Legislature(2023 - 2024)BUTROVICH 205

04/05/2023 01:30 PM Senate JUDICIARY

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              SB  20-APPROPRIATION LIMIT; GOV BUDGET                                                                        
                 SJR  4-CONST. AM: APPROP LIMIT                                                                             
1:49:12 PM                                                                                                                    
CHAIR CLAMAN  announced the  consideration of  SPONSOR SUBSTITUTE                                                               
FOR  SENATE BILL  NO. 20  "An  Act relating  to an  appropriation                                                               
limit; relating  to the budget responsibilities  of the governor;                                                               
and providing for an effective date."                                                                                           
SPONSOR SUBSTITUTE  FOR SENATE JOINT  RESOLUTION NO.  4 Proposing                                                               
amendments to  the Constitution of  the State of  Alaska relating                                                               
to an appropriation limit.                                                                                                      
1:49:56 PM                                                                                                                    
SENATOR JAMES KAUFMAN,  District F, speaking as sponsor  of SB 20                                                               
and SJR 4, summarized the following sponsor statement:                                                                          
     SJR   4  and   SB  20   work  together   to  create   a                                                                    
     constitutional  and  statutory  framework  for  how  we                                                                    
     limit appropriations.  A spending limit was  one of the                                                                    
     elements  agreed  upon  by  Comprehensive  Fiscal  Plan                                                                    
     Working   Group  as   a   necessary   component  of   a                                                                    
     comprehensive fiscal plan.                                                                                                 
     Alaska   has  been   operating  without   an  effective                                                                    
     appropriation limit  for nearly 40 years,  resulting in                                                                    
     less  than-meaningful control  of  our state  spending.                                                                    
     The current limit  was enacted in 1982  when Alaska was                                                                    
     approaching  peak oil  production. The  timing of  this                                                                    
     cap's  passage,  plus   its  population  and  inflation                                                                    
     adjustment mechanism,  have made  the cap so  high that                                                                    
     it   no  longer   plays  any   role   in  capping   our                                                                    
     appropriations or spending.                                                                                                
     Successful  appropriation limits  have boundaries  that                                                                    
     meet  the  needs  of the  unique  way  that  government                                                                    
     operates;  the right  mix of  rigidity where  it counts                                                                    
     and flexibility  when and  where it's  needed. Alaska's                                                                    
     inflation   rate   often  varies   significantly   from                                                                    
     national  inflation  numbers,   our  tax  structure  is                                                                    
     unique,  and   our  spending   per  capita   is  wildly                                                                    
     different than  other states. If  Alaska bases  our cap                                                                    
     on any of  these factors, we risk  failure because that                                                                    
     formula does not meet our unique needs.                                                                                    
     SJR 4/SB 20 proposes a  new, functional cap which bases                                                                    
     its  formula on  a  five-year trailing  average of  our                                                                    
     private  sector   economic  performance;  specifically,                                                                    
     Real GDP minus government  spending, which measures the                                                                    
     value produced within our borders.                                                                                         
     By tying the  state's spending limit to  the success of                                                                    
     our   state's  private   economy,  the   government  is                                                                    
     incentivized  to support  policy that  will enable  the                                                                    
     growth  of our  private sector  economy if  there is  a                                                                    
     desire to  spend more on state  services. The five-year                                                                    
     trailing averaging of GDP will  moderate the effects of                                                                    
     our  economy's volatility,  leading  to stability  that                                                                    
     prevents  the worst  consequences of  drastic cuts  and                                                                    
     binge spending.  SB 20 would  set a  statutory spending                                                                    
     cap at the most recently  approved budget levels at the                                                                    
     time of drafting  and SJR 4 would  set a constitutional                                                                    
     upper  limit  that  gives   the  state  flexibility  to                                                                    
     respond to capital and unforeseen operational needs.                                                                       
     Our  Permanent  Fund  is a  tremendous  asset,  but  it                                                                    
     creates the  risk of Alaska becoming  a "financialized"                                                                    
     economy.  Instead of  maintaining commitment  to build,                                                                    
     add value,  and produce, we risk  becoming Alaskans who                                                                    
     wait  and passively  watch the  market  hoping for  the                                                                    
     best.  A  spending  limit tethered  to  GDP  creates  a                                                                    
     constructive  link  between  state government  and  our                                                                    
     private sector  ensuring that government does  not grow                                                                    
     past the private sector that it is meant to support.                                                                       
     Alaska needs  a strong link between  government and our                                                                    
     productive  economy before  it's too  late. We  have an                                                                    
     opportunity to solve our  biggest structural issues and                                                                    
     deliver  a better  future  for  all Alaskan's  centered                                                                    
     around our people's productive efforts.                                                                                    
1:54:21 PM                                                                                                                    
MATTHEW HARVEY, Staff, Senator James Kaufman, Alaska State                                                                      
Legislature, Juneau, Alaska, presented the sectional analyses                                                                   
for SJR 4 and SB 20 on behalf of the sponsor.                                                                                   
     SJR 4                                                                                                                  
     Section 1:                                                                                                               
     Amends Article IX,  sec. 16 of the  Constitution of the                                                                    
     State  of  Alaska  to  slightly  revise  appropriations                                                                    
     subject to  the limit  as well  as the  conditions that                                                                    
     determine  the  appropriation  limit.  Sets  a  maximum                                                                    
