Legislature(2019 - 2020)SENATE FINANCE 532
02/04/2020 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 104 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
February 4, 2020
9:03 a.m.
9:03:22 AM
CALL TO ORDER
Co-Chair von Imhof called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
MEMBERS ABSENT
Senator David Wilson
ALSO PRESENT
Senator Cathy Giessel; Caroline Schultz, Staff, Senator
Natasha von Imhof.
SUMMARY
SB 104 APPROPRIATION LIMIT
SB 104 was HEARD and HELD in committee for
further consideration.
SENATE BILL NO. 104
"An Act relating to an appropriation limit; relating
to the budget responsibilities of the governor; and
providing for an effective date."
9:03:54 AM
Co-Chair von Imhof recalled that the previous day the
committee had considered the proposed Motor Fuels tax. She
asserted that if the state was going to discuss revenues,
Alaskans needed to be assured that the state budget was not
being bloated in response. She emphasized that the state
still needed to look for savings and thought there was
efficiencies to be found throughout the budget.
Co-Chair von Imhof continued her opening remarks. She
opined that the state needed to hold down spending growth
by selling unneeded state assets, consolidate real estate,
and manage the vacancy rate through worker attrition.
Co-Chair von Imhof explained the SB 104 would put an
effective spending cap in statute. The bill was first
presented on April 10, 2019. There were two additional
hearings on April 29, when public testimony was taken, and
April 30, when the Committee Substitute (CS) version K was
adopted.
9:05:41 AM
CAROLINE SCHULTZ, STAFF, SENATOR NATASHA VON IMHOF, gave
provided an overview of the bill. She addressed a Sectional
Analysis (copy on file):
Sec. 1: Amends AS 37.05.540(a) by deleting a reference
to the existing statutory appropriation limit that is
repealed by this bill.
Sec. 2: Enacts a new AS 37.05.545 - Appropriation
Limit.
(a) Establishes the parameters of the limit:
Includes all Unrestricted General Fund (UGF)
appropriations for agency spending, Permanent Fund
dividends, retirement obligations, and capital
projects. Does not include reappropriations, federal
funds, Designated General Fund (DGF) spending, program
receipts, money received from nonstate sources for
specific purposes, or the exclusions listed in (b).
Starting point is $6 billion for FY 2021, with a
growth rate based on the average of the previous five-
year's inflation. This rate was chosen because it
provides a more stable rate than an annual inflation
adjustment.
(b) Lists the exclusions to the appropriation limit:
(1) Appropriations to the Permanent Fund principal
(corpus);
(2) Debt payments;
(3) Disaster funding; and
(4) Deposits into savings accounts and transfers into
accounts that require additional legislative action to
spend.
(c) Allows an additional five percent above the limit
to be spent on capital projects.
(d) Defines the terms "debt obligation", "program
receipts", and "unrestricted general fund" for the
purposes of this section.
Sec. 3: Adds a requirement to AS 37.07.020 that the
governor submit, along with the annual budget, a
report noting whether the proposal is within the
spending limit. The report must be updated to include
any supplemental appropriations and budget amendments.
Sec. 4: Repeals the current statutory appropriation
limit, specifically AS 37.05.540(b); 37.05.540(c), and
37.04.540(e).
Secs 5 - 7: Applicability, transition, and effective
date language that specifies when the new
appropriation limit and reporting requirements would
take effect. The limit would apply to the FY2021
budget and the governor would be required to file the
necessary reports for the proposed budgets starting in
December 2020.
9:07:40 AM
Ms. Schultz addressed the presentation, "Senate Finance
Committee Presentation - 2/4/2020" (copy on file).
Ms. Schultz addressed slide 1, "Decision Points":
1. Starting Point
2. Growth rate
3. What is included under the cap
4. What is excluded outside the cap
Ms. Schultz tuned to slide 2, "Decision Points: current SB
104 (v. K)":
1. Starting Point $ 6 Billion
2. Growth rate 5-year trailing average CPI
3. What is included under the cap
? UGF, except the specific exclusions below,
including Permanent Fund Dividends
4. What is excluded outside the cap
Appropriations to PF Principal, debt
obligations, disaster, transfers that require
further appropriation
Co-Chair von Imhof paused on slide 2 for discussion. She
recalled the previous year that the starting point for the
spending cap in the first bill was approximately $5.25
million. There had been committee discussion and an
amendment to increase the amount to $6 billion. She thought
it was important to understand that the spending cap was
not intended to be a spending goal and was also not meant
to be punitive. She thought there needed to be a definitive
line, then go forward with the CPI growth rate. The purpose
of the cap was to constrain spending when there was higher
than expected revenue. She observed that state revenues
were currently steady, but in some years, there were
extreme jumps in revenue.
