Side 1 Begin: SFC-95, #15, Side 1 Mr. Guiley asked that both the administration and districts be given time to review the school funding issue and bring forth recommendations for the next legislative session. Senator Phillips advised that he sponsored legislation, now in Senate HESS, for a task force to review school funding and provide recommendations next year. That option was rejected by Senate HESS. The Senator voiced his hope that the department would work with the legislature on the bill. He acknowledged that the bill is not ideal. It does, however, provide a "vehicle which all of us can look at and deal with the school foundation formula . . . because there are inequities in it right now." The intent is for everyone to sit down and find a way to modify the formula. Senator Sharp inquired concerning the number of districts that meet minimum enrollment of eight and the number of schools that would not meet the minimum were it not for inclusion of the teacher's children. Mr. Guiley said he had no statistics on that issue. Three facilities are currently operated with less than eight students. A fourth, the Beluga site on the Kenai Peninsula, has also been identified as being in its last year of operation. Mr. Guiley then advised that Meyers Chuck in the Southeast Islands District has five students. Elfin Cove, in the Chatham District, and the Telida School, in the Iditarod School District, both have six. An additional school has attendance of eight. The next size is ten. Regulations state that a school program may begin when there are eight students of elementary school age. That is defined as K-8. There is no discussion either in statutes or regulations "as to when an elementary or secondary program ends." The only statutory reference says that if a school district drops below eight students, the district board may declare itself to be inoperative for the year that there are less than eight students. There is no discussion of when a school program ends. Senator Sharp suggested that there is a "reverse incentive" for a school district to declare that a school should be closed. Mr. Guiley responded, "Certainly." The Senator asked that the department check into the number of enrolled students who are dependents of the school teacher. Senator Rieger voiced his understanding that in the above- cited schools, the funding community was started when there were eight students. Enrollment then dropped. Mr. Guiley responded affirmatively. Senator Rieger asked if there is a difference in definition between a funding community and a school. Mr. Guiley again answered affirmatively. He explained that the consequence of a funding community is that it establishes the minimal level of funding for a school or a group of schools. In some cases a funding community is many schools combined together. The largest example is Anchorage where over 65 school buildings are combined into one funding community. In very small sites, one or two school buildings make one funding community. The funding community establishes a floor, or minimum level of funding. The greatest amount of funding comes with the first increment of students. As students are added to the community, each subsequent student generates less money than the child before. Senator Rieger asked if the logic behind funding communities is that "a funding community equals the school." A minimum number of eight students is the point at which a substantial increment of money is needed because that is the point where the school physical plant begins to operate. Mr. Guiley concurred. He attested to fixed costs associated with establishment of a school building and programs. It costs less to add a student to an existing facility than to start up a new school. That is the basis of the floor level of funding for the funding community. In response to a subsequent question from Senator Rieger concerning how funding flows to a school once the minimal level of eight students is reached, Mr. Guiley explained that current statutes provide a minimal level of funding of two units for any funding community. A list of funding communities was produced by the Dept. of Education and distributed to all school districts. Districts had an opportunity for input into that list. The list has been modified, since that time, by individual requests from districts to establish additional funding communities. In some cases, it has been modified when a district has notified the department of intent to close a school and delete a funding community. If there is a request to establish a funding community, and, hypothetically, if that funding community only had one child, that one child would generate $122.0. If the same funding community was established with two children, the two children would generate the same $122.0. Children three, four, and five would also generate that same $122.0. There is no incremental funding until enrollment exceeds ten. The eleventh child would thus generate incremental money. In addition to the basic K-12 unit, any child with special needs would generate money either through gifted and talented or some other category of special education, vocational education, or bilingual education. Supplemental funding for vocational education is available for grades 9- 12. Bilingual is available for grades K-12. Special education covers preschool through 12. Those are supplemental units over and above the K-12 unit. Responding to a further question concerning how the funding would flow should the department not approve a funding community for the hypothetical child, Mr. Guiley explained