Legislature(2013 - 2014)

02/24/2014 02:06 PM House JUD


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        HB 245-SCHOOL FUNDING: REQ'D LOCAL CONTRIBUTION                                                                     
                                                                                                                              
2:35:12 PM                                                                                                                    
                                                                                                                              
CHAIR KELLER announced the next  order of business would be HOUSE                                                               
BILL NO. 245,  "An Act repealing the  required local contribution                                                               
to school  funding; making conforming changes;  and providing for                                                               
an effective date."                                                                                                             
                                                                                                                                
CHAIR  KELLER   informed  the  committee   there  is   a  lawsuit                                                               
[Ketchikan  Gateway Borough  v. State  of Alaska,  Superior Court                                                             
Case No.  1KE 14-CI], and if  the decision in that  lawsuit is in                                                               
favor of the Ketchikan Gateway  Borough (KGB) it would accomplish                                                               
the same goal as if HB  245 passed the legislature.  He cautioned                                                               
the committee not to advocate in  favor or against the bill as it                                                               
could  be  perceived as  legislative  intent  and explained  this                                                               
hearing is solely for the purpose of gathering information.                                                                     
                                                                                                                                
2:36:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TAMMIE WILSON,  Alaska State Legislature, speaking                                                               
as the  sponsor of HB  245, clarified that  HB 245 can  be passed                                                               
and the lawsuit can continue  forward as one does not necessarily                                                               
void the other.  She then paraphrased from the following sponsor                                                                
statement [original punctuation provided]:                                                                                      
                                                                                                                                
     House  Bill  245  would   reform  the  inequitable  and                                                                    
     onerous  state  mandate  for  local  contributions  for                                                                    
     organized areas in the state of Alaska.                                                                                    
                                                                                                                                
     The State  of Alaska  has a  duty under  [Article VII],                                                                    
     Section 1  of the Constitution  of the State  of Alaska                                                                    
     to "establish  and maintain a system  of public schools                                                                    
     open to all  children of the state".  The Fiscal burden                                                                    
     placed on local governments  that must bear that burden                                                                    
     is  enormous   and  consuming.  The  State   of  Alaska                                                                    
     provides  only partial  funding to  organized boroughs,                                                                    
     home-rule  cities  in   the  unorganized  borough,  and                                                                    
     first-class cities in the  unorganized borough to carry                                                                    
     out  the   State's  responsibility  for   education  by                                                                    
     deducting a  "local contribution" of 2.6  mils from the                                                                    
     level of state aid as stated in 14.17.410(G)(2)                                                                            
                                                                                                                                
     In  the  area  of Alaska  outside  organized  boroughs,                                                                    
       home-rule cities in the unorganized boroughs, home-                                                                      
     rule  cities in  the  unorganized  borough, and  first-                                                                    
     class  cities in  the  unorganized  borough, the  State                                                                    
     carries  out its  duties  for  education through  State                                                                    
     "educational  service   areas"  established   under  AS                                                                    
     14.08.031, which  exempt them  from the  required local                                                                    
     contribution. There are  presently 19 State educational                                                                    
     service  areas,  referred  to as  regional  educational                                                                    
     attendance areas (REAAs).                                                                                                  
                                                                                                                                
     In 1963  Alaska State Legislature passed,  and Governor                                                                    
     Egan  signed into  law,  the  "Mandatory Borough  Act",                                                                    
     dictating  that   certain  regions  of   Alaska;  those                                                                    
     encompassing Ketchikan,  Juneau, Sitka,  Kodiak Island,                                                                    
     Kenai  Peninsula,  Anchorage,   the  Matanuska  Susitna                                                                    
     valleys  and Fairbanks  to form  organized boroughs  by                                                                    
     January  1,   1964.  Furthermore,  Section  1   of  the                                                                    
     Mandatory   Borough  Act   promised   that,  "No   area                                                                    
     incorporated as an organized  borough shall be deprived                                                                    
     of  state  services,  revenues,  or  assistance  or  be                                                                    
     otherwise penalized because of incorporation.                                                                              
                                                                                                                                
     HB  245  removes   the  "required  local  contribution"                                                                    
     penalty  imposed by  the State  of Alaska  on organized                                                                    
     areas   and    again   fulfills    its   Constitutional                                                                    
     responsibility.                                                                                                            
                                                                                                                                
REPRESENTATIVE T. WILSON  then added that when an  area becomes a                                                               
borough  there  is the  assumption  that  services such  as  more                                                               
police,  and parks  and recreation  will  be added,  and yet  the                                                               
first  issue to  arise is  the 2.6  mil [local  contribution] tax                                                               
required for  something the  state is  currently providing.   She                                                               
explained  that  although when  Alaska  became  a state  a  local                                                               
contribution provision  was included but when  oil was discovered                                                               
the   state  provided   the  municipalities'   share  [of   local                                                               
contribution] until  the state ran  out of money.   Consequently,                                                               
the state looked  to the organized areas to fill  the coffers for                                                               
[services]  that  are  the state's  responsibility.    The  state                                                               
developed the formula for basic needs  to educate a student.  She                                                               
characterized  this  as a  constitutional  issue  that should  be                                                               
rectified  prior  to going  to  court  because it's  the  state's                                                               
responsibility to  ensure the state  pays its share and  that the                                                               
issue  is  rectified  prior  to  the  commencement  of  Ketchikan                                                             
Gateway Borough v. State of Alaska.                                                                                           
                                                                                                                                
