HOUSE FINANCE COMMITTEE April 4, 1998 1:15 P.M. TAPE HFC 98 - 90, Side 1. TAPE HFC 98 - 90, Side 2. TAPE HFC 98 - 91, Side 1. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:15 P.M. PRESENT Co-Chair Hanley Representative Foster Co-Chair Therriault Representative Grussendorf Representative J. Davies Representative Mulder Representative G. Davis Representative Moses Representatives Kohring, Kelly and Martin were not present for the meeting. ALSO PRESENT Senator Randy Phillips, (Testified via Teleconference), Anchorage; Representative Mark Hodgins, (Testified via Teleconference), Kenai; Senator John Torgerson; Senator Gary Wilken; Representative Joe Ryan; Richard Cross, Deputy Commissioner, Department of Education; Eddy Jeans, Manager, School Finance Section, Department of Education; Wilson Condon, Commissioner, Department of Revenue. SUMMARY HB 393 An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date. HB 393 was HELD in Committee for further consideration. SB 36 An Act relating to transportation of public school students; relating to school construction grants; relating to the public school foundation program and to local aid for education; and providing for an effective date. SB 36 was HELD in Committee for further consideration. SENATE BILL NO. 36 "An Act relating to transportation of public school students; relating to school construction grants; relating to the public school foundation program and to local aid for education; and providing for an effective date." SENATOR RANDY PHILLIPS, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE, testified that Alaska's public school foundation formula is broken and needs to be fixed this year. Alaska's five largest school districts serve almost 75% of Alaska's students. These five districts receive 57% of the State general fund support in the foundation program. The remaining school districts, which serve 25% of school age students, receive 43% of the State aid for operating schools. At the same time, the five largest school districts contribute approximately 72% of local tax revenue which goes to operating schools in Alaska. The current formula provides neither education equity for students nor taxpayer equity between school districts. For the past ten years, State funding for public schools in Alaska has been distributed, based on a formula that provides a disproportionate share of funding to small rural school districts at the expense of larger districts. Senator Phillips pointed out that the current formula makes size adjustments by gathering students into "instructional units" within "funding communities", and makes geographical cost adjustments based on household cost of living differential between school districts. Alaska is only one of seven states that use instructional units instead of a per student allocation. In the Alaska School Operating Cost Study (McDowell Report) provided for the Legislative Budget and Audit (LBA) Committee determined that the definition of "funding communities" is not consistent. He suggested that costs could better be compared at the school level. SB 36 would adopt the changes recommended in that report. Senator Phillips stated that there are two major components to the cost of providing school education which must be accounted for in any formula that seeks to provide equity in funding between school districts. Instructional costs (approximately 70% of spending) consisting primarily of teacher's salaries, vary based on the size of individual schools. Administrative and non-personal service costs (such as supplies, books, utilities) vary, based on the size of a district, the district's location and the unique circumstances of that district. Senator Phillips continued, SB 36 distributes school funding based on the actual costs of providing instruction to students and the actual current costs of operating school districts. ? Funding is allocated based on a per student rather than an instructional unit value. The public is better able to understand a per student than a unit value. ? Size adjustment in formula is based on individual schools instead of "funding communities". ? Adjustments for geographical cost differences are based on a study of the actual costs of operating school districts instead of the household cost of living. ? The required local contribution for municipal districts is set at four mills of assessed value or 100% of district State support. Taxpayer equity would be improved. ? Categorical funding is set at 20% of State support plus funding for intensive-need students, which will remove any incentive in the current formula to identify students as special-ed in order to qualify for additional funding. ? Funding for statewide correspondence study programs offered by a district are set at .65 times Average Daily Membership (ADM), the same as the State operated program. At least one school district has several times as many students enrolled in their statewide correspondence program that live in their district. The provision is intended to prevent districts from being in the business of providing programs to finance their operations. ? Provides reimbursement for district operated pupil transportation at 90% of actual cost. Currently, districts that contract for their school buses are reimbursed 100% of their costs. The Anchorage School District is reimbursed for only 66% of its bussing costs. ? Districts are required to spend at least 70% of school funding on instructional costs. The Education Week "report card" distributed earlier this year, criticized Alaska for spending too much money on school administration and not enough on instruction. In Alaska, approximately 70% of public school funding is spent on instruction. Some districts spend about 75% on instruction while others are spending closer to 39%. Senator Phillips concluded, the changes proposed in SB 36 to Alaska's public school foundation formula would benefit school districts that serve 84% of Alaska's children. SENATOR GARY WILKEN provided an overview of a handout, SB 36 - A Proposal to Bring Simplicity & Fairness to the Way Alaska Funds Its Public Schools. [Copy on File]. He stated that since 