04/13/2007 07:06 AM House W&M
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| HJR5 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 13, 2007
7:06 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 5
Proposing amendments to the Constitution of the State of Alaska
limiting appropriations from certain mineral revenue, relating
to the balanced budget account, and relating to an appropriation
limit.
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HJR 5
SHORT TITLE: CONST. AM: APPROP. LIMIT/MINERAL REVENUE
SPONSOR(s): REPRESENTATIVE(s) KELLY
01/25/07 (H) READ THE FIRST TIME - REFERRALS
01/25/07 (H) W&M, JUD, FIN
04/04/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
04/04/07 (H) <Bill Hearing Canceled>
04/11/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
04/11/07 (H) Scheduled But Not Heard
04/13/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
REPRESENTATIVE MIKE KELLY
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HJR 5.
DEREK MILLER, Staff
to Representative Mike Kelly
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented portions of HJR 5 on behalf of
sponsor Representative Mike Kelly.
ROB CARPENTER, Fiscal Analyst
Legislative Finance Division
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: Answered questions on HJR 5.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:06:27 AM. Present at the call to
order were Representatives Hawker, Roses, Gruenberg, Seaton,
Cissna, Wilson, and Fairclough.
7:07:24 AM
HJR 5-CONST. AM: APPROP. LIMIT/MINERAL REVENUE
CHAIR HAWKER announced that the first order of business would be
HOUSE JOINT RESOLUTION NO. 5, Proposing amendments to the
Constitution of the State of Alaska limiting appropriations from
certain mineral revenue, relating to the balanced budget
account, and relating to an appropriation limit.
REPRESENTATIVE MIKE KELLY, Alaska State Legislature, testified
as sponsor of HJR 5. He reminded the committee of the state's
dependence on fluctuating revenues from steadily declining oil
production. He expressed concern that future revenues would
diminish until the start of a gas pipeline. He suggested that
HJR 5 could provide significant assistance to the state's budget
process by establishing a mechanism to control spending. The
resolution would require the legislature to incorporate oil
revenue into the budget "in any given fiscal year on a five-year
rolling average. That is we look back four years, and we also
look a year forward ...." He opined that there is pressure on
the legislature to spend money, but little push to require a
balanced budget. However, he suggested that the legislature
should take steps to control the amount available for the state
to spend, especially in light of the numerous demands made upon
it to increase funding in many areas.
7:13:53 AM
CHAIR HAWKER clarified that the "mineral revenue" in HJR 5 would
include revenues from oil and gas, as well as from the
extraction of other mineral resources of the state.
REPRESENTATIVE KELLY agreed with the aforementioned statement,
and went on to say there was some consideration given to
expanding the resolution to include all state resources.
7:15:01 AM
DEREK MILLER, Staff to Representative Mike Kelly, explained the
process by which the balanced budget process of HJR 5 would
work. He referred to a PowerPoint presentation which was
provided to the committee and explained that slide 2 pictorially
represents the mechanics of HJR 5. Once a five-year average of
mineral revenues is calculated, the legislature has the ability
to move funds from a Balanced Budget Account (BBA) to fund any
shortfall in the five year average. For example, if the five
year average is $3 billion, but the state only receives $2.5
billion one year, the legislature by majority vote can transfer
$500 million from the BBA into its available funds. The BBA is
available only to receive funds in excess of the five-year
average, or to fund shortfalls should revenue fall below the
five year average. If the legislature wants to spend above the
five year average, it must take the money from the
Constitutional Budget Reserve Fund (CBRF) or other sources. If
the revenues received are more than the five-year average, the
excess is automatically transferred to the BBA-no vote is
required, he explained. He said that the BBA only has the
capacity to hold two year's worth of appropriations; when the
balance exceeds two years of appropriations, the excess will be
transferred into the CBRF.
REPRESENTATIVE FAIRCLOUGH relayed her understanding that the
payment into the CBRF is a "repayment" of past draws.
MR. MILLER agreed with the aforementioned statement.
MR. MILLER further expanded on the method of calculating the
five-year average, referring to slide 4. Based on petroleum
revenues from the past four years and the predicted revenue for
the next year, the five year average for fiscal year (FY) 2008
would be $2.9 billion. He reiterated that since the BBA is
limited to a maximum amount equal to oil appropriations for two
years - any excess will be transferred to the CBRF.
