Legislature(2003 - 2004)
03/16/2004 01:44 PM House FIN
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HOUSE JOINT RESOLUTION NO. 9
Proposing amendments to the Constitution of the State
of Alaska relating to an appropriation limit and a
spending limit.
Representative Stoltze introduced HJR 9, commenting that
this may be the fifteenth hearing on the measure. He stated
that a constitutional spending limit is appropriate among
the other fiscal plan measures being advanced. He believes
that the public will support the measure, bringing an added
responsibility to make it especially well crafted. The
measure has evolved since he first introduced it and it
incorporates provisions requested by the Governor's Office.
He has tried to include enough exemptions, accompanied by
the limitation, to anticipate the needs of the state along
with the anticipated growth in population. He expressed his
hope that the measure would allow for the controlled growth
of government.
TAPE HFC 04 - 57, SIDE B
KELLY HUBER, STAFF TO REPRESENTATIVE STOLTZE, explained the
changes in the Judiciary Committee Substitute. Section 1
outlines (indisc. -tape change) Page 2, lines 2-5, state
"The total amount of appropriation under this subsection
made for a fiscal year may not exceed two percent of the
amount appropriated for the fiscal year two years preceding
the fiscal year for which the appropriations are made." Ms.
Huber noted the exclusions from the calculation of a
spending limit that follow on lines 7 through 29 of page 2.
Section 2 adds a new section stating that the spending limit
would go to the ballot in 2004, be applied to appropriations
in FY 06 and be reaffirmed by the voters every six years
thereafter. Ms. Huber stated that the constitutional
amendment is based on the two preceding fiscal years'
average, with the calculations set forward by the Governor's
Office.
CHERYL FRASCA, DIRECTOR, DIVISION OF MANAGEMENT & BUDGET,
OFFICE OF THE GOVERNOR, stated that spending limit
discussions have considered using inflation versus
population, instead of this proposal that includes change in
the personal income rate. The rationale for using personal
income rate as one indicator is that if citizens throughout
the state were doing well and their income went up each
year, it would be appropriate for the state to increase its
spending. Then, if citizens were going through a
retrenchment due to recession, the state should cut back as
well. Earlier discussions indicated that when the state is
in a recession, ironically some of the state costs go up for
public assistance and other responsibilities. Ms. Frasca
said it's a toss up which indices to use. Costs and revenues
don't always go up at the rate of inflation. This measure
puts forth using 50% of the rate of change in personal
income for three calendar years averaged out, and the
percentage equal to the percent of change in the state's
population, linking it to the demand for services.
Ms. Frasca commented on lines 1-2, page 2, and she
encouraged the committee to think seriously about continuing
to use a three-fourths vote threshold because no other state
requires such a high threshold to exceed a spending limit.
In terms of setting 2% spending cap, Ms. Frasca mentioned
there might be extraordinary unanticipated events requiring
additional spending by the state. Ms. Frasca felt that
setting the 2% threshold would bind future legislatures when
looking forward to events such as the buildup for a gas
pipeline. She questioned whether the Legislature wants to
lock that in.
Ms. Frasca encouraged selectivity regarding what is excluded
from the limit because it sets up an incentive to categorize
spending under things that are excluded from the limit.
Instead of being considered off budget, items will be
considered off limit. One addition in the Judiciary version
first excluded University receipts and then narrowed it down
to University tuition. She concluded that it is an excellent
idea to have re-ratification of the provision in the future
to allow the revisiting of concerns.
Vice-Chair Meyer asked why six years was chosen for bringing
it to a vote again. Representative Stoltze explained that it
was a subjective judgment based on a bill before the Senate
in 2000 with a provision allowing safety valves. It would
give the voters a chance to reaffirm their support or back
out of it.
Ms. Huber clarified that the current spending limit in the
Constitution has only one re-approval by the voters after
four years.
Vice-Chair Meyer expressed his support for HJR 9. He agreed
with Ms. Frasca that a three-fourths vote in each house is a
"high hurdle" and asked the sponsor if he intended that.
Representative Stoltze replied that it is arbitrary, and he
acknowledged that he is cognizant of unintended
consequences.