1988, State of Alaska General Fund dollar support to the public school Foundation Formula has increased 54.3%. At the same time, the number of public school students to be educated in Alaska has increased 27.9%. Senator Wilken provided a historical review of public school funding. In 1985, there was a one-year stopgap- funding scheme adopted. In 1986, a re-write proved impossible which was another one-year solution. In 1987, after two years of different stopgap measures, a new proposal was considered. Then in 1987, as a result of several years of turmoil, a new proposal was adopted, even though that legislation would be a "further setback" for Railbelt taxpayers and students. In 1998, SB 36 proposes a funding formula that is based on actual school costs and that is fair. Senator Wilken referenced the Alaska Education Survey. [Copy on File]. The survey found that only one in three Alaska voters believes that significant increases in education funding would improve the quality of education. He noted that the survey indicated that 81% of voters believed that the State's method of funding schools should be simplified and that 73% of voters support funding education based on an amount per student, with additional amounts added for special needs, rather than the current method used addressing the instructional unit. He pointed out that the Governor acknowledged this need and submitted SB 85, introduced 2/12/97. Page 5 of Handout #1 provides an analysis of SB 85 and SB 36. Senator Wilken stated that SB 36 would consist of three major efforts: ? Bases the formula on the actual cost of operating a school. (McDowell Study) ? Converts from an "instructional unit" basis of funding to a "student dollar". ? Would define a "fair share" for the organized areas of the State. (4 mills or 100%) SB 36 would address simplicity, fair share contribution, categorical definition without verification and classroom funding priority. Senator Wilken pointed out that the legislation would not address the unorganized areas of our State Rural Education Attendance Area (REAA) contribution toward education. Senator Wilken defined "fair share" as equal funding participation by all districts based on assessed value of an organized area. The assessed value would be used as it provides an "arms length" relative evaluation of the wealth or lack of wealth in a community; validated by an objective civic and judicial process at no cost to the State. It would be readily available from organized governments and it could rise and fall annually. Senator Wilken continued, Page 23 illustrates REAA wages and employment with a total estimated wage around $460 million dollars. The 1996, State support to REAA's was $135 million dollars. He suggested that was 28% of the budget for 8% of the students. Senator Wilken urged that those people be required to make a contribution toward education. Page 25 addresses categorical funding, i.e. monies identified through the foundation formula for special education needs such as gifted and talented, bi-lingual, bi-cultural, and vocational education. In the current formula, the school districts define and count funding needs, creating the instructional unit. That unit is then funded, although, audits are minimal and districts are not required to spend the money for categorical needs. Senator Wilken distributed a copy of an additional handout, The Result of the Legislation. [Copy on File]. He acknowledged that the makers of the legislation do recognize that there are different costs associated with educating children in different parts of the State. SENATOR JOHN TORGERSON spoke to the 70% instructional unit cap contained in the bill. SB 193 was introduced, which placed a cap on the amount to be spent in both district and for school administrative costs. The calculated average was $950 dollars per student, a cost which was multiplied by the area cost differential. That legislation would switch approximately $21 million dollars from the administrative area back into the classroom. When the McDowell Report was issued, they recognized that 70% of the cost was being used for instruction and that an area cost differential did not exist for that particular segment of the budget. Senator Torgerson recommended that school districts be consolidated and that administrative costs be reduced. An administrative cap could control the amount of money used for student allocation. The 70% amount became the final number agreed upon through recommendation by the McDowell Report. Senator Torgerson pointed out that 92% of the Alaskan people who pay for education receive 79% of those monies. The 8%, who do not pay, receive 21% of the education money. The question posed is how to require that 8% to pay. Many considerations have been proposed in how to make the non- paying areas contribute. He advised that the Senate Leadership has decided to proceed with SB 337, the mandatory borough issue, which will make it mandatory in the formation of third class boroughs, leaving out the single sites to require a local contribution to education similar to that made by the borough. Senator Wilken acknowledged that there continues to be a few concerns regarding the proposed legislation. The Department of Education (DOE) needs to help define what a "school" is; also, the North Slope Borough concern must be addressed. He urged the Committee's cooperation to help move the education concern beyond the status quo. Representative J. Davies questioned if the need would be determined by the assessed valuation. Senator Wilken agreed that the issue is complicated. If a community derives revenue from which they support their community, with one tax base, their expenses should also be derived off that same tax base. Representative Grussendorf pointed out that the overview does not address "quality" schools. Senator Wilken replied that the school districts applied pressure to remove that stipulation since it was an unfunded mandate. He pointed out that language regarding that concern had been reinserted into the bill in the version forwarded by the last Committee's actions. (Tape Change HFC 98- 90, Side 2). Senator Torgerson commented