Co-Chair von Imhof continued to speak to slide 2. She
expressed the intent to save funds during times of excess
revenue and have funds for down years. She reminded that
the FY 20 budget, including the supplemental budget and the
recently paid $1600 Permanent Fund Dividend (PFD), was
estimated to be approximately $5.7 billion; so total
spending was under the proposed cap. She qualified that
technically only $5.5 billion of FY 20 spending would apply
to the cap, because certain debt payments were not
included. She reiterated that the proposed $6 billion cap
was not a spending goal, but rather was to constrain
spending.
9:10:36 AM
Senator Bishop mentioned the state's large repayment to the
Constitutional Budget Reserve (CBR) and did not anticipate
the state receiving a windfall anytime soon. He thought the
bill was a good first step.
Co-Chair von Imhof reminded that any payments to the
state's savings accounts were not included under the
proposed cap.
Senator Wielechowski raised the issue of population change.
He thought spending caps in other states were tied to
population change. He asked if Co-Chair von Imhof had
rationale for not including it as a metric.
Co-Chair von Imhof discussed the growth rate as shown on
slide 2. She stated that she had looked at the 5-year
trailing average CPI. She had looked at states that had
spending caps or tax and expenditure limits. Some states
had included just CPI, some states included just
population, and some a blend of the two. Most states that
had population included had some type of statewide tax. She
asserted that as the population went up and down it did not
affect the percent of market value (POMV) or oil revenues.
She noted that the CPI showed a slow and steady rate of
population growth.
Senator Wielechowski thought that in prior versions of the
bill, the appropriation limit excluded the payment of PFDs.
In the current version, the bill excluded appropriations to
the principal of the Permanent Fund, but not dividends. He
was concerned that the state would continue to have a fight
over what the dividend should be and what should be
available for government. He was curious about the
rationale from taking the payment to the dividend out.
Co-Chair von Imhof thought it was important to consider all
the state's spending obligations. She noted there had been
discussion about changing the formula for the PFD. She
referenced a Supreme Court ruling and thought that if
agency spending was under the cap, then the Permanent Fund
should be under the cap. She emphasized that having fiscal
discipline required managing all obligations.
9:14:35 AM
Co-Chair Stedman was concerned about not considering
population growth in the spending cap calculation. He
mentioned the issue of the trailing CPI, which he thought
was smoothing in constant dollars and freezing the
purchasing power at the base rate being used. He thought
the CPI index was heavily weighted to housing and therefore
would be heavily weighted to the Anchorage housing market.
He thought it should be considered that Anchorage was
dissimilar economically to many areas of the state.
Co-Chair Stedman continued his remarks. He thought he had a
slightly different view of the dividend. He thought the
payout to the PFD should be unrelated, and if the fund grew
it should be shared with the public, as well as the
inverse. He thought embedding the dividend within the
spending cap was destabilizing to the overall objective. He
thought it may appear on the surface that the state had a
trailing 5-year average growth rate, but in reality, the
CPI was freezing spending at the local purchasing power
today.
Co-Chair Stedman offered a counterpoint. He felt the best
way to control spending was through controlling cash flow.
He asserted that as long as cash flow swelled, there were
needs from the agencies. He thought some agency budget had
seen staggering changes. He recalled that some agencies had
proposed 15 percent changes in spending.
9:18:07 AM
Co-Chair Stedman continued to discuss state spending. He
posited that spending pressure did not solely reside within
the legislature but came from agencies. He suggested if the
legislature wanted to control spending at the municipal,
state, or federal level; it was through controlling the
cash flow. He referenced a large display of a check for
$4.9 billion in the committee room that represented the
contribution to the principal of the Permanent Fund. He
thought the proper course was to make sure there was not
excess liquidity or excess spending of the ERA. He was
cautious of a prescriptive plan for spending and was more
comfortable with controlling cash flow.
9:19:42 AM
Co-Chair von Imhof advanced to slide 3, "Appropriation
Limits: Article XI, Section 16 vs SB104," which showed a
line graph that depicted the revenues and spending from
1982 to 2032. She noted that revenues were shown in green
and spending was shown in orange. She pointed out that in
2006 and 2017, revenue had gone up precipitously then went
down. Spending went up and was going down while cushioned
using the CBR funds. She pointed out a gray line at the
top, which represented the constitutional spending cap,
which had both CPI and population at 100 percent for the
growth rate. She pointed out the gray line that represented
the current spending cap, and the growth rate was high. The
royal blue line was the recalculated spending cap using
just the CPI.
