HOUSE FINANCE COMMITTEE February 20, 1996 1:36 P.M. TAPE HFC 96-44, Side 1, #000 - end. TAPE HFC 96-44, Side 2, #000 - end. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:36 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 Representative Alan Austerman; Neil Slotnick, Assistant Attorney General, Department of Law; Bob Bartholomew, Assistant Director, Income and Excise Tax Division, Department of Revenue. SUMMARY HB 397 An Act relating to the seafood marketing assessment; and providing for an effective date. CSHB 397 (FIN) was reported out of Committee with "no recommendation" and with two fiscal impact notes; one by the Department of Revenue; and the Department of Commerce and Economic Development, dated 2/2/96. HB 428 An Act giving notice of and approving a lease-purchase agreement for construction and operation of a correctional facility in the Third Judicial District, and setting conditions and limitations on the facility's construction and operation. HB 428 was assigned to a subcommittee consisting of Representative Mulder as Chair and Representatives Kelly and Navarre. 1 HB 437 An Act establishing the Judicial Officers Compensation Commission; relating to the compensation of supreme court justices, judges of the court of appeals, judges of the superior court, and district court judges; and providing for an effective date. HB 437 was rescheduled to another time. Representative Martin provided members with work draft #9- LS1723\A, dated 2/19/96 (Attachment 1). He requested that the legislation be introduced by the House Finance Committee. He noted that the legislation was requested by the Permanent Fund Board. He observed that the market has changed over the past 20 years. He explained that the legislation would allow the Board to maximize the corpus of the Permanent Fund. He clarified that the Board of Trustees crafted the legislation. There being NO OBJECTION, #9- LS1723\A, dated 2/19/96 will be introduced by the House Finance Committee (This legislation was introduced as HB 525). HOUSE BILL NO. 428 "An Act giving notice of and approving a lease-purchase agreement for construction and operation of a correctional facility in the Third Judicial District, and setting conditions and limitations on the facility's construction and operation." Co-Chair Hanley noted that HB 428 would be assigned to a subcommittee. Representative Mulder observed that the Department of Corrections' budget has grown by over 600 percent. He stressed that the intent of HB 428 is to come to grips with the spiraling cost of corrections. He noted that HB 428 was influenced by hearings held during the interim. He explained that the legislation allows, but does not mandate, the Department of Corrections to contract with a private contractor to construct and operate up to a 1,000 bed facility. The total cost would be up to $100.0 million dollars. He observed that private contractors projected that a 1,000 bed facility could be built for $60.0 to $75.0 million dollars. He maintained that savings derived from the private sector stem from the fact that the private sector does not have to contend with all the rules and inefficiencies of the public system. Representative Mulder addressed misconceptions. He clarified that the legislation does not require the construction of 1,000 beds. The legislation allows the 2 commissioner to authorize construction of up to 1,000 beds. He noted that $100.0 million dollars is the upward limit that can be spent. He added that the safety record of privately operated facilities is roughly comparable to state operated facilities. He asserted that the new prison will relieve overcrowding. He observed that the State is over capacity by 100 -250 prisoners per day. He noted that the State is being fined $300 hundred dollars for each institution each day that the facility is over capacity. He maintained that the legislation will allow the new prison to take pretrial prisoners. Representative Mulder acknowledged that the new facility will have associated operating costs. He observed that the State currently spends $6.0 million dollars in the state of Arizona to house Alaskan prisoners. He stressed that the bill will not take jobs away from Alaskans. The bill calls for a project labor agreement for the construction of the facility that will maximize Alaskan hire and employment. He emphasized that Alaskan Native corporations and Alaskan private businesses have expressed interest in the legislation. He maintained that HB 428 represents new economic opportunities for Alaskan businesses. He observed that corrections is a growth industry. He pointed out that as long as the State continues to pass get-tough-on-crime legislation the State will be incarcerating more individuals. He noted that the State is projected to need 962 new beds by the year 2002. Representative Mulder noted that the facility will be built some where in the Third Judicial District. He stated that the facility will not be built at the location of the Alaska Village in Anchorage. Representative Mulder summarized that HB 428 represents a