Legislature(2003 - 2004)

03/16/2004 01:42 PM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     SENATE FINANCE COMMITTEE                                                                                 
                          March 16, 2004                                                                                      
                              1:42 PM                                                                                         
SFC-04 # 42,  Side A                                                                                                            
SFC 04 # 42,  Side B                                                                                                            
SFC 04 # 43,  Side A                                                                                                            
CALL TO ORDER                                                                                                               
Co-Chair Lyda  Green convened the meeting at approximately  1:42 PM.                                                            
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice-Chair                                                                                                   
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Ben Stevens                                                                                                             
Also Attending:  SENATOR TOM WAGONER; SENATOR GARY  STEVENS; SENATOR                                                          
BERT STEDMAN;  SENATOR RALPH  SEEKINS; SENATOR  HOLLIS FRENCH;  BILL                                                            
CORBUS, Commissioner, Department  of Revenue; MICHELLE PREBULA, Cash                                                            
Manager, Treasury  Division, Department  of Revenue; LUCKY  SCHULTZ,                                                            
Staff  to Senator  Fred Dyