Legislature(1993 - 1994)
02/09/1994 01:30 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 58 An Act relating to the budget reserve fund established under art. IX, sec. 17, Constitution of the State of Alaska. CS HB 58 (FIN) was reported out of Committee with "no recommendation" and with zero fiscal notes by the Department of Law and the Department of Administration. HOUSE BILL 58 "An Act relating to the budget reserve fund established under art. IX, sec. 17, Constitution of the State of Alaska." Representative Brown provided the Committee with Amendment Representative Hanley OBJECTED. Representative Brown explained that Amendment #1 stated that all money that may be withdrawn by the Legislature "shall" be included, unless it has already been appropriated, and can be withdrawn without further appropriation. Representative Brown pointed out the problem of having "quasi" dedicated funds or attempts to hoard off money from the General Fund. She stated it would not be appropriate to be excluding those funds. There is no legal basis for it. Representative Brown stated that Ms. Cook with the Legislative Affairs Agency, Legal Services, felt that the proposed legislation was not in agreement with the Constitution and would be an overreaching attempt. Representative Brown stated that Amendment #1 addresses the legal opinion and advice of that Agency. Representative Brown thought Amendment #1 would be consistent and would make sense for Alaska over the long term and suggested that both the Majority and the Minority partake in decisions made regarding the Budget Reserve. Representative Hanley recommended clarifying the record to describe the terms "or the money in funds or accounts designated by laws as outside of the general fund" and what they included. Co-Chair Larson provided the Committee with copies of Alaska Statutes Section 37.05.146 which defines program receipts and non-general fund program receipts. [Attachment #1]. Representative Grussendorf referenced A.S. 37.05.146 and pointed out that (J) lists the permanent fund. He added 5 that the Constitution and the articles dealing with the Permanent Fund does implicate the interest earned could be used for the operation and capital budget. He stressed that language was in the Constitution and those funds were available as a pool of money to be considered before touching the Constitutional Budget Reserve. Constitutionally, the Permanent Fund earnings are available to the legislative body. He emphasized the corpus of that account would not be available. Co-Chair MacLean asked if the income of the Permanent Fund could be used. Representative Grussendorf replied it could be used. He pointed out that the Earnings Reserve Account had been used to pay off "hold harmless" items in the General Fund. Representative Martin asked for the legal opinion of the Legislative Affairs Agency. Representative Martin understood that the Permanent Fund earnings were considered part of the Permanent Fund Corporation and would be separate from General Funds. He suggested that this information be made clear to the people of the State. Representative Brown disagreed with Representative Martin. It was her understanding that in the lower Court decision, the judge totally objected at looking at legislative intent as having anything to do with the interpretation of "administrative proceedings". He stated that "what the legislative body thought was relevant was not". She requested that Tam Cook testify regarding what is meant by "money in funds or accounts designated by law as outside of the general fund". TAMARA BRANDT COOK, DIRECTOR, DIVISION OF LEGAL SERVICES, LEGISLATIVE AFFAIRS, responded to Representative Hanley's question regarding " money in funds or accounts designated by law as outside of the General Fund". She pointed out that the categories established in separate paragraphs (1), (2), and (3) of the amendment apply to the repayment section of the Constitutional provision, Subsection (D). That section differs as it specifically provides that the repayment is going to: 1. Come out of general fund money, and; 2. Will give the Legislature the power to implement that section. To that extent, it is different from the others, as the Constitution states that the repayment money will come from general fund revenues only. The Constitution does not define that word. 6 The first category is an attempt to define it. It states that money in funds or accounts which are designated by law as outside the general fund are not used for repayment. Ms. Cook said there is at least one significant account which is currently outside the General Fund as a matter of law - the Earnings Reserve Account which is in the Permanent Fund. Essentially, what this says is, "When the Legislature establishes an account, the Legislature can designate, for purposes of this provision, whether it is inside or outside the Permanent Fund", for purposes of the repayment. Representative Hanley asked if that was the repayment provision and not what is available for appropriation. Ms. Cook pointed out that the language earlier in the bill points out two important differences when looking at appropriations from the Budget Reserve Fund. Ms. Cook noted that the committee substitute does not include the language that refers to the General Fund in applying the formula of funds available for appropriation. It does exist in Section (D) but does not exist in Section (B). In addition, she added, there is not language which would allow the Legislature to implement the section which would clearly give the Legislature some discretion for interpreting the language. She felt that a court would be "literal minded" when it attempts to ascertain which funds are available for appropriation for purposes of applying the formula that lets the Legislature appropriate from the Budget Reserve Fund to meet