Co-Chair Harris asked whether the appropriations to pay
general obligation and revenue bonds are included in the
spending cap. Representative Stoltze replied it is exempted
under (c)(6) on page 2, lines 17-18.
Representative Stoltze commented on the 2% limit under the
three-fourths vote, and expressed concern about setting any
percentage limit. He suggested that it should be part of
the committee's discussion whether the 2% becomes a cap or a
floor.
Ms. Huber noted that debt service may not be excluded under
the Judiciary version, but it was excluded in a previous
version. In response to a question by Co-Chair Harris, Ms.
Frasca clarified that (c)(6) excludes the revenue bond
proceeds. One consideration for discussion is that this does
exclude the proceeds from the bonds. She advised that
increased costs of debt service don't mean increased
revenues to the state. Under the spending limit, debt
service would still need to be paid, which competes with
everything else for the same dollars.
Co-Chair Harris expressed that the public has voted for a
revenue bond appropriation in an election that authorizes
the incurrence of this debt, and he asserted that it should
be placed outside of a spending cap imposed on the
Legislature. Ms. Frasca replied that it would create the
incentive to incur debt to pay for costs because it's
outside the spending limit, as opposed to paying cash. Co-
Chair Harris argued that the public has voted to do that,
and should understand that whenever it votes on general
obligation bonds.
Representative Croft agreed with Ms. Frasca that the
proceeds in general obligation and revenue bonds are
excluded, but it is only the revenue bond appropriation that
is excluded. He felt that general obligation (GO) debt
service makes more sense than revenue bond debt service. He
asked why the appropriation to pay GO bonds is not excluded
along with the appropriation for revenue bonds. Ms. Frasca
explained that revenue bond proceeds are excluded from the
spending limit because an outside entity, such as an
airport, would be collecting the revenues to pay for that
debt.
Co-Chair Harris expressed concern with the spending cap and
how to keep under control the costs of services that lack a
continuous source of income. He noted that a revenue bond
generates its own revenue by charging fees. If there is no
payment of fees, there is no service. He reiterated that if
the public votes to incur debt service, they have informed
the Legislature of their wishes.
Representative Stoltze commented that the Anchorage tax cap
exempts debt service. Ms. Frasca agreed, but explained that
the voters are approving additional taxes to be collected
from them to pay the debt service.
Representative Croft asked if the tobacco settlement
involved revenue bonds. Ms. Frasca affirmed. He then asked
if the student loan that was recently sold would be
considered a revenue bond under this measure. Ms. Frasca
affirmed. Representative Croft noted that he understands
revenue bond exemptions for airports, but questioned the
tobacco settlement and student loans being under this
exemption. Ms. Frasca explained that the tobacco bond debt
service is being paid by the tobacco settlement. The
repayments of student loans are paying the student loan
corporation bond debt service. She made the distinction that
in each case, an external entity is providing the revenues
to pay the debt service, as contrasted with GO bonds or
school reimbursement bonds where the state comes up with
general revenues or a mix of other sources, including
corporate receipts or dividends.
Representative Croft questioned exempting AHFC, AIDA, or the
student loan corporation, which he feels are almost an
interchangeable source of General Funds. He asked if
exempting them creates an incentive, pointing out that that
the student loan corporation can either pay a dividend
included in the spending limit, or it can bond on that
revenue stream and it won't be included in the appropriation
limit. He asked if it doesn't create a way around the
spending limit.
Ms. Frasca replied it is important to distinguish that this
proposal is an appropriation limit on the spending side. A
corporate dividend from AHFC is a fund source, while revenue
bonds and the federal government are distinct revenues from
external sources. It is prescribed how they can be spent
and these are excluded from the spending limit.
Representative Croft noted that in (c)(5) the proceeds are
exempt, and in (c)(6) the appropriations made each year to
pay for the bonding are exempt. He questioned if this isn't
a way around the spending limit itself. Ms. Frasca said
that he was correct, that in this measure, the tobacco
settlement in the future would be a way to circumvent the
spending limit. She said that AHFC is different, in terms
of revenues generated for general government purposes that
are fungible.
Representative Croft asked why AHFC is different. Ms.
