04/10/2018 03:15 PM House STATE AFFAIRS

        SB 196-APPROPRIATION LIMIT; BUDGET RESERVE FUND                                                                     
                                                                                                                                
4:16:28 PM                                                                                                                    
                                                                                                                                
CHAIR KREISS-TOMKINS  announced that the final  order of business                                                               
would  be CS  FOR  SENATE  BILL NO.  196(FIN)(efd  fld), "An  Act                                                               
relating to  an appropriation limit;  and relating to  the budget                                                               
responsibilities of the governor."                                                                                              
                                                                                                                                
4:16:39 PM                                                                                                                    
                                                                                                                                
SENATOR  PETER MICCICHE,  Alaska State  Legislature, pointed  out                                                               
that the sponsors  conducted some statewide polling  and he found                                                               
it interesting  the percentage of  people who support  a spending                                                               
limit.  He noted that the  high level of support was not specific                                                               
to party, region,  or demographic, and every region  was above 75                                                               
percent [of  the people polled].   The  state relies on  a single                                                               
commodity  to   fund  more  than   85  percent  of   the  state's                                                               
governmental  services,   and  although  the   operating  capital                                                               
budgets have been cut by over  $3 billion in the last four fiscal                                                               
years, the state  continues to draw from its  savings accounts to                                                               
fill the gap  between revenue and expenditures.   He advised that                                                               
this legislation  sets an appropriation  limit and referred  to a                                                               
chart  titled  "SB  196 Appropriation  Limit"  demonstrating  the                                                               
spending  limit  plotted in  a  couple  of  different ways.    He                                                               
explained  that the  top purple  line is  the existing  statutory                                                               
appropriation limit,  the red  line is the  actual spend.   There                                                               
are  two parallel  lines, the  blue  line is  deflating from  the                                                               
current  spend  back  to  around  1999, and  the  green  line  is                                                               
inflating at this appropriation limit trend through today.                                                                      
                                                                                                                                
SENATOR MICCICHE advised that the  chart demonstrates why this is                                                               
important, "we've gotten  back into this band and  had we avoided                                                               
getting  out  of  this  band, we  would  have  approximately  $15                                                               
billion  more in  saving right  now.   We  wouldn't have  reduced                                                               
dividends,  we  wouldn't  have  been  talking  about  broad-based                                                               
taxes,   and  we   have  would   have  been   delivering  quality                                                               
constitutionally protected services in the  meantime."  This bill                                                               
requires  the  legislature  to prioritize  state  spending  going                                                               
forward so  it does  not find  itself in  the same  situation, he                                                               
remarked.                                                                                                                       
                                                                                                                                
4:19:51 PM                                                                                                                    
                                                                                                                                
SENATOR NATASHA  VON IMHOF,  Alaska State  Legislature, described                                                               
that Alaskans are living in  a "feast or famine" environment with                                                               
the primary  single source  of revenue being  oil.   Alaskans can                                                               
effectively live  in that  environment if  there is  control over                                                               
spending whereby the state's spending  does not necessarily match                                                               
the revenue that may  jump or fall over the course  of time.  She                                                               
noted that history has revealed that  the state had huge jumps in                                                               
revenue between fiscal years 2010  and 2014, that there have been                                                               
feasts and  famines in  the past.   Over the  last 25  years, she                                                               
pointed out, the  state put money into  the constitutional budget                                                               
reserve (CBR) and  borrowed from the CBR during the  times it was                                                               
necessary to  fund the  deficit.   She acknowledged  that between                                                               
the years 2010  and 2014, the state did not  control its spending                                                               
and the state  matched its spending to revenue;  and when revenue                                                               
started  falling in  2015 and  the state  could not  contract its                                                               
spending fast enough.  As a  result, she offered, to what Senator                                                               
Micciche stated, approximately $15 billion  was left on the table                                                               
by money  that was not  put into  savings during the  good years,                                                               
and additional money was removed  to cover large deficits because                                                               
the state  had large  budgets during  the falling  revenue years.                                                               
This legislation,  she related,  helps future growth  in spending                                                               
in order to avoid the big  jumps and big falls in spending, which                                                               
creates  much  anxiety  and  uncertainty   in  the  state.    She                                                               
explained  that   the  bill  grows   spending  over  time   in  a                                                               
predictable rate  based on what  most other states use,  which is                                                               
usually the  consumer price index (CPI)  for their state.   It is                                                               
an agreed  upon set of principles  that the entire bodies  of the                                                               
legislature  agree  to  set  their  budgets  on  each  year,  she                                                               
commented.      A   spending  cap   brings   predictability   and                                                               
sustainability  to   Alaska's  budget   process  and  is   a  key                                                               
ingredient in  a bi-annual  budget, which  is a  two-year budget.                                                               
She opined  that that will  avoid this type of  conversation with                                                               
pink  slips for  educators, and  so forth.   This  legislation is                                                               
meant  to  ease  the  anxiety   and  provide  predictability  and                                                               
sustainability, she described.                                                                                                  
                                                                                                                                