2:41:36 PM                                                                                                                    
                                                                                                                                
DAN BOCKHORST,  Manager, Ketchikan Gateway Borough  (KGB), stated                                                               
KGB supports  HB 245 as it  attempts to achieve the  same goal as                                                               
the  recently filed  lawsuit by  KGB,  which is  full funding  of                                                               
basic need  for all school  districts whether they  are municipal                                                               
districts or  Regional Educational Attendance Areas  (REAA).  The                                                               
term "basic need," which is central  to HB 245 and KGB's lawsuit,                                                               
is  defined  in  [AS  14.17.410(b)(1)]   and  consists  of  seven                                                               
separate components.   Beyond the  technical jargon of  the term,                                                               
he opined  that it's a  straight forward  and fair formula.   The                                                               
first component  is student enrollment  in each district  and, he                                                               
explained,  there   are  approximately  2,200  students   in  the                                                               
Ketchikan  Gateway  Borough  School  District  which  equates  to                                                               
approximately $12.6 million in basic  need.  The second component                                                               
is  the   school  size  factor  that   takes  into  consideration                                                               
economies  of  scale  as  there  are  school  districts  with  15                                                               
students and  others with approximately 50,000  students, such as                                                               
the Municipality  of Anchorage.   He explained  that there  is an                                                               
adjustment  for the  greater  economies of  scale  in the  larger                                                               
schools.  The third component  is the district cost factor, which                                                               
range from the  base in Anchorage at 1.0 to  a remote district of                                                               
2.116.   The KGB District has  a 17 percent increase  in its cost                                                               
factor, which generates  $2.7 million for Ketchikan.   The fourth                                                               
component is  funding for special education,  gifted and talented                                                               
educational,  vocational   education,  and   bilingual  education                                                               
services and the adjustment for  the KGB District amounts to $3.7                                                               
million.                                                                                                                        
                                                                                                                                
2:45:33 PM                                                                                                                    
                                                                                                                                
CHAIR KELLER questioned if the factor  is on the actual number of                                                               
special needs students, or on after the adjustment.                                                                             
                                                                                                                                
MR. BOCKHORST explained  that every one of  [the factors] adjusts                                                               
for  the  number of  students,  school  size, and  district  cost                                                               
factor; it's  an adjustment that  continues to build.   The fifth                                                               
component  is vocational  and technical  instruction, which  adds                                                               
approximately $350,000 for the KGB  District; the sixth component                                                               
is correspondence students, which  add approximately $150,000 for                                                               
the  KGB  District; and  the  seventh  component is  for  special                                                               
education  students who  receive  intensive  services which  adds                                                               
$3.3  million to  the  basic  need for  the  KGB  District.   Mr.                                                               
Bockhorst expressed  the importance of  the "model" as  it totals                                                               
$26.2 million,  which is approximately $11,850.00  per student in                                                               
Ketchikan for its  basic need.  He acknowledged that  Alaska is a                                                               
diverse  state as  there are  53 separate  districts encompassing                                                               
over 650,000 square  miles.  In terms of per  student basic need,                                                               
on one end of  a spectrum the total is $5,200  per student and on                                                               
the other  end the total  is $48,500  per student, which  is more                                                               
than nine times what it is at the  lower end of the spectrum.  He                                                               
related that  the basic need  formula equalizes the  districts in                                                               
the  state.   In  fact,  the Department  of  Education and  Early                                                               
Development (EED)  says that "all districts  are considered equal                                                               
at basic need."   In other words,  students, taxpayers, teachers,                                                               
parents, and others who support  schools in Alaska's 34 municipal                                                               
districts  have equal  rights and  opportunities under  the basic                                                               
need   formula  compared   to  those   in  the   19  REAAs.   The                                                               
aforementioned is  a critical point  when considering  the merits                                                               
of HB 245 and the Ketchikan Gateway Borough v. State lawsuit.                                                                 
                                                                                                                                