Frasca clarified that (c)(5) relates to revenue bonds, and
the mechanism by which you raise the money and repay the
cost. The annual AHFC dividend is calculated on a statutory
formula, and it's not tied to selling bonds. The state ends
up paying AHFC's debt service on their bonds out of the
dividends. This governs the appropriation. Revenue bonds
where a third party pays debt service are excluded under
this. The chairman has indicated that he also wants to
exclude the state paying the debt service.
Representative Croft reiterated his concerns about AHFC
using revenue bond proceeds on the capital budget, which
would be excluded from the limit. He questioned whether
always revenue or GO bonding the capital would circumvent
the appropriation limit. Ms. Frasca indicated that she
couldn't track his scenario, but explained there are rules
governing revenue bonds. There must be a source to repay the
bonds, and GO bonds can only be used for certain purposes.
She couldn't say if the AHFC dividend, which is a fund
source, would be excluded from the appropriation limit.
Representative Croft brought up a past proposal to borrow
against future federal transportation money in order to fund
big projects. He asked if that was a revenue bond. Ms.
Frasca explained that it was the GARVEES and that the debt
service was paid by the state. She was unsure if the
Department of Revenue categorized it as a revenue bond. She
commented that voters approved it on the ballot, and there
were competing opinions by the attorneys general.
A discussion ensued between Representatives Stoltze and Fate
and Co-Chair Harris. Ms. Frasca noted that it was the kind
of debt service that concerns the chairman.
Co-Chair Harris walked through the spending limit, noting
that an increase in the appropriation would require a three-
fourths vote of both bodies to increase it by 2%. He asked
if it is 2% above the amount appropriated two years
previously plus 2%. [Answer indisc.]
Co-Chair Harris asked the sponsor if he had considered a
stair-step provision, noting that a three-fourths vote is a
high threshold. He suggested having one spending increase
requiring a two-thirds vote and a higher benchmark at three-
fourths. Representative Stoltze asked Representative Hawker
if he had explored it in a Ways and Means Committee version
of the proposal.
Representative Hawker stated that Ways & Means reported out
a version with a stair-step mechanism of a fixed 2% at a
fifty percent vote, another 2% increase at a two-thirds
vote, and an additional 2% increase at a three-fourths vote.
Co-Chair Harris asked how much a 2% increase would total
today, and then noted that it would be $40 million of $2
billion dollars. He asked if it is cumulative.
Representative Stoltze replied that it is.
Representative Hawker advised that this draft has changed
substantially since last session. He explained that it would
be cumulative only on the amount of increase that actually
occurred. It would be cumulative but not compounding.
Representative Croft asked in Section 16(a) if the numbers
were negative in both the population growth and personal
income, would it bring the appropriation limit down. He
discussed a scenario of a net increase of zero if population
and personal income zero each other out, resulting in a zero
increase appropriation.
Representative Stoltze commented that the limit must also
counterbalance where the money is coming from.
Co-Chair Harris expressed that there is no negative downside
in the amount of money that could be spent. He quoted
"Appropriations made for a current fiscal year shall not
exceed the amount appropriated for the fiscal year two years
immediately preceding by more than fifty percent," --of
those two factors. He stated that there would be a "ceiling"
that you couldn't go above, but you wouldn't have to go
below it either.
Representative Croft asked for a technical explanation when
there are negative numbers for population or income in (1)
or (2). Co-Chair Harris responded that it means the
appropriation can't be more than in the previous year.
BRUCE TANGEMAN, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION
responded to Representative Croft that based on his
scenario, the appropriation could go down.
Representative Croft asked for clarification on whether
negative numbers in (1) and (2) would reduce the base. Mr.
Tangeman replied yes, it is possible that the appropriation
limit would go down if both income and population are going
down, and the previous three-year average is added together
and halved.
Representative Croft commented that this could mean the
appropriations have to be reduced from the base year. Mr.
Tangeman briefly noted that 37 states have spending limits.
Their revenue sources are income or sales taxes, or both. If
their population or personal incomes decrease, the states
generate less tax, or revenue, and the spending limits would
need to go down. He said that Alaska is unique because it is
not linking the spending limit to revenue, although this
measure is using similar scenarios.