REPRESENTATIVE WILSON asked what happens once the CBRF is paid
back.
REPRESENTATIVE KELLY replied that the excess funds would
continue to go into the CBRF.
7:21:28 AM
MR. MILLER explained that HJR 5 does not touch the "sacred
cows," such as any aspect of the Permanent Fund or Amerada Hess
account. It is also not "subject to the CBRF sweep." He
summarized that HJR 5 is a fiscal responsibility resolution that
encourages "a better budgeting system." It provides a simple
but effective mechanism to help save budget surpluses and avoid
deficits and eliminates the need for complicated "parking" of
excess funds to avoid the three-quarter legislative vote
required to access the CBRF. He opined that a constitutional
amendment is recommended because the legislature can overpower,
ignore, or change statutory appropriation constraints. Further,
this approach lets the citizens voice their opinion concerning
this simple fiscal framework. He suggested the HJR 5's approach
would be compatible with the Percent of Market Value (POMV)
approach should that concept be adopted with regard to permanent
fund earnings.
7:23:45 AM
REPRESENTATIVE ROSES asked about the how the mechanisms in HJR 5
would accommodate a POMV approach.
REPRESENTATIVE KELLY indicated that the approach in HJR 5 would
accommodate a POMV approach, and would not prevent or affect it.
REPRESENTATIVE ROSES asked how the state would provide an
infusion of cash for emergency situations.
REPRESENTATIVE KELLY suggested that in an emergency situation,
the state could access the CBRF, although he recognized that
process could be slow, especially if the emergency arose when
the legislature was not in session.
MR. MILLER opined that it may be possible to insert a provision
in HJR 5 to allow fund access in emergency situations. He
stated that the sponsor does not desire a "laundry list" of
exceptions however.
7:26:56 AM
REPRESENTATIVE ROSES asked whether there would be a mechanism by
which to ever adequately fund the education account so as to
forward fund education if the approach in HJR 5 was passed prior
the full funding of the education account.
MR. MILLER said no.
REPRESENTATIVE GRUENBERG noted that there have been similar
constitutional resolutions proposed in the past, and that these
prior resolutions had spending exceptions within them.
REPRESENTATIVE KELLY opined that if a fund is established with
very few exceptions, it will be more likely to remain a solvent
fund.
REPRESENTATIVE GRUENBERG offered that the legislature is a
reactive institution and therefore many of its spending
decisions are based on the legitimate needs of its constituents.
He noted that the Alaska Constitution provides for a strong
executive branch, and that the approach in HJR 5 "ratchets it
up" one step further as it makes revenues unavailable to the
executive branch as well as to the legislature.
7:33:24 AM
REPRESENTATIVE SEATON opined that this approach may require the
legislature to access the CBRF in more instances.
REPRESENTATIVE KELLY said that the approach of HJR 5 imposes
discipline on the legislature and will keep the legislature from
having to draw from the CBRF. He relayed his understanding that
accessing the CBRF is contentious, difficult, and costs
approximately $20 million.
REPRESENTATIVE SEATON clarified that his understanding is that
the legislature can only constitutionally appropriate out of the
BBA to the five-year average amount. If the needs of the state
are greater, the CBRF is "100 percent available on an three-
quarter vote." He suggested that the effect of the resolution
is to constitutionally "rat hole" funds away in the CBRF. He
questioned whether the effect is to provide budget discipline,
or whether it just directs the legislature to a different source
of funds.
REPRESENTATIVE KELLY referenced HB 125 and opined that the
message behind that bill is that constituents desire a fiscal
plan. He opined that this resolution is positive step in the
move towards long-term fiscal planning. He opined that the
legislature tends to spend any surplus funds. The resolution
directs the legislature to make spending decisions based on a
five-year income average, he indicated.
7:41:25 AM
REPRESENTATIVE SEATON asked whether the spending limitations in
the resolution would have any effect between now and when the
revenues start coming in from the gas pipeline, noting that,
since future revenues are projected to decline, the average
income will be higher than current income. He opined that the
resolution would not really have an effect until the gas
pipeline begins operation since the average income is expected
to decline after FY 07.