     statutory  cap  at  15%  of  Real  GDP  (not  including                                                                    
     government spending).                                                                                                      
        • Exceptions List [Article IX, Sec. 16]                                                                                 
        • Adds appropriations to the Alaska permanent fund                                                                      
          to exceptions list                                                                                                    
        • Moved from Appropriation Limit Section to                                                                             
          Exceptions List                                                                                                       
        • Adds Appropriation of GO Bond proceeds to                                                                             
          exceptions list                                                                                                       
        • Moved with slight variation from Appropriation                                                                        
          Limit Section to Exceptions List                                                                                      
        • Adds payment of principal  and interest on revenue                                                                    
          bonds to exceptions list                                                                                              
        • Adds 'appropriations  to a  state account  or fund                                                                    
          that  requires  a  subsequent  appropriation  from                                                                    
          that  account or  fund as  prescribed  by law'  to                                                                    
          exceptions list                                                                                                       
        • Adds 'appropriations  to meet a state  of disaster                                                                    
          declared by the governor  as prescribed by law' to                                                                    
          exceptions list                                                                                                       
        • Moved   from   Appropriation  Limit   Section   to                                                                    
          Exceptions List                                                                                                       
        • Appropriation Limit  Conditions [Article  IX, Sec.                                                                    
        • Adds (Appropriations  Not to Exceed)  a percentage                                                                    
          of the average Real  GDP (not including government                                                                    
          spending)  for  the first  five  of  the last  six                                                                    
          years. This measure of Real  GDP is as reported by                                                                    
          the  responsible federal  bureau and  expressed in                                                                    
          current dollars.                                                                                                      
        • Adds  language stating  that the  percentage shall                                                                    
          be established by a law  that is not enacted as an                                                                    
          appropriation  bill, or  15 percent,  whichever is                                                                    
        • Adds  language stating  that with  a 2/3  vote the                                                                    
          legislature  may appropriate  above the  statutory                                                                    
          limit, but  below the constitutional limit  of 14%                                                                    
          for capital improvements.                                                                                             
        • Removes Old  appropriation limit anchored  to $2.5                                                                    
          Billion + Pop. and  infl. (since 7/1/81) o Removes                                                                    
          language  reserving 1/3  for capital  projects and                                                                    
          loan appropriations.                                                                                                  
        • Removes    language     adding    exceptions    to                                                                    
          appropriations  subject  to  the limit  from  this                                                                    
          Appropriation Limit  Conditions section  and moves                                                                    
          these to the exceptions list section.                                                                                 
        • Removes specific language surrounding Capital                                                                         
          projects exemptions                                                                                                   
     Section 2:                                                                                                               
     Adds a  new section to  Article XV of  the Constitution                                                                    
     of  the  State  of  Alaska  (Schedule  of  Transitional                                                                    
     Measures), section  30, which sets an  'effective date'                                                                    
     of  the end  of the  fiscal year  immediately following                                                                    
     the next possible opportunity for  Alaskans to ratify a                                                                    
     proposed amendment to the constitution.                                                                                    
     Section 3:                                                                                                               
     Includes   the   provision  that   the   constitutional                                                                    
     amendments proposed  by this resolution must  be placed                                                                    
     before the voters at the next general election.                                                                            
     SB 20                                                                                                                  
     Section 1:                                                                                                               
     Amends AS  37.05.540(b) to conform  to changes  made by                                                                    
     SJR  4.  Changes  affect  the  list  of  appropriations                                                                    
     subject to  the limit  as well  as the  conditions that                                                                    
     determine   the   appropriation    limit.   Defines   a                                                                    
     calculation  for  an  appropriation  cap at  12%  of  a                                                                    
     trailing average of Real  GDP (not including government                                                                    
        • Exceptions List [37.05.540(b)]                                                                                      
          • Adds Appropriation of GO Bond proceeds to                                                                           
             exceptions list                                                                                                    
          • Adds payment of principal and interest on                                                                           
             revenue bonds to exceptions list                                                                                   
          • Adds 'appropriations to a state account or fund                                                                     
             that requires a subsequent appropriation from                                                                      
             that account or fund as prescribed by law' to                                                                      
             exceptions list                                                                                                    
          • Adds 'appropriations to meet a state of                                                                             
             disaster declared by the governor as prescribed                                                                    
             by law' to exceptions list                                                                                         
     • Appropriation Limit Conditions [37.05.540(b)]                                                                          
        • Adds (Appropriations Not to Exceed) 12% of the                                                                        
          average Real GDP (not including government                                                                            