Representative Croft noted that the University of Alaska
federal research grants are excluded, and asked if research
grants from nonprofits are also excluded. Representative
Stoltze replied (c)(10) probably addresses it. Ms. Frasca
recalled that the example she had discussed with
Representative Stoltze was the University Foundation, not
research grants from nonprofits. She confirmed that federal
grants are excluded but was unsure how nonprofit research
grants are categorized.
Representative Hawker questioned (c)(11) exempting tuition.
The University of Alaska creates receipt authority and
appropriates money in excess of what they expect to receive,
and not just federal receipt authority but in the area of
private contributions and funding. He recalled that it is
more than $65 million. He said it would seem that receipt
authority is subject to the spending limit, and it might be
one of the first to go, setting the University up with the
inability to receive private grant monies.
Ms. Frasca explained that the assumption is that the $65
million in "empty receipt authority" would be the base for
the future spending limit. Only when the University got up
to $65 million in actual receipts would it be limited by the
percentage change in the spending limit in the future. In
previous versions, University receipts were excluded. She
predicted that in the future, new expenditures would get
categorized as University receipts. She advised that any
time an off-limit category is set up, there is an incentive
to recategorize spending, and she urged caution in deciding
what is excluded from the limit.
Representative Hawker posed a hypothetical dilemma, asking
whether the Legislature would increase Medicaid or keep this
empty receipt authority at the University, and he suggested
that the Legislature would sacrifice the empty receipt
authority. It would pump up the Medicaid appropriation in
the current budget by $65 million but in the following year,
there would no receipt authority. He advised using extreme
caution
Representative Hawker noted that (c)(10) is extremely vague
and asked what is money held in trust. Ms. Frasca gave the
example of the public school trust fund, which has a
dedicated stream. She said there aren't a lot of trust
funds. Representative Hawker observed that the Mental Health
Trust is a true trust fund. He asked if "money held in trust
by the state" isn't much broader language. He suggested that
designated funds are also monies held in trust. Ms. Frasca
offered to check with the Department of Revenue, but she
didn't expect that designated fund sources would fall into
that category. In response to a question by Representative
Hawker, Ms. Frasca concurred that the legal intent of the
language in (c)(10) is to tie down specific trusts.
Representative Hawker pointed out that money held by debt
covenant or by other legal covenants of the state would
clearly be money held in trust.
Representative Hawker brought up the base formula in Section
16(a)(1) and (2) on page 1, and agreed with Representative
Croft that with mathematical logic, it has the potential to
go negative. He asked the number for this year and the
projections for the next two years. Ms. Frasca stated that
it was calculated for FY 06 at a 3.47% increase.
Representative Croft asked who estimated personal income.
Ms. Frasca replied the source is the U.S. Bureau of Economic
Analysis. The data for 2003 will not be available until this
April.
Representative Hawker requested a hypothetical projection
using the numbers through 2002, with 3.47% for FY 06 and
extrapolating on the presumption that would remain steady.
He asked if there have been any attempts to contrast it to
increasing state expenditures that are known and
quantifiable. He noted that there is a footnote on all the
projections stating, "this projection is based on level
General Fund spending of $2.3 billion dollars a year." He
argued that there is a fallacy in that presumption, with 15%
compounding increases in Medicaid and the issue of the
public retirement systems.
TAPE HFC 04 - 58, Side A
Representative Hawker continued. He asked if the State would
be "setting itself up" with the budget spending limit to
have to close schools because there isn't money to meet the
State's contractual obligations.
Mr. Tangeman explained that he had gone backward to 1996 to
determine the projection. Representative Hawker argued that
there were forward projections the last time this measure
was discussed.
Representative Fate brought up the University of Alaska
research grants and pointed out that the Board of Regents
has broad constitutional powers to determine how the
accounting is done. He thought it was problematic to place
it in a spending limit because of those constitutional
powers, absent any statutory language demanding the
University do that. If the language exists, then the
University must comply, but he was not aware of any existing
language.
Co-Chair Harris thought the concern was that the Legislature
provides yearly authorization to the University to spend and
receive. All monies the University receives must come
through the Legislature. He voiced concern with the amount
of general funds authorized from year to year without
knowing what the recurring revenue sources will be, saying
some revenues are a one-time occurrence that shouldn't be
built into the base.