4:22:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX advised that she  supports the concept of a                                                               
spending  limit  and  asked why  Senator  Micciche  believes  the                                                               
legislature  will adhere  to a  spending limit  because it  is in                                                               
statute,  any  more  than  it  has  adhered  to  paying  out  the                                                               
permanent fund  dividend (PFD)  according to  the formula  set in                                                               
statute,  for  example.    The   legislature's  track  record  in                                                               
following  the  statutes  is  sometimes   not  100  percent,  she                                                               
commented.                                                                                                                      
                                                                                                                                
SENATOR  MICCICHE responded  that the  Senate Majority  discussed                                                               
the fact that this is a test  and the real objective is that this                                                               
translates  into a  constitutional spending  limit.   He stressed                                                               
that the goal is to make sure it  is right, so it has a look back                                                               
and he is hesitant to  change the Alaska State Constitution until                                                               
it is somewhat time tested.   He commented that, "If we find that                                                               
we are successful ... so soon  after we pass statutory items that                                                               
the legislature  weighs in  on heavily  and heavily  supports, we                                                               
have a  tendency to stay  very close to that."   In time,  as the                                                               
new legislators  come in,  they are  not particularly  married to                                                               
that  past  statutory  structure.     Although,  he  opined,  the                                                               
legislature  has time  to  determine within  the  next two  years                                                               
whether  this  proves  to  be  the right  trend  of  spend  going                                                               
forward,   and  subsequently,   hopefully   there   would  be   a                                                               
constitutional amendment the people of Alaska would support.                                                                    
                                                                                                                                
4:24:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  commented that  he thinks "this  is great,"                                                               
and at the  municipal level there are tax caps  with some sort of                                                               
institutional limits  or boundaries  on spending.   He reiterated                                                               
that this is  good, it could possibly be modified  over time, but                                                               
it is helpful to have a road map on spending.                                                                                   
                                                                                                                                
REPRESENTATIVE  KNOPP  noted  that  he agrees  with  the  sponsor                                                               
statement  in creating  exemptions for  the payment  of permanent                                                               
funds,  capitol  projects,  state  debt obligations,  but  he  is                                                               
concerned about the  receipt supported services.   He pointed out                                                               
that the state  does not have diversified growth  funds (DGF) and                                                               
every  department  now  has receipt  supported  services.    This                                                               
legislation does  not appear to  cap receipt  supported services,                                                               
and over  the last couple  of years, almost every  department has                                                               
raised fees in one form or  another.  He asked whether that issue                                                               
should have "fallen  under unrestricted general fund  (UGF).  You                                                               
know  we've really  strayed I  think, from  what we  said is  not                                                               
general fund (GGF), but we're calling it GGF."                                                                                  
                                                                                                                                
SENATOR  VON IMHOF  responded that  there were  discussions about                                                               
what  a spending  cap might  include, such  as, UGF  only or  all                                                               
state funds  including DGF and  other state funds.   The decision                                                               
was UGF  because it is  important to provide the  departments and                                                               
the  university with  flexibility  to raise  fees  and what  they                                                               
believe the market will bear.   President Jim Johnsen, University                                                               
of Alaska, stated on the record  that the University of Alaska is                                                               
subsidized by the  state more than any  other Western university.                                                               
In the event  the university decides to raise  tuition, the state                                                               
should allow  them to do so  and not necessarily be  stymied by a                                                               
spending  cap,  the  same  goes  for  hunting  fees  and  fishing                                                               
regulations.   There  is a  point where  market equilibrium  will                                                               
dictate whether a  price is too high, and it  is more appropriate                                                               
for the departments to retain that autonomy and flexibility.                                                                    
                                                                                                                                
