Legislature(1995 - 1996)

03/09/1995 09:40 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                               
                             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.                        
                                                                               

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