shortfalls. Ms. Cook stated that the test she used in drafting the amendment is that one could argue to a court forcefully that surely the amount available for appropriation was not intended to include amounts already appropriated. Logically, that must be so, because if not so, then the entire structure of the Budget Reserve Fund unravels. Section (B) then could not be applied. If reappropriation would have to be considered, Ms. Cook asked herself how many years back would it be necessary to check for unaccounted balances. She said this would be "a nightmare" and felt that even the most determined court would be willing to agree that if the funds had already been appropriated, they would not be available for appropriation within the terms of this language. That is essentially the test which Ms. Cook said she tried to establish at the first part of Amendment #1. Representative Hanley asked, for example, if the Railbelt Energy Fund money had been appropriated by the Legislature as specifically, not to be withdrawn from the State Treasury 7 without further appropriation, would it be available. Ms. Cook explained the reason she used that formula. She said the Legislature can appropriate funds to AHFC for grants, however, only if appropriations are made for the grants each year. She added, it would be difficult to stand in front of the courts each year and state that the money would not be available for appropriation. She said within the structure of the fund which has been established, it is a requirement that no expenditures can be made without an act of appropriation as a legal matter. There are quite a few funds like that. Most of AHFC funds do not have that type of language. Ms. Cook continued, stating that in fact the Railbelt Energy Fund, is now depleted and it is no longer an issue. However, when it was a large fund, it was established and the Legislature stated specifically that money could not be used from that fund without an act of appropriation. The Legislature also stated as a result of the manner in which it was established, that money within the fund would be used for certain limited purposes. The Legislature kept control over the fund by requiring additional appropriations. She added that it will be difficult to convince a court of law that such money is not available for appropriation when the statute itself clearly states that it must be appropriated "again" before it can be expended. Representative Martin pointed out that he had introduced HB 35. He did not know that Representative Barnes had asked Ms. Cook for an opinion pertaining to repayment. Representative Martin understood that the earnings reserve account was under the Permanent Fund Corporation and would not normally be considered as part of the General Funds. He asked if this was correct. Ms. Cook stated that the Earnings Reserve Account money could not be used for repayment, because the statute states that the account is established in the Permanent Fund. The Permanent Fund is established as a matter of constitutional law and therefore a court would recognize that the Permanent Fund is outside of the General Fund. Because the statutes says the Earnings Reserve Account is in the Permanent Fund, under the constitutional provision establishing the Permanent Fund, there is a provision which states that the income can go to the General Fund or as is designated by the Legislature. Ms. Cook said this is a situation where the Constitution has given the Legislature the authority to identify where this money will go. The Legislature has chosen to keep the money within the Permanent Fund itself, separated for accounting 8 purposes. For this reason, Ms. Cook did not feel that the money could be placed under the repayment requirement. She believed that the funds would be subject to appropriation. Representative Martin stated that the court can not tell the government to reappropriate the money. He thought that only the Legislature has the responsibility to make whole the constitutional budget account. He asked if the Governor could take the earnings reserve or any money that is available and put it into the Constitutional Budget Reserve Account. Ms. Cook thought that the Governor could not take the Earnings Reserve Account, however, she believed that the Governor could "correct an accounting error". Ms. Cook stated that the court has said, "The Legislature has placed money into the wrong account in the General Fund and it should have gone somewhere else". As a matter of correcting an accounting error, the Governor can order the Department of Revenue to return money from the General Fund to the Budget Reserve Fund. Ms. Cook stated that under the terms of the Superior Court order, which has not currently modified it on the Supreme Court level, essentially, the Governor has been directed by the end of the legislative session, to replace the money "as an accounting matter". The obvious result is that the Legislature ends up with a depleted General Fund. Ms. Cook said the fact that the General Fund is substantially decreased is a matter for the Legislature to deal with through the appropriation process. Representative Martin asked Ms. Cook what she believed was meant by the people voting on the amendment of what was available for use. He asked if the public was aware that the earnings reserve must be used first, before touching the Constitutional Budget Reserve. Ms. Cook replied that she could not speculate on what the public thought when they were in the position of voting on this issue. She does believe that there is wide spread misconception about the legal status of the Earnings Reserve Fund. Very often in the press, it is referred to as Permanent Fund money and seems to be "somewhat lumped in the mind of the public as part of the constitutionally mandated Permanent Fund". Ms. Cook believes that as a