that the child would be added to the largest funding community in the district and would generate money as if the child were being served at the larger funding community. The district could then serve the child through a correspondences program and any other itinerant service. If the parent chose to enroll the child in state centralized correspondence study, correspondence study would receive funding for the child, and the district would receive no funding. By statute, each school board in Alaska has the legal obligation to provide a grade-level-equivalent program to every child that resides within district boundaries. Senator Rieger asked if the department would approve a funding community for two schools of five students each. Mr. Guiley said that the schools would receive less funding if they combine rather than seek separate approval. The department looks at the following in determining funding communities: 1. Geographic boundaries 2. Students to be served 3. Proximity to other schools 4. Whether or not they are connected by road to other existing funding communities There is a traditional sense of an approximate 30-mile radius around a high school comprised of the funding community of all the elementary schools and secondary schools (whether they be middle or junior high schools) that feed into that high school. Senator Salo voiced her understanding that Anchorage is one funding community. Mr. Guiley explained that under current statutes the Anchorage School District consists of three funding communities: 1. Anchorage 2. Eagle river 3. Girdwood The Senator then asked if, under the current definition, the Anchorage area could consist of more than three funding communities. Mr. Guiley responded that existing statutes and regulations provide the commissioner of education with discretion in establishing additional funding communities. If Anchorage were to apply, and the commissioner approved, the answer is "Yes, they could be." Senator Salo then voiced her understanding that that could be accomplished if a high school and its feeder schools were considered as a funding community. Mr. Guiley concurred. Senator Zharoff asked what would happen to the buildings and facilities for the 35 schools with enrollments less than the minimum of 16 proposed in the subject bill. Mr. Guiley said that most of the buildings are operated under use agreements with the Dept. of Education. The agreement requires local school districts to "keep the building in safekeeping for, normally, one year." The local district would be required to insure, maintain and heat the facility for one year while the department determines whether or not to surplus the facility. Present statutes and regulations deal with surplusing procedures that involve the Dept. of Administration and in some cases the Dept. of Transportation and Public Facilities and Dept. of Natural Resources. It is possible that after the initial year the building would be surplused and used for other purposes. If, at a later date, there were enough students to again open a school, the state would be faced with the situation of no longer having a school in which to serve the children. Senator Zharoff noted the migrant nature of populations in some rural areas and voiced concern that the proposed bill has created trauma in rural areas. He stressed need for schooling in a formal educational setting as opposed to correspondence study. Senator Zharoff also raised concern over the fact that the state does not have a definition or policy "of what basic education is." Basic education in one area may not be the same in another. He noted specifically that many students graduating from high school must have a foreign language to get into a good college. A number of Alaskan schools do not offer foreign language programs. He then asked whether foreign language should be considered an element of basic education. Senator Phillips attested to problems with class size in urban schools. The proposed bill represents an attempt to lower the TPR. He said that while the legislation may not be perfect, it is a start. Discussion followed regarding enrollment at a logging camp school in the Southeast Islands District. Senator Phillips voiced his understanding that most, if not all, of the students are "from out of state." Mr. Guiley said that the foregoing statement would be correct "of many of the logging camps on Prince of Wales and Southeast Island REAA school district . . . ." In response to comments by Senator Sharp regarding district responsibility to maintain and insure school facilities for one year after closure, Mr. Guiley said that the department has no funding source to take over the building once it is transferred back to the state. Under current statutes, the state owns the facility. The cost of maintaining and insuring it would be added to the department budget. In the course of further discussion, Mr. Guiley advised of the existing hold harmless statute. In case of declining enrollment or decrease in the number of K-12 units, a district receives 75% of the revenue it would have received in the prior year. When a funding community is deleted from a school district, that normally puts the district in the situation of receiving hold harmless funds. Those funds allow for transition from an active school to closure. Senator Sharp voiced his understanding that the district could receive up to 75% for zero students once a school is closed. Mr. Guiley responded affirmatively. He further advised that the hold harmless statute provides 75% the first year, 50% the second year, 25% in year