Legislature(2019 - 2020)ADAMS ROOM 519
05/01/2019 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB131 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 131 | TELECONFERENCED | |
HOUSE BILL NO. 131
"An Act relating to an appropriation limit; relating
to the budget responsibilities of the governor; and
providing for an effective date."
9:00:42 AM
Co-Chair Wilson relayed that she had asked the Office of
Management and Budget (OMB) to testify on the bill. She
wanted the committee to see the many different outcomes of
a sending cap.
9:01:24 AM
ED KING, CHIEF ECONOMIST, OFFICE OF MANAGEMENT AND BUDGET,
stated his understanding of the discussion. He did not have
prepared materials. He offered to provide an introduction
on the levers and options available when creating a
budget spending cap.
Mr. King offered that three levers were available when
considering a spending limit. The limit should include all
funding that an appropriating body wanted to restrict. The
current limit in the constitution and other spending cap
proposals all excluded federal funds. There was no desire
to restrict the amount of federal funds received by the
state. He reiterated that all the appropriation limit
proposals excluded federal funds. He mentioned that some of
the proposals excluded the Permanent Fund Dividend (PFD)
and some did not. He maintained that exclusion or inclusion
was a matter of political philosophy; either include as a
budget item or exclude the funds outside of the limit so it
did not compete with other budget items. He stated that the
other significant issue to exclude or include was
designated general funds (DGF) versus undesignated general
funds (UGF). He indicated that some proposals included all
general funds (GF). He exemplified raising state park fees;
if DGF was included in the limit it would restrict the
ability to increase the fees. He noted that HB 131 excluded
DGF.
Co-Chair Wilson asked whether the constitution excluded
DGF. Mr. King answered that the constitution included all
GF except for public corporate receipts that were excluded;
e.g., University of Alaska (UA) tuition and Alaska
Industrial Development and Export Authority (AIDEA)
receipts.
Co-Chair Wilson determined that if a state tax was
implemented and the revenue was included in the cap it
would keep spending consistent and if the tax was excluded
government could grow. She thought that taxes were a big
lever either inside or outside of a cap. Mr. King answered
that all spending limit caps were tied to the uses of
funds, not the sources of funds. Raising a tax would not
change anything in the limit, but how the taxes were used
would. However, if a sales tax was used for a designated
purpose there would be no check on the amount of growth
that could occur.
Vice-Chair Johnston wondered whether the Department of
Revenues (DOR) fees for investment would be part of the
cap.
9:07:07 AM
Mr. King answered that under current law, the management
fees for a corporate entity were excluded. He commented
that the language was similar in the statutory and
constitutional measures before the legislature. He noted
that it would ultimately depend on how the language was
drafted in the limit. Mr. King referenced debt service and
other items. In general, debt service payments were
considered outside the cap. He recalled that in all the
current limit and all other proposals they were excluded.
He noted that the type of debt service mattered. For
example, if the debt was a general obligation bond (GEO)
the debt was excluded in all proposals. However, things
like school reimbursement and other subject to
appropriation bonds would depend on how the language was
drafted as to whether it would be included or excluded. The
debt service payments not voted on by the public were
subject to the cap in the current constitutional cap.
9:09:27 AM
Vice-Chair Johnston deduced that he had answered the
question. She was interested in whether bonding for oil tax
credits and the unfunded pension obligation were under the
cap. She deemed that they were included. Mr. King affirmed
her conclusion. Vice-Chair Johnston wondered if pension
obligation bonds would be included under the cap. Mr. King
replied in the affirmative.
Representative Knopp referenced Mr. King's comment that
federal funds were excluded. He ascertained that since the
federal funds needed matching state funds, a cap would
limit federal funds since the state matching funding was
subject to the cap. Mr. King agreed that the state matching
portion would be subject to the cap and federal funds could
be lost. Representative Knopp remembered that initially the
administration wanted to eliminate the DGF designation and
had combined UGF and DGF. He determined that combining the
funds would likely be an easy way to manage a limit. He
asked about whether capital funds were excluded.