result of the "popular press" some people do not make a distinction between income of the Permanent Fund and principle of the Permanent Fund. She is not sure that all members of the public do not actually understand there is an Earnings Reserve Account which is made up entirely of income. She has seen in the press a great many allegations that the State is "robbing" the Permanent Fund when there is an 9 appropriation from the Earnings Reserve Account. From a legal point of view, that is not accurate because the State can not rob the Permanent Fund principle and the earnings as income has always been able to be appropriated. Representative Martin asked if the earnings reserve would need to be used before the Constitutional Budget Reserve is touched. Ms. Cook believed that it would have to be used because the Budget Reserve Fund as a created constitutionally created entity clearly prevails over any politically established fund that identifies money that does not have constitutional protection. That money is more vulnerable than the Budget Reserve Fund under the form which requires the majority vote. With regard to the requirement of a three quarter vote, Ms. Cook stated, this vote is not based on the formula of funds available for appropriation. To the extent that the Legislature is trying to access to the Budget Reserve Fund under Section 17(B), the issue is essentially, "What is the court going to do with applying the formula and ascertaining what funds are available for appropriation for the given fiscal year". If there is a large pot of money in the Earnings Reserve Account, Ms. Cook believes a court will find that money is available for appropriation for purposes of applying the formula. Ms. Cook proceeded, that should the State have a billion dollars and no money in the General Fund, there is no requirement to use the Earnings Reserve Account per se. Although, if it is unused, it may be part of the formula which is used to ascertain whether the Legislature can access money in the Budget Reserve Fund. Representative Martin asked if the money is being divided into two sections, funds that are left over and funds which are going to be appropriated (re: dividends and inflation proofing). Ms. Cook responded that if money is appropriated from the Earnings Reserve Account for the purposes of dividends, then that accounts for a portion as it has been appropriated and will no longer be in that account. If it is appropriated for the current fiscal year, it surely was available for appropriation during that fiscal year. According to Ms. Cook, the formula requires the Legislature to look at what was actually appropriated in the prior fiscal year to ascertain the level that it may reach during the current fiscal year. In the recent history of our State, there has always been during a prior fiscal year, a substantial appropriation for the Permanent Fund dividends. From that point of view, since the prior fiscal year already had an appropriation for permanent fund dividends then that should 10 increase the amount available for appropriation. Representative Grussendorf commented on the Undistributed Income Account and his original desire to call that account the Budget Reserve Account. He eventually supported earmarking the funds as the Earnings Reserve Account. He supported Ms. Cook's argument. The Permanent Fund requires that all the earnings from the corpus would be available to the General Fund unless provided for by law. He emphasized that has occurred particularly in three categories. He believed the money would be available for appropriation and questioned whether the earnings reserve funds would be considered funds designated by law as outside the General Fund. Representative Grussendorf stated that the Earnings Reserve Account was available to go into the General Fund. He asked Ms. Cook if it would be required to be used. Ms. Cook stated it would, although it would not be required to be used for repayment and should the situation at the end of a fiscal year present the State with a repayment requirement for a prior appropriation from the Budget Reserve Account. The Earnings Reserve Account is an example of a fund which would not need to be given up in repayment. She added, that it would be counted and available for appropriation but under Section (D) if there were a balance, it would not be required to be transferred for repayment. Co-Chair Larson asked if a deficit balance could be carried into FY95. Ms. Cook questioned the provision on "indebtedness". She stated that she was not certain whether the Alaska Constitution requires a balanced budget. She thought that a deficit could be carried forward although eventually there could be a cash flow situation which would preclude expenditures or delay them. Co-Chair Larson asked for examples in each of the three provisions specified in Amendment #1. Ms. Cook referenced (1) and stated that a "fund which is designated by law as outside of the General Fund" would be the Earnings Reserve Account of the Permanent Fund. A fund which is designated by the law as inside would be the Statutory Budget Reserve Fund. With regard to most funds, the statute is either silent on where it is located from an accounting point of view or it specifically states that the fund is within the General Fund. Ms. Cook referenced (2), "money that by law, may be used only for a specific purpose that precludes placing it in the budget reserve fund" is an attempt by Counsel to address true trust funds. The three groups apply only to the repayment requirement. The requirement applies only to 11 General Fund money and also states that the Legislature has the power to implement the requirement. She added that there is a need to make as provision for trust funds. She cited the example an individual who leaves money to the State of Alaska to be used for a