Ms. Frasca stated that she had misspoken regarding the funds
held in trust, clarifying that those are retirement
appropriations for the administration of retirement programs
for FICA, PERS and TRS, JRS, National Guard retirement
system, and the Mental Health Trust.
Representative Croft asked if the Marine Highway Fund and
oil spill contingency are held in trust. Ms. Frasca did not
think that any of those would apply. Representative Hawker
stated that it is a definition issue of "trust and agency
funds."
Co-Chair Harris stated that if the funds are spent, they are
not recurring sources of revenue. Representative Croft asked
if appropriations into the trust would still be within the
appropriation limit.
Ms. Frasca replied that deposits into the endowment would
also count in the limit, but not the endowment balance
itself. Representative Croft asked if there was a firmer
definition of "trust," because he was curious about Power
Cost Equalization (PCE) and the Marine Highways.
Representative Croft noted excess authority in the Kodiak
Launch Facility. He asked if it would be exempt. Ms. Frasca
replied that they are primarily federally funded and
statutorily designated. Representative Croft thought that
the Facility could be increasing the civilian satellite
launches from a base of 5 launches per year. He expressed
concern that with the constitutional amendment, $50 million
would need to cut from other areas because Kodiak received
$50 million in business. Ms. Frasca stated that it does not
appear that Kodiak would be excluded. Representative Croft
thought that it did not make much sense.
Co-Chair Harris expressed concern with the definition of
general funds. He stressed that when there is not a known
source of revenue, the Legislature should not depend on it.
He suggested that the revenue sources should be defined.
Representative Stoltze interjected that when the measure was
conceived, it attempted to grasp actual funding. There are
drafting challenges and the original version addresses the
general fund spending.
Co-Chair Harris asked if this is an attempt to address
annual spending when there is not the backup for the money.
He thought that grants and business charges should be
encouraged. He noted that the Kodiak Launch Facility
operates on the amount of business it can generate even
though it receives authority to spend money. A parallel
example is the receipt authority given to the University for
general funds while being expected to raise tuition and
apply for grants. He did not want to discourage that.
Ms. Frasca stated that the challenge is to determine if the
Legislature wants to limit the growth of government, which
HJR 9 addresses, or to limit how much the spending from
certain revenue sources can increase from one year to the
next. She gave the example of the tax limit in Anchorage,
which limits how much taxes can go up from one year to the
next. It is a limit on a fund source. She cautioned that the
proliferation of designated fund sources over the past
decade has eroded the General Fund and set up gross in non-
General Fund areas. Those monies go to particular programs.
The pure general funds tend to be spent on the traditional
responsibilities of government that include education,
transportation maintenance and operation, corrections,
public safety, the Legislature, the Governor's Office, and
the court system. The challenge, she said, is whether to
apply the limit to only the general fund portion, and allow
the non-general fund activity to go unchecked. It would
create an incentive to re-categorize funding.
Co-Chair Harris noted that the difference is that the
Legislature has the appropriation authority to determine
where the money will be spent. He commented on the small
cost of operating the Division of Motor Vehicles while the
receipts charged to the public are relatively large. It is
general funds, but annual revenue that is counted on. He
questioned how to control the costs but not penalize the
agencies.
Mr. Tangeman commented that it is Alaska's dilemma compared
to other states whose appropriation is directly connected to
their revenue source. Other states generate new revenues.
Representative Stoltze agreed to continue discussion of the
measure with Representative Hawker and other committee
members. Co-Chair Harris stated that he is supportive of
the concept of containment of government growth but
expressed that it is a difficult concept to address.
Representative Fate noted that there had been discussion
regarding revenues rather than expenditures. He voiced
appreciation of the revenue approach discussion, and
applauded Representative Stoltze's work on the bill.
Representative Croft asked if the bills would be moved at
the next meeting. Co-Chair Harris stated that they each
measure needs a fair amount of work before being reported
out of Committee. Co-Chair Williams asked Representative
Croft for his changes before the next meeting.
Co-Chair Williams stated that HJR 9 would be HELD in
Committee for further consideration.
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