that the total for "quality" school funding was now at $2.2 million dollars, and that Representative Bunde's amendment was for $500 thousand dollars. Representative Grussendorf responded that the $2.2 million dollars was only enough for development of the plan and would not cover the implementation. He estimated that the package would cost approximately $23 million dollars. Representative Grussendorf questioned the 70% minimum expenditure for instruction. He suggested that amount could probably work for a larger population area, but with the high fixed costs in rural areas, it would cause problems. Senator Torgerson replied that the administrative cap was contained in an additional piece of legislation, accompanied by a waiver requirement to address the 70% issue. He noted that if the 70% concern could be achieved, it would put $40 million dollars back into the classroom. The waiver would first need to be submitted to the Board of Education for consideration and then it would move to the Legislative Budget and Audit (LBA) Committee in report form. RICHARD CROSS, DEPUTY COMMISSIONER, DEPARTMENT OF EDUCATION, referenced a letter written 4/2/98 addressing the Department of Education's (DOE) concerns with the proposed bill relating to the public school funding program. [Copy on File]. ? Amendment #2 would impose a 3% wage tax for employment within the unorganized borough. The Department is seeking direction from the Committee as to what tax revenue estimates should be used in developing updated spreadsheets incorporating the amendment. ? The local contribution requirement has raised issues regarding the taxable full value of the North Slope Borough (NSB). The Department of Community and Regional Affairs (DCRA) is determining the appropriate and taxable full value of the NSB to be used in calculating required local efforts. Resolution of the issue will impact the amount of funding available for redistribution under HCS CSSB 36 (HES). ? Page 14, Lines 19-31, and Page 15, Lines 1-2. Requires that the Department develop a comprehensive assessment system. The requirement mirrors language in the Governor's quality school bill, HB 351/SB 257. The fiscal note for those bills would amount to $3.6 million dollars to develop a system and would include an additional $20 million dollars to assist school districts with the cost of implementing the assessment program. ? Page 5, Lines 6-9. Requires districts to have on file with the Department, a plan of service for special education, gifted and talented education, vocational education, and bilingual education. It is the Department's understanding that these would not be required in order to receive the 20% allocation. The Department believes further clarification of this language is needed. ? Page 6, Line 10. The school size table is very aggressive in applying multipliers for adjusted ADM. Depending on the definition of "school", Mr. Cross stated that the table raises many issues. ? Page 6. The current foundation program has a three year hold harmless for school districts that experience a drop in enrollment of 10% or more from one year to the next. The proposed legislation does not contain a similar safety net. ? Page 8, Lines 19-23. That would require the Department to adjust district cost factors by the Anchorage Consumer Price Index (CPI) and submit proposed district cost factors to the legislature every other year. The Department contacted the McDowell group for advice in meeting the requirement. The group stated that the Anchorage CPI has no relationship to district cost factors and that inflationary adjustments should occur elsewhere in the legislation. The McDowell group also indicated that DOE could not apply the same methodology they used in determining the proposed district cost factors to meet the requirement in SB 36. The McDowell Report did provide additional information to the Chairman of the House HES Committee to suggest alternative methodology. ? Page 10, Line 5. References minimum expenditure for instruction. Most districts can not meet the requirement due to fixed costs to operate facilities. Only school districts with large student population and the larger schools can meet that requirement. ? Page 11, Line 2. The definition of "instruction component" is inconsistent with the existing chart of accounts. ? Page 27, Line 12. Subsection (b) requires the Department to define "school". Current regulation 4 AAC 05.900(5) defines a school as a "program of instruction". There is a lack of data to support a consistent definition of "school". As the definition is clarified, a significant reallocation of dollars will occur. ? Page 27, Lines 14-17. Transition for proposed district cost factors, requires the Department to submit to the Legislature, proposed district cost factors by January 15, 2001. As previously stated, the McDowell group informed DOE that their methodology can not be used to update proposed district cost factors. ? Page 16, Line 12. This section would remove the requirement to employ a chief school administrator. If districts hire a non-certified administrator to run the school district, the administrator would not be subject to the ethic requirement of the Professional Teaching Practices Commission (PTPC). Mr. Cross concluded his testimony and offered to answer questions of the Committee. SB 36 was HELD in Committee for further consideration. (Tape Change HFC 98- 91, Side 1). HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." REPRESENTATIVE MARK HODGINS, (TESTIFIED VIA TELECONFERENCE), KENAI, explained that last year the Legislature passed HB 250 which enabled commissioners to establish the needs base for HB 393. The emphasis of the legislation is to advance the development of Alaska's vast supply of North Slope natural gas. The legislation follows the recommendations put forth by the North Slope Gas Commercialization Team, which was established last year to build a framework to improve the economic feasibility and competitiveness of a North Slope gas project. The bill authorizes the State to negotiate contracts with project sponsors to improve the economic feasibility of developing stranded