Legislature(2005 - 2006)SENATE FINANCE 532

04/04/2005 09:00 AM FINANCE

Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Scheduled But Not Heard
Moved CSSB 93(FIN) Out of Committee
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
9:27:02 AM                                                                                                                    
     SENATE BILL NO. 155                                                                                                        
     "An  Act  making  appropriations   from  the  earnings  reserve                                                            
     account  for construction of  an integrated science  complex at                                                            
     the University  of Alaska in Anchorage, for replacement  of the                                                            
     virology   laboratory  in  Fairbanks,  for  expansion   of  the                                                            
     Anchorage Museum of  History and Art, for the major maintenance                                                            
     grant  fund,   and  for  other  capital  projects   related  to                                                            
     education; and providing for an effective date."                                                                           
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
SENATOR  BEN STEVENS,  sponsor  of  the bill,  testified  this  bill                                                            
specifically funds  construction $142 million to address  the entire                                                            
list of  statewide  deferred maintenance  projects  compiled by  the                                                            
Department  of  Education  and  Early  Development.  Secondly,  this                                                            
legislation  appropriates money for  new construction of  elementary                                                            
schools statewide.  These projects  were selected based on  location                                                            
in school districts that  have experienced population growth as well                                                            
as  student  population  growth. Consideration   was also  given  to                                                            
projects located in areas  in which rapid growth is anticipated as a                                                            
result of  construction of  a natural gas  pipeline and exploration                                                             
and development of the Arctic National Wildlife Refuge.                                                                         
Senator  B.  Stevens continued  that  this  legislation  would  also                                                            
provide funding  for University of Alaska projects  and appropriates                                                            
$5 for the Anchorage Museum of History and Art.                                                                                 
Senator   B.  Stevens   informed   that   the  funding   for   these                                                            
appropriations is entirely  from the earnings reserve account of the                                                            
Alaska Permanent Fund.                                                                                                          
Senator  B. Stevens referenced  charts provided  showing  population                                                            
growth  in areas  of  the state,  including  the  Matanuska  Susitna                                                            
valleys [copies on file.]                                                                                                       
9:30:40 AM                                                                                                                    
Co-Chair Green  clarified this legislation would fund  every project                                                            
included  on  the Department  of  Education  and  Early Development                                                             
deferred maintenance list.                                                                                                      
Senator B. Stevens affirmed all 78 projects are included.                                                                       
Co-Chair  Green  asked  if  funding  for  all deferred  maintenance                                                             
projects has ever been provided in one appropriation.                                                                           
Senator B. Stevens was unaware of a previous instance.                                                                          
Co-Chair  Green  noted  Senator  Hoffman  affirmed  this  has  never                                                            
9:31:26 AM                                                                                                                    
Senator  Stedman asked  the length  of  time to  "build up"  another                                                            
deferred  maintenance project  list. He asked  if consideration  has                                                            
been  given to  a scheduled  maintenance  plan to  eliminate  future                                                            
deferred maintenance  needs. This  would avoid another onerous  list                                                            
with schools in disrepair.                                                                                                      
9:32:26 AM                                                                                                                    
Senator  B. Stevens  deferred  to the  Department  of Education  and                                                            
Early Development.                                                                                                              
9:32:39 AM                                                                                                                    
Senator B.  Stevens noted  that each year  a certain portion  of the                                                            
maintenance  list  is funded.  School  districts  identify  deferred                                                            
maintenance projects  and apply to the Department  for consideration                                                            
and priority ranking.  He did not know how rapidly  the project list                                                            
would be regenerated.                                                                                                           
9:33:11 AM                                                                                                                    
Co-Chair Wilken  recalled in 1997 or 1998 the legislature  adopted a                                                            
provision  requiring  school  districts  to develop  a preventative                                                             
maintenance  plan  in order  for deferred  maintenance  projects  to                                                            
qualify for State funding.                                                                                                      
9:34:51 AM                                                                                                                    
Co-Chair  Green asked  if the  State has  the ability  to  determine                                                            
whether  appropriated funding  has been expended  for the  specified                                                            
9:35:04 AM                                                                                                                    
Co-Chair Wilken  understood the Department  has this oversight,  but                                                            
