03/18/2010 01:30 PM House FINANCE

HOUSE JOINT RESOLUTION NO. 8                                                                                                    
                                                                                                                                
     Proposing amendments  to the Constitution of  the State                                                                    
     of Alaska limiting  appropriations from certain mineral                                                                    
     revenue, relating  to the balanced budget  account, and                                                                    
     relating to an appropriation limit.                                                                                        
                                                                                                                                
3:02:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MIKE KELLY,  SPONSOR, introduced the proposal                                                                    
to  change the  constitution  to include  a balanced  budget                                                                    
mechanism. He  believed Alaska was  moving in  the direction                                                                    
of  revenue  shortages  and   cuts  in  government  services                                                                    
because of declining oil revenue  and growth in state budget                                                                    
at  the rate  of 10  percent  per year.  He stated  concerns                                                                    
about possible consequences.                                                                                                    
                                                                                                                                
Representative Kelly noted that  Alaskans had signaled their                                                                    
desire  to have  costs controlled  in 1982  with a  spending                                                                    
limit  measure  and in  1990  with  a Constitutional  Budget                                                                    
Reserve  (CBR)  measure. He  asserted  that  neither of  the                                                                    
mechanisms had solved the fiscal problems.                                                                                      
                                                                                                                                
Representative   Kelly  reminded   the  committee   about  a                                                                    
previous  attempt at  ten-year  forecasting legislation.  He                                                                    
referred  to other  work on  the  unfunded liability,  which                                                                    
saved municipalities from sinking and  set a course to repay                                                                    
the debt over  a 25-year period. He believed  more should be                                                                    
done.                                                                                                                           
                                                                                                                                
DEREK MILLER,  STAFF, REPRESENTATIVE MIKE  KELLY, introduced                                                                    
a   PowerPoint  presentation,   "HJR   8,  Balanced   Budget                                                                    
Resolution, March  18, 2010" (copy on  file), beginning with                                                                    
Slides 2 and 3:                                                                                                                 
                                                                                                                                
   · In  1982, voters  approved an  amendment to  the Alaska                                                                    
     Constitution to control state spending.                                                                                    
   · The  amendment  established   an  annual  appropriation                                                                    
     limit of  $2.5 billion plus adjustments  for changes in                                                                    
     population and inflation.                                                                                                  
   · In  today's   dollars:  For  FY   09,  the   Office  of                                                                    
     Management  and  Budget  estimated   the  limit  to  be                                                                    
     approximately $8.3 billion.                                                                                                
                                                                                                                                
Mr. Miller turned to the FY 09 budget passed (Slide 4):                                                                         
                                                                                                                                
   · The   unsustainable  FY   09  budget   passed  by   the                                                                    
     legislature    after    vetoes   was    $6.7    billion                                                                    
     (unrestricted  General Fund  revenue), or  $1.6 billion                                                                    
     less than the 1982 constitutional spending limit.                                                                          
   · Translation: The  1982 spending limit passed  by voters                                                                    
     is  ineffective;  or,  we're   doing  a  great  job  of                                                                  
     controlling government growth.                                                                                             
                                                                                                                                
Mr. Miller spoke to the  Constitutional Budget Reserve Fund,                                                                    
(Slides 5 and 6):                                                                                                               
                                                                                                                                
   · In 1990, another  attempt was made by  voters to impose                                                                    
     budget  stability.  Voters  approved  a  Constitutional                                                                    
     Amendment  creating the  Constitutional Budget  Reserve                                                                    
     Fund (CBRF).                                                                                                               
   · The  CBRF was  created  to receive  and protect  excess                                                                    
     revenues generated  in high  revenue years  rather than                                                                    
     leaving excess  funds in the  General Fund  (where they                                                                    
     could  be easily  spent). Taking  money  from the  CBRF                                                                    
     requires  a  supermajority  ¾   vote,  making  it  more                                                                    
     difficult  to tap  and  therefore  arguably a  spending                                                                    
     controller.                                                                                                                
                                                                                                                                