REPRESENTATIVE KELLY indicated agreement with the aforementioned
point. He reminded the committee that the price of oil is
volatile, and noted that world events can cause significant
fluctuations in the price of oil. He opined that it is
impossible to anticipate when and how much oil prices may
fluctuate, therefore his proposal is more of a "50 year plan" to
accommodate the varying, but unpredictable price of oil.
7:44:54 AM
CHAIR HAWKER noted that under this approach, money is set aside
during times of high revenues to offset shortfalls in times of
low revenues.
REPRESENTATIVE CISSNA reminded members that the legislature has
a history of regularly depositing money into the permanent fund.
She expressed concern about a possible dampening effect on some
issues, such as improvement of mental health care, if there are
too many limits on spending.
REPRESENTATIVE KELLY opined that the bill supports
sustainability of spending decisions and lessens the state's
reliance on the fluctuating price of oil by establishing funds
that provide a regular method of spending. This may result in
an improved ability to structure long-range policy goals, he
noted.
7:52:35 AM
REPRESENTATIVE WILSON noted that there are significant deferred
maintenance issues in the state and expressed concern that
leveling the budget too much will continue to make it difficult
for agencies to address maintenance issues.
REPRESENTATIVE KELLY offered his belief that imposition of
spending discipline will allow the legislature to address
chronic problems such as deferred maintenance because it will
allow for more money to go into the CBRF, which would then be
available for a big "catch up" on issues such as deferred
maintenance. He suggested that certain items, such as
maintenance, should be in the operating budget, not the capital
budget.
REPRESENTATIVE FAIRCLOUGH spoke in favor of HJR 5, noting that
that its approach allows policymakers to design future long-term
spending plans. She opined that this approach does not hamper
the ability of the state to use POMV to manage the permanent
fund. She suggested that the approach of HJR 5 forces the
legislature and the governor to look at revenue sources besides
oil and mineral sources which would promote diversity in the
state's revenue stream. She also expressed support for
repayment of funds back into the CBRF. She suggested that a
budget surplus in the next few years could be directed towards
some forward funding concerns, such as education and health
issues.
8:00:54 AM
REPRESENTATIVE CISSNA asked who would manage the investment
account referred to in HJR 5 page 2, lines 8-9.
ROB CARPENTER, Fiscal Analyst, Legislative Finance Division,
Legislative Affairs Agency, explained that the Treasury Division
of the Department of Revenue currently manages the CBRF and he
assumes that the same mechanism would apply to management of the
BBA.
MR. MILLER agreed that the intent was for the BBA to be managed
like the CBRF.
REPRESENTATIVE ROSES relayed that while he supports the concept
in HJR 5, he has some concern regarding the relationship of this
approach with other serious financial issues facing the state,
such as the Public Employees' Retirement System (PERS) and
Teachers' Retirement System (TRS) liabilities. He said that the
state may need to be able to provide an infusion of cash in
certain unpredictable situations wherein the state may have
greater liability than anticipated.
8:05:59 AM
REPRESENTATIVE KELLY opined that if the legislature accepts the
discipline imposed by the bill, it will be able to build the
funds necessary to support a long-term spending plan. He
suggested that his approach is more of a 50 year plan. He said
he supports forward funding of education needs, yet indicated
that the current budgeting mechanisms will not provide a
solution to all looming long-term financial issues. He offered
that the people of the state may be reluctant to allow the
legislature to use permanent fund earnings until spending
discipline like that proposed in HJR 5 has been in place and
operated for a time. He indicated that fiscal discipline by the
legislature would engender public trust in the legislature's
spending decisions.
REPRESENTATIVE ROSES reminded the committee that the legislature
is working very hard to come up with a solution to the unfunded
pension liabilities. If the legislature puts forth some
mechanism to reduce the pension fund liabilities, it will become
part of the budget process. He offered that once included in
the budget, the spending to pay down pension liabilities becomes
sustainable if the assumptions are correct. He suggested the
fixes to the pension plan and other issues should be determined
prior to implementation of the mechanism suggested by HJR 5 so
that the spending is built into the five year plan.
