HOUSE FINANCE COMMITTEE April 12, 1995 1:30 P.M. TAPE HFC 95-83, Side 1, #000 - end. TAPE HFC 95-83, Side 2, #000 - end. TAPE HFC 95-84, Side 1, #000 - #617. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:45 p.m. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Mulder Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring ALSO PRESENT Larry Wigget, Anchorage School District, Anchorage; Kathy Hoyt, Soldotna; Richard Swarner, Kenai School District, Kenai; Steve McPhetres, Alaska Council of State Administrators, Juneau; Tom Wright, Staff, Representative Ivan; Bob Bartholomew, Director, Income and Excise Audit Division, Department of Revenue; Debra Garrish, Juneau; Jack Fargnoli, Office of Management and Budget, Office of the Governor; Dr. Shirley Holloway, Commissioner, Department of Education; Edward Rasmuson, National Bank of Alaska; Robert Gottstein, State Board of Education; Dale Staley, Juneau Board of Education, Juneau; Rich McClear, Southeast Alaska Media Consortium; Willie Anderson, NEA-Alaska. SUMMARY HB 230 An Act making appropriations to the Department of Education for support of kindergarten, primary, and secondary education and for community schools programs for fiscal year 1996 and fiscal year 1997; making appropriations from the constitutional budget reserve fund under art. IX, sec. 17(c), Constitution of the State of Alaska; and providing for an effective date. HB 230 was HELD in Committee for further discussion. 1 HB 269 An Act relating to credits against certain taxes for contributions to certain public educational radio and television networks and stations and to endowments for public educational radio and television networks; and providing for an effective date. HB 269 was HELD in Committee for further discussion. HOUSE BILL NO. 269 "An Act relating to credits against certain taxes for contributions to certain public educational radio and television networks and stations and to endowments for public educational radio and television networks; and providing for an effective date." TOM WRIGHT, STAFF, REPRESENTATIVE IVAN testified in support of HB 269. He observed that the legislation provides a tax credit for contributions made to instate public radio and television stations and networks. The tax credit ceiling was raised from $100 thousand dollars to $450.0 thousand dollars. The credit is allowed on 50 percent of the first $100.0 thousand dollars in contributions and 100 percent of the next $400.0 thousand dollars. The new limits would also apply to the university system and library and museum acquisitions. The tax credit would be applied against a taxpayer's liability under insurance premiums, corporation income, oil and gas production, oil and gas property, mining licenses and fisheries business taxes. He explained that a credit claimed under one of the tax types may not be claimed under another tax type. Members were provided with a proposed committee substitute for HB 269, Work Draft #9-LS0937\K, dated 4/3/95 (copy on file). Mr. Wright explained that the work draft incorporates technical changes requested by the Department of Revenue. Representative Mulder MOVED to adopt Work Draft #9-LS0937\K, dated 4/3/95. There being NO OBJECTION, it was so ordered. Mr. Wright reviewed changes incorporated by CSHB 269 (FIN) as outlined in the sectional analysis prepared by Representative Ivan (copy on file). Representative Mulder observed that the fiscal note shows a loss of revenue to the state of $35 million dollars. Mr. Wright emphasized that revenue is currently being lost 2 through contributions to the University of Alaska and libraries. Representative Brown asked if the total potential loss of state revenues have been calculated. BOB BARTHOLOMEW, DEPURTY DIRECTOR, DIVISION OF INCOME AND EXCISE AUDIT. DEPARTMENT OF REVENUE replied that the fiscal note was calculated by assuming that tax payers who participated in the program in FY 95 would take the maximum credit allowed in FY 96. He stated that there is no way to estimate the maximum loss revenue through deductions by corporations that are not participating. Representative Navarre expressed concern with the level of deduction allowed under the legislation. He emphasized that tax credits allow appropriations without the legislative process. Mr. Bartholomew observed that not all corporations have made contributions. He did not know if all the corporations that gave did so at the maximum level. Representative Navarre expressed support for the philosophy of HB 268. He expressed reservations in regards to the level of contribution that would be diverted from the general fund by the tax credit. In response to a question by Representative Brown, Mr. Wright acknowledged that the sponsor considered setting up two different contribution deductions. He stressed that the sponsor did not want the public broadcasting credit to be in competition with the credit for the University of Alaska and libraries and museums. Representative Brown expressed reservations in regards to the constitutionality of the tax credit. She noted that there is a prohibition against appropriating public money to private institutions. She indicated support for public broadcasting. In response to a question by Representative Mulder, Mr. Bartholomew stated that the state lost $944.0 thousand dollars through the tax credit in FY 95. Representative Mulder suggested that the credit would be a "back door" appropriation. He emphasized the difficult decisions the Committee has had to make in regards to cutting the operating budget. Representative Navarre pointed out that there is no match requirement for the tax credit. 