          spending) for the first five of the last six                                                                          
        • Removes Old cap of 5% more than last year + the                                                                       
          change   in   population   and   inflation   since                                                                    
          beginning of preceding fiscal year                                                                                    
        • Removes language describing determination of                                                                          
          change in population based on annual estimate by                                                                      
        • Removes language describing change in inflation                                                                       
          based on CPI for all urban consumers for                                                                              
     Section 2:                                                                                                               
     Adds  a  new  subsection  (f)  to  AS  37.07.020  which                                                                    
     requires   a  comparison   of  the   governor's  budget                                                                    
     requests, supplemental requests,  and budget amendments                                                                    
     to the calculated appropriation limit.                                                                                     
     Section 3:                                                                                                               
     Repeals  AS 37.05.540(e)  due  to section  1  of SB  20                                                                    
     adding  disaster response  spending  to the  exceptions                                                                    
     list in subsection b.                                                                                                      
     AS  37.05.540(e)  Notwithstanding other  provisions  of                                                                    
     this  section,  appropriations  may be  made  from  the                                                                    
     budget reserve  fund needed by  the governor to  meet a                                                                    
     disaster.  In  this   subsection,  "disaster"  has  the                                                                    
     meaning given in AS 26.23.900.                                                                                             
     Section 4:                                                                                                               
     Adds a  new section to  Uncodified Law of the  State of                                                                    
     Alaska which  ensures that this act  is contingent upon                                                                    
     the ratification  of an amendment  to Article  IX, Sec.                                                                    
     16 of the Constitution.                                                                                                    
     Section 5:                                                                                                               
     Sets  an  'effective  date' of  the  beginning  of  the                                                                    
     fiscal  year immediately  following  the next  possible                                                                    
         opportunity for Alaskans to ratify a proposed                                                                          
         amendment to the constitution. Aligns with the                                                                         
     effective date in SJR 4.                                                                                                   
CHAIR CLAMAN asked Mr. Harvey to proceed with the PowerPoint                                                                    
2:00:31 PM                                                                                                                    
MR. HARVEY presented the PowerPoint presentation titled "GDP-                                                                   
Based Spending Cap." He began with slide 2, Appropriation                                                                       
Limits Overview."                                                                                                               
        • Structure of an appropriation limit                                                                                   
             o Exemptions List: Appropriations subject to                                                                       
               the limit The Appropriation Limit: Define                                                                        
               the calculation factor, starting point,                                                                          
               growth rate, and other limit mechanisms                                                                          
             o Other: Capital projects or other specific                                                                        
        • Current Appropriation Limit                                                                                           
             o Constitutional: Article IX, §16 (effective                                                                       
              in 1982) Statutory: AS 37.05.540(b)                                                                               
        • Types of Appropriation Limits                                                                                         
        • Proposed Appropriation Limit (SJR 4 / SB 20)                                                                          
2:01:47 PM                                                                                                                    
MR. HARVEY moved to slide 3, "Current Constitutional Limit."                                                                    
        • Constitutional: Article IX, §16 (effective in                                                                         
        • "Appropriations from the treasury made for a                                                                          
          fiscal  year shall  not  exceed $2,500,000,000  by                                                                    
          more  than  the  cumulative change,  derived  from                                                                    
          federal   indices  as   prescribed   by  law,   in                                                                    
          population and inflation since July 1, 1981.                                                                          
             o $2.5 B plus inflation and population growth                                                                      
               since 1982                                                                                                       
                  square4 Calculation for FY 21 would be about                                                                  
                    $9.8 billion.                                                                                               
        • At least 1/3 of limit reserved for Capital                                                                            
          Projects and Loans                                                                                                    
             o Can also break the limit for appropriations                                                                      
               to Permanent fund, capital projects if                                                                           
               signed by governor or approved by the                                                                            
               voters, and a state of disaster                                                                                  
2:02:49 PM                                                                                                                    
MR. HARVEY continued with slide 4, "Current Constitutional                                                                      
Limit: Exemptions.                                                                                                              
     "Expect  for appropriations  for Alaska  permanent fund                                                                    
     dividends,  appropriations  of revenue  bond  proceeds,                                                                    
     appropriations  required  to   pay  the  principal  and                                                                    
     interest    on    general   obligation    bonds,    and                                                                    
     appropriations  of  money  received  from  a  non-state                                                                    
     source  in  trust  for a  specific  purpose,  including                                                                    
     revenues of  a public enterprise or  public corporation                                                                    
     of  the  state  that issues  revenue  bonds...No  other                                                                    
     appropriation  in  excess of  this  limit  may be  made                                                                    
     except  to meet  a state  of disaster  declared by  the                                                                    