2:49:28 PM                                                                                                                    
                                                                                                                                
MR.  BOCKHORST reiterated  that  the basic  need formula  ensures                                                               
every  district  [receives]  adequate  funding,  and  stated  the                                                               
University of  Alaska Institute of  Social and  Economic Research                                                               
(ISER)characterizes  basic need  as the  dollar amount  the state                                                               
determines  sufficient to  provide  an Alaska  school child  with                                                               
acceptable  educational services  wherever the  child lives.   He                                                               
then highlighted the  following by EED: "Basic  need provides all                                                               
districts  with needed  resources  based on  the various  formula                                                               
adjustments."   Under the Alaska  State Constitution,  Article 7,                                                               
Section 1, the  state has a constitutional  obligation to provide                                                               
adequate  funding to  maintain a  system of  public schools.   On                                                               
four different occasions over the  course of 30 years, the Alaska                                                               
Supreme Court has stated that  no other unit of government shares                                                               
the  duty.   In fact,  Judge Sharon  Gleason, Anchorage  Superior                                                               
Court  Judge,  held it  is  the  state's constitutional  duty  to                                                               
maintain  and  fund  a  system  of schools.    Therefore,  it  is                                                               
critical that basic need is  recognized as adequate funding.  Mr.                                                               
Bockhorst  pointed  out  that   on  average  municipal  districts                                                               
receive approximately  80 percent of  basic need from  the state,                                                               
with  some  [municipal  districts]  receiving  as  little  as  55                                                               
percent while  REAAs receive  full state  funding of  basic need.                                                               
Thus,   while   all  districts   are   equalized   in  terms   of                                                               
identification of  basic need,  only two  out of  three municipal                                                               
districts  are not  equalized  in  terms of  funding.   In  other                                                               
words, on an  average, municipal districts are  only 4/5ths equal                                                               
to non-municipal districts in terms  of state funding basic need,                                                               
he highlighted.   The  34 municipal  districts required  by state                                                               
law to operate schools are  forced to backfill [funding] and this                                                               
year KGB will  pay $4.2 million for a community  of 14,000 people                                                               
with  2,200 students.    He  estimated that  within  the last  22                                                               
years, KGB  has been  forced to  pay in  excess of  $100 million,                                                               
which is a staggering amount                                                                                                    
.                                                                                                                               
2:54:05 PM                                                                                                                    
                                                                                                                                
MR. BOCKHURST  referred to the  2/10/14 House  Education Standing                                                               
Committee  meeting  regarding   HB  245,  wherein  Representative                                                               
Reinbold questioned "Is  it truly equal protection  when some pay                                                               
and  some  don't?"   He  opined  that  Representative  Reinbold's                                                               
question is  critical given the lack  of a rational basis  of the                                                               
disparate treatment  among districts  that is evident  in various                                                               
materials including  the work prepared  by Attorney  Robert Hicks                                                               
for the  KGB District in  which he describes the  stereotype that                                                               
unorganized areas  lack resources while municipal  districts have                                                               
substantial resources,  which is not  true.  He then  referred to                                                               
his  written testimony  wherein there  is  a listing  of the  per                                                               
capita income of  the 53 districts in Alaska and  the highest per                                                               
capita  income in  Alaska  is a  REAA.   The  REAAs have  similar                                                               
income  levels to  boroughs that  were  mandated into  existence.                                                               
For  example, the  per  capita income  of  the Delta-Greely  REAA                                                               
school district is  virtually identical to that  of the Fairbanks                                                               
North Star Borough.   Although, 50 years ago  the Fairbanks North                                                               
Star Borough  voted against borough incorporation,  Fairbanks was                                                               
incorporated  by legislative  fiat.   He noted  that the  Chatham                                                               
REAA  has  virtually  the  same  per capita  income  to  the  KGB                                                               
District.   In contrast, the  Delta-Greely REAA  rejected borough                                                               
incorporation, and  there has been  no consequence.   He recalled                                                               
discussions  at the  2/10/14 House  Education Standing  Committee                                                               
meeting  regarding  the four  separate  school  districts on  the                                                               
Prince  of  Wales Island,  of  which  there are  three  municipal                                                               
districts  and one  is a  REAA.   During that  hearing Prince  of                                                               
Wales   Island  expressed   concern  over   the  required   local                                                               
contribution when  considering borough  formation.   Although the                                                               
Prince   of  Wales   REAA  is   not  subject   to  the   required                                                               
contribution,  he pointed  out;  it has  the  highest per  capita                                                               
income and is twice the size  of the city school district that is                                                               
subject to  the required [local]  contribution on the low  end of                                                               
the scale.   Testimony  provided at  the 2/10/14  House Education                                                               
Standing  Committee  meeting  by  the  Department  of  Law  (DOL)                                                               
focused on a  17-year old case in which the  Alaska Supreme Court                                                               
rejected a challenge of the  required local contribution based on                                                               
equal  protection   grounds  [Matanuska-Susitna   Borough  School                                                             
District v.  State of Alaska, (1997)  931 P.2d 391].   The Mat-Su                                                           
case has significant weight on HB  245 issues.  However, he noted                                                               
disagreement since the  court decided in Mat-Su that it  is up to                                                             
the  legislature  to choose  an  appropriate  policy for  funding                                                               
schools.   Mr. Bockhorst opined  that HB  245 is a  viable choice                                                               
under  the  Mat-Su decision,  but  the  current required  [local]                                                             
contribution  is not  viable given  the prohibition  on dedicated                                                               
taxes  and   other  constitutional  infirmities  raised   in  the                                                               
Ketchikan Gateway Borough lawsuit.   During the same meeting, DOL                                                             
asserted the Alaska Supreme Court's  decision stated the required                                                               
contribution  is a  "reasonable  way  to deal  with  the lack  of                                                               
required  contribution   from  Regional   Educational  Attendance                                                               
Areas,"  but the  court  never said  the  disparate treatment  of                                                               
municipal districts compared to REAAs  is reasonable.  Rather, in                                                               
the  Mat-Su  case the  court  determined  disparate treatment  is                                                             
permissible by  placing the interests  of municipal  taxpayers at                                                               
the  low   end  of   the  scale  of   rights  protected   by  the                                                               
constitution.  The two justices,  who weighed in on the decision,                                                               
added  that the  method chosen  by the  legislature may  not have                                                               
been the  most protective  of taxing equality.   In  other words,                                                               
the method may  not have been the most fair,  but could be gotten                                                               
away  with.   He  opined  that  is not  the  same  as saying  the                                                               
disparate treatment  was reasonable.   Moreover, when  the Alaska                                                               
Supreme Court  examines the equal  protection claims  it examines                                                               
"the  purpose served  by the  challenged statute"  which was  the                                                               
requirement  of  local contributions  on  the  part of  municipal                                                               
school  districts.   Interestingly,  he  noted,  rather than  the                                                               
court  applying  the  three-part  test  to  the  purpose  of  the                                                               
challenged statute,  it reviewed the  entire body of  law dealing                                                               
with the foundation  formula.  He opined that in  the Mat-Su, the                                                             
borough chose a cost saving  strategy of attacking the statute on                                                               
its  face  and there  was  no  evidence  provided by  the  Mat-Su                                                               
Borough of  the denial of  educational opportunities  and minimal                                                               
facts were presented  with respect to tax payer  inequity.  There                                                               
were no facts  showing disparities among school  districts and no                                                               
challenge of  highly inaccurate facts stated  by witnesses called                                                               
by the State  of Alaska.  In  the end, he noted,  the cost saving                                                               
strategy  of  the  Mat-Su  Borough failed  and  the  analysis  of                                                               
Attorney  Bob  Hicks  concluded  it  is  a  weak  and  vulnerable                                                               
precedent.                                                                                                                      
                                                                                                                                