3 EDWARD RASMUSON, EXECUTIVE DIRECTOR, NATIONAL BANK OF ALASKA spoke in support of HB 268. He noted that the educational tax credit was passed approximately 5 years ago. He observed that the university system, public and private, have used them extensively. He maintained that the Alaska Pacific University and Sheldon Jackson College would not be operating without the tax credit. He stated that about a third of the contributions go to the University of Alaska, a third to the Alaska Pacific University and a third to Shelton Jackson College. He stressed that it is difficult to quantify how much the State will loose as a result of the tax credit. Mr. Rasmuson urged members to consider the benefit to the state of Alaska. He stressed that contributions will remain in the state. He did not think that the state would loose $3.5 million dollars as estimated by the fiscal note. ROBERT GOTTSTEIN, CHAIR, ALASKA PUBLIC BROADCASTING ENDOWMENT TRUST maintained that more people will be educated in the state as a result of the credit. He observed that the goal of the Trust is to wean public broadcasting from state support. He stressed that the Trust will be more creditable if funding is provided through the tax credit. He emphasized that the money will help the Trust to leverage funding in order to build an endowment for the future. Mr. Gottstein stressed that Alaska will remain a public schooling state. He maintained that the public will benefit from a better educated society. He asserted that something needs to be done to ensure that essential radio and television service exists in all parts of Alaska in the future. Representative Navarre commended the efforts of Mr. Rasmuson and Mr. Gottstein. He noted the competition for general fund dollars, including K - 12 education funding. He observed that the state of Alaska spends more in the university system per student than in K - 12. He suggested that the Committee meet in executive session in order to more accurately ascertain the potential drain to the general fund that the tax credit represents. Mr. Gottstein emphasized that the legislation attempts to create a mechanism to provide incentives for greater contributions. He stated that the mission is to attract outside, non-state investment to the recipients of the credit. He accentuated that they are seriously interested in raising outside capital contributions that will result in more education in Alaska and provide a better assurance that essential radio and television service will take place. Mr. Rasmuson observed that more money was paid by outside 4 sources to Shelton Jackson than the college received from inside Alaska. He added that there was as much money paid from outside sources to the Alaska Pacific University as came from inside the state. He emphasized his desire to see a better educated work force. Representative Mulder emphasized the need to balance what works with what is affordable to the state. He suggested that the credit amounts to an appropriation from the state. He reiterated the need to reduce spending. He asked how the credit ceiling was decided. Mr Rasmuson stated that the ceiling level was arbitrary. Mr. Gottstein emphasized that if the cap is not raised that public broadcasting will be in competition with the funds that are currently being raised. He stressed that it is not the intent to take money away from universities which are already receiving funds from the credit. He stated that public radio and television is an educational enterprise. He maintained that it is appropriate to include them in the statute. He indicated that a lower ceiling on the credit would be acceptable. He urged the Committee to adopt a level high enough not to impact current contributions. He emphasized the need to ensure that public broadcasting remains in the state of Alaska. Mr. Rasmuson pointed out that most corporations in Alaska are subchapter (s) corporations and do not pay state taxes. He gave a brief history of the institutions that have taken advantage of the tax credit. Representative Kelly suggested that public broadcasting be deleted and the current credit ceiling raised. Mr. Rasmuson replied that he would not support such an amendment. He emphasized that public broadcasting and postsecondary education are both educational items. He stated that public broadcasting should not be sacrificed for education. He emphasized that they should be treated together. Mr. Gottstein speculated that more than 50 percent of the benefit will go to higher education. Representative Martin suggested that the state's general fund contribution to the University was reduced in response to increased contributions in the form of tax credits. He thought there would be no net gain in terms of University funding. He observed that the University is a responsibility of the state. He expressed concern that other non-profit organizations would want to be added to the credit. Mr. Rasmuson did not think that corporations would give to 5 other organizations. (Tape Change, HFC 95-83, Side 2) Representative Parnell queried the long term plan for phasing out state funding. Mr. Gottstein replied that the plan is to create a mechanism to provide a substantial trust that will throw off income in lieu of federal and state funding. He observed that the state contributes $7.2 million dollars to public radio, television and RATNet. He noted that they are asking for less in FY 96 than was appropriated in FY 95. He acknowledged that the state contribution must be reduced. He stated that the goal is to raise $100.0 million dollars for the endowment. He emphasized that it would be easier to raise money if there was some money in the bank. He stressed that incentives to attract private capital must be developed. He reiterated that the contribution amount could be reduced. Mr. Rasmuson emphasized that there are not many corporations that pay taxes in the state of Alaska. In response to a question by Representative Mulder, Mr. Gottstein stated that a five year sunset would be reasonable. He did not support a sunset in regards to the education contribution. Representative Navarre noted that the legislation allows credits to individual stations as well as to the endowment. He expressed concern that the system will suffer as contributions are allocated to individual stations. Mr. Gottstein felt that the majority of contributions would go to the endowment. He stated that most of the contributions to the University are given to endowments. He emphasized that contributions to the endowment will protect the principal investment. Mr. Rasmuson observed that most stations do not have the luxury of setting money aside for an endowment. Representative Navarre expressed concern that the Anchorage television station and other urban radio stations could create competition for the endowment. Mr. Gottstein emphasized that essential service needs to be protected. He stated that contributions to rural Alaska would be to the same end, of ensuring that service is provided. He did not think that urban broadcast centers would receive significant contributions, since substantial commercial competition exists in those areas. 