     governor as prescribed by law."                                                                                            
     o  Creates exemptions  for  fund  sources  as  well  as                                                                    
     o  Current limit  applies to  all  UGF, most  statewide                                                                    
        items, and some DGF items                                                                                               
     o  Excludes PFDs, bond proceeds, debt service payments,                                                                    
        non-State sources of revenue, public corporation                                                                        
        revenues, and disaster declarations                                                                                     
     o  School Bond Debt Reimbursement is  excluded from the                                                                    
2:03:40 PM                                                                                                                    
MR. HARVEY continued with slide 5, "Current Statutory Limit                                                                     
   • Enacted in 1986                                                                                                            
   • Based on appropriations made in a fiscal year, not for                                                                     
     a fiscal year                                                                                                              
     • Counts supplementals in the year appropriated, not                                                                       
   • Limits spending growth to population plus inflation                                                                        
     plus 5%                                                                                                                    
     • The use of both factors to calculate the limit has                                                                       
        caused the limit to outgrow effectiveness                                                                               
     • The timing of data for calculation of this limit                                                                         
        does not work well with the budget process. The                                                                         
      limit is not known before the annual budget process                                                                       
2:04:38 PM                                                                                                                    
MR. HARVEY moved to slides 6 and 7, "UGF Spending History." The                                                                 
timelines on the graphs depict milestones beginning with the                                                                    
North Slope oil flow initiated in FY 77. He pointed to FY 82,                                                                   
which displayed the passage of the Constitutional Spending                                                                      
MR. HARVEY moved to slide 8, "Proposed Appropriation Limit."                                                                    
     • Calculated by subtracting government spending from                                                                       
        historical State GDP values and adjusting for inflation                                                                 
     • Stability is improved by averaging these values over the                                                                 
        previous full five fiscal years                                                                                         
     • Constitutional amendment, as drafted, caps the statutory                                                                 
        limit at 15% of the calculated value                                                                                    
     • Statutory limit, as drafted, caps appropriations at 12%                                                                  
        of calculated value                                                                                                     
     • We arrived at 12% based upon FY24GovAmd appropriation                                                                    
2:06:04 PM                                                                                                                    
MR.  HARVEY  continued  with  slide  8,  "Proposed  Appropriation                                                               
Limit."  He  informed  the committee  that  the  chart  describes                                                               
reactivity  under the  proposed changes.  The reactivity  results                                                               
from changing oil prices and volatile revenues.                                                                                 
2:06:38 PM                                                                                                                    
SENATOR TOBIN assessed that 2009-2014 were recession years.                                                                     
MR.  HARVEY  offered  to  provide  the  depiction  of  historical                                                               
revenue figures  for comparison.  He stated  that Alaska  did see                                                               
effects from the 2008 financial collapse.                                                                                       
SENATOR  KIEHL noted  that the  period Senator  Tobin highlighted                                                               
was also  a time of  significant capital spending. He  added that                                                               
the  state   addressed  a  portion  of   the  multibillion-dollar                                                               
deferred maintenance  backlog. He  believed that the  proposal in                                                               
the  bill  would have  constrained  that  effort to  address  the                                                               
backlog.  He wondered  how the  state can  maintain the  existing                                                               
facilities under the proposed constraints.                                                                                      
MR. HARVEY  responded that  a vote of  two-thirds is  required to                                                               
spend up  to the  constitutional limit  for capital  projects. He                                                               
stated  that  the proposed  plan  would  efficiently address  the                                                               
backlog of maintenance costs.                                                                                                   
SENATOR KAUFMAN commented  on the chart on slide  9. He explained                                                               
that the  area between the  constitutional limit proposed  by SJR
4, and the  statutory limit proposed by SB 20  would be available                                                               
for   capital  spending   with   a  two-thirds   vote  from   the                                                               
legislature.  He advocated  for  moderate  spending and  sweeping                                                               
funds   forward,  which   would  allow   continuity  in   project                                                               
completion.  He  proposed  that continuity  would  enable  better                                                               
workforce retention  and development. The continuity  would allow                                                               
the  state  to sustain  capital  projects,  address the  deferred                                                               
maintenance backlog and prevent overbuilding in the future.                                                                     
2:10:22 PM                                                                                                                    
SENATOR KIEHL  responded that the constraint  in FY 14 and  FY 15                                                               
capital spending followed a reduction  in revenue. He stated that                                                               
he would contemplate the notion further.                                                                                        
SENATOR KAUFMAN  surmised that moving  the revenue  forward would                                                               
moderate the process.                                                                                                           
2:11:28 PM                                                                                                                    
MR. HARVEY  continued the presentation  with slide  10, "Spending                                                               
Subject to  Limit." He noted  that all Undesignated  General Fund                                                               
(UGF)  operating, and  capital expenditures  would be  subject to                                                               
the limit.  He mentioned that appropriations  to capitalize state                                                               
retirement accounts would not be subject to the limit.                                                                          
CHAIR  CLAMAN asked  about  the  exclusion of  the  PFD from  the                                                               
appropriation limit.                                                                                                            