Co-Chair von Imhof pointed out that during the time when
revenues and expenses peaked, had the state kept to a
spending cap, the state would have saved more money and
spent less. She estimated that the state would have $10
billion to $15 billion more in the CBR if the state had a
more effectual spending cap at the time. She commented that
the Permanent Fund was steady with constant market growth
and an annual 5 percent draw. She thought the Alaska
Permanent Fund Corporation (APFC) had estimated that the
fund would be at about $80 million in ten years.
Co-Chair von Imhof pondered what the state would do if
there was an increase in oil revenue. She considered
alternatives such as implementing savings, spending for
deferred maintenance, agency spending, or a larger capital
budget. She thought there had been discussion over the
years about maintaining fiscal discipline, particularly in
agency spending, and reimbursing the CBR. She reiterated
that the spending cap was not punitive, but was merely
keeping a lid on growth in the event of high revenue years.
She suggested that the committee could put a sunset on the
cap and revisit it in five years.
9:23:54 AM
Co-Chair Stedman thought it would be nice to look at the
chart on slide 3 with primary consideration of the
operating budget. He thought the real underlying challenge
was the state's handling of the operating budget. He
mentioned deferred maintenance, which was building again
after multiple minimal capital budgets. He thought it was
important to keep a close eye on agency operations and it
was an area of the greatest challenge.
Co-Chair von Imhof acknowledged that slide 2 was a "busy
slide." She thought the slide showed the decisions made
that put the state in the fiscal crisis it was currently
experiencing. She thought DGF, UGF, and other state
spending should be under the cap.
9:25:43 AM
Co-Chair Stedman wanted to put a finer point on Co-Chair
von Imhof's comment for the public. He relayed that the
state had problems in the past with reclassification of
funds, which had enabled an appearance of less growth in GF
spending or reductions in GF spending which had not in
reality taken place. He explained that there had been year
after year of budget growth. He recalled that the
legislature had gone forward with a process to reclassify
and restate spending to get an accurate view of the
magnitude and direction of the budget. He thought the
practice of fund reclassification had started to occur
again in the previous few years and thought the legislature
had to practice continual vigilance.
Co-Chair von Imhof concurred with Co-Chair Stedman's
remarks. She recalled legislation the previous year that
pertained to tax revenues from marijuana sales. She
mentioned designating some of the revenues to recidivism
efforts, anti-drug efforts, and after-school programs. She
thought only a quarter of the marijuana tax revenue went to
the General Fund, and much of it was designated. She was a
full believer and supporter of the spending cap and thought
the cap would provide guidance for future legislators and
help replenish the CBR and give discipline to find
efficiencies in agency spending. She thought a spending cap
would prevent large jumps in overall UGF spending in times
of plentiful funds.
9:28:40 AM
Senator Bishop looked at Section 2 (c) of the committee
substitute, which described an additional 5 percent above
the cap limit to spend on capital projects. He referenced
Co-Chair Stedman's comments relating to deferred
maintenance. He could not recall if the 5 percent provision
was modelled after the deferred maintenance schedule.
Co-Chair von Imhof stated that the committee came up with
the provision the previous April, and the 5 percent
amounted to about $3 million. She referenced a capital
limit in the constitution. The feedback that was received
related to investing in capital when the state had enough
funds, but not so much that there was not sufficient
workforce to keep up with the demand. There had been a
"sweet spot" discussed that was particular to the state. It
was thought that $300 million would allow the headroom
needed to address deferred maintenance and the capital
needs of the state. The amount also provided a slight bit
of headroom to do geo bonds and leverage the funds more.
Co-Chair von Imhof reviewed slide 4, which showed a data
table which showed a framework of the budget showing total
UGF revenue, total operating and capital budgets, and the
PFD payment. The total budget with the PFD payment was
about $5.7 billion, which yielded about a $647 million
deficit, which was a draw on the CBR. She considered the
budget and implementation of the proposed spending cap for
FY 21. The spending subject to the cap was $5.4 billion. As
the cap grew over time with the 5-year trailing CPI, it was
possible to see how state spending was under or over the
cap for FY 22 and FY 23. She summarized that there would be
quite a bit of headroom with the proposed cap in place
considering projected revenues based on the Department of
Revenue forecast. She reiterated that if additional
revenues came in, the state could choose to use them.
9:32:48 AM
Co-Chair Stedman clarified that there had not been a policy
decision about the upcoming dividend appropriation. He
thought the table on the slide showed a PFD check of $1600,
and reminded that the number was a placeholder for
consideration of potential fiscal impacts of the proposed
spending cap.