6 Representative Kelly asked if underwriting on public broadcasts will amount to commercials. RICH MCCLEAR, SOUTHEAST ALASKA MEDIA CONSORTIUM replied that Congress set in the Communications Act specific parameters which limit underwriting to things that do not mention price, adjectives that are comparative or superlative, and do not amount to a call to action. He did not think that federal guidelines would be relaxed. HB 269 was HELD in Committee for further discussion. HOUSE BILL NO. 230 "An Act making appropriations to the Department of Education for support of kindergarten, primary, and secondary education and for community schools programs for fiscal year 1996 and fiscal year 1997; making appropriations from the constitutional budget reserve fund under art. IX, sec. 17(c), Constitution of the State of Alaska; and providing for an effective date." SHIRLEY HOLLOWAY, DR., COMMISSIONER, DEPARTMENT OF EDUCATION testified in support of full funding for education. She observed that the public has demanded better schools. She asked that dollar decisions consider the consequences to student learning. She stated that student learning will be adversely impacted by a funding level that does not include money for increased enrollment. She observed that students have special needs that require additional services. She maintained that ground will be lost if funding does not remain stable. She stressed that innovations and risks have been made to keep kids in school, do a better job at preparing students and raise standards. She discussed some innovations being made by teachers and parents. Commissioner Holloway noted that the State Board of Education is committed to reviewing the foundation formula in order to provide recommendations to the Legislature. Representative Martin noted the amount of overhead in education funding. He suggested that savings could be made if school districts were combined. Commissioner Holloway stated that the Board has started a dialogue in regards to combining school districts. LARRY WIGGET, ANCHORAGE SCHOOL DISTRICT testified via the teleconference network. He stated that the Anchorage School District opposes HB 230. He stressed that the District supports the $61.0 thousand dollar instructional unit level. He maintained that HB 230 would result in a loss to the Anchorage School District of $4.0 million dollars in FY 96 7 and $9.0 million dollars in FY 96-97. He observed that the Anchorage School District is the 80th largest school district in the United States and the largest in Alaska. He emphasized the need to pursue computer technology. He stated that Anchorage has the second lowest student cost in Alaska. Representative Grussendorf observed that Sitka has the lowest student cost in the state. In response to a question by Representative Brown, Mr. Wigget noted that student ratios would increase if HB 230 is enacted. He discussed ramifications of a $4.0 million dollar reduction to the Anchorage School District. KATHY HOYT, SOLDOTNA testified via the teleconference network. She spoke in opposition to HB 230. She compared the cost of supporting individuals in the criminal system to educating a high school student in Alaska. She noted that 89 percent of the nation's criminals are high school drop outs. The high school drop out rate in Alaska is 33 percent. It costs approximately $32.0 thousand dollars to incarcerate a prisoner annually. In Anchorage in 1991, it cost $4,050 thousand dollars to educate a high school student. She insinuated that it is cheaper and better to provide education than to pay for institutionalizing offenders. RICHARD SWARNER, EXECUTIVE DIRECTOR, BUSINESS MANAGEMENT, KENAI PENINSULA SCHOOL DISTRICT testified via the teleconference network. He testified in opposition to HB 230. He testified in support of the Governor's proposed $61.0 thousand dollar foundation formula instructional unit. He stressed that the foundation program needs to be reviewed. He observed that the Kenai School District is up against the local effort cap. He noted that assessed value in the Borough has dropped 5.87 percent. He noted that the cost per pupil over 10 years has only increased 1.44 percent. He noted that Kenai School District employee's salaries have not been raised in four years. He emphasized that 38 percent of their school district's budget comes from local contributions. DEBRA GARRISH, JUNEAU testified in opposition to HB 230. She expressed concern with the quality of state education. She observed that the student/teacher ratio is high, books are obsolete and that teachers have been laid off. She suggested that state school and income taxes be re- instituted. She maintained that HB 230 sacrifices the education and future of children in the state. JACK FARGNOLI, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF 8 THE GOVERNOR testified in support of the Governor's proposal for full funding. He stated that the Governor is concerned with the function of the bill and the funding source the bill uses. He observed that the two year forward funding mechanism would be disadvantageous in respect to the state's reserves. He maintained that the state's ability to respond to