3:02:02 PM                                                                                                                    
                                                                                                                                
MR. BOCKHURT opined that the vision  of the framers of the Alaska                                                               
State  Constitutional was  for the  state  to create  inducements                                                               
encouraging voluntary  incorporation of  boroughs.   However, and                                                               
on  the basis  of the  constitutional record  the Alaska  Supreme                                                               
Court concluded  that the constitution encourage  all intend that                                                               
the  formation of  boroughs organize  yet the  state has  offered                                                               
disincentives  and  dismay  with   respect  to  incorporation  of                                                               
organized boroughs.   Interestingly, after 55  years of statehood                                                               
more  than half  of Alaska  remains unorganized.   This  point is                                                               
clarified by the  fact that 95 out of 100  residents of organized                                                               
boroughs live in organized boroughs  that were formed as a result                                                               
of the 1963 Mandatory Borough  Act.  Former Governor Jay Hammond,                                                               
who served  in the  legislature during the  adoption of  the 1963                                                               
Mandatory Borough  Act, observed "Attractive enough  on paper, in                                                               
practice  the organized  borough  concept had  little appeal  for                                                               
most communities.  After all,  why should they tax themselves for                                                               
services  received  from the  state  in  gratis."   The  required                                                               
contribution imposed  on boroughs  is identified  by some  as the                                                               
greatest disincentive to  voluntary incorporation. He highlighted                                                               
that  the  guarantee  in  the  Alaska  Constitution,  Article  1,                                                               
Section 1, that  leaves no room for  interpretation or three-part                                                               
test of the  interests of taxpayers at the low  end of the scale.                                                               
The guarantee is found in 52 SLA 1963, as follows:                                                                            
     Chapter 52, SLA 1963                                                                                                       
                                                                                                                                
     "No area incorporated as an organized borough shall be                                                                     
     deprived of state services, revenues, or assistance or                                                                     
     be otherwise penalized because of incorporation."                                                                          
                                                                                                                                
MR. BORKHORST  opined that it  is undeniable today  that boroughs                                                               
are  severely penalized  because  of incorporation,  particularly                                                               
when  it comes  to funding  of basic  need.   During the  2/10/14                                                               
House Education  Standing Committee meeting it  was observed that                                                               
the legislature  amends laws all  the time and the  1963 promise,                                                               
which  exists in  the  uncodified  laws of  the  state, could  be                                                               
readily abolished by legislative  action whenever the legislature                                                               
chooses  to do  so.   However, the  state's citizens,  he opined,                                                               
rely on the guarantee when voting  to incorporate, as in the case                                                               
of Ketchikan, Juneau, Sitka, and  Kodiak, or take comfort if they                                                               
are  forced into  incorporation, as  was the  case in  Fairbanks,                                                               
Kenai, Anchorage and Mat-Su.  He  urged the committee to keep the                                                               
promise and support HB 245.                                                                                                     
                                                                                                                                