9:12:19 AM
Mr. King replied that there were three types of DGF. The
constitution did not allow the full dedication of funds. He
explained that one type of DGF generated from a business
like function. The current limit and constitutional
proposal excluded that type of DGF. He pointed to another
type of DGF that involved business like activities not part
of a public corporation; e.g., user fees collected from
state parks when the funds were used to maintain the parks.
The fees were included under the current constitution and
the proposed constitutional amendment but was excluded in
HB 131. He indicated that the state could collect more
revenue from fees than needed to reinvest in the program
and it was a policy call. The third type of designation was
not tied to the program from which the funds were collected
and could be excluded or included. The administration
concluded that the later type should not be considered DGF.
He furthered that under the constitution and the proposed
constitutional amendment, the PFD was excluded and under
the bill and senate proposals the PFD was included.
9:15:24 AM
Representative Knopp asked about capital funds and noted
they were typically UGF. Mr. King answered that the
constitution included some unusual language that had never
been triggered. He relayed that in all proposals, capital
funding was included in the cap and had been amended to
provide some flexibility with either a 10 percent or 5
percent allowance over the cap.
Representative Josephson asked whether some states had a
revenue cap. Mr. King asked for clarification.
Representative Josephson explained that Colorado had a cap
on the revenue the state could generate. He assumed that a
revenue cap correlated to ultimate expenditures. Mr. King
responded in the affirmative and purported that the limit
on government spending could be restricted in various ways;
either restricting the ability to raise revenues or
restricting appropriations. He agreed that Colorado had a
restriction on the revenue it could generate, and other
states made it difficult for a state to implement a new
tax; therefore, limiting the ability to grow government.
Representative Josephson contended that part of the reason
for the proposed development of Alaska National Wildlife
Refuge (ANWR) was that Alaskans wanted to get rich. He
deduced that Alaska could implement a spending cap but
still get rich. He did not view revenue generation and a
spending cap as a correlation. Mr. King answered in the
affirmative. He agreed that revenues could exceed a
spending limit especially in a resource-rich state where
the imbalance was typically temporary. He advised against
increasing spending with volatile revenue sources.
9:19:16 AM
Representative Josephson used Mr. King's hypothetical
example of DGF that was derived from a source like a sales
tax and used for a specific purpose. He surmised that the
funds would be designated, not dedicated and each year the
money could be rerouted to another purpose. He believed his
scenario was fundamental to the states constitution. Mr.
King replied that the exclusions from the limit were not
dedications of the funds. He added that revenue from a
sales tax that was designated for a purpose was not
dedicated but it would be excluded from the formula that
calculated the cap.
Vice-Chair Ortiz asked whether the Department of Fish and
Game (DFG) fees and taxes would be included or excluded
from the cap. Mr. King answered that under HB 131, if the
fees or taxes met the definition of program receipts under
AS 37.05.146, they would be excluded. Vice-Chair Ortiz
asked about the Alaska Marine Highway System (AMHS) fees or
fares. Mr. King replied the same exclusion would apply
under HB 131. However, it would not be the case under the
proposed constitutional amendment - DGF would be subject to
the cap and changed the dynamics of how the legislature may
be able to alter what was under the cap or not. Vice-Chair
Ortiz noted that the state's revenues fluctuated greatly
from year to year. He advised caution regarding a
constitutional revision because it would be hard to adapt
to changing revenue situations.
9:22:45 AM
Mr. King agreed that regardless of revenue volatility, the
constitution was difficult to change and should be
addressed with caution. He addressed the original
constitutional spending limit proposed in 1982 and reported
that the reasoning at the time was to smooth out the
volatility in revenue and not increase spending when
revenue increased. He judged that a spending limit
stabilized government spending, which was the governor's
reason for proposing the limit.
Co-Chair Wilson reasoned that the current spending limit
had never really come into effect because it was too high.
She wondered whether there was some merit in putting the
cap in statute initially, to determine how it was working
versus putting the cap in the constitution. Mr. King
confirmed that there should be significant thought before
putting something into the constitution. He offered that
there were ways to ensure the limit would be effective and
durable over time. In 1982, when the amendment had passed
the first time, it had automatically gone back to the
public for a vote in 1986. The vote meant to ensure the
limits efficacy. Co-Chair Wilson countered that it had not
been working because it never went into effect. She
wondered whether doing something like that and going back
to voters every four years was better than a statute that
required the legislature to test and adjust every year. Mr.
