Legislature(2021 - 2022)BUTROVICH 205

05/03/2021 01:30 PM Senate JUDICIARY

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         SJR 5-CONST. AM: APPROP LIMIT; BUDGET RESERVE                                                                      
1:59:36 PM                                                                                                                    
CHAIR  HOLLAND  announced  the   consideration  of  SENATE  JOINT                                                               
RESOLUTION  NO. 5,  Proposing amendments  to the  Constitution of                                                               
the  State of  Alaska  relating to  an  appropriation limit;  and                                                               
relating to the budget reserve fund.                                                                                            
2:00:35 PM                                                                                                                    
NEIL STEININGER, Director, Office  of Management & Budget, Office                                                               
of the  Governor, Juneau, Alaska,  stated that OMB created  a new                                                               
graph in response to a request  at the hearing on April 30, 2021.                                                               
The question was about the  current constitutional spending limit                                                               
and setting its  base at $2.5 billion. OMB adjusted  the graph to                                                               
depict the spending limit in FY 1982 more clearly.                                                                              
2:01:11 PM                                                                                                                    
CAROLINE SCHULTZ, Policy Analyst,  Office of Management & Budget,                                                               
Office  of the  Governor,  Juneau, Alaska,  responded to  Senator                                                               
Hughes's  question in  an earlier  meeting  about whether  voters                                                               
believed they were  implementing a lower spending  limit than the                                                               
current spending levels.  The answer is no. This  was because the                                                               
current constitutional spending limit  in Article IX, Section 16,                                                               
excludes  capital appropriations.  She referred  to the  graph on                                                               
today's handout  that added  two more  lines. She  explained that                                                               
the  blue  line represents  the  UGF  Agency operations  and  UGF                                                               
Agency  +  statewide  [the  purple  line]  represents  the  total                                                               
operating  budget. She  said members  could see  that UGF  Agency                                                               
Operations  and  UGF  Agency  + Statewide  fall  well  below  the                                                               
constitutional spending limit.                                                                                                  
2:02:24 PM                                                                                                                    
SENATOR  KIEHL said  he was  interested in  the rationale  behind                                                               
limiting the budget to population  growth or inflation. It seemed                                                               
to him  if the state  experiences a growing economy  that happens                                                               
to  coincide  with  inflation, it  could  hamstring  the  state's                                                               
ability to  meet the needs of  an influx of population.  He asked                                                               
if it could be a combination of the two.                                                                                        
MR.  STEININGER  explained  that  the reason  for  selecting  the                                                               
"greater of  population or inflation"  was made by  examining the                                                               
existing  constitutional  spending limit.  Compounding  inflation                                                               
and population together in the  current spending limit results in                                                               
a  spending limit  that  grows much  faster  than is  reasonable,                                                               
compared to the growth and  need for state services. In examining                                                               
how to  set the proper  adjustor factor  on a spending  limit, it                                                               
mustn't be  so great  that it  will not  limit spending.  He said                                                               
that that is  the effect of compounding with  the state's current                                                               
spending limit. However, as Senator  Kiehl alluded to, it adjusts                                                               
and accounts for  things that create pressure  on state spending.                                                               
He  stated  that  both  population  and  inflation  could  create                                                               
pressure  on  the  cost of  providing  government  services,  one                                                               
through the  demand and the  other through the cost  of providing                                                               
those services.  However, compounding the two  is not necessarily                                                               
a  perfect  analogy  for  the  pressure  on  state  spending.  He                                                               
concluded that  was the reason  that the  greater of the  two was                                                               
selected.  It  would  ensure  that the  state  could  respond  if                                                               
significant  inflation  or  a   significant  jump  in  population                                                               
occurred. However, it would not create unconstrained growth.                                                                    
2:05:14 PM                                                                                                                    
SENATOR KIEHL acknowledged the effects  of compounding, such that                                                               
the  existing spending  limit compounds  from  a fixed  reference                                                               
year. Regardless  of what the  legislature spends, it  will rise.                                                               
He asked  the reason for  the approach of  the greater of  one or                                                               
the  other factor  when it  also changes  from a  fixed reference                                                               
year to a three-year average  of actual expenditures. He asked if                                                               
it would  prevent massive compounding  but still allow  the state                                                               