SENATOR  KAUFMAN  replied  that  separate  legislation  seeks  to                                                               
establish  new  control  limits  for  the  PFD.  He  mentioned  a                                                               
constitutional resolution  to combine  the earnings  reserve with                                                               
the corpus  and manage it with  a Percent of Market  Value (POMV)                                                               
draw.  He added  that SB  20  and SJR  4  offer a  solution to  a                                                               
specific subset of Alaska's fiscal challenges.                                                                                  
CHAIR CLAMAN recalled the Wielechowski  v. Alaska case. The court                                                               
ruled  that the  dividend  must compete  with  every other  state                                                               
program for available  revenue. He wondered if  the effort before                                                               
the committee might prioritize the  dividend over other spending.                                                               
He expressed concern about the lack of a dividend cap.                                                                          
SENATOR KAUFMAN explained that  the proposed legislation involves                                                               
a  constitutional resolution  versus a  revision. He  agreed that                                                               
the PFD  presents a significant  variable that must  be addressed                                                               
in separate efforts or legislation.                                                                                             
2:15:23 PM                                                                                                                    
SENATOR  TOBIN  expressed  curiosity  about  Alaska's  retirement                                                               
systems and  Article 12,  Section 7  of the  Alaska Constitution,                                                               
which states that benefits from  the retirement systems cannot be                                                               
diminished or  infringed upon. She  opined that the  spending cap                                                               
counters the constitutional requirement.                                                                                        
MR.  HARVEY  responded that  the  proposed  legislation does  not                                                               
alter the  current constitutional limit.  He offered to  obtain a                                                               
legal opinion related to the two provisions' interaction.                                                                       
SENATOR TOBIN  pointed out that the  current constitutional limit                                                               
considers  the  state retirement  accounts  since  the number  of                                                               
retirees is projected to increase over the next decade.                                                                         
2:16:43 PM                                                                                                                    
SENATOR  KIEHL revisited  the question  about the  PFD. He  noted                                                               
that the  bills before  the committee  set a  lower limit  on the                                                               
dividend  amount,  with  permission   to  increase  payment  with                                                               
additional  revenue. He  wondered  if the  issue  relates to  the                                                               
earlier  conversation about  spreading  capital  budget needs  to                                                               
meet the deferred maintenance backlog.                                                                                          
2:17:36 PM                                                                                                                    
SENATOR  KAUFMAN opined  that the  legislature  must balance  all                                                               
spending.  He declared  that  the current  spending  plan is  not                                                               
working,   evidenced  by   the  results.   He  stated   that  the                                                               
legislature must balance an abundance  of needs going forward. He                                                               
remarked   that  rebuilding   budget  management   processes  and                                                               
structures around budget performance  is crucial. He acknowledged                                                               
that the bills  before the committee are not  designed to address                                                               
every fiscal concern.                                                                                                           
2:18:52 PM                                                                                                                    
SENATOR  GIESSEL revisited  the PFD  and Wielechowski  v. Alaska.                                                               
She  wondered if  the  limits proposed  in  the bills  prioritize                                                               
those  dividends over  the money  supporting state  services. She                                                               
wondered  if   the  Internal   Revenue  Service   considered  the                                                               
Permanent Fund  exempt from taxation  because it is  considered a                                                               
support fund.  She added  that the dividend  is not  the priority                                                               
related to  the spending of  the permanent fund. If  the dividend                                                               
becomes the  priority, then the  fundamental purpose of  the fund                                                               
becomes the question.                                                                                                           
CHAIR  CLAMAN offered  a time  limit related  to upcoming  public                                                               
SENATOR TOBIN commented that  disaster declaration exemptions and                                                               
limited capital expenditures might  impact economic recovery from                                                               
the  pandemic.  She  commented   that  Alaska  might  require  an                                                               
increase  in  state  and  nationwide  capital  expenditures.  She                                                               
wondered  if placing  disaster spending  outside of  the spending                                                               
cap  might  create a  situation  where  a governor  might  access                                                               
disaster  declaration funds  inappropriately. She  asked how  the                                                               
bill provides ramifications related to loopholes.                                                                               
SENATOR KAUFMAN agreed that spending  caps lead to many questions                                                               
about  spending and  mechanisms. He  opined that  a governor  who                                                               
spends  disaster funding  inappropriately would  face significant                                                               
reputation damage.  He stated  that inappropriate  behavior would                                                               
be  unsustainable and  come at  a price.  The current  cap allows                                                               
twice  the spending  permitted in  the  proposed legislation.  He                                                               
surmised  that  the  state's  fiscal issues  are  the  result  of                                                               
established  structures.  He  proposed   a  solution  for  better                                                               
process control and budget development.                                                                                         
2:24:06 PM                                                                                                                    
MR. HARVEY  continued the presentation  on slide  11,  Benefits.                                                                
He spoke to the following:                                                                                                      
        • Effective and Reasonable                                                                                              
             o This proposal would set the cap at recently                                                                      
               approved budget levels and would include a                                                                       
               constitutional     provision     for     some                                                                    
               flexibility in the case of unforeseen risks                                                                      
        • Stable and Predictable                                                                                                
             o The    5-year   trailing    average   creates                                                                    