REPRESENTATIVE KELLY replied that "with something like this,
there's never the perfect year to put it in place." He
suggested it may be possible to use the CBRF to fund other
looming financial issues, such as payment of the PERS\TRS
liabilities.
8:13:28 AM
CHAIR HAWKER relayed that since a proposal to change the
constitution is a profound and serious matter, it requires a
very detailed examination of all aspects of the proposed
changes. He expressed support of the concept presented in the
resolution, but indicated it needed further examination. He
noted that the resolution does not propose changing the three-
quarter vote requirement to access the CBRF, which may be an
aspect that could use further consideration. He suggested the
concept in HJR 5 could be a starting point to craft a
constitutionally structured fiscal plan.
8:17:16 AM
REPRESENTATIVE SEATON clarified that recently the legislature
has not appropriated money from the permanent fund earnings
reserve account. He noted that there are currently proposed
large resource development projects in the state, and expressed
concern that the revenues from those projects may not be
available to pay off the impacts of those projects since the
revenue stream would be limited to the five year average from
oil and gas revenues. He offered that his understanding of the
mechanism in HJR 5 is that any income above the five-year
average would not be available to the legislature, but would
roll to the CBRF.
REPRESENTATIVE KELLY opined that the sequestered part of
revenues would be considered in determining the five-year
average.
8:22:05 AM
REPRESENTATIVE ROSES noted that once a revenue stream starts, it
would be included in the determination of the five-year average.
The five-year average also includes revenue predictions for the
next year. The revenue would be "sequestered" only if it were
not calculated into the projection of the next year's revenue
income, he explained.
REPRESENTATIVE SEATON referred to HJR 5, page 2, lines 9-10,
which seems to indicate that the money in the BBA is not
available for spending.
REPRESENTATIVE KELLY agreed that the money is to be used to make
up shortfalls and is limited to twice the annual earnings. He
said that the point of HJR 5 is to take the operating revenues
and put restrictions on spending so as to level the state's
spending patterns.
REPRESENTATIVE SEATON asked if the only way to access the BBA
fund would be by another constitutional amendment.
REPRESENTATIVE KELLY answered yes, but went on to say that if
one assumes the CBRF is exhausted, one could also assume that
the BBA would not have much money in it. He predicted that
situation would indicate the state is in serious financial
straits.
8:27:45 AM
CHAIR HAWKER explained that it would require a constitutional
amendment to invade or change the corpus of permanent fund. He
reminded the committee that only the earnings are available for
appropriation.
REPRESENTATIVE WILSON expressed support for the concept in HJR 5
and agreed that it is necessary to implement some kind of fiscal
planning structure. She suggested that the resolution requires
a fiscal note to educate the public as to the bill's effect.
REPRESENTATIVE GRUENBERG expressed some reservation with
amending the constitution and with limiting the legislature's
options. He suggested that the fiscal restraint proposed by the
bill may be at the expense of being able to pay for other
worthwhile causes. He said he is more receptive to looking at
options that allow for more flexibility.
8:38:25 AM
REPRESENTATIVE ROSES offered that what is being proposed is a
balanced income resolution because it does not address spending,
it addresses only income. He noted that the legislature could
still go to the CBRF or other sources for funding. He opined
that this type of approach may have an effect similar to a
municipal tax cap. He relayed that municipalities did not stop
spending money because of tax caps, but instead used bonds or
other mechanisms to pay for projects.
REPRESENTATIVE KELLY opined that tax caps are like a
sledgehammer, while the approach in HJR 5 is more finely tuned
and responsive than a tax cap. He set forth that his proposal
responds to times of prosperity and times of lowered revenues by
leveling spending. He said this approach does require
discipline and fiscal planning in a simple, straightforward
manner.
8:44:27 AM
REPRESENTATIVE SEATON opined that the resolution seems to be a
levelized income resolution more than a balanced budget
resolution. Furthermore, it only concerns resource income but
does not effect other revenue sources. He suggested that other
income sources, such as taxes, can provide a more predictable
income stream. He indicated that the legislature would likely
need to consider ways to "fill in" income gaps.
[HJR 5 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
8:51:28 AM.
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