to deal with the actual needs.                                                                                                  
2:05:58 PM                                                                                                                    
MR. STEININGER stated that one thing  shown on the graph based on                                                               
the ten-year  plan is the  difference without a fixed  base using                                                               
the three-year average. This graph  shows the inherent difference                                                               
in  the spending  decisions  made  in any  given  year, he  said.                                                               
There's a  difference between  whether the  legislature continues                                                               
to constrain  spending, as shown  based on the ten-year  plan, or                                                               
if  the legislature  chooses to  maximize  spending. Suppose  the                                                               
legislature  decides to  maximize spending  using the  three-year                                                               
average.  In  that  case,  the   legislature  can  still  achieve                                                               
unconstrained growth by using compounding  factors. It allows the                                                               
legislature to continue spending  more each year, thereby driving                                                               
up the three-year  average. At that point,  the legislature would                                                               
still have  the ability to  achieve less constrained  growth even                                                               
though it's  not using the  fixed base. Using  compounding allows                                                               
the expenditure maximization scenario  to be less constrained, as                                                               
shown  on the  graph.  It will  be more  aligned  to the  state's                                                               
actual  spending because  of the  three-year  average. This  also                                                               
assumes that future legislatures  and executive branches will try                                                               
to   maximize  their   expenditures.  Although   that  does   not                                                               
necessarily pose a high risk, it  is something to consider as the                                                               
legislature calculates a spending cap in SJR 5.                                                                                 
2:07:45 PM                                                                                                                    
SENATOR KIEHL  stated that  he also  did not  think the  risk was                                                               
that high  unless there was  a genuine need for  additional state                                                               
2:08:00 PM                                                                                                                    
SENATOR MYERS  recalled at  the previous  hearing he  agreed that                                                               
the $1  billion in  federal COVID-19  funding qualified  as money                                                               
received  from a  non-state source  for a  specific purpose.  The                                                               
legislature will need to decide  whether to use the extra billion                                                               
of  federal  funding  to  backfill  the deficit  or  use  it  for                                                               
programs.  For  example,  the governor  has  discussed  providing                                                               
relief  for tourism  businesses.  If the  state  were to  receive                                                               
future windfall monies from outside  the state's funding sources,                                                               
it  seems as  though it  would  create a  perverse incentive.  It                                                               
essentially translates  to "what is  beneficial in the  short run                                                               
is not beneficial in the long run."                                                                                             
MR.  STEININGER acknowledged  that  the  administration has  been                                                               
considering how to  cope with that type of  situation. He pointed                                                               
out that the state routinely  receives some discretionary federal                                                               
revenues, but  it typically  represents a  rounding error  in the                                                               
overall federal  funding. These funds are  not significant enough                                                               
to  take  into consideration,  he  said.  However, it  should  be                                                               
considered  since the  state currently  faces that  situation. As                                                               
SJR 5 is currently written,  if the federal funding were entirely                                                               
used  to offset  general fund  expenditures, it  would lower  the                                                               
three-year  average, creating  a perverse  incentive in  terms of                                                               
how to allocate the federal funds.                                                                                              
2:12:17 PM                                                                                                                    
SENATOR HUGHES  referred to the  chart that shows the  effects of                                                               
the constitutional  spending limit from  FY 1982 to FY  2022. She                                                               
said  the legislature  did not  foresee that  the spending  limit                                                               
would constrain spending but allow  for astronomical increases in                                                               
per capita spending. She wondered  why the voters thought passing                                                               
the  constitutional amendment  was  the right  thing  to do.  She                                                               
asked  if  he  had  any  background  information  on  the  ballot                                                               
measure, including voting statistics on the measure.                                                                            
MR. STEININGER deferred to Mr. Milks.                                                                                           
2:14:25 PM                                                                                                                    
WILLIAM MILKS,  Senior Assistant Attorney General,  Legislation &                                                               
Regulations Section,  Civil Division, Department of  Law, Juneau,                                                               