4:27:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WOOL  referred to the previously  described chart,                                                               
and when  Senate Micciche said  "we've left the band"  he assumed                                                               
that is  between the  parallel green line  and the  parallel blue                                                               
line, and the  red line is state spending.   He commented that it                                                               
looks like  "we're actually back in  the band the last  couple of                                                               
years."                                                                                                                         
                                                                                                                                
SENATOR MICCICHE  answered that Representative Wool  was correct,                                                               
the $15  billion that disappeared  is the difference  between the                                                               
blue line and  the red line when  the red line is  outside of the                                                               
two parallel lines.                                                                                                             
                                                                                                                                
4:28:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WOOL referred to the  statement that 85 percent of                                                               
Alaska's governmental  services rely upon a  single commodity and                                                               
advised that that statement is  probably no longer valid "and may                                                               
not be  for some time in  the foreseeable future."   He asked how                                                               
Senator Micciche would adjust that statement.                                                                                   
                                                                                                                                
SENATOR  MICCICHE replied  that he  did  not know  that he  would                                                               
because if a percent of market  value (POMV) passes, or any other                                                               
arrangement  that will  pay  the  state's bills,  it  is still  a                                                               
single  commodity generated  with the  escalation from  earnings.                                                               
He  related that  Representative Wool  was converting  production                                                               
from the past into funding for  the future, so "I don't know that                                                               
you've  moved outside  of that  band.   I think  you picked  up a                                                               
higher proportion  of that  band and  likely will  in perpetuity.                                                               
Particularly, if  we can  get an agreement  on what  our spending                                                               
should  look  like  today  and  how it  should  escalate  in  the                                                               
future."   The primary  point of the  chart is,  "with relatively                                                               
little  discomfort we  are back  in  that band."   Obviously,  he                                                               
advised, it is  doable because "as a team we've  done it together                                                               
with UGF spending.  If we  can maintain being within that band in                                                               
the  future, we  can avoid  those  spikes in  spending with  some                                                               
outlets for  things that when we  do have high revenues,  we have                                                               
the ability to  catch up on things like  deferred maintenance and                                                               
other projects that may be lagging at the moment."                                                                              
                                                                                                                                
4:29:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WOOL surmised that  this legislation proposes that                                                               
the  $4.1 billion  will not  include capital  projects and  asked                                                               
whether  the  red  line  of   spending  also  follows  that  same                                                               
exclusion of  capital projects.   He  opined that  that is  a big                                                               
part of the deduction from FY14 through FY18, for example.                                                                      
                                                                                                                                
SENATOR MICCICHE  described that   this discussion is   apples to                                                               
apples on operating.                                                                                                            
                                                                                                                                
4:30:23 PM                                                                                                                    
                                                                                                                                
CHAIR   KREISS-TOMKINS  asked   whether  there   have  been   any                                                               
discussions  about  extending the  spending  cap  to the  capital                                                               
budget.                                                                                                                         
                                                                                                                                
SENATOR VON IMHOF answered that  there have been some discussions                                                               
about a  potential waterfall  if oil  revenues or  other revenues                                                               
exceed  the spending  cap.   For example,  she advised,  what has                                                               
priority  on a  certain percentage,  or a  certain dollar  amount                                                               
when there are  competing interests, such as PERS  and TERS, debt                                                               
payments, repayment  to the constitutional budget  reserve (CBR),                                                               
capital,  possibly school  education,  building, matching  funds,                                                               
and things  of that nature.   Those discussions have  taken place                                                               
and "we  have not necessarily  landed on anything at  this point,                                                               
and we are open to feedback."                                                                                                   
                                                                                                                                