win/win situation. He maintained that HB 428 relieves overcrowding, brings prisoners back to Alaska, saves the State money, and provides jobs for Alaskans. Representative Brown stated that she shares many of the goals expressed by the Subcommittee Chairman. In response to a question by Representative Brown, Representative Mulder emphasized that he has no personal tie to the legislation. He noted that several Native corporations and private businesses have expressed interest in the legislation. He could not provide details of plans by the private sector. He stated that no particular site has been identified. He observed concerns by the Mayor of Anchorage. He pointed out that arrests in Anchorage have more than doubled. He emphasized that the Commissioner has latitude in selecting a site. 3 Representative Brown expressed concern with the overall cost of the legislation. She questioned if operating costs and land purchase are included in the total construction and related costs as contained on page 3, line 9. She emphasized the need to compare "apples to apples." Representative Mulder noted that the Subcommittee has not received a plan by the Administration. Representative Mulder noted that the Commissioner of the Department of Corrections recommends the deletion of the requirement that contract facilities abide by court orders. The restriction on housing male maximum security prisoners will be removed at the request of the Commissioner. The Department felt that this provision was confusing. The removal of this provision will allow the Commissioner the full range of options for housing inmates at the facility. In addition, the facility accreditation provision will be removed at the request of the Commissioner. He noted that design cost will be included in the cost of construction. Operating costs will not be included. Representative Mulder reiterated his belief that the private sector can built the facility cheaper than the State. He observed that the Department of Corrections estimated that a 400 bed facility would cost $104.0 million dollars. Private contractors have indicated that the facility could be build for approximately $65.0 million dollars. He observed that operating costs will be part of the private bid process. If the Department feels it can operate the facility at a lower cost the Commissioner does not need to accept the bid. He observed that it would be prudent to construct the RFP to state that if none of the bids meet the requirements in terms of cost savings no bid will be accepted. In response to a question by Representative Brown, Representative Mulder reiterated that maximum security male prisoners are being excluded to allow the Commissioner more flexibility. He noted that Spring Creek is the State's primary maximum prison facility. Representative Navarre pointed out that a prohibition on housing maximum security prisoners could restrict the housing of pretrial prisoners. Removal of the language would allow the housing of pretrial prisoners. He asked if the facility would displace current facility beds. Representative Mulder stated that the new facility is not projected to displace any current state employees. He observed that the Mayor of Anchorage is considering the closure of the 6th Avenue facility. He estimated that employees of the 6th Avenue facility could be absorbed within the current system. 4 Representative Brown asked the estimated operating costs. She observed that the annual operating cost of the Spring Creek facility is $14.0 million dollars. She asked how the operating costs would be provided for in the State's budget. Representative Mulder emphasized that the State is being fined for being overcrowded. Representative Brown pointed out that the fine is returning to the General Fund. Representative Mulder observed that options for adding beds include, additional prisoners being sent to Arizona, construction of additional beds in existing state facilities, or the construction of a new facility. All three options have associated costs. He acknowledged that sending prisoners out-of-state represents the lowest cost. He emphasized that it is good public policy to employ Alaskans. Representative Brown asked the estimated per day operating cost per prisoner. Representative Mulder noted that private contractors have given rough estimates of $55 to $69 dollars a day. He estimated that bids would be less than the current state average. He noted that public employee groups can form cooperatives to bid on the contract. Representative Mulder noted that the legislation allows a lease purchase option. The facility could also remain in the ownership of the private entity. He stressed that a private entity would pay property tax. Representative Navarre estimated that the private owner would roll property costs into the contract bid. Co-Chair Hanley assigned HB 428 to a subcommittee consisting of Representative Mulder as Chair and Representatives Kelly and Navarre. Co-Chair Hanley noted that the legislation does not require that a facility be built by a private enterprise. The Commissioner could request capital funds from the Legislature. HOUSE BILL NO. 397 "An Act relating to the seafood marketing assessment; and providing for an effective date." Co-Chair Hanley provided members with a spreadsheet detailing Education Credits claimed in FY 94 and FY 95 prepared by the Department of Revenue on HB 397 (Attachment 2). He noted that an amendment was provided by Representative Brown to include the Winn Brindle Scholarship in HB 397 (Attachment 3). 