3:07:25 PM                                                                                                                    
                                                                                                                                
MR. BOCKHORST opined that at least the following five elements                                                                  
of the Alaska Constitution have been violated.                                                                                  
                                                                                                                                
Article I, § 1. Inherent Rights                                                                                                 
                                                                                                                                
     This constitution  is dedicated to the  principles that                                                                    
     all persons have a natural  right to life, liberty, the                                                                    
     pursuit of happiness, and the  enjoyment of the rewards                                                                    
     of their own  industry; that all persons  are equal and                                                                    
     entitled   to   equal    rights,   opportunities,   and                                                                    
     protection  under the  law; and  that all  persons have                                                                    
     corresponding  obligations to  the  people  and to  the                                                                    
     State.                                                                                                                     
                                                                                                                                
Article VII, §1. PUBLIC EDUCATION.                                                                                              
                                                                                                                                
     The  legislature shall  by  general  law establish  and                                                                    
     maintain  a  system  of  public  schools  open  to  all                                                                    
     children  of  the  State, and  may  provide  for  other                                                                    
     public    educational    institutions.   Schools    and                                                                    
     institutions   so  established   shall  be   free  from                                                                    
     sectarian control.  No money shall be  paid from public                                                                    
     funds for the direct benefit  of any religious or other                                                                    
     private educational institution.                                                                                           
                                                                                                                                
Article IX, § 7. Dedicated Funds.                                                                                               
                                                                                                                                
     The proceeds of  any state tax or license  shall not be                                                                    
     dedicated to  any special  purpose, except  as provided                                                                    
     in section 15  of this article or when  required by the                                                                    
     federal government  for state participation  in federal                                                                    
     programs.  This   provision  shall  not   prohibit  the                                                                    
     continuance  of  any  dedication for  special  purposes                                                                    
     existing upon the date of  ratification of this section                                                                    
     by the people of Alaska. [Amended 1976]                                                                                    
                                                                                                                                
Article II, § 15. Veto                                                                                                          
                                                                                                                                
     The governor may veto bills  passed by the legislature.                                                                    
     He   may,  by   veto,   strike  or   reduce  items   in                                                                    
     appropriation bills.  He shall return any  vetoed bill,                                                                    
     with a  statement of  his objections,  to the  house of                                                                    
     origin.                                                                                                                    
                                                                                                                                
Article IX, § 13. Expenditures                                                                                                  
                                                                                                                                
     No money  shall be  withdrawn from the  treasury except                                                                    
     in  accordance  with  appropriations made  by  law.  No                                                                    
     obligation for  the payment of money  shall be incurred                                                                    
     except    as    authorized    by    law.    Unobligated                                                                    
     appropriations outstanding at the  end of the period of                                                                    
     time specified by law shall be void.                                                                                       
                                                                                                                                
MR. BOCKHORST  pointed out that  the last three elements  are the                                                               
basis  of the  KGB  lawsuit.   He  referred  to  the "red  block"                                                               
[Ketchikan Gateway  Borough, Written  Testimony before  the House                                                             
Judiciary Committee  in Supportof HB 245,  Repealing the Required                                                             
Local   Contribution  to   School  Funding,   pages  2-5]   which                                                             
symbolizes  impairment  of  the   vision  of  the  constitutional                                                               
framers with respect to promotion  and strength of Alaska's local                                                               
government system, while also breaching  of the 1963 promise that                                                               
local governments would not be penalized.                                                                                       
                                                                                                                                
3:08:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  T. WILSON  clarified  that certain  REAAs do  pay                                                               
impact aid  into the formula.   With HB 245 [each  district] will                                                               
continue to  have a portion  of its impact aid  [credited] toward                                                               
the formula  as the districts  receive the same amount  of credit                                                               
for their  impact aid,  "although it  is different,"  she opined.                                                               
In response  to Chair Keller, Representative  T. Wilson explained                                                               
that   impact  aid   [supports   local   school  districts   with                                                               
concentrations of  children who reside on  Indian lands, military                                                               
bases,   low-rent   housing   properties,   and   other   federal                                                               
properties,  or who  have parents  in the  uniformed services  or                                                               
employed on eligible federal properties.  The law refers to local                                                               
school districts as local educational agencies, or LEAs].                                                                       
                                                                                                                                
3:09:46 PM                                                                                                                    
                                                                                                                                
CHAIR KELLER related  his understanding that the intent  is to be                                                               
in lieu  of property taxes  that would otherwise be  collected if                                                               
it was in private ownership.                                                                                                    
                                                                                                                                
REPRESENTATIVE  T.   WILSON  agreed  and  advised   [the  federal                                                               
government] pays  into areas  that may not  have property  tax or                                                               
personal taxes to  go with it, although some may  have sales tax.                                                               
She clarified that  HB 245 is not requesting every  area become a                                                               
borough, but if  there are to be more  boroughs the [legislature]                                                               
must incentivize and not penalize.                                                                                              
                                                                                                                                