King noted that the governor desired the constitutional
amendment. Co-Chair Wilson favored a constitutional
amendment but was trying to ensure the cap would work. She
wondered if the limit should be a statutory change at first
with the idea of a constitutional amendment in the future.
9:28:30 AM
Vice-Chair Johnston noted that in 1986 the cap had been
voted on immediately prior to a drop in oil price. She had
voted for both caps.
Co-Chair Wilson interjected and wondered if the vote had
come a couple of years after the drop, would the vote have
passed. Vice-Chair Johnston speculated that "the tax cap
had been the last thing on peoples' minds because there
were so many other things going on." She believed that the
portion of citizenry that were interested in fiscal
sustainability and clambering for a fiscal plan would have
engaged and a robust discussion would have taken place.
Mr. King opined that in 1977, oil started flowing and
revenues had started significantly increasing. As a result,
the government had started to grow and by 1986 to 1988 when
revenues fell, and the problem regarding government
growth had gone away, it had stayed that way for many
decades until 2005 when the prices spiked. Many realized
that the limit put in place in 1982 was ineffective.
9:31:26 AM
Vice-Chair Johnston followed up on an earlier question by
Representative Knopp related to the capital budget. She
stated that the cap would exclude debt and if the capital
budget was funded via a GEO bond, the debt payment would be
excluded. Mr. King replied in the affirmative.
Representative Sullivan-Leonard asked for an overview
regarding the existing budget reserve fund compared to the
governor's proposal that included a savings reserve fund.
Co-Chair Wilson asked what fund Representative Sullivan-
Leonard was referencing. Representative Sullivan-Leonard
explained that reserve funds were part of the spending cap
conversation and wanted a comparison of the idea proposed
in HJR 7-Const Am:Approp. Limit; Reserve Fund. Mr. King
answered that HJR 7- Const. Am.: Permanent Fund & Dividend
and its companion bill SJR 6, contemplated situations when
the state had more revenues than it was allowed to spend.
He elaborated that under current law, Article 9, Section 7
and Section 16, provisions existed for a cap and a savings
fund the Constitutional Budget Reserve (CBR). The CBR
held money from oil settlements and litigation. The
legislature had the ability to borrow from the CBR with the
understanding that the money would be repaid to the fund
when revenues were sufficient. The proposed resolution
would change the concept slightly - rather than paying back
what was owed to the CBR it would always hold one year's
worth in funds to act as a buffer. The fund was renamed as
the Savings Reserve Fund in HJR 7. He added that if there
were additional funds available, rather than holding
significant amounts in the CBR the funds would be
automatically deposited into the corpus of the Permanent
Fund (PF).
Co-Chair Wilson asked where the money to initially seed the
savings account with one years funding would come from if
revenue was insufficient. She speculated that the funding
would come from the ERA. Mr. King answered that the
resolution in front of the legislature required spending
cuts to meet the limit or finding additional revenue. A
withdrawal from the ERA would be a legislative decision.
9:36:35 AM
Co-Chair Wilson thought that the limit could force the
state into a taxation.
Vice-Chair Ortiz asked whether moving forward with HB 131,
which did not include the PFD as part of the spending cap -
if it by necessity negated SB 26-Approp Limit & Per Fund:
Dividend; Earnings [CHAPTER 16 SLA 18 - 06/13/2018] that
used part of the Earning Reserve Account (ERA) draw to pay
for the dividend and government services. Mr. King
corrected that HB 131 included the dividend in the limit.
He believed that Vice-Chair Ortizs broader point was sound
and the limitation on the amount that could be drawn from
savings impacted the amount of expenditure. He agreed that
a strict appropriations limit would preclude the ability to
draw from the POMV.
Co-Chair Wilson interjected that the PF corpus was
excluded.