               stability,  smooths   out  overspending  when                                                                    
               revenues are  up, allows  government spending                                                                    
               to  fall much  slower  than  GDP during  poor                                                                    
               years, and the limit  can be known before the                                                                    
               budget process begins                                                                                            
        • Private-Sector Focused                                                                                                
             o Open the discussion to outcomes during the                                                                       
               budget process                                                                                                   
2:25:08 PM                                                                                                                    
SENATOR  KIEHL asked  for an  explanation  for the  use of  Gross                                                               
Domestic Product (GDP) and Gross State Product (GSP).                                                                           
MR. HARVEY  responded that  different appropriation  limits exist                                                               
relative to population and inflation.  He stated that GDP and GSP                                                               
provide a holistic view of Alaska's economy.                                                                                    
SENATOR KIEHL appreciated  the desire to obtain  a holistic view,                                                               
but  he opined  that Alaska's  business activity  involves varied                                                               
commodities. He wondered why the element is included.                                                                           
MR. HARVEY  turned back to slide  9 and responded that  the five-                                                               
year trailing  average provides one of  the moderating mechanisms                                                               
to combat  the volatility  in GSP. He  stated that  volatility is                                                               
also seen  in state  income because employment  is driven  by the                                                               
industries.  He  remarked  that the  five-year  trailing  average                                                               
provides the  best mechanism to moderate  and increase reactivity                                                               
and drive the need for services.                                                                                                
2:28:13 PM                                                                                                                    
SENATOR  KAUFMAN  informed the  committee  that  the modeling  on                                                               
slide 9 reflects  the ebb and flow of the  economy. He added that                                                               
the cap is neutral to a  revenue source. State spending is linked                                                               
to a  manageable percentage of  our economic activity.  He stated                                                               
that the cap  may prevent Alaska from becoming  a service economy                                                               
supported  by the  Permanent Fund.  He remarked  that the  plan's                                                               
averaging  allows  the  potential   to  continue  an  upward  and                                                               
horizontal  trajectory,   which  provides   continued  employment                                                               
during recessive times. The  mechanism enables lay-off protection                                                               
because the state  will not experience a contraction  in the same                                                               
way the  private sector might.  He added that the  revenue source                                                               
must exist. The structure presented  will help in a downturn, but                                                               
reserves must be retained.                                                                                                      
2:30:37 PM                                                                                                                    
CHAIR CLAMAN turned to invited testimony.                                                                                       
2:31:03 PM                                                                                                                    
KEVIN BERRY,  PhD., Associate Professor of  Economics, University                                                               
of  Alaska,  Anchorage, Alaska,  spoke  to  his prepared  remarks                                                               
based on  GDP-based spending caps.  He intended to  draw insights                                                               
from  tax and  expenditure limits  that share  similar objectives                                                               
with spending  caps. He explained  that Alaska has  a non-binding                                                               
existing and effective  cap. He pointed to the graph  on slide 2,                                                               
"Proposed Cap Under  SB 20 and SJR 4." He  analyzed the graph and                                                               
noted that the yellow line  depicts the state's existing limit or                                                               
cap.  The two  proposed caps  are depicted  with orange  and grey                                                               
lines. The  blue bars indicate  the spending subject to  the cap.                                                               
He remarked that lowering the  cap requires less spending in peak                                                               
years for use in down years.                                                                                                    
DR.  BERRY moved  to slide  3, "Tax  and Expenditure  Limits Have                                                               
Mixed Evidence."                                                                                                                
        • Reduced taxes are hoped to positively impact                                                                          
          economic growth                                                                                                       
             o Unclear, as taxes fund services and we can't                                                                     
              disentangle these two things easily                                                                               
        • Also possible revenue sources (or spending) are                                                                       
          just moved outside the cap                                                                                            
2:33:48 PM                                                                                                                    
DR. BERRY continued  with slide 4, "Components  of State Spending                                                               
in  Alaska." He  pointed to  the graph  on the  left side  of the                                                               
slide  "FY2024   Governor  Amended  UGF."  He   reported  to  the                                                               
committee that he  included the Permanent Fund  Dividend (PFD) in                                                               
the data  even though it is  not subject to the  proposed cap. He                                                               
stated that the large budget  items depicted in the graph include                                                               
Education,   Health,  Corrections,   and  Family   and  Community                                                               
Services. The graph on the right  side of the slide depicts state                                                               
spending  by category,  FY  75 -  FY 21.  The  graph depicts  the                                                               
necessary source of cuts if the binding cap is used.                                                                            
2:34:31 PM                                                                                                                    
DR.  BERRY  moved  to  slide   5,   Changes  in  AKGSP  Excluding                                                               
Government are More  Volatile." He commented on the  use of Gross                                                               
State  Product (GSP)  to measure  a spending  cap. He  noted that                                                               
Alaska's GSP is  volatile and heavily influenced by  the price of                                                               
oil. When  the government is excluded,  the volatility increases.                                                               
He added  that the government  is stable compared to  the private                                                               
sector  economy. When  the government  is excluded  from the  cap                                                               