Alaska,  explained that  whenever a  constitutional amendment  is                                                               
before  the voters,  it  is included  in  the election  pamphlet,                                                               
which  is sent  to all  the  voters. The  Division of  Election's                                                               
pamphlet  will   describe  the   proposed  ballot   measure.  The                                                               
legislative  affairs agency  prepares  a summary  of the  changes                                                               
proposed  in  the  constitutional amendment.  The  pamphlet  also                                                               
contains a  statement in favor  and a statement in  opposition to                                                               
the  amendment. He  did not  paraphrase  the 1982  constitutional                                                               
amendment  specifically,  but  the document  explained  why  some                                                               
residents  wanted  an appropriation  limit.  He  opined the  1982                                                               
voter pamphlet would be the best source document.                                                                               
2:16:21 PM                                                                                                                    
MR.  MILKS said  Senator Hughes  posed a  question at  a previous                                                               
hearing on  SJR 5. She asked  whether the language of  the entire                                                               
constitutional amendment  is on  the ballot  that voters  have in                                                               
the voting booth. He answered no,  it is not. Instead, the ballot                                                               
contains an  impartial summary  of the  constitutional amendment.                                                               
The  Division  of  Elections'  polling  place  posts  the  entire                                                               
constitutional  amendment language.  The  Division of  Elections'                                                               
pamphlet mailed to  each voter also contains the  language of the                                                               
constitutional  amendment,  a  neutral summary,  a  statement  in                                                               
support and a statement in opposition to the amendment.                                                                         
SENATOR  HUGHES  related  her understanding  that  in  1982,  the                                                               
legislature  was  concerned   about  overspending.  She  surmised                                                               
legislators must  not have  had projections.  She stated  she was                                                               
just handed information  on the November 1982 vote;  the vote was                                                               
61  percent  in  favor  and  31  percent  in  opposition  to  the                                                               
constitutional amendment limiting increases in appropriations.                                                                  
2:18:01 PM                                                                                                                    
CHAIR HOLLAND  related his understanding that  the Constitutional                                                               
Budget Reserve (CBR) would become  a nonissue once Art. IX, Secs.                                                               
17 (c) and 17  (d) are repealed and the spending  cap is in place                                                               
because  the  spending cap  applies  to  all spending,  including                                                               
spending from  the CBR.  Thus, the  language in  Sec. 3  could be                                                               
unnecessary. Further, the  language in Sec. 2  may be unnecessary                                                               
because without Secs.  17 (c) and 17 (d), there  is no difference                                                               
between monies  in the  CBR and  monies in  the general  fund. He                                                               
asked whether  all of Art. IX,  Sec. 17 should be  removed, or if                                                               
it should just maintain the supermajority vote for access.                                                                      
MR.  STEININGER responded  that  he would  not necessarily  agree                                                               
that the  CBR no  longer becomes  relevant. It  would effectively                                                               
state that  certain revenues, as listed  in Art. IX, Sec.  17 (a)                                                               
will  be deposited  into  a  Rainy Day  Account,  which would  be                                                               
available for expenditures if ordinary  revenues to the state are                                                               
insufficient. The legislature could  access the Rainy Day Account                                                               
with a simple majority vote.  He characterized the current CBR as                                                               
a Rainy  Day Account but  with more stringent  access provisions.                                                               
SJR 5  will simplify  the access provisions  but retain  a formal                                                               
general fund Rainy Day Account.                                                                                                 
2:20:39 PM                                                                                                                    
SENATOR MYERS  expressed concern  about repealing Art.  IX, Secs.                                                               
17 (c)  and 17  (d) because  it was  likely that  the legislature                                                               
would cease repayments to the  CBR unless a windfall occurred. If                                                               
the  state encountered  future  hard times,  it  would enter  any                                                               
slumps without any reserves, he said.                                                                                           
2:22:53 PM                                                                                                                    
MR.  STEININGER  addressed the  concern  by  explaining that  the                                                               
state's ability to repay the  CBR is fairly constrained under the                                                               
current  revenue  projections.  The  state  does  not  anticipate                                                               
future years  with significant excess  revenue to repay  the CBR.                                                               
However,  that  is  not  necessarily   a  reason  to  remove  the                                                               
repayment  provision. He  explained  that SJR  5  would create  a                                                               
ceiling of  true constraints  on expenditures  in the  context of                                                               