three, and zero for the fourth year. Closure thus involves phase out over a four-year period. Senator Rieger inquired concerning the rate at which instructional units are accumulated. Mr. Guiley explained that the table of values for a combined K-12 program allows two units for the first ten students. When enrollment moves above ten, the funding community receives 1/5 of a unit for each child above ten in the size range from 11 to 20. When enrollment moves beyond 20 to 21, each incremental child generates 1/8 of a unit for funding communities ranging from 21 to 60. As enrollment moves above 60, additional students generate 1/12 of a unit. Above 120 students, each additional child generates 1/15 of a unit. In each case, the minimal level of funding carries forward. Every funding community has the benefit of those first two units, if it is funded under the K-12 formula. Senator Rieger voiced his understanding that a funding community would receive two units at enrollment of 10, three units at 15, four at 20, and five at 28. Mr. Guiley concurred, adding that a funding community would receive nine units at 60. Those nine units carry forward to 121 when fourteen units would be received. Senator Rieger asked what would happen should the floor increase to sixteen. Mr. Guiley said that the bill does not change the table of instructional values. There would simply be no funding communities in the range of 1 to 10 or 11 through 15. When enrollment reaches 16, the funding community would receive two units and 1/5 of each unit for each child beyond 10. Co-chairman Frank asked if the hold harmless statute speaks to funding communities or decreases in district enrollment. Mr. Guiley said that it speaks to district decreases in K-12 units. As the number of K-12 units decreases by more than 10%, a district becomes eligible for hold harmless. The Co- chairman suggested that a district "would have to have no more than 20 units total . . . to achieve some money under the hold harmless . . . ." Mr. Guiley concurred. He explained that Sec. 5 of SB 70 reduces the current hold harmless requirement from 10% to 5%. The department has provided an analysis of which districts would fall under the new 5% threshold. As an example, Bristol Bay School District would lose a funding community under Sec. 4. The district would "get some hold harmless money under Sec. 5 by being decreased to the 5%." The district would lose $134.0 but would make back $78.0 on hold harmless. That would be phased out over a four-year period. Co-chairman Frank reiterated that hold harmless applies to district-wide units rather than funding communities. Mr. Guiley concurred. Senator Sharp voiced his understanding that if closure of a school of eight or ten students within a larger district did not amount to 5% reduction in enrollment, the district would not be held harmless from the expense of maintaining the structure. Mr. Guiley responded affirmatively. Under the current statute, the district would have to sustain a loss of more than 10% of its K-12 units. Under SB 70, the loss would only have to be 5%, and the loss would be applied district wide. In a district with generally increasing average daily membership, the loss of units associated with closure of a funding community would not generate hold harmless revenue. The district would have to cover expenses of maintaining and insuring the closed facility, for a year, out of the district operating budget. Senator Salo raised a question regarding circumstances at Ketchikan. Mr. Guiley explained that past discussion of hold harmless related to situations where there has been a substantial decline in enrollment, and the district needs time to phase out program offerings so that remaining students are not immediately impacted. That is the general purpose of hold harmless. It does not generally anticipate closure of physical school buildings. Referencing Sec. 2 of the bill, Senator Salo noted the broad change associated with instituting the school price index as a replacement for the area cost differential. She then noted that a school price index study was conducted some years ago, and she asked if the study remains valid. Mr. Guiley advised that work on the school price index "fell out of the work that was originally done on Alaska 2000 activities which began in November of '91." The committee began work in April of 1992 and worked on the price index for two years. The work was never completed nor endorsed universally because the end result suggested that some districts might lose money while others would gain. An attempt to reduce the study to legislation produced much opposition. At the present time, the department does not have a school price index available and ready. The proposed legislation provides a one-year period to develop the index. Remaining portions of the bill would be implemented the year before. In response to a question from Senator Phillips, Mr. Guiley said that the last update to the area cost differential (the current area cost differential that exists in statute) was done in 1988 by the McDowell Group. Prior to that, it was accomplished in 1983 and '84. Senator Phillips asked if the McDowell study was done in 1988 but effective in 1989. Mr. Guiley said that the McDowell update was never adopted by the legislature. The department continues to work from 1983-84 data. Co-chairman Frank called for additional questions on the legislation. None were forthcoming. He then directed that SB 70 be HELD in committee for further consideration. ADJOURNMENT The meeting was adjourned at approximately 11:00 a.m.