3:10:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FOSTER,  referring to the remarks  that some REAAS                                                               
may have  per capita income similar  to other areas in  the state                                                               
that  are not  REAAs, pointed  out  that the  Wade Hampton  Area,                                                               
which would include  Emmonak and Hooper Bay, is in  an area where                                                               
its per capita  income is very low.   In fact, it  is the poorest                                                               
area of  the state.   Representative Foster suggested  that large                                                           
communities  would  receive  funds that  would  replace  property                                                               
taxes  that  would  go  toward   local  education.    He  further                                                               
suggested  that larger  communities  could  possibly lower  their                                                               
property taxes  and pass the  savings on to property  tax payers,                                                               
or  keep the  property  taxes the  same and  add  those to  local                                                               
schools.                                                                                                                        
                                                                                                                                
REPRESENTATIVE T.  WILSON interjected  there is a  certain amount                                                               
of  money that  can be  added to  local contribution,  but it  is                                                               
capped  by the  federal  government  to maintain  "equalization."                                                               
For example,  she explained, Fairbanks' portion  is approximately                                                               
$28 million and is shy $13  million for the cap, so theoretically                                                               
it could  take the $13 million  and "fill up" what  Fairbanks can                                                               
give as a local contribution.   However, Fairbanks cannot put the                                                               
remaining  $15  million toward  schools  as  it  is part  of  the                                                               
"equalization"  the  federal  government  determines  as  a  cap.                                                               
Representative  T. Wilson  related  that the  question was  asked                                                               
whether  in lieu  of  bonding  the money  could  go  to a  school                                                               
building, and the  answer was "not if it goes  over the amount of                                                               
the cap."   Hopefully, [the  federal government] would  give [the                                                               
money]  back to  Fairbanks; although  it  may be  put into  other                                                               
borough  needs   nothing  more  into  schools   for  equalization                                                               
purposes.                                                                                                                       
                                                                                                                                
3:12:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX noted the  equal protection clause in KGB's                                                               
[lawsuit]  is missing  and the  lawsuit  appears to  be based  on                                                               
taxes dedicated to a specific purpose.                                                                                          
                                                                                                                                
MR. BOCKHORST  agreed that  at this  point KGB's  litigation does                                                               
not  include  equal  protection   claims,  partly  due  to  KGB's                                                               
financial  concerns.    Regrettably,  he  expressed,  the  Mat-Su                                                             
precedence creates  an encumbrance  on [equal  protection claims]                                                               
and the  precedence would have  to be [overturned] in  a lawsuit.                                                               
He opined  that KGB  is not  a rich community  and thus  it chose                                                               
solid arguments that did not  have to overcome that precedent [of                                                               
equal protection].                                                                                                              
                                                                                                                                
3:15:14 PM                                                                                                                    
                                                                                                                                
SCOTT  BRANDT-ERICHSEN,  Attorney,   Ketchikan  Gateway  Borough,                                                               
confirmed that KGB's  claim doesn't pursue equal  protection.  He                                                               
then referred to  the red block [on the  model], which represents                                                               
an unconstitutional dedicated tax  because the money is dedicated                                                               
to education spending  and cannot be used for  any other purpose.                                                               
He noted  that federal impact aid  money does not go  through the                                                               
[constitutional] legislative appropriation process,  as it is not                                                               
appropriated and  the governor never  has an opportunity  to veto                                                               
it.   In KGB's case  the amount [of required  local contribution]                                                               
is $4.2 million  and based upon DEED's estimates  for fiscal year                                                               
2014,   the   statewide  amount   is   $221   million  which   is                                                               
approximately 2.5 times the next  largest type of tax revenue the                                                               
state  receives,  outside  of   petroleum  related  revenues,  he                                                               
explained.                                                                                                                      
                                                                                                                                
3:17:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX  reiterated that the  presentation appeared                                                               
to focus on the equal  protection argument, but the lawsuit there                                                               
does not include equal protection.                                                                                              
                                                                                                                                
MR. BOCKHORST stressed that equal  protection is actually driving                                                               
KGB's  lawsuit, but  due to  the Mat-Su  decision pursuing  equal                                                             
protection  claims would  significantly add  to the  cost of  the                                                               
lawsuit.   Therefore,  KGB determined  it would  focus on  issues                                                               
that are  impairments to the  circumstances and methods  by which                                                               
the state  is operating.   In further response  to Representative                                                               
LeDoux, he  opined [local  contribution] is  unfair and  a burden                                                               
for KGB  to backfill the state's  underfunding of basic need.   A                                                             
burden  which he  expects to  grow.   In  fact over  the last  20                                                               
years, it's  a burden that  has cost KGB  over $100 million.   He                                                               
remarked  that  KGB's taxes  are  significant  and the  [lawsuit]                                                               
attempts  to  establish  fairness  with  respect  to  funding  of                                                               
schools.                                                                                                                        
                                                                                                                                