other structures.  If the revenue  projections are wrong  and the                                                               
state  experiences increased  revenue,  an  expenditure cap  will                                                               
limit  the state's  ability  to spend  that  windfall. The  state                                                               
would need  to save it  or put  it somewhere. This  would provide                                                               
constrained options  for a revenue surplus,  including depositing                                                               
the funds  into the CBR  as a state  savings account. If  the CBR                                                               
becomes a more  formalized Rainy Day Savings  Account for revenue                                                               
downturns, it  would be  prudent to deposit  funds into  the CBR.                                                               
Once the state  resolves the other state fiscal  problems, it may                                                               
not be  necessary to  build the CBR  to $12  billion. Ultimately,                                                               
whether  to  erase  the  CBR  debt  is  a  policy  call  for  the                                                               
legislature and the people to make.                                                                                             
2:25:43 PM                                                                                                                    
CHAIR HOLLAND asked if Mr. Milks had any comments.                                                                              
MR. MILKS answered no.                                                                                                          
2:26:14 PM                                                                                                                    
SENATOR   KIEHL  recalled   that  in   1982,  when   the  current                                                               
constitutional  spending   limit  was  adopted,  the   state  had                                                               
experienced an average of 9  percent inflation per year for eight                                                               
years, four years of which exceeded 11 percent.                                                                                 
He  said it  is difficult  to think  of the  CBR as  a Rainy  Day                                                               
Account  once  the  constitution removes  the  restricted  access                                                               
provision. In reviewing  the language in SJR 5,  he found several                                                               
ways that the  legislature could drain the CBR. He  asked how the                                                               
CBR under  SJR 5 would  differ from the Statutory  Budget Reserve                                                               
(SBR) since both can be accessed with a simple majority vote.                                                                   
MR. STEININGER  agreed that the  SBR functioned similarly  to how                                                               
SJR 5 envisions the CBR from  an expenditure side. He stated that                                                               
the state  structurally needs  to have a  financial tool  such as                                                               
the  Rainy  Day  Account,  with  revenues  dedicated  to  it,  to                                                               
repopulate  itself. This  account could  be the  CBR as  drafted,                                                               
repopulating  the  SBR,  or  the  current  option  of  using  the                                                               
Earnings Reserve Account. The state  needs an account to use when                                                               
revenues are low. SJR 5 would  establish the CBR as that account,                                                               
he  said.  When revenues  are  lacking,  it  will take  a  simple                                                               
majority vote to  access the Rainy Day Account. He  would like to                                                               
discuss  any loopholes  to identify  if they  are what  the state                                                               
intended or drafting errors that need to be closed up.                                                                          
2:29:19 PM                                                                                                                    
SENATOR KIEHL  referred to a  Legislative Legal Memo  dated April                                                               
30, 2021,  that discusses the  significant reduction  of deposits                                                               
to the CBR  by deleting the word "directly." He  offered his view                                                               
that the Rainy Day Account will  not function as one if the state                                                               
significantly reduces funds deposited to  the CBR, making it easy                                                               
for the  legislature to  access with a  simple majority  vote. He                                                               
noted  that all  proceeds of  General Obligation  (GO) Bond  Debt                                                               
would  be  added  to  the   exemptions.  He  said  he  previously                                                               
expressed  concern about  the administration's  GO Bond  proposal                                                               
projects  because many  of the  projects were  appropriations for                                                               
routine  capital improvements.  He  expressed  concern that  this                                                               
exemption   would  encourage   maximizing  debt,   especially  as                                                               
revenues decline.                                                                                                               
MR. STEININGER  responded that it was  not necessarily maximizing                                                               
borrowing.  He  said  the  voters'  consent  through  the  ballot                                                               
measure process  inherent in GO Bonds,  so it is exempted  in SJR
2:31:46 PM                                                                                                                    
CHAIR HOLLAND  suggested allowing  spending above the  limit only                                                               
on  capital projects  and in  the same  manner used  for GO  Bond                                                               
MR.  STEININGER   responded  that  was  certainly   something  to                                                               
consider  when considering  the current  constitutional spending.                                                               
He  stated that  SJR 5  is drafted  to put  all capital  spending                                                               
under the cap.                                                                                                                  
2:32:30 PM                                                                                                                    