5 NEIL SLOTNICK, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW explained Amendment 1, Attachment 3. He observed that Amendment 1 corrects an oversight. The amendment would incorporate the Winn Brindle Scholarship into the Landing Tax credit. Co-Chair Hanley noted that Amendment 1 would make the credits equal. Mr. Slotnick noted that the two taxes have a compensatory tax doctrine. The legislation would eliminate arguments by tax payers of discrimination. Co-Chair Hanley asked when the Winn Brindle Scholarship was added. BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE noted that the Winn Brindle Scholarship was added to the Fisheries Business Tax in 198. The credit against the Fisheries Business Tax for the Winn Brindle Scholarship was $446.0 thousand dollars in FY 95. He noted that $39 million dollars was collected for the Fisheries Business Tax. The tax credit is limited to 5 percent of liability. Co-Chair Hanley summarized that the revenue loss would be approximately $51.0 thousand dollars for the Education Credit and $80.0 thousand dollars for the Scholarship Fund. Representative Navarre asked if the calculation considers what percentage is available for deduction that the tax credit has not previously been used against. Mr. Bartholomew explained that each individual tax payer under the education credit is going to have a cap of $150.0 thousand dollars that can be taken against any of six taxes. The Division looked at which tax payers had contributed to the Education Credit under the corporate tax and the Fisheries Business Tax. He observed that there is not a lot of duplication. A new series of taxpayers will be eligible by adding the Education Credit to the Fish Landing Tax. Those that have already taken the maximum credit would not be affected. The first $100.0 thousand dollars is subject to the 50/50 split. The majority of tax payers who work in off shore fisheries are not based in Alaska. (Tape Change, HFC 96-44, Side 2) In response to a question by Representative Navarre, Mr. Bartholomew explained that businesses that are organized as taxable corporations would be subject to the corporate income tax. Companies not based in Alaska pay corporate income tax based on an apportionment. A formula based on the amount of wages, sales and property in Alaska is used to 6 allocate income and pay taxes. There are 4,000 corporations that are registered as S Corporations for tax purposes and are not subject to state or federal corporate income tax. Mr. Bartholomew explained that $7.0 million was collected in FY 95 for the Landing Tax. Seven thousand of this amount went to the Alaska Seafood Marketing Institute (ASMI). He observed that HB 397 would align the Fisheries Business Tax to the Fisheries Resource Landing Tax. Co-Chair Hanley summarized that after the reduction for the Alaska Seafood Marketing Institute the 50/50 split would be $3.15 million dollars each. All the credits come out of the $3.15 million dollars that goes to the State. If there is a million dollars worth of credits the State would receive $2.15 million dollars. Representative Brown noted that the State spends between $62.0 and $100.0 thousand dollars a year to administer the program. She suggested that the cost be spread to the municipalities which are receiving part of the benefit. She asked what the State would receive in offsetting revenue if local governments pick up their share of the administrative costs. Mr. Bartholomew replied that wording could be added to clarify that the State and local governments would share the amount less the allocated costs of administrating the tax program. The State would receive back the local government share of $100.0 thousand dollars. He noted that more than 90 percent of the shared taxes relate to fishery programs. Representative Brown stated that she would prefer to eliminate the credit. Co-Chair Hanley summarized that Representative Brown would like to not adopt the amendment and eliminate the education credit. Representative Brown added that the credits would have to be eliminated for the Fisheries Resource Landing Tax and the Fisheries Business Tax. Co-Chair Hanley noted that there would be a $596.6 thousand dollar decrease to the institutions that are receiving the credits and a $596.6 thousand dollar increase to the State. Mr. Slotnick noted that the Education Credit and/or the Winn Brindle Scholarship Credit could be retained as long as they are in or out of both the Fisheries Resource Landing Tax and the Fisheries Business Tax. Representative Martin asked if the share amount given to ASMI could be used to provide their state