9:38:21 AM
Vice-Chair Johnston referenced the newly defined savings
account. She asked if a temporary sweep of funds would
exist in that situation. Mr. King answered that HJR 7
contemplated the elimination of the three-quarter vote and
prohibited the reverse sweep. He elucidated that HJR 7 did
not require a full sweep to repay the CBR but required a
sweep of GF known as the waterfall to the either the
corpus or the CBR. Vice-Chair Johnston stated that one of
the aspects of the CBR was it acted as a cash management
tool. The fund would still be used as a fund balance and a
cash management tool, but the resolution required a full
year's budget balance as opposed to merely a basic cash
management tool. She asked whether he agreed. Mr. King
answered in the affirmative and elaborated that currently,
the CBR acted as a stabilization fund. The question was
what the balance needed to be to provide the stability. The
current law did not have an upper limit to the CBR balance.
He deemed that the question was about the right balance to
maintain in the CBR and how the excess funds should be
handled. The general idea of HJR 7 was that one years
worth of revenue was adequate and the CBR would truly
become a stabilization fund rather than a holding account.
He recommended that the legislature further analyzed what a
proper reserve amount was.
9:41:22 AM
Vice-Chair Johnston addressed what qualified and what did
not regarding the limit. The government could employ Tax
Anticipation Notes (TAN) that would be included within the
tax cap because it was debt service. Mr. King replied that
the administration had not talked about it specifically, he
guessed that it would be under the cap, but he would have
to follow up.
Representative Carpenter cited page 2, line 8 and read the
following:
of money to a state savings account or fund that
requires a subsequent appropriation from that account
or fund.
Representative Carpenter asked for an example of the type
of fund. Mr. King answered that Power Cost Equalization
(PCE) was the type of fund described. He noted that the
Retirement Trust Fund did not require a subsequent
appropriation. He maintained that lacking a subsequent
appropriation meant that the money was already spent and
should be subject to a cap. Representative Carpenter asked
how a fund requiring a subsequent appropriation was
created.
Mr. King replied that the type of fund was created by
statute. Representative Carpenter surmised that the
legislature could create a fund to avoid the cap. Mr. King
clarified that the transfer from GF to the fund was not
subject to the cap but the subsequent spend or
appropriation from the fund was included in the cap. He
maintained that it was not possible to avoid the cap.
9:44:27 AM
Representative Josephson spoke about a new state savings
account. He surmised that the idea was to have one year's
worth of spending in the account. Mr. King answered that
HJR 7 contemplated maintaining one year's spending as the
upper balance, which was about $5 billion in the account.
He recounted that the administration did not discuss
whether the amount was adequate. Representative Josephson
discussed the administration's goal to restore the full
formula PFD from 2016 through 2018 to residents by drawing
from the ERA. He refenced that Mr. King testified that the
initial seed money for the new savings account would be
withdrawn from the ERA. He worried about the burden on the
ERA. He thought that the action would make it easier to
expend funds from the new savings account. Mr. King
clarified that HJR 7 did not proposed to withdraw money
from the ERA and deposit it into the CBR.
Co-Chair Wilson interjected that it had been her comment
when wondering where the initial extra $5 billion would
come from.
9:46:51 AM
Representative Josephson reiterated that he recalled Mr.
King had stated that it would be necessary to find the
money and it may come from the ERA. Mr. King clarified that
he stated the legislature either must turn to the ERA, cut
spending, or raise taxes if the CBR was empty and revenue
was insufficient. He did not intend to say that money would
be moved from the ERA to the CBR. He addressed the question
about whether the money would be easier to spend and asked
whether the query was still relevant. Representative
Josephson deemed that changing the name of an account
changed the way the public thought about it and how the
media covered it. Mr. King supposed it could be a true
statement. He answered that in terms of spending, a
provision prohibited spending more from the CBR or SRF (as
named in the proposed resolution) than the gap between the
limited amount and the revenue available. The legislature
did not get free access to the money. The legislature
could not fill the gap with the ERA and still access the
CBR. He declared that the provisions did not allow easy
access to the funds.
9:49:43 AM
Co-Chair Wilson indicated that Representative Louise Stutes
joined the meeting.