was unsure of the details.                                                                                                      
9:35:14 AM                                                                                                                    
Co-Chair Green  expressed interest in including such  a provision in                                                            
this legislation for monitoring  projects. Some school officials are                                                            
express interest in securing  State funding for projects but have no                                                            
interest in reporting back to the Department.                                                                                   
9:36:03 AM                                                                                                                    
Senator  Hoffman applauded  Senator B. Stevens  for presenting  this                                                            
bill.  This proposal  would  save  the State  "several  millions  of                                                            
dollars" in the  future. Maintaining and improving  facilities would                                                            
extend their live expectancy.                                                                                                   
9:36:51 AM                                                                                                                    
Senator  Stedman  spoke  to his  past  experience  with maintenance                                                             
issues. Due to budget constrains,  the Sitka School District did not                                                            
maintain its  facilities. As a result  the Borough assembly  removed                                                            
that function from the Board's authority.                                                                                       
9:38:04 AM                                                                                                                    
Co-Chair  Green noted  that several  local governments  have  "cross                                                            
purposes"   with   different   entities   in  charge   of   facility                                                            
9:38:22 AM                                                                                                                    
Co-Chair Wilken  agreed. He told of his participation  in a deferred                                                            
maintenance  task force in  which he traveled  to different  schools                                                            
and made  a comparison of  the condition  of different schools  some                                                            
within the  same district. The issue  is not a matter of  money, but                                                            
rather of attitude.                                                                                                             
9:39:34 AM                                                                                                                    
Senator Bunde  commented to  the mentality  that residents  are less                                                            
inclined  to  maintain  a  facility   they  did  not  contribute  to                                                            
financially.  He indicated the next  bill on the Committee's  agenda                                                            
could assist in overcoming this.                                                                                                
Senator Bunde  clarified the intent is to utilize  earnings from the                                                            
Alaska Permanent Fund for this appropriation.                                                                                   
9:41:17 AM                                                                                                                    
Senator B. Stevens  listed the three justifications  for his efforts                                                            
on this bill.  The proposed projects  are nonrecurring expenditures                                                             
and would not require ongoing  funding from this source. It could be                                                            
argued that  deferred maintenance  is an  ongoing service;  however,                                                            
this  legislation  does  not  stipulate  continued  appropriations.                                                             
Secondly,  this  is an  investment.  The  Alaska Permanent  Fund  is                                                            
viewed  as an  investment  fund and  the  earnings have  never  been                                                            
expended for any  purposes other than investments.  Past investments                                                            
have been made  for a monetary return;  this would be an  investment                                                            
in educational facilities  and would provide an intellectual return.                                                            
It  is important  to  invest in  these  facilities that  provide  an                                                            
intellectual return. Lastly,  the Alaska Constitution mandates these                                                            
funds  be deposited  into the State  general  fund unless  otherwise                                                            
provided for  in statute. Current  statute provides that  funds from                                                            
the earnings  reserve account  must first  be utilized to  inflation                                                            
proof the Fund with excess  earnings available for allocation at the                                                            
discretion  of the  legislature. Past  legislatures  have chosen  to                                                            
invest the funds for monetary return.                                                                                           
9:44:18 AM                                                                                                                    
Senator  Bunde  asking that  this  information  be conveyed  to  the                                                            
public to promote understanding  of this philosophy. He indicated he                                                            
is a cosponsor of this legislation.                                                                                             
Senator Bunde stated that  investments, dividends, and hold harmless                                                            
provisions  are appropriate  uses  of the earnings  reserve  account                                                            
funds. Constitutionally  these are State funds and  are no different                                                            
than  oil revenues  or other  revenues  generated by  the State.  He                                                            
countered the argument  that proceeds from the Alaska Permanent Fund                                                            
should not  be spent without  a public vote  by contending  that all                                                            
State appropriations  should therefore require such  voter approval.                                                            
Every year the legislature expends excess earnings of the Fund.                                                                 
9:46:17 AM                                                                                                                    
Senator Hoffman noted the  sponsor statement reference to the effect                                                            