SENATOR HUGHES asked the administration  to provide a snapshot of                                                               
the state's current condition,  including the state's population,                                                               
economy and  operating budget spending compared  to other states.                                                               
He acknowledged  that Alaska has  unique challenges  and provides                                                               
services  in communities  that local  government would  typically                                                               
provide.  She  recalled some  studies,  including  the number  of                                                               
state  employees per  capita.  She offered  her  belief that  the                                                               
government  sector doesn't  produce any  wealth, but  the private                                                               
sector  supports  it. She  said  every  dollar drained  from  the                                                               
private sector to  support government is a dollar  that cannot be                                                               
used for  the economy. The multiplier  effect of a dollar  in the                                                               
private sector is greater than  the multiplier effect of a dollar                                                               
in the government sector. She said she would like documentation.                                                                
SENATOR  HUGHES asked  whether  the  legislature should  consider                                                               
addressing the  spending cap  in statutes and  not in  the Alaska                                                               
MR.  STEININGER answered  that  generally  speaking, placing  the                                                               
spending limit in  the Alaska Constitution creates  a hard limit;                                                               
the  statutory  spending  cap  likely  could  be  exceeded  by  a                                                               
legislative appropriation and would be less enforceable.                                                                        
2:36:28 PM                                                                                                                    
MR.  MILKS  agreed  with Mr.  Steininger  that  a  constitutional                                                               
spending limit is  binding and a statutory spending  limit is not                                                               
since the legislature retains the power of appropriation.                                                                       
2:37:03 PM                                                                                                                    
SENATOR  HUGHES maintained  her  belief that  dollars that  swirl                                                               
around the  state, such as  government funds, do not  provide any                                                               
growth.  The  private  sector  dollars can  draw  money  in  from                                                               
outside Alaska  and strengthen Alaska's economy.  She offered her                                                               
belief that  the only value of  a statutory spending cap  is that                                                               
the constituents will react if the legislature exceeds it.                                                                      
2:37:55 PM                                                                                                                    
CHAIR  HOLLAND recalled  Senator Kiehl  raised the  issue at  the                                                               
last hearing on SJR 5. He  asked if narrowing the language "state                                                               
savings  account" to  language "an  appropriation  to the  budget                                                               
reserve fund"  or "appropriations  to the state  retirement trust                                                               
fund" would address that issue.  The term "state savings account"                                                               
was  broad  and a  subsequent  legislature  could create  another                                                               
state savings account not subject  to the constitutional spending                                                               
2:38:44 PM                                                                                                                    
MR.  STEININGER responded  that  such an  approach would  provide                                                               
more specificity. However, it is  hard to predict future accounts                                                               
that may  fund future  programs. For  example, the  Alaska Marine                                                               
Highway System  Fund revenues  are deposited  into that  fund and                                                               
the  legislature appropriates  from the  fund. It  is counted  as                                                               
spending when  an appropriation  is made  from the  account. When                                                               
the  AMHS  experiences  a  bad   revenue  year,  the  legislature                                                               
appropriates  additional  monies  into  the  fund.  Monies  being                                                               
appropriated  into the  fund  are not  counted  against the  cap.                                                               
Instead, those funds are merely  considered deposits to a savings                                                               
account. It  is counted  as spending  once expenditures  are made                                                               
from  the  account.   This  raises  the  issue   of  whether  the                                                               
appropriation would be  counted both times if it  will only count                                                               
when the  fund is spent for  services or when deposits  are made.                                                               
He   explained  that   listing   the  accounts   in  the   Alaska                                                               
Constitution  would  limit  the  ability  to  use  that  type  of                                                               
financial tool for future programs.                                                                                             
MR.   STEININGER  said   it  would   create   a  constraint   the                                                               
administration  does  not intend  in  SJR  5. He  clarified  that                                                               
deposits  to  some accounts  are  counted,  such as  the  Vaccine                                                               
Assessment Account, which is capitalized  with monies paid to the                                                               
state and  funds from the  state to pay for  purchasing vaccines.                                                               
Monies deposited  to the  account count  as spending  because the                                                               