Representative Carpenter asked if the change in inflation
adequately reflected the demand in spending in the event of
a population change. Mr. King referred to the three levers
or options when establishing a spending limit. He would
answer Representative Carpenters question after he
addressed the last two levers.
Mr. King continued that the second lever was what the
limitation was based on and the third lever was how the
base was escalated over time. He expounded that under the
current constitution, the limit had been allowed to grow at
the rate of inflation and population as a cumulative rate
over time with the base set at $2.5 billion. Therefore, the
amount was about $10.5 billion in current prices. The
escalation happened based on the previous year's limit,
which was how the limit became detached from spending. The
fixed base was growing at a variable rate tied to a fixed
value. He related that the constitutional amendment
proposed by the governor had an adjusting base versus a
fixed base that was recalculated each year based on the
prior three years of actual spending. The base
automatically adjusted down if the spending was below the
limit and would never become detached like the current
limit. He reasoned that it might not be necessary to
readjust the amendment due to the nature of an adjusting
base. Rather than using an adjusting base, HB 131 changed
the fixed values to $5 billion and grew at inflation only.
He deduced that the fixed base still had the potential to
become detached from actual need.
9:53:02 AM
Mr. King addressed Representative Carpenter's question
regarding whether the inflation adjustment was adequate.
He believed that it made sense to consider some amount
towards inflation, it was a policy call that needed to be
made. He considered whether population adjustments were
necessary. He pondered whether government services needed
to grow at that same rate as the population and if the
population grew by 10 percent was the full proportional
rate necessary. He noted the large population growth
between 1990 and 2010. He delineated that there had been
significant population growth in the past, but a
significant increase in public services was unwarranted.
The governors proposal included half the rate of inflation
and in the amended SJR 6 the Senate included the full rate
of inflation but eliminated the population adjustment; the
same in HB 131. He thought that the answer was a policy
call determined on what the requirements of government
would be in a future with a different population.
Co-Chair Wilson wondered if it was possible to model the
numbers using a mathematical equation. Mr. King answered
that the bill could be structured in any manner. He offered
that it depended on how reactive the legislature wanted the
cap to be with changing circumstances. He suggested that
the limit could be tied to revenue or various items such as
inflation and population. He did not believe there was a
right answer, there were numerous ways to approach the
issue. Co-Chair Wilson thought that the voters did not have
the opportunity to choose the levers unless there were
several constitutional amendments offered. Mr. King
responded in the affirmative.
9:56:38 AM
Vice-Chair Ortiz asked that if the capital budget was part
of the limit whether there was a way to factor in existing
deferred maintenance needs. Mr. King replied in the
affirmative. He stated that deferred maintenance could be
excluded, or the legislature could bond for it. Vice-Chair
Ortiz spoke to the benefits of bonding for capital
projects. He asked if the dollar costs to the state
increased through a bonding process. Mr. King confirmed
that there was a cost associated with bonding but to
consider what the opportunity costs were. He commented that
it was not clear cut whether bonding would be better for
the state or worse.
Co-Chair Wilson asked about the possibility of using
modeling to analyze the options for a spending limit. Mr.
King responded that he was unaware of available software
due to the unique nature of Alaska. He suggested that the
Legislative Finance Division could develop some modeling.
He offered to help.
Co-Chair Wilson wondered if the members wanted to have
modeling and comparisons done. If there were other things
the committee wanted to see in a modeling format, she
invited them to let her know. She favored a spending cap
but wanted to ensure that the spending cap was appropriate.
Representative Josephson understood that population growth
and services did not warrant a one to one ratio. He asked
about the 20 year period from 1990 through 2010 and noted
things like school bond debt reimbursement, law enforcement
needs, and the lack of a state income tax all impacted
expenditures. Mr. King reiterated that even though the
state experienced large population growth, the government
did not grow. He questioned whether population growth as a
factor was necessary in the overall limit.