scholarship fund. Scholarships would be the only thing the funds could be used for. The terms of the trust would be violated if used to repay the Budget Reserve Fund. Ms. Cook referenced stating that if the Legislature had in fact appropriated money in a position where it could be expended, that money could be taken and used for repayment even though the money is in the General Fund and is obligated at a specific point in time. An example would be the entire operating budget or the money which goes to Alaska Housing Finance Corporation (AHFC). Ms. Cook used the reference of AHFC because there has been a lot of talk of use of AHFC funds. AHFC has nearly twenty different established funds and accounts. Virtually all of them, the language which establishes the accounts says, "this money can be used by AHFC for mortgage loans as security for bonds, for insurance reserves". There is also language establishing the funds which allows AHFC to use the money without the Legislature having to be involved. There are a couple of accounts in AHFC, Senior Housing for example where language says AHFC can not expend funds unless the Legislature appropriates it on a project specific basis. Representative Therriault asked where the Science and Technology Fund would be located. Ms. Cook believed the fund to be outside the general fund as far as the repayment portion is concerned. Representative Therriault asked if the Railbelt Energy Fund money would have been available for appropriation. Ms. Cook noted that she feared that a court could reach that result, however, said that opinion is extremely speculative as a court has not looked at this concern. She thought that the Railbelt Fund would be more vulnerable than the Science and Technology Fund which is an endowment with the intent that it will generate income, the income will be used and the money has been appropriated. Ms. Cook advised that the Railbelt Energy Fund was essentially a "savings account" created by statute which could not be "touched by anyone without specific appropriation by the Legislature. (Tape Change HFC 94-29, Side 1). Representative Navarre referenced Representative Larson's question regarding carrying a deficit forward. He stated 12 that as a matter of public policy, this would not be a good idea. He noted his concern that then the budget would be based on projections which would create an intentional or unintentional deficit. Co-Chair MacLean asked if funds established by statute would be available for repayment with the proposed amendment. Ms. Cook replied that the Legislature would need to designate that the fund is outside the General Fund or outside of the General Fund for purposes of this constitutional provisions. She believed that the Legislature could do this, because under Subsection (D) of the Constitutional provision it is stated that the Legislature shall implement that section. At this point, money has not been appropriated from the Budget Reserve Fund. There is no Subsection (D) budget repayment requirement. The repayment requirement will only occur if there is money available at the end of the year in the General Fund and has not been expended. Co-Chair MacLean asked if there were funds which would be scrutinized. Ms. Cook stated that it would be helpful if it were clear in the statute that funds would not be used for repayment. Otherwise, if the account is an account created where the money can be used without a further act by the Legislature, that money would not be deemed to be used for repayment. Most of the accounts are of that nature such as an account which is established for the use of grants. Co-Chair Larson noted concern with the rights of the citizen. He thought that the amendment would create more problems than those being settled. Representative Brown asked if Ms. Cook had checked CS HB 58 (FIN). She asked how the approach to repayment in the legislation would differ from that recommended in Amendment Ms. Cook referenced Subsection (b), Page 2, which would specifically identify a portion of the General Fund, the unreserved and undesignated General Fund balance. She presumed that evidence could be presented to a court to identify that money. She thought that approach could work. She cautioned the inclusion of a certain date and time. Ms. Cook explained the courts reaction to "legislative intent" regarding constitutional amendments. She disagreed stating that the court for years have expounded on what the founding fathers did when interpreting constitutional provisions. JAMES L. BALDWIN, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, made general comments upon the testimony of Ms. Cook. He stated that it is hard to believe that one could have a definite opinion as to what Amendment #1 would mean. He 13 said that is why the Department of Law supports legislation which will provide definition for the Constitution. He explained that the Department can not suggest the way in which the Constitution could be interpreted. He offered to suggest reasonable interpretations and then leave it up to the Legislature to provide the best policy call for how it should be interpreted. Mr. Baldwin stated that Subsection (d) of the Constitutional amendment, states that the Legislature "shall" implement it by law. Generally, those types of provisions are interpreted as mandatory directive to the Legislature, by law, for some way to implement it. It does not preclude the Legislature, or establish a presumption that it can not be done, as to the other provisions. He added, it would be very difficult to determine the real meaning and there is some degree of latitude to arrive at a rational definition of the terms used. Mr. Baldwin stated that there is a high probably of litigation concerning the meaning of the provision. It will definitely concern the enactments passed through the House Finance