Co-Chair von Imhof concurred with Co-Chair Stedman. She
pointed out that line J showed $773 million that
represented an approximately $1100 PFD. For calculation,
every $325 million spent would add $500 to each dividend
check. She confirmed that line J was a placeholder.
Co-Chair Stedman mentioned that when the state had
substantial revenue inflow seven years ago, there had been
robust capital budgets to address deferred maintenance and
build infrastructure that was needed around the state.
There had been a discussion at the time to use bonded
indebtedness and go forward with bond packages, which had
been done a couple of times. He brought up the topic
because the indebtedness would be outside the cap. He
thought there was an extremely high likelihood that the
legislature would add bonded debt for capital projects to
get around a spending cap. He recalled that the topic had
been discussed before, and some colleagues felt the public
did not understand bond debt as part of the budget. He
discussed debt service and was concerned about the
potential for budget "games" as mentioned by Co-Chair von
Imhof.
9:36:33 AM
Co-Chair von Imhof agreed with Co-Chair Stedman. She
recalled that state debt manager had discussed the state's
low capacity for bonding. She thought it was important not
to overuse the capacity and potentially not have available
cashflow to pay the debt. She had asked Mr. Mitchell how
the rating agencies would react if the state went to its
capacity in bond debt yet utilized revenues for dividends.
Mr. Mitchell had thought the situation could put a negative
rating on the state.
Co-Chair von Imhof emphasized that it was important to look
at all spending, including debt. She thought it could make
sense to put debt under the cap. She pondered where the
revenue would go to pay back the additional debt. She
questioned the opportunity gained by paying a dividend
versus capital and deferred maintenance.
Senator Wielechowski thought the state had classified some
of its debt as "subject to appropriation" debt, such as oil
tax credits. He referenced SB 331 [legislation passed in
2018 creating a public bond corporation to finance the
purchase of tax credits]. He asked if it was the intent of
the bill to include things such as tax credits under debt
obligations such that they would be excluded from the
appropriation limit.
Co-Chair von Imhof stated that the state had the headroom
currently to pay the statutory tax credit payment if
needed. She thought there would be more headroom if the
constitutionality of paying with a bond was established.
She thought the payments would be reduced even further if
there were additional discounts as proposed by former
Governor Bill Walker.
9:39:54 AM
Ms. Schultz addressed Senator Wielechowski's point. She
pointed out that in Section 2 (d), debt obligation did not
include state pension liability or appropriation for school
bond debt reimbursement. The intent of including debt as an
exception was in order to reassure any possible buyers of
state debt that there was not something preventing the
state from paying the debt. She noted that there were some
things included in the "debt" category that would not be
excluded in the cap. The bill was written with the intent
of having a narrow definition of state debt.
Senator Wielechowski asked how much "subject to
appropriation debt" the state had and how much was being
appropriated per year.
Ms. Schultz stated that in the FY 20 budget, there was
roughly $90 million in state debt in the budget, that
included general obligation debt payments and other bond
payments. There was also an appropriation for 50 percent
bond debt reimbursement, which was included in the FY 20
budget following the governor's veto of half the payment.
There was also a roughly $300 million payment to the
retirement obligation not included in the definition in the
bill.
Co-Chair von Imhof set the bill aside. She asked committee
members to contact her office with ideas and suggestions.
She wanted to bring the bill back before the committee in
ten days' time.
Co-Chair von Imhof discussed the agenda for the following
day.
ADJOURNMENT
9:43:00 AM
The meeting was adjourned at 9:43 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 104 Sectional Analysis v. K 2.3.2020.pdf |
SFIN 2/4/2020 9:00:00 AM |
SB 104 |
| SB 104 DRAFT Fiscal Note GOV-OMB 2.3.2020.pdf |
SFIN 2/4/2020 9:00:00 AM |
SB 104 |
| SB 104 - Sponsor Statement.pdf |
SFIN 4/10/2019 9:00:00 AM SFIN 2/4/2020 9:00:00 AM |
SB 104 |
| SB 104 Explaination of Changes version K.pdf |
SFIN 4/30/2019 9:00:00 AM SFIN 2/4/2020 9:00:00 AM |
SB 104 |
| SB 104 Work Draft Version K.pdf |
SFIN 4/30/2019 9:00:00 AM SFIN 2/4/2020 9:00:00 AM |
SB 104 |
| SB 104 Presentation 2020.02.04.pdf |
SFIN 2/4/2020 9:00:00 AM |
SB 104 |