10:03:31 AM
Vice-Chair Ortiz suggested that perhaps there was not a
need for a limit and the hypothesis merited further
discussion. Mr. King replied that if there were no revenues
or savings the economics was creating the limit. He
detailed that when there was volatility (e.g. a spike in
oil price) the legislature had been a bit slow to react to
the increase or decrease in revenue. During the prior
revenue spikes, he noted that there had been some savings,
but also a significant increase in spending. He asked
whether legislators would have passed large budgets if the
legislature knew that the price of oil would eventually
plummet. He maintained that if they had known the downturn
was coming, they would have adjusted the budget sooner. He
believed that a spending limit forced the conversation.
Co-Chair Wilson asked what would happen if the legislature
deposited $12 billion from the ERA into the Permanent Fund
corpus. She thought that the action would implement a
spending cap. Mr. King affirmed her statement. He added
that it did not address a future circumstance of increased
revenues.
Co-Chair Wilson thought that the committee and the public
were learning a significant amount from the conversation.
Representative Carpenter noted that HB 131 excluded
designated or dedicated funds from the cap. He returned to
his earlier question about creating a fund like PCE. He
determined that the appropriation would be DGF and the
expenditure would be excluded from the cap. He asked if his
statement was accurate. Mr. King answered in the
affirmative and explained that under HB 131 the exclusion
of the designation made the scenario possible. He furthered
that the legislature had the purview to designate funds any
time. He believed that it was a question that should be
closely considered as the cap language was crafted. He
emphasized that it was not the creation of a fund and its
subsequent appropriation it was the exclusion of DGF that
allowed the scenario.
10:08:05 AM
Representative Carpenter agreed. He was trying to point out
that a spending cap that did not cap all spending was not a
spending cap. Mr. King agreed with the statement.
Co-Chair Wilson used the Division of Motor Vehicles (DMV)
funds as an example that collected more revenue than it
needed. She used a scenario where departments would be as
self-sustaining as possible. She wondered whether the DMV
funds would be inside or outside the cap under HB 131
versus the governor's proposal. Mr. King replied that under
HB 131 the DMV funds would be inside the cap. If the
legislature took an action to designate the funds solely
for DMV operations the funds would move from inside the cap
to outside the cap. The governor's proposal kept the funds
in both scenarios inside the cap. Co-Chair Wilson asked if
it would still be possible if the DMV collected more
revenue than needed for operations. Mr. King answered that
the spending limit was tied to the appropriations, not
revenues, any additional funds would lapse to the GF and
the use of the funds would be subject to the limit.
Representative LeBon hypothesized a fuel tax that was not
designated for road maintenance. He asked if there was a
method short of changing the constitution that allowed the
tax revenue to be dedicated to road maintenance. Mr. King
answered that the legislature had the ability to designate
the funds that were subject to yearly appropriation by the
legislature. Dedicated funds required a constitutional
amendment. Representative LeBon asked for verification that
there was no proposal by the governor to designate a fuel
tax for road maintenance. Mr. King was not aware of any
such proposal.
10:11:29 AM
Representative Josephson was thinking about the merits or
demerits of including designated funds within the cap. He
returned to his example about family finances. He
questioned why revenue from a self-sustaining agency would
be included in the cap. Mr. King reminded the committee
that the expenditure was limited and not the revenue.
Representative Knopp looked at agency receipts that often
brought in more revenue than it expended. He thought that
it was appropriate to include the revenue in a spending cap
and share the excess revenue. He asked for comments. Mr.
King answered that the governor's proposal contemplated the
program receipts as part of the general fund and subject to
the cap.
Co-Chair Wilson noted that all boards and commissions would
be under the cap. Mr. King affirmed the statement. Co-Chair
Wilson asked if it would include statutory designated fees.
Mr. King answered in the negative statutory designated
program receipts would be outside the cap and were held in
a trust.
Co-Chair Wilson thought agencies that taxed themselves
should be able to use the funds as they wanted. She
indicated that she would request modeling from LFD.
Co-Chair Wilson reviewed the agenda for the following
meeting.
Vice-Chair Ortiz asked about the $5 billion spending cap He
wondered where the figure was derived from. Mr. King did
not know - the bill had come from the House Finance
Committee.
Co-Chair Wilson replied that the cap was based on a three
year average and was a starting point. She characterized
the base as the most important lever in building a spending
cap.
HB 131 was HEARD and HELD in committee for further
consideration.
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