calculation,  larger volatility  is observed.  He explained  that                                                               
the graph's blue bars indicate  the percentage change in Alaska's                                                               
GSP. The grey  bars depict the percentage change  in Alaska's GSP                                                               
minus  the  government.  The yellow  bars  indicate  a  five-year                                                               
2:35:58 PM                                                                                                                    
DR. BERRY moved  to slide 6,  Longer Time Horizons  Dampen but Do                                                               
Not  Remove Cycles."  He pointed  to the  graph's dark  blue bars                                                               
indicating the percentage change  in a three-year average: yellow                                                               
bars  depicting  a five-year  average,  light  blue indicating  a                                                               
seven-year  average, and  green  showing a  ten-year average.  He                                                               
explained that the longer time  horizons show smaller changes and                                                               
fluctuations. He remarked that despite  the longer time horizons,                                                               
fluctuations  follow  the GDP.  He  added  that the  orange  line                                                               
indicates the Alaska North Slope's  first purchase price (dollars                                                               
per barrel). He pointed to years  with higher oil prices, the GDP                                                               
spending cap  allows the state  to spend more, but  spending must                                                               
be cut when  oil prices fall. He stated that  the cap will smooth                                                               
the spending out over time.                                                                                                     
2:36:52 PM                                                                                                                    
DR.  BERRY moved  to  slide 7,   GSP in  Alaska  is dominated  by                                                               
natural resources.                                                                                                              
        • Alaska GDP is dominated by natural resources (oil                                                                     
          & gas).                                                                                                               
             o Pre-2014 recession this was ~30% of Alaskan                                                                      
             o Now ~16% of Alaskan GSP                                                                                          
             o Production has been declining for decades                                                                        
        • Many of our fiscal shocks are due to changing oil                                                                     
DR. BERRY continued with slide 8, Issues with procyclical                                                                       
     "Balanced budget requirements  lead to substantial pro-                                                                    
     cyclicality  in  state  government spending,  with  the                                                                    
     stringency  of  a state's  rules  driving  the pace  at                                                                    
     which it must adjust to shocks."                                                                                           
     (Clemens and Miran 2012)                                                                                                   
     Concerns for procyclical policy                                                                                            
        • Government competes with the private sector to                                                                        
          hire or purchase materials during periods of                                                                          
          rapid growth                                                                                                          
        • Safety net programs grow in economic slowdowns                                                                        
2:40:25 PM                                                                                                                    
DR. BERRY continued with slide 9, Considerations with Real                                                                      
Gross State Product                                                                                                             
        • Real Gross State Product is calculated using                                                                          
          chain-type indexes weighted using current-period                                                                      
             o current-dollar shares of GDP provide a more                                                                      
               accurate measure of the relative importance                                                                      
               of components and are preferable to chained-                                                                     
               dollar shares                                                                                                    
             o chained-dollar levels tends to overstate or                                                                      
               understate sector contributions to GDP                                                                           
        • Real GDP by state does not capture state-to-state                                                                     
          differences in  the prices  of goods  and services                                                                    
          that are  produced and sold locally  • Issues with                                                                    
          measuring  quality improvements  and productivity,                                                                    
          particularly in service industries                                                                                    
        • Nominal GDP  expressed in current year  prices has                                                                    
          similar issues                                                                                                        
2:41:49 PM                                                                                                                    
DR. BERRY moved to slide 10, RGSP Government Spending is Based                                                                  
on Infrequent Survey Data.                                                                                                      
        • Based   mostly    on   quinquennial    Census   of                                                                    
          Governments   and   annual   Government   Finances                                                                    
          Surveys with regular revisions                                                                                        
        • Takes about 2 years from  the close of each fiscal                                                                    
          year  for  the  Census   Bureau  to  tabulate  and                                                                    
          release   COG   and   GF  data.   However,   BEA's                                                                    
          production schedule calls  for more timely monthly                                                                    
          and quarterly estimates.                                                                                              
             o Data on government receipts and expenditures                                                                     
               are interpolated based on various data                                                                           
               sources and revised later                                                                                        
        • Annual revisions  cover the prior 3  years and the                                                                    
          current year and include both annual and                                                                              
          quarterly estimates                                                                                                   
DR. BERRY continued with slide 11, "Issues with Other Various                                                                   
        • Including  population  growth   does  not  reflect                                                                    
          population composition                                                                                                
             o Senior citizen or child population might                                                                         
              grow faster than overall population                                                                               
             o Focusing only on employment numbers ignores                                                                      
               users of services                                                                                                
        • Including inflation  measures is  not the  same as                                                                    