3:19:05 PM                                                                                                                    
                                                                                                                                
MR. BRANDT-ERICHSEN  echoed earlier  remarks that  the motivation                                                               
behind the  lawsuit is  fairness.  He  related that  there aren't                                                               
many folks who  don't grasp the fairness concept;  the concern is                                                               
regarding the cost of the lawsuit.   He directed attention to the                                                               
spreadsheet  in member's  packets  depicting,  on a  district-by-                                                               
district  basis, how  much  each district  might  cost the  state                                                               
additionally   based  upon   EED's  fiscal   year  2014   budget.                                                               
Generally, the  total [underfunding of  the basic need]  is about                                                               
$199 million  and the  reason it  is less  than $221  million, he                                                               
explained, is  that the  state would  retain more  federal impact                                                               
aid.  Currently,  the state retains 90 percent  of federal impact                                                               
aid from  REAAs and  the remaining  10 percent  the REAAs  get to                                                               
keep is used  as an incentive for  REAAs to apply for  the aid so                                                               
otherwise the aid doesn't come  in and the state cannot intercept                                                               
it, he  remarked.  The  state withholds 90 percent  of "eligible"                                                               
impact  aid  for  municipal  districts  and,  he  explained,  the                                                               
eligible   amount  is   determined  by   a  ratio   of  voluntary                                                               
contributions to  all contributions.   He further  explained that                                                               
if the  state pays  all of  basic need, the  state would  take 90                                                               
percent  of the  federal  impact  aid from  all  districts.   The                                                               
amount  of federal  impact aid  Anchorage  and Fairbanks  retains                                                               
would be reduced  and all districts would be treated  the same at                                                               
90  percent of  the  total  amount of  federal  impact  aid.   He                                                               
advised that  it is completely  within the  legislature's purview                                                               
to change  the percentage  to any percentage  it prefers.   There                                                               
are similarities and differences, he  pointed out, in the Federal                                                               
Impact  Aid  Program,  and  Payments in  Lieu  of  Taxes  (PILT.)                                                               
Federal lands cannot be taxed and  PILT is a payment to counties,                                                               
local  governments in  lieu  of the  taxes  they would  otherwise                                                               
collect.    The Federal  Impact  Aid  Program bases  the  funding                                                               
related to federally connected children  and a portion of the tax                                                               
base is available  to fund education.  For  example, KGB receives                                                               
approximately  $1  million  in  PILT  funding  and  zero  funding                                                               
through the  Federal Impact Aid  Program.  He explained  that the                                                               
two programs  are distributed differently  in that are  REAAs and                                                               
municipal districts  that receive zero funds  through the Federal                                                               
Impact Aid Program, and other  REAAs and municipal districts that                                                               
receive huge  amounts of funding  through the Federal  Impact Aid                                                               
Program.  He noted  that  the only  objection  the committee  has                                                               
heard is,  "Where the money is  going to come from?"   From where                                                               
the  funding  will  come  is  something  KGB  cannot  advise  the                                                               
legislature about.                                                                                                              
                                                                                                                                
3:23:17 PM                                                                                                                    
                                                                                                                                
CHAIR KELLER questioned why is  Mr. Brandt-Erichsen so sure there                                                               
would   be  additional   state  funding   provided  because   the                                                               
constitution is  clear the state's  responsibility is  to provide                                                               
an open public school  system.  He opined that if  HB 245 were to                                                               
pass,  [the state]  would not  necessarily fill  the backfill  as                                                               
there could  be less overall  money distributed equitably  in the                                                               
state.   Furthermore, he stated, Mr.  Brandt-Erichsen presumes in                                                               
his statement  that the option  would be additional  funding from                                                               
the state.                                                                                                                      
                                                                                                                                
MR. BRANDT-ERICHSEN posited that  there are two relevant factors.                                                               
First,  he  pointed  out that  the  educational  funding  statute                                                               
includes a  provision for  a pro-rata reduction  if it  is short-                                                               
funded.   He explained that  if the  amount needed to  fully fund                                                               
basic need is "X" dollars  and the legislature provides "X" minus                                                               
"Y," the  shortage is spread  pro rata across all  the districts.                                                               
Secondly, if  the state has  to provide $200 million  to maintain                                                               
basic  need for  KGB  it  is probably  not  going  to receive  an                                                               
increase  in  per  student  funding,   or  as  much  supplemental                                                               
funding.     However,   the  aforementioned   depends  upon   the                                                               
legislature  and the  governor.   Based  upon KGB's  observations                                                               
this year,  the governor  is recommending  increases in  the base                                                               
student  allocation  over  a  three year  period.    Mr.  Brandt-                                                               
Erichsen  related his  belief that  the public,  legislature, and                                                               
governor place  a sufficient  value on  education as  compared to                                                               
other choices, and therefore it  is unlikely that education would                                                               
receive less than basic need funding  from the state at a time of                                                               
declining state revenue.                                                                                                        
                                                                                                                                
3:26:00 PM                                                                                                                    
                                                                                                                                
CHAIR KELLER posed  a scenario in which the  legislature made the                                                               
[visual  aid  block  area]   formula  equitable,  and  questioned                                                               
whether   federal  equity   laws  would   prevent  an   organized                                                               
municipality from adding [funding] to  the school system in their                                                               
area.  He further questioned  the effect of eliminating the local                                                               
contribution cap completely.                                                                                                    
                                                                                                                                