cash flow problems will be inhibited. He observed that if the second year's funding remains in the general fund it would not provide any of the constancy or predictability that true forward funding would provide. He stated that the Governor does not support forward funding. He stressed that the state is facing a $300 to $400 million dollar deficit in cash projections. He expressed concern that the work and purpose of the Long Range Fiscal Planning Commission not be truncated or prejudged. Mr. Fargnoli discussed the effect that the legislation would have on the Constitutional Budget Reserve Fund. He stated that the Governor prefers that education is funded through the general fund as all other items. (Tape Change, HFC 95-84, Side 1) In response to a question by Representative Martin, Mr. Fargnoli agreed that the state's cash flow problem would be diminished by funding education from the Constitutional Budget Reserve Fund. He stated that there is no consensus in regards to leveling expenditures or altering revenue in- flows. STEVE MCPHETRES, EXECUTIVE DIRECTOR, ALASKA COUNCIL OF SCHOOL ADMINISTRATORS testified in opposition of HB 230. He spoke in support of the $61.0 thousand dollar instructional unit. He observed that parents are concerned about education. He stressed that the state is not broke. He referred to the Alaska Permanent Fund Dividend Program. Representative Therriault suggested that rural Alaskan's will support the re-institution of an income tax over the use of their permanent fund dividends. He observed that a 15 percent state income tax would only cover half of the state's deficit. He emphasized that a combination of taxes and spending cuts are needed to balance the budget. Mr. McPhetres stated that school administrators would welcome dialogue in regards to raising revenues. He emphasized that "all the cards have got to be placed on the table." WILLIE ANDERSON, NEA-ALASKA testified in opposition to HB 230. He observed that if the instructional unit had kept pace with increases in the cost of living the instructional 9 unit would now be $81,318 thousand dollars. He urged the Committee to "do the right thing by our kids." He maintained that we must educate our children and look to the future. He suggested that revenues could be raised through taxes or capping permanent fund dividends. He stressed the need for quality education. Representative Kelly questioned if NEA-Alaska would accept downward negotiations in teacher's pay. Mr. Anderson pointed out that increases were not taken in 1986 - 1987. He stressed that teachers or public schools employees should not carry the whole burden. Representative Parnell stressed that education funding will increase by $200 million dollars over the next five years at the current rate. He emphasized that we need to reinvent how we provide government and education. He urged NEA- Alaska to join in rethinking the delivery of education services. He stressed that he has a deep concern about the children of Alaska. Mr. Anderson agreed that education delivery must be rethought, but emphasized that it cannot be transformed overnight. He observed that technology can assist in education delivery. Representative Parnell emphasized the need to start working towards doing something now. ROBERT GOTTSTEIN, ALASKA STATE SCHOOL BOARD spoke in support of full funding for education. He acknowledged the need to do more with less. He stressed that solutions must be found. He noted that there are 54 school districts in Alaska. He suggested that the number of school districts is not cost effective. He observed that the correspondence school program costs about $1.5 hundred dollars. It costs about $7.5 hundred dollars to teach a student in the Anchorage School District. He maintained that the level of parent involvement makes the difference. He stressed that principles and teachers cannot replace parents. He observed the value of quality parents and emphasized the need to provide opportunities to improve parenting skills. He acknowledged the need for change. He asserted that success will be greater if funding is protected than if it is cut. He stated that the state of Alaska must invest in our children, their parents and in creating an economic opportunity for everyone in the state. He stressed that if the state does more for children the public will do more for the state. He maintained that revenue will not be raised by making the state less worthy. He stated that there is no area in state government more worthy than education. He expounded that the way out of this dilemma is to make sure that everyone has a value received from the state. He maintained that there is no better opportunity than to 10 provide a value education. Representative Grussendorf noted the need to maximize the revenue that is due the state of Alaska. Mr. Gottstein stated that an Anchorage survey showed that if the public was guaranteed educational opportunities for everyone in their family, including postsecondary education, then 85 percent would be willing to give up their dividend and begin to pay taxes. DALE STALEY, PRESIDENT, JUNEAU SCHOOL BOARD testified in support of full funding for education. He noted that nurses, counseling services, janitorial services and teachers have been reduced in the Juneau School District. He observed that the District will not be able to lay teachers off in the coming year since most are tenured. There are only 8 non-tenured staff and 3 non-tenured administrators. He observed that the District's teaching staff is experienced and well educated. He observed that if the state reduces funding to the Juneau School District, the local contribution must also be reduced. He noted that Juneau's local contribution has been at its cap for several years. He acknowledged the need to do more with less, but asserted that it cannot be accomplished in the next three or four months. HB 230 was HELD in Committee for further discussion. ADJOURNMENT The meeting adjourned at 3:52 p.m. 11