          measuring the cost of providing state services                                                                        
             o Medicaid and medical costs growing faster                                                                        
               than CPI                                                                                                         
        • Exclusion  of   funds  and  budget   items  biases                                                                    
          spending, and excluded categories would likely                                                                        
          grow as a share of spending                                                                                           
2:44:43 PM                                                                                                                    
CHAIR CLAMAN asked if there were questions.                                                                                     
2:45:02 PM                                                                                                                    
SENATOR TOBIN  asked Dr. Berry to  expound on the ebbs  and flows                                                               
coupled   with  the   need  for   support  services   and  social                                                               
programming.   She  mentioned   the  Medicaid   and  Supplemental                                                               
Nutrition  Assistance Program    increase  in beneficiaries.  She                                                               
wondered if the proposed cap  would require a reduction in social                                                               
DR. BERRY responded  that he was unable to  provide precise data.                                                               
He highlighted  the idea of automatic  stabilizers, which include                                                               
government  programs that  naturally increase  during recessions.                                                               
Accommodating the  binding cap with  support programs  and social                                                               
services would require the state to limit total spending.                                                                       
CHAIR CLAMAN  wondered about the  impact of including the  PFD in                                                               
the cap, with education spending  outside of the cap. He wondered                                                               
about the  impact the hypothetical  structural change  would have                                                               
on education spending.                                                                                                          
DR.  BERRY  replied that  the  change  would  likely lead  to  an                                                               
increase in  education funding  and a  decrease in  dividends. He                                                               
noted that anything outside of  the cap would compete for revenue                                                               
above the cap.                                                                                                                  
CHAIR  CLAMAN clarified  that the  program label  was irrelevant,                                                               
including  the program  in the  cap  was the  limiting factor.  A                                                               
program  or agency  located outside  the cap  would be  easier to                                                               
spend money on.                                                                                                                 
DR. BERRY agreed.                                                                                                               
2:47:51 PM                                                                                                                    
SENATOR KIEHL  asked if  there were  periods in  American history                                                               
where a shift in government spending occurred.                                                                                  
DR. BERRY  replied that  large shifts  occurred during  the Great                                                               
Depression and  the Second World  War. He offered to  provide the                                                               
committee with more details.                                                                                                    
2:48:58 PM                                                                                                                    
CHAIR CLAMAN queried  the effectiveness of the  Anchorage tax cap                                                               
related to  constraints on municipal  spending. He  requested Mr.                                                               
Berry's  opinion  about  the  effectiveness of  the  tax  cap  in                                                               
DR. BERRY replied that he had  not reviewed the municipal tax cap                                                               
in preparation for  the presentation. He understood  that the tax                                                               
cap in Anchorage was binding  and constrained the total amount of                                                               
taxes collected, which forces budgetary  choices. He noted recent                                                               
debates about spending included in the cap.                                                                                     
CHAIR CLAMAN offered  his perspective that the  municipal tax cap                                                               
is more effective than the  spending cap for influencing spending                                                               
decisions.  He  wondered  if Mr.  Berry  perceived  that  revenue                                                               
restrictions  have more  influence on  spending decisions  than a                                                               
tax cap.                                                                                                                        
2:51:19 PM                                                                                                                    
DR.  BERRY  replied that  both  mechanisms  have similar  effects                                                               
because of the requirements for  balanced budgets, but he offered                                                               
to follow up with more details.                                                                                                 
2:51:51 PM                                                                                                                    
SENATOR  KIEHL  disclosed  his apprehension  about  the  economic                                                               
measure. He  opined that the  government should have  an interest                                                               
in  the   economy,  but  government   spending  does   not  serve                                                               
resources, it serves  citizens. He pointed to the  chart on slide                                                               
four displaying  state spending.  He wondered about  an indicator                                                               
that would  more closely  address the  service needs  of Alaskans                                                               
without resource volatility.                                                                                                    
DR.  BERRY  replied  that  no  one  measure  provides  a  perfect                                                               
solution. He explained that each  model comes with its challenges                                                               
and benefits. He encouraged a comprehensive approach.                                                                           
2:53:45 PM                                                                                                                    
CHAIR  CLAMAN held  SB  20 and  SJR 4  in  committee for  further                                                               

Document Name Date/Time Subjects
SB 20 version B 3.10.2023.PDF SJUD 4/5/2023 1:30:00 PM
SB 20
SJR 4 version B 3.10.2023.PDF SJUD 4/5/2023 1:30:00 PM
SJR 4 & SB 20 Sponsor Statement version B 4.3.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SB 20 Sectional Analysis version B 4.3.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SJR 4 Sectional Analysis version B 4.3.2023.pdf SJUD 4/5/2023 1:30:00 PM
SJR 4 & SB 20 Supporting Document - LFD Modeling 4.3.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SJR 4 & SB 20 Supporting Document - Spending Cap Handout 4.4.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SJR 4 & SB 20 Supporting Document - LFD Modeling Chart 4.3.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SJR 4 & SB 20 PowerPoint Presentation 4.5.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SJR 4 & SB 20 Additional Document - UAA PowerPoint Presentation (Distributed by the SJUD Committee) 4.5.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SB 20 Fiscal Note GOV-OMB 3.31.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 20
SJR 4 Fiscal Note OOG-DOE 3.31.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 53 Work Draft Committee Substitute version P 4.4.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 53
SB 53 Fiscal Note DOA-OPA 3.29.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 53
SB 53 Opposing Document - Letters Received as of 4.4.2023.pdf SJUD 4/5/2023 1:30:00 PM
SB 53