MR. BRANDT-ERICHSEN explained  that the cap is in  place and much                                                               
of the  current formula  is designed to  capture as  much federal                                                               
impact aid  as possible.   In 1985  when the current  formula was                                                               
adopted, federal  impact aid  totaled approximately  $100 million                                                               
and the state intercepted about  $60 million, which is similar to                                                               
today except that all of the  other costs have increased so there                                                               
is a greater consideration, he opined.   The state is required to                                                               
meet a disparity test statewide in  order to intercept any of the                                                               
money  and,  he  explained,  that by  eliminating  5  percent  of                                                               
students who  receive the least  amount of money together  with 5                                                               
percent of students who receive the  most amount of money, the 90                                                               
percent in  the middle must be  within 25 percent of  each other.                                                             
He  further explained  that basic  need is  the formula  everyone                                                               
receives  and  then  the voluntary  contribution  maximum  is  23                                                               
percent, and with  23 percent as a maximum there  is not a chance                                                               
of going over  25 [percent].  He continued that  state law limits                                                               
voluntary  contributions  to 23  percent  and  if that  limit  is                                                               
removed  municipalities  can  provide more.    Unfortunately,  he                                                               
advised,  one of  the  consequences  is that  if  the 25  percent                                                               
disparity  is exceeded  the  state could  no  longer intercept  a                                                               
portion of  the federal impact  aid and  it would go  directly to                                                               
the districts.                                                                                                                  
                                                                                                                                
3:28:35 PM                                                                                                                    
                                                                                                                                
CHAIR  KELLER  remarked that  if  the  state makes  an  equitable                                                               
distribution of  state funds,  the state  should be  eligible for                                                               
impact aid.   Furthermore, if impact aid is  delegated by federal                                                               
law for a certain criteria  of students, he questioned should the                                                               
state would  have to adjust  its equitable formula to  match [the                                                               
federal government].  He posed  a scenario that the state advises                                                               
the federal government [it did  not want federal impact aid], and                                                               
then the  state could  design a formula  that would  be equitable                                                               
for all  Alaskans taking  into account  [the seven  components of                                                               
basic need].   He surmised that the confusion factor  seems to be                                                               
focused on impact aid.                                                                                                          
                                                                                                                                
3:29:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  T. WILSON  explained  that this  is a  discussion                                                               
about  the basic  needs formula  that the  state put  into place.                                                               
"It would  not adjust  at all  with what we  are asking  how much                                                               
impact aid comes  into the state, it would not  at all affect the                                                               
additional  amount the  municipalities  do."   There are  changes                                                               
that  could be  implemented,  as  currently [municipalities  are]                                                               
bonding  70-30 and  once  that figure  is  equal the  legislature                                                               
could   determine   not   to    bond   with   municipalities   as                                                               
municipalities  would  be  receiving  additional  funding.    She                                                               
mentioned  that  she  has   been  advised  that  [municipalities]                                                               
attempt  to get  the money  back through  capital projects.   She                                                               
opined that the  state will never be equitable as  long there are                                                               
those  that are  governmental entities  and those  that are  not.                                                               
Currently,  for  the  REAAs,  the   state  takes  care  of  their                                                               
buildings as they are on  the capitol maintenance list because at                                                               
this point they  are not taxing in any fashion.   She pointed out                                                               
that there are  areas that could tax and areas  that could try to                                                               
tax, but  there would be very  little to tax not  just because of                                                               
the economy  because so much  of the  areas are federal  or state                                                               
lands.    She opined  that  Alaska's  founding fathers  preferred                                                               
organized areas as they add  extra money into education, maintain                                                               
most of their buildings even if it  is a 70-30 or 60-40 ratio, it                                                               
is money  the state does  not have to  [spend].  If  the ultimate                                                               
goal is to  be organized, the required  [local contribution] must                                                               
be addressed first, she opined.                                                                                                 
                                                                                                                                
3:32:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FOSTER related  his understanding  that the  base                                                               
student allocation  should guarantee a certain  level of funding.                                                               
He then  posed a scenario  in which HB 245  were to pass  and the                                                               
legislature  did  not  fully  fund  the  $200-plus  million  [for                                                               
education], and asked whether that  would result in the REAAs, as                                                               
in  the Wade  Hampton School  area, experiencing  a reduction  in                                                               
education funding.                                                                                                              
                                                                                                                                
REPRESENTATIVE T.  WILSON clarified  that currently if  the state                                                               
chooses  not  to  fully  fund the  formula,  [funding]  would  be                                                               
equally divided.   For example,  if HB  245 passes and  next year                                                               
[the  legislature]  determines the  [state]  can  only fund  $1.2                                                               
billion rather  than $1.6 billion,  that amount would  be divided                                                               
equally amongst all of the districts, she explained.                                                                            
                                                                                                                                

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