match. DWAYNE PEEPLES, ADMINISTRATIVE OFFICER, ALASKA SEAFOOD MARKETING INSTITUTE testified that ASMI receives three sources of revenues, assessments against the processors, assessments against fishermen and a federal grant matched by state general funds. He observed that currently the state 7 match is currently made with general fund dollars. He stated that these funds are program receipts and could be used for the federal match. He added that the ASMI Board of Directors is presenting a plan to phase out the state match over the next few years. He requested that ASMI's state match be held harmless in FY 96. He noted that the price of salmon is currently low. Representative Brown asked if the program would be revenue neutral if both the credits and administrative costs were taken off the top. Representative Grussendorf spoke in support of maintaining the Educational Tax Credit. Co-Chair Hanley observed that when the credit was allowed against the Fisheries Resource Landing Tax it was not understood that the Fisheries Business Tax needed to be treated equally. He stated that the credits could be continued in both programs with the administrative costs taken from both portions. Representative Navarre suggested that unless the State is able to choose which taxes the credit is applied against a shifting would occur from what the credit is counted against toward taxes that are not shared with municipalities. This would minimize the impact on municipalities. Representative Navarre suggested the Committee address all taxes collected in which the administrative costs are not charged. He observed that municipalities receive a significant benefit from taxes collected by the State. Co-Chair Hanley clarified that the corporate net income tax is a pure state revenue which is not shared. Representative Navarre observed that companies can take the credit against any tax they want. He suggested that municipalities would encourage businesses to take the tax against the corporate tax. Representative Navarre suggested that the House Finance Committee draft a bill to address the whole issue. He noted that HB 397 corrects an immediate legal problem. He spoke in support of passage of HB 397. Representative Austerman urged the Committee to pass HB 397 from Committee. He recommended that all taxes collected by the State for municipalities be addressed in separate legislation at another time. Representative Navarre MOVED to adopt Amendment 1. There being NO OBJECTION, it was so ordered. Representative Brown pointed out that a new fiscal note is 8 needed to show the negative impact on the General Fund. Co- Chair Hanley noted that a Department of Revenue fiscal note should show a negative $130.0 thousand dollar impact on the General Fund. Representative Navarre estimated that $130.0 thousand dollars is overstated. Representative Brown observed that use of the tax credit has increased. She expressed concern that the tax credit is unconstitutional because of the provision against public support for private education. She asked that the House Finance Committee consider legislation to require the administrative cost of all shared taxes be taken from both the state and local share. Representative Mulder asked for a legal opinion regarding the constitutionality of the Educational Tax Credit. Members discussed which taxes should be identified in a proposed House Finance Committee bill. Representative Navarre suggested that all shared taxes should have the administrative cost taken off the top before they are shared. He suggested that the amount could be graduated over a period of years. Mr. Bartholomew clarified that $130.0 thousand dollars is what it costs to administrate the sharing of the collected tax. Additional costs are associated with collection and processing. The total cost of administrating the tax programs would be more than $130.0 thousand dollars. Representative Navarre pointed out that some taxes collected by the state pass 100 percent back to municipalities. He added that the majority of the increase in tax credits were in Corporate Net Income and Insurance Premium Tax. He stressed that the impact of HB 397 would be negligible. Representative Navarre MOVED to report CSSSHB 397 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Co-Chair Hanley directed Mr. Bartholomew to provide the Committee with draft legislation which would take the administrative cost of share programs off the top of the collected tax before sharing. Representative Brown recommended that if the amount is significant the Committee consider a phase-in approach. Mr. Bartholomew observed that the cost of collection of the Fisheries Business Tax is several hundred thousand dollars. He stated that the Division would prepare a spread sheet listing options for the Committee. Mr. Bartholomew noted that the Community Development Quota 9 (CDQ) is the only other credit allowed. Co-Chair Hanley asked that a spreadsheet be developed to show CDQ's. He also asked that the spreadsheet identify which taxes are shared. ADJOURNMENT The meeting adjourned at 2:54 p.m. 10