Department of  Health and  Social Services  (DHSS) can  use those                                                               
funds to make bulk purchases.  When those purchases are made, the                                                               
state does  not count them  as expenditures. Thus, there  are two                                                               
ways to  address some  of the accounts.  It is  generally counted                                                               
when the funds are committed to  a specific purpose and cannot be                                                               
redirected.   The   AMHS   Fund    is   available   for   general                                                               
appropriation.  When the  monies are  deposited to  that account,                                                               
they are  not counted because  the legislature has  the authority                                                               
to spend it elsewhere.                                                                                                          
2:42:25 PM                                                                                                                    
SENATOR KIEHL  remarked that he  does not share  Senator Hughes's                                                               
view  on  private and  public  sector  spending. Alaskans  create                                                               
businesses that  innovate and generate efficiency,  which creates                                                               
economic  growth. He  disagreed that  dollars circulating  within                                                               
Alaska do not create growth.  Further, when companies and workers                                                               
earn money  in Alaska and  take it to the  Lower 48, it  does not                                                               
help Alaska's economy.                                                                                                          
2:43:27 PM                                                                                                                    
SENATOR  KIEHL  offered  that currently,  there  is  very  little                                                               
connection between economic activity  and support for the state's                                                               
economy, except corporate  income tax provides some  help. If the                                                               
state  maintains  this  model,  it  will  need  additional  state                                                               
services  when  it  experiences   good  economic  and  population                                                               
growth. He related  his understanding that one  incentive will be                                                               
to devolve  government services to  other levels. SJR 5  will not                                                               
limit total government  spending, just what comes  from the state                                                               
treasury. For example, suppose the  legislature decided it needed                                                               
$18 million  of spending authority.  In that case, it  could give                                                               
second-class  boroughs police  power  and cut  the entire  Alaska                                                               
State Trooper staff  from the Fairbanks North  Star Borough area.                                                               
It  would   essentially  shift  the   burden  to   the  Fairbanks                                                               
taxpayers.  He  asked  if that  would  provide  additional  state                                                               
2:44:57 PM                                                                                                                    
MR.  STEININGER  responded  that  if the  legislature  needed  to                                                               
generate additional  room to meet  a need, the  legislature would                                                               
need to  weigh that  against other  state expenditures.  It would                                                               
require  an offsetting  reduction, either  to the  trooper staff,                                                               
education,  or  other  services.  He explained  that  creating  a                                                               
constraint will limit government growth.  If the state would like                                                               
to add  a new program,  the legislature  would need to  find room                                                               
within the spending cap. The intent  is to limit new programs and                                                               
constrain government growth. This is  difficult to do as revenues                                                               
decline, he said.                                                                                                               
2:45:59 PM                                                                                                                    
SENATOR KIEHL expressed  concern that SJR 5 does  not institute a                                                               
spending cap on  government but instead it would  cap the state's                                                               
current spending.                                                                                                               
2:46:21 PM                                                                                                                    
CHAIR HOLLAND offered  his view that the  inflation adjustment in                                                               
SJR 5  is generous.  Over three years,  the cumulative  change in                                                               
inflation is about  7 to 9 percent allowable  growth. That figure                                                               
will  be applied  to the  three-year  average spending,  normally                                                               
about  2  to 3  percent  below  the  prior year's  spending.  The                                                               
current language allows budget growth  by more than inflation. He                                                               
asked whether  the cumulative growth  factor should be  two years                                                               
instead of three years.                                                                                                         
2:47:09 PM                                                                                                                    
MR.  STEININGER explained  that he  was interested  in additional                                                               
modeling using  a different  inflationary factor,  as shown  on a                                                               
graph.  He  offered to  report  back  to  the committee  using  a                                                               
different inflationary factor graph.                                                                                            
[SJR 5 was held in committee.]                                                                                                  

Document Name Date/Time Subjects
SJR 5 Legal memo.pdf SJUD 5/3/2021 1:30:00 PM