of  this legislation  on  dividend  payments,  which is  likely  the                                                            
highest  concern of  citizens.  The impact  would be  less than  one                                                            
percent,  or a $10 reduction  to the amount  of the previous  year's                                                            
dividend payment.                                                                                                               
9:47:09 AM                                                                                                                    
Senator B.  Stevens stated he would  provide further details  on the                                                            
calculations [copy on file.]                                                                                                    
Senator  B.  Stevens  clarified  these  calculations   are  "forward                                                            
looking", explaining that  the one-percent impact on dividends would                                                            
be an  impact on  the distribution  of future  dividends, as  growth                                                            
rates would  not be as  high. He cited information  provided  by the                                                            
Division  of  Legislative   Finance,  "the  impact   on  the  future                                                            
distribution over the next  15 years is anticipated under the status                                                            
quo … would be  $29,690 in distributions." If this  legislation were                                                            
implemented  and this "one-time  draw" were  made from the  earnings                                                            
reserve account,  the distribution  is estimated to be $29,393.  The                                                            
total reduction  would therefore  be $297  in future distributions.                                                             
Dividends  would   continue  to  increase  from  royalty   deposits,                                                            
inflation-proofing  the principal  of the  Fund would continue,  and                                                            
with  prudent  management,  the  Fund would  continue  to  grow.  He                                                            
informed  that  over the  15  years  an individual  is  educated  in                                                            
kindergarten through college,  that individual would receive $29,000                                                            
from the State.  These are conservative  estimates. The question  as                                                            
to whether this is a prudent investment is justified.                                                                           
9:50:19 AM                                                                                                                    
Senator Stedman  wanted elaboration on the history  of utilizing the                                                            
Alaska Permanent  Fund for  capital appropriations  versus  on-going                                                            
operation  expenses.  He  pointed  out  the significant   difference                                                            
between  these expenses.  He  also requested  clarification  on  the                                                            
differences  of  debt  versus  equity  financing.  This legislation                                                             
essentially  proposes to "pay cash"  for these projects,  as opposed                                                            
to borrowing money to fund the projects, which is "not free".                                                                   
9:51:21 AM                                                                                                                    
Senator B. Stevens replied  that a capital expenditure is a one-time                                                            
expense  not  a  baseline  number  for  future appropriations.   The                                                            
operating  budget  uses  a management   plan to  create  an  ongoing                                                            
funding  source  to provide  a  steady  stream  of funds  for  State                                                            
services. This legislation  is a one-time appropriation bill with no                                                            
expectation  to continue the following  year. The proposed  projects                                                            
are worthy of this funding source.                                                                                              
9:53:22 AM                                                                                                                    
Senator B. Stevens  continued that certain projects  are "worthy" of                                                            
debt financing,  while others  should be funded  with cash.  None of                                                            
the proposed  projects are  to "cash generating"  facilities.  Roads                                                            
would  generate  commerce  from  freight  transports  and  commuters                                                            
traveling  to jobs.  The  proposed projects  provide  education  for                                                            
students. This  funding source would allow the proposed  projects to                                                            
be completed earlier.  An argument could be made that  the funds are                                                            
currently  invested  to  earn  money and  would  not  earn  interest                                                            
through this  appropriation. However,  funding would be required  to                                                            
pay for the  projects or to pay off  debt incurred to undertake  the                                                            
projects. Investing equity  into an "instrument" that earns money is                                                            
sensible; investing equity  into a facility that does not make money                                                            
only increases the debt.                                                                                                        
9:56:11 AM                                                                                                                    
Co-Chair  Green  recalled  calculations  done  on  a  separate  bond                                                            
proposal of $350 million  paid out over 20 years estimated a debt of                                                            
$600 to $700 million  over the life of the bonds.  The interest owed                                                            
on bonds  issued  for these  projects could  impede  the ability  to                                                            
undertake new projects.                                                                                                         
9:57:02 AM                                                                                                                    
Co-Chair  Wilken   appreciated  Senator  B.  Stevens'   efforts  and                                                            
recognizing  that the  State has the  capacity to  pay for  projects                                                            
without debt  financing. Conditions  may not be as favorable  in the                                                            