SENATOR  VON   IMHOF,  in   response  to   Representative  Wool's                                                               
question, advised that he is  correct that past oil revenues have                                                               
been a much  higher percentage of revenue, absent of  a POMV, and                                                               
it  still remains  the highest  or dominate  revenue force.   She                                                               
commented that one would argue that  even with a POMV, in its own                                                               
way it is from oil revenue in  its origin.  Moving forward, it is                                                               
believed that  starting with  a "4.1 UGF"  is realistic  based in                                                               
the world  market of what the  state can afford with  the current                                                               
oil  revenue, production,  and opportunities  through SB  21, the                                                               
oil  tax legislation.   She  related that  this is  realistic and                                                               
makes  sense  based  upon current  information,  but  as  Senator                                                               
Micciche  advised,  this is  a  trial  period with  a  three-year                                                               
lookback, and  at that time there  will be a determination  as to                                                               
whether  the rate  makes sense.   The  rate in  the Alaska  State                                                               
Constitution currently "is a little  high," it is both population                                                               
and CPI  and it is too  big of a  growth rate, it does  not work.                                                               
This  should  have  probably  been reviewed  20  years  ago,  she                                                               
offered.                                                                                                                        
                                                                                                                                
4:33:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WOOL  offered appreciation for the  statement that                                                               
the source of  revenue originally was oil, the  revenue went into                                                               
a fund,  the fund  is invested,  and the state  uses that  as its                                                               
number one source of revenue.   He surmised that it is not direct                                                               
oil revenue, but that  oil is on the fund.   He asked whether the                                                               
CPI takes into  account surging healthcare costs  that are higher                                                               
than inflation.                                                                                                                 
                                                                                                                                
SENATOR VON  IMHOF advised  that that CPI  is everything  and the                                                               
Anchorage CPI is,  in essence, the statewide CPI.   Alaska is one                                                               
of the  few states  that has the  dominant city  representing the                                                               
state.  She  said that she has a 30-year  lookback available, and                                                               
advised that in  2016, the CPI range was negative  point one, all                                                               
the way  to approximately 4.6  in one given  year.  The  CPI does                                                               
fluxuate  when the  price of  oil and  the price  of housing  and                                                               
healthcare rises, but  then it goes down, and when  looking at it                                                               
over  time  it  is  "pretty  level and  our  numbers  work,"  she                                                               
advised.                                                                                                                        
                                                                                                                                
4:34:46 PM                                                                                                                    
                                                                                                                                
CHAIR KREISS-TOMKINS  asked whether  there is  any other  sort of                                                               
idiosyncrasy in  the CPI  where there could  be a  CPI calculated                                                               
for Anchorage  that in any  way has a  large delta from  what the                                                               
sort of de facto statewide CPI would be.                                                                                        
                                                                                                                                
SENATOR MICCICHE answered as follows:                                                                                           
                                                                                                                                
     So, a  very direct example  of that was right  went the                                                                    
     price of oil went from $107  a barrel down to $29.  You                                                                    
     are going  to see  an offset,  you are  going to  see a                                                                    
     state that  is used  to a very  high level  of revenue,                                                                    
     many more  high-paying jobs, rents  were up,  renting a                                                                    
     storefront, many materials were  at a much higher price                                                                    
     and suddenly you  had a revenue drop.   There are times                                                                    
     when there is  a lag, but considering it  is the actual                                                                    
     costs of the primary drivers  due to the cost of living                                                                    
     in Anchorage,  it generally catches up  in a relatively                                                                    
     short order.   The reason that capital  is excluded, is                                                                    
     because  you can  shut it  off like  a faucet,  like we                                                                    
     did.  That  is not our problem in spending.   It can be                                                                    
     a problem  in spending when you  are building community                                                                    
     centers in  the middle of nowhere  that, unfortunately,                                                                    
     have operating dollars  attached to them.   That can be                                                                    
     a problem.   But, as you saw in 2014  and 2015, we were                                                                    
     able to make that immediate  reduction.  You don't have                                                                    
     bodies  attached to  it, you  don't have  employees and                                                                    
     their  families attached  to it,  you don't  have their                                                                    
     healthcare  and their  retirement, and  all that  other                                                                    
     burden that's  so difficult to  reduce.  So,  UGF spend                                                                    
     in our  operating budget is  the key exposure  and that                                                                    
     is  what  made  this  so uncomfortable  over  the  last                                                                    
     couple of years.   And where, in my view,  we are still                                                                    
     not spending at  the place where we  should be spending                                                                    
     for a state of 740,000 people.                                                                                             
                                                                                                                                
4:37:19 PM                                                                                                                    
                                                                                                                                
SENATOR MICCICHE pointed to the sectional analysis [contained                                                                   
within the committee packet] and offered to answer questions                                                                    
prior to the next hearing.                                                                                                      
                                                                                                                                
[SB 196 was held over.]