gas on the North Slope. Contract payments would replace some or all of the State's and municipal taxes applicable to the gas project including: ? State and municipal ad valorem property taxes; ? Production or severance taxes; and ? State corporate taxes. The State's royalty share of produced gas would not be subject to that contract. Contract payments would be designed to improve project economics by "back-end loading" tax liabilities to allow project investors to begin to recoup some of their investment before facing a heavy tax burden. The contract payments would also be designed to provide the State with an increased share of the project's revenue if energy prices increase or if the sponsors are able to substantially decrease anticipated project construction costs. Representative Hodgins stated that it is important to remember that this is a "for profit" project. The State of Alaska owns resources on the North Slope and would like to see those resources moved to a revenue source. There are several benefits to the approach authorized in the bill. Fiscal arrangements could be tailored to the specific economics of a gas project. Contractual payments are more likely to provide predictability for potential investors in a project. Representative Hodgins pointed out that the total cost of the project is not known. He projected that if the cost were around $12 billion dollars, it would probably move forward; although, noted those variables exist. While the bill is unique in many respects, there are precedents for the incentive. For example, the Liquefied Natural Gas (LNG) project on the Kenai Peninsula, which provides significant jobs, production and property tax revenue, benefits directly from the Alaska Industrial Incentive Act which provides tax advantages critical for development. He noted that oil could be sold on the spot market, whereas, LNG would be contracted over many years. The project will not go forward without contracts guaranteeing sales of the product. Representative Hodgins commented that from results put forth from the mayor's recommendations, an advisory group will be established. The taxable amount of funds coming into the State would be $12.6 billion dollars. The amount generated for federal government would be approximately $26 billion dollars. There is room to help increase profitability by not front-end loading the costs. He proposed that the State should give up no more than 2% in order that the project can move forward. He pointed out that an important addition to the bill is the confirmation to be given by the Legislature on each contract. He emphasized the need that the commissioner negotiates contracts with the Legislature. Representative Hodgins summarized, the Stranded Gas Development Act is a critical step in the efforts to realize the benefits of our gas resources located in the North Slope. WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, stated that this proposed legislation was originally submitted by the Governor, however, the Special Committee on Oil and Gas made significant changes to it. The Administration supports the bill as changed by that Committee and the House Resources Committee. HB 393 provides a framework for developing a customized proposed fiscal system applicable for the development of stranded gas. The bill is particularly focused on the LNG process, whereby, gas would be pipelined from the North Slope, liquefied on the southern coast of Alaska, shipped to Asia and sold as LNG. The bill acts as framework legislation, designed to instruct the Executive Branch to develop a proposal/contract which would provide for payments in lieu of some or all taxes imposed on the project by State or local governments. The bill only authorizes and directs the Executive Branch to bring proposals before the Legislature in the form of such contracts. Once it is put before the Legislature, they would in turn need to pass enabling legislation. Commissioner Condon noted that several issues relate to the contracts. He replied that it is unknown if the contracts would bind future legislatures. He proposed that the Legislature should determine if they would want to be bound in that way, which would be a policy call decided when the contract is brought before the entire Body. The legislation specifies that if someone applies to create a stranded gas project and it meets the criteria of the bill, the Executive Branch is then instructed to develop a proposal in the form of a fiscal contract, which would substitute payments for all State and local taxes. The contract would then come back before the Legislature so that enabling legislation could be passed. Co-Chair Therriault pointed out that passage of HB 393 would not bind future legislatures to ratify the contracts. Commissioner Condon distributed a flow chart for HB 393. [Copy on File]. Co-Chair Therriault inquired the requests submitted by the mayors involved. Commissioner Condon replied that the bill works as follows. ? The bill provides for the filing of an application; and ? Then the contract is negotiated. Commissioner Condon added, the legislation would provide for the establishment of a Municipal Advisory Group and each affected municipality would provide a member for that advisory group. Commissioner Condon touched on the gas to liquid concern. He stated that the bill should provide for a full range of opportunities to commercialize stranded gas in Alaska, although, the fiscal systems would be different. Co-Chair Hanley pointed out that the application deadline would be 2001; if no one submitted an application by that time, it would be over. Co-Chair Therriault noted HB 250, which established the North Slope Gas Commercialization team, contained a fiscal note for $230 thousand dollars which was zeroed out. The effort was paid for out of the Governor's contingency fund. He asked the amount expended on creating HB 393. Commissioner Condon did not know. He stated that most of the money provided by the Governor's contingency fund was used, although, other resources had also been included. HB 393 was HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 3:10 P.M. H.F.C. 13 4/04/98