future and efforts should  be made to ensure that future generations                                                            
are not encumbered.                                                                                                             
Co-Chair Wilken  emphasized that appropriations  would be  made from                                                            
the earnings  reserve account  after the  Fund is inflation  proofed                                                            
and after dividends are  paid. He acknowledged that constituents are                                                            
concerned about  reduced dividends,  but stressed that once  this is                                                            
explained to  them, they understand.  Many mistakenly predict  their                                                            
annual  dividend  would be  reduced  significantly,  at about  $900;                                                            
however,  the actual  reduction  is approximately  $42.  This is  an                                                            
investment  he could accept for "building  Alaska". This  requires a                                                            
change in "how we view  Alaska" but Alaskans have a fund of billions                                                            
of  dollars to  benefit  600,000 people,  which  no  other state  or                                                            
country has.  This presents a "daunting responsibility."                                                                        
10:00:51 AM                                                                                                                   
Senator Bunde compared  this legislation to personal finances. It is                                                            
illogical to incur maximum  debt on personal credit cards if one has                                                            
sufficient  funding in  a bank  account. He  expressed concern  that                                                            
Alaska could  become akin to an eccentric  who dies in poverty  with                                                            
millions of dollars stuffed into a mattress.                                                                                    
10:01:58 AM                                                                                                                   
Senator  Stedman  referenced  a  table  titled,  "State  of  Alaska,                                                            
Department of  Education and Early Development, Capital  Improvement                                                            
Projects  (FY 2006),  Major  Maintenance  Grant Fund,  Final  Agency                                                            
Decision" dated  March 11, 2005 [copy on file] that  lists the total                                                            
cost  of  the  projects  at  $187  million.  He  noted  the  sponsor                                                            
statement   includes   a  list   of   "K-12  Maintenance   and   New                                                            
Construction"  totaling over $212 million. He understood  the intent                                                            
of  this   legislation   to  address   every   identified   deferred                                                            
maintenance project  and asked about the additional  $25 million. He                                                            
agreed to  the necessity  to prioritize investment  in areas  of the                                                            
State  with increasing  student  population growth  and anticipated                                                             
future  growth as  a result  of the  construction of  a natural  gas                                                            
10:03:16 AM                                                                                                                   
Senator B.  Stevens replied that appropriations  made in  Sections 1                                                            
and 2  of the legislation  equal  $212 million.  Section 2 lists  14                                                            
specific  projects.  Section  3  appropriates  funding  to  for  the                                                            
construction of  a virology laboratory managed by  the University of                                                            
Alaska, Fairbanks. Section  4 appropriates funding to the University                                                            
of Alaska for  projects at various campuses. Section  5 appropriates                                                            
funding for the Anchorage Museum of History and Art.                                                                            
10:04:32 AM                                                                                                                   
Senator Stedman  calculated this legislation would  appropriate $141                                                            
million  for deferred  maintenance  projects,  $80  million for  new                                                            
construction  of schools, the University  of Alaska and the  museum.                                                            
Senator B. Stevens affirmed.  The University of Alaska would receive                                                            
$119 million, $80 million  would be appropriated for construction of                                                            
new K-12 facilities,  approximately  $142 would be appropriated  for                                                            
deferred maintenance, and $5 million for the museum.                                                                            
10:05:32 AM                                                                                                                   
Senator   Stedman  commented   that   in  the   past,  some   school                                                            
construction   has   been  undertaken   without   consideration   to                                                            
population changes. He  agreed with the concept of directing capital                                                            
to  areas with  population  growth  and not  stagnant  or  declining                                                            
populations.  "There  is  only so  much  money  to go  around."  The                                                            
distribution proposed in  this legislation is fair and would address                                                            
areas experiencing  population growth much quicker  than would occur                                                            
if past practices were continued.                                                                                               
10:06:47 AM                                                                                                                   
Senator  Olson noted  the proposed  projects listed  in the  sponsor                                                            
statement are  not all maintenance  and deferred maintenance  items,                                                            
but  also include  new  construction,  which he  considered  capital                                                            
10:07:18 AM                                                                                                                   
Senator B.  Stevens replied  that the list  of deferred maintenance                                                             
projects  is provided  separately  than the proposed  new  projects.                                                            
Individual new construction  projects are listed in Section 2 of the                                                            