Mr. Miller turned to a graph  on Slide 7 depicting through a                                                                    
steadily rising line what state  general fund spending would                                                                    
have been  FY 1990  through FY  2010 if  it had  been simply                                                                    
adjusted for inflation at 3 percent.                                                                                            
                                                                                                                                
Mr. Miller  described the graph  on Slide 8, with  a second,                                                                    
contrasting  line  depicting  actual general  fund  spending                                                                    
throughout the same period. The  second line is volatile and                                                                    
erratic compared  to the steady inflation-adjusted  line. He                                                                    
noted the sharp  rise in recent years when the  price of oil                                                                    
went up and there was more money to be appropriated.                                                                            
                                                                                                                                
3:08:48 PM                                                                                                                    
                                                                                                                                
Mr.  Miller pointed  to  a third  graph on  Slide  9 with  a                                                                    
third, green line added illustrating  the total general fund                                                                    
revenue (including non-mineral  revenue). He highlighted the                                                                    
sharp  peak in  the green  line for  FY 08  and argued  that                                                                    
mineral   revenue,   including    mineral   lease   rentals,                                                                    
royalties,  bonuses, and  production taxes  on oil  and gas,                                                                    
are the most volatile part of the state's revenue base.                                                                         
                                                                                                                                
Mr.  Miller  turned to  Slide  10,  the  same graph  with  a                                                                    
fourth, black line  added in order to  compare what spending                                                                    
would have  looked like over  the time  period if HJR  8 had                                                                    
been  imposed in  2000. He  noted that  spending would  have                                                                    
been significantly  lower than what was  actually spent over                                                                    
the period until FY 10. In  FY 10, the state would have been                                                                    
able to access account funds.                                                                                                   
                                                                                                                                
Mr. Miller described Slide 11 as  a clear visual of what the                                                                    
measure would  do. The  left column  shows revenue  from oil                                                                    
after the permanent  fund is paid. The  five-year average is                                                                    
calculated and  if revenue from  the year is lower  than the                                                                    
five-year average,  funds could  simply be  transferred from                                                                    
the Balanced Budget  Account (BBA) by the  legislature up to                                                                    
the  five-year limit.  Revenue received  during the  year in                                                                    
excess   of   the   five-year   average   is   automatically                                                                    
transferred  back into  the BBA,  which the  legislature can                                                                    
access during low-revenue years.                                                                                                
                                                                                                                                
Mr.  Miller assured  the  committee that  the  BBA does  not                                                                    
touch certain "Sacred Cows" (Slide 12):                                                                                         
                                                                                                                                
   • Permanent Fund Dividend                                                                                                    
   • Permanent Fund Corpus                                                                                                      
   • Permanent Fund Earnings                                                                                                    
   • Amerada Hess                                                                                                               
                                                                                                                                
Mr. Miller  also assured the  committee that the BBA  is not                                                                    
subject to the  CBR sweep. He pointed to a  bar graph (Slide                                                                    
14) covering  calendar years (CY) 2006  through 2010. Adding                                                                    
the numbers  from CY  2006 through CY  1200 and  dividing by                                                                    
five produces the five-year average.                                                                                            
                                                                                                                                
   • HJR 8 transfers funds into  the BBA when oil prices are                                                                    
     high and, with a  simple majority vote, transfers funds                                                                    
     out of  the BBA  to fill  the gap  when oil  prices are                                                                    
     low.  When  the  balance  of BBA  exceeds  2  years  of                                                                    
     appropriations,  excess will  be  transferred into  the                                                                    
     CBR.                                                                                                                       
                                                                                                                                
Mr. Miller spoke  regarding a similar graph on  Slide 15. He                                                                    
then  turned  to  Slide 16  and  detailed  the  relationship                                                                    
between the BBA and CBR:                                                                                                        
                                                                                                                                