Committee. He stated that the Department is looking for tools to help in defending the State and defending the ultimate interpretation which is applied when enacting a budget for next year. Mr. Baldwin advised members that legislation which provides a set definition, and enactment by the Legislature of a budget which is consistent, there will be something substantial to work with which will the odds increase considerably in being able to prevail in supporting the interpretation adopted to address the budget bills and major appropriation bills. Comparing Amendment #1 to the House Judiciary version language, Mr. Baldwin said there is merely a refinement on the words which are used to describe the amounts available for appropriation for figuring out the central method for calculating what is available for appropriation. The Department could live with the Judiciary language, although it did state what "isn't" included rather that stating what "is". The approach being proposed is identify what is available for appropriation so the State would not be involved in accounting terms. Mr. Baldwin stated that should the Committee elect, it would be acceptable to place Amendment #1 into Section (d) although he did not believe it would be as good as the language proposed by the Department. Mr. Baldwin addressed federal funds. He believed Amendment #1 would address money 14 used only for a specific purpose and noted that federal funds cover a wide range of types of funds and usage. He felt that the proposed House Finance Committee version would be a good approach. Mr. Baldwin said the language drafted by Law was prepared by budget writers to be a budget writing tool. The State "looks" into the future one year when formulating that budget and looks back to see what is carried forward from the previous year. He emphasized that the committee substitute work draft would assist in that endeavor. He stated that the argument questioning what would be accomplished with all other reserve funds is irrelevant. Each fund was created by the Legislature with good intentions. He said those funds were established by law and "deserve respect". Representative Navarre asked if the safest position for the Legislature would be to appropriate out of the Constitutional Budget Reserve by a three quarter vote, and that anything else to define available for appropriation would likely lead to litigation. Mr. Baldwin thought in order to comply with the court's order for FY94, it would be the recommendation of the Department to do it by three quarters vote simply because there are appropriations on the books and expenditures made by third parties in connections with those appropriations, amounts advanced by the State Treasury, and the State should not do anything to throw into question the validity of those actions. Representative Martin asked with that opinion why would there be a separation between Section (b) and Section (c). He thought that Section (c) would make it clear, with the understanding with Legislative shortfalls are coming from the prior years. Mr. Baldwin agreed with Representative Martin. He added, that there would be a great potential for litigation. He reiterated his legal advise would be to solicit and receive a three quarter vote for FY94. Representative Martin replied, if the shortfall from this year is to be made up, a simple majority should be able to make that decision. Mr. Baldwin stated that the risks would be increased by taking a simple majority vote. Representative Martin summed up that Section (B) would allow a simple majority and Section (C) would mean a three quarters vote. Representative Brown referenced Section 2, the retroactive clause to July 1, 1993. She asked the purpose in making the proposal retroactive. Mr. Baldwin stated that this would be applied to FY94, in order for any decisions to be made for 15 restoration of the funding in compliance with the court order, this interpretation would have to be in effect at the time of the appropriations which are in dispute. Representative Brown asked the effect of not including that provision in the bill. Mr. Baldwin thought it may have the same effect. The retroactive provision would make it absolutely clear, stating this is how it should have been for FY94. He was not sure that the provision was absolutely necessary although it would provide clarity. Representative Hoffman questioned the amount available for appropriation. He noted the discrepancy between Mr. Baldwin and Ms. Cook on the Permanent Fund earnings. Representative Hoffman questioned if the Legislature had the authority to make the appropriation. Mr. Baldwin replied that the Legislature does have the power to appropriate the money. He thought there could be a problem in how that power could be exercised. The justification for not considering it to be available for appropriation in the context of which that term is used in the amendment is because it is a separate provision established by statute. Representative Hoffman disagreed with Mr. Baldwin. A roll call vote was taken on the MOTION to adopt Amendment IN FAVOR: Grussendorf, Hoffman, Navarre, Brown. OPPOSED: Hanley, Martin, Parnell, Therriault, Larson, MacLean. Representative Foster was not present for the vote. The MOTION FAILED (4-6). Representative Martin MOVED that CS HB 58 (FIN) be reported out of Committee with individual recommendations. Representative Navarre OBJECTED. A roll call vote was taken on the MOTION. IN FAVOR: Hanley, Martin, Parnell, Therriault, MacLean, Larson. OPPOSED: Hoffman, Navarre, Brown, Grussendorf. Representative Foster was not present for the vote. The MOTION PASSED (6-4). CS HB 58 (FIN) was reported out of Committee with "no recommendations" and with zero fiscal notes by the 16 Department of Law and the Department of Administration.
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