10:07:48 AM                                                                                                                   
Senator  Olson  asked  that  although  such   withdrawals  from  the                                                            
earnings  reserve  account   are legal,   how  assurances  would  be                                                            
provided that future projects  would be as worthy and the draw would                                                            
not escalate in future years.                                                                                                   
10:08:24 AM                                                                                                                   
Senator B.  Stevens reiterated this  legislation is a "stand  alone"                                                            
capital appropriation  worthy of consideration. Future  legislatures                                                            
would have discretion  to make future withdrawals  from the account.                                                            
This is  not a binding  process. He intended  to utilize the  excess                                                            
earnings  of the  Fund for  an investment.  The "time  is right"  to                                                            
undertake these projects  in this manner, and circumstances could be                                                            
more or less favorable  in the future. These projects  are necessary                                                            
and the State has the resources to fund them.                                                                                   
10:09:37 AM                                                                                                                   
Senator  B.   Stevens  addressed   a  spreadsheet  titled,   "Alaska                                                            
Permanent Fund, Fund Financial  History & Projections, as of January                                                            
31, 2005"  [copy on file.]  Each year the  financial projections  of                                                            
the  that  FY  05 would  be  the  first  year  the  expenditure  for                                                            
inflation  proofing  the principal  of  the  Fund would  exceed  the                                                            
dividend  payout. The end  of year balance  is important because  of                                                            
concerns that  appropriation of the  earnings reserve account  would                                                            
affect dividend  distribution. The  balance of the earnings  reserve                                                            
account has  been "swept",  or transferred  to the principal  of the                                                            
Fund, seven  times and  has never  been used to  pay dividends.  The                                                            
appropriation  of this legislation  would be less than one-third  of                                                            
the excess amount in the account in the worst-case scenario.                                                                    
10:14:05 AM                                                                                                                   
Co-Chair  Wilken directed  attention  to the  total  balance of  the                                                            
Fund, which is expected to be $49 billion in FY 2015.                                                                           
Co-Chair Wilken  spoke of the upcoming  election year and  suggested                                                            
the Committee  members could campaign  for reelection on  a platform                                                            
that utilizing  a portion of the earnings reserve  account funds for                                                            
these projects  would have improved the condition  of the State at a                                                            
cost of $154  per person over ten  years of receiving approximately                                                             
$10,000 in  Permanent Fund dividends.  Some would argue this  amount                                                            
is too  high and  therefore  the question  is political.  If  voters                                                            
disapprove  of the decision to appropriate  these funds,  they could                                                            
vote for a different candidate.                                                                                                 
10:17:36 AM                                                                                                                   
Senator Olson  asked the source of the $49 billion  FY 15 projection                                                            
of the balance of the Permanent Fund.                                                                                           
10:18:00 AM                                                                                                                   
Co-Chair Wilken corrected the projected amount is $48 billion.                                                                  
10:18:13 AM                                                                                                                   
Senator  Olson expressed  concern  with the  projection,  cautioning                                                            
that  the situation  might not  be as  favorable in  the future.  In                                                            
constructing  new facilities,  maintenance  and  operation  expenses                                                            
would increase.  He cited the under funding of the  State retirement                                                            
system as an example of unforeseen circumstances.                                                                               
10:19:19 AM                                                                                                                   
Co-Chair Wilken agreed  that the situation could decline but pointed                                                            
out that during  the worst bear market since the 1930s,  the balance                                                            
of the Fund declined from  $26.5 billion to $23.5 billion. This loss                                                            
is inconsequential given the circumstances.                                                                                     
10:20:08 AM                                                                                                                   
Senator B.  Stevens informed that  endowments to the Permanent  Fund                                                            
are  dependant  upon  receipt  of  royalty  payments   from  natural                                                            
resource development. The  projected amounts of these royalties only                                                            
reflect  proven  oil reserves  and  production  of  those  reserves.                                                            
However,  efforts  continue  to  identify   and develop   additional                                                            
reserves. The  projected amounts do not include potential  royalties                                                            
as a result of  a natural gas pipeline, development  of resources in                                                            
the  Arctic  National  Wildlife  Refuge  (ANWR)  or  other  sources.                                                            
Therefore,  future  royalty  projections   are significantly   under                                                            
10:21:55 AM                                                                                                                   
Co-Chair Green  reported a student  population growth in  the Mat-Su                                                            
School District  of 300 since October 2004. This places  pressure on                                                            
existing facilities.                                                                                                            
KIM FLOYD  of the Mat-Su  School District,  and a parent,  testified                                                            
via  teleconference  from  Mat-Su to  thank  the Committee  for  the                                                            
discussion, which  has informed her on this matter.  She would share                                                            
this information  with others.  She detailed  the growth in  student                                                            
population  and need  for three new  elementary  schools not  in the                                                            
future but for  today. Additional schools would be  needed in future                                                            
years.  She preferred  utilizing  funds  from the  earnings  reserve                                                            
account,  which  she  stated  she  would  "never  see"  rather  than                                                            
increased property taxes.  She spoke to a positive impact created by                                                            
investing  in  the   future.  She  pledged  her  support   for  this                                                            
10:24:50 AM                                                                                                                   
KRIS  MOORE, Wasilla  resident,  testified via  teleconference  from                                                            
Mat-Su  glad  to  the  growth  rate  in  the  area.   She  witnesses                                                            
development activities  daily. While she is privileged to live in an                                                            
area  with  potential,  some  issues must  be  addressed  to  ensure                                                            
quality of  life. She supported  this legislation  and the  proposed                                                            
funding source  for the listed  projects. She  intended to  speak to                                                            
others  about this bill.  It offers  a fiscally  responsible  way to                                                            
address these needs.                                                                                                            
10:26:55 AM                                                                                                                   
Co-Chair Wilken  asked if either of the previous two  witnesses were                                                            
elected officials.                                                                                                              
Ms. Moore  informed she  is a mother,  a student  at "Mat-Su"  and a                                                            
member of the community.                                                                                                        
Ms. Floyd listed her title  as the Public Information Specialist for                                                            
the Mat-Su  School  District,  although her  role as  mother of  two                                                            
elementary-school aged students is primary.                                                                                     
10:27:31 AM                                                                                                                   
Co-Chair Wilken  understand the needs  of the Matanuska and  Susitna                                                            
valleys area. He questioned  the decision of the local government to                                                            
not  issue   bonds  to   fund  additional   school  facilities   and                                                            
expansions.  This  is  an  appropriate   question  for  the  elected                                                            
10:28:09 AM                                                                                                                   
Co-Chair  Wilken spoke of  preventative  maintenance, reminding  the                                                            
Committee of legislation  adopted in 1998 stipulating rules by which                                                            
grants for deferred maintenance  projects could be received from the                                                            
State.  These  rules  require  that  a  school  district  develop  a                                                            
preventative  maintenance  plan  acceptable  to  the  Department  of                                                            
Education   and  Early  Development.   The   plan  must  include   a                                                            
computerized  maintenance  management   program,  regular  custodial                                                            
care,  facilities   training,  energy  management,   and  renew  and                                                            
replacement  schedules.  Department  regulations  require that  each                                                            
school district  be visited one of  every five years. All  53 school                                                            
districts  have been visited  at least once  and the Department  has                                                            
issued  a report  titled,  "Preventative  Maintenance  State of  the                                                            
State,  Report  of   the  ADA  [Americans  With  Disabilities   Act]                                                            
Assessments and Related  Data" [copy not provided.] The preventative                                                            
maintenance  plans of six  districts do not  meet the five  criteria                                                            
necessary  to  receive  grants. If  the  Department  enforces  these                                                            
regulations,  premature  deferred   maintenance  projects  would  be                                                            
minimized.  Therefore,  the list  of proposed  deferred maintenance                                                             
projects would not "grow out of control" in the future.                                                                         
10:30:46 AM                                                                                                                   
Co-Chair Green  clarified that additional  language in this  bill is                                                            
not necessary to address this matter.                                                                                           
10:30:56 AM                                                                                                                   
Co-Chair  Wilken  stated  that  "preventative   language"  could  be                                                            
10:31:11 AM                                                                                                                   
Co-Chair Green assigned Co-Chair Wilken to draft this language.                                                                 
10:31:36 AM                                                                                                                   
Co-Chair Green ordered the bill HELD in Committee.                                                                              

Document Name Date/Time Subjects