   · The BBA  is limited  to a maximum  amount equal  to oil                                                                    
     appropriations  for   2  years.  Any  excess   will  be                                                                    
     transferred to the CBR.                                                                                                    
   · The CBR:  HJR 8 transfers  funds into the CBR  when the                                                                    
     BBA  exceeds its  2 year  limit. The  legislature would                                                                    
     still need a ¾ vote to access the CBR.                                                                                     
                                                                                                                                
3:12:12 PM                                                                                                                    
                                                                                                                                
Mr.   Miller   stressed  that   HJR   8   is  about   fiscal                                                                    
responsibility (Slide 17):                                                                                                      
                                                                                                                                
   • Encourages  a better  budgeting system  than "when  you                                                                    
     have it, spend it - when you don't, cut."                                                                                  
   • Provides a simple but effective  mechanism to help save                                                                    
     budget surpluses  and avoid deficits  while encouraging                                                                    
     government to live within its means.                                                                                       
   • Eliminates  need  for   complicated  "rat  holing"  and                                                                    
     "parking" of excess funds to avoid ¾ vote.                                                                                 
                                                                                                                                
Mr. Miller addressed  the issue of why the  budget should be                                                                    
a constitutional amendment (Slide 18):                                                                                          
                                                                                                                                
   • The legislature can easily  overpower, ignore or change                                                                    
     statutory appropriation constraints.                                                                                       
   • Let  the people  speak  concerning  this simple  fiscal                                                                    
     framework. It  may be  the only  fiscal plan  they will                                                                    
     endorse at this time.                                                                                                      
                                                                                                                                
Mr. Miller  maintained that the measure  would dovetail with                                                                    
a  Percent  of  Market  Value  (POMV)  approach  to  funding                                                                    
government.  He  concluded  with  excerpts  from  Brandner's                                                                    
Legislative Digest No. 29/07 Dec. 19, 200& (Slide 20):                                                                          
                                                                                                                                
   • Fiscal policy is more than savings and sound bites; it                                                                     
     requires long-haul skilled political crafting.                                                                             
   • Long term fiscal policy has been elusive in Alaska,                                                                        
     especially since  the beginning [of] the  pipeline flow                                                                    
     and  the flow  of  easy money.    The citizen  taxpayer                                                                    
     close scrutiny faltered  and was replaced by  all of us                                                                    
     with  our hands  out.   There are  reasons why  we have                                                                    
     failed, and continue to do so.                                                                                             
   • We play the budget game from the seat of our pants.                                                                        
   • Lawmakers are besieged with demands to spend,                                                                              
     especially when there is the  perception or the reality                                                                    
     as  is the  current case,  that there  is money  on the                                                                    
     table.   Fiscal restraint  then becomes  someone else's                                                                    
     business,  or   the  business  of   tomorrow,  although                                                                    
     tomorrow brings the same appetites.                                                                                        
   • The same people who demand that they see a critical                                                                        
     need  in  their  community,  or in  relation  to  their                                                                    
     institution   or   industry,   will   still   say   the                                                                    
     Legislature "spends too much."                                                                                             
                                                                                                                                
3:13:15 PM                                                                                                                    
                                                                                                                                
Representative  Kelly  summarized  by calling  the  proposed                                                                    
measure  a  gentle  movement towards  fiscal  stability.  He                                                                    
calculated  that the  state's savings  would have  generated                                                                    
about $4  billion more  if HJR  8 had  been in  effect since                                                                    
2000. He pointed  out that change thus far  had assured that                                                                    
the  state's revenue-sharing  dollars  are  average now;  he                                                                    
believed the  proposed legislation would have  the same sort                                                                    
of impact.                                                                                                                      
                                                                                                                                
Co-Chair Stoltze  recalled taking up similar  legislation in                                                                    
the past. He commended the work done.                                                                                           
                                                                                                                                
Representative  Austerman agreed  and believed  the proposal                                                                    
fit into discussions that the committee had been having.                                                                        
                                                                                                                                
Vice-Chair Thomas  commented that  the fiscal  framework was                                                                    
not simple.                                                                                                                     
                                                                                                                                
HJR  8  was   HEARD  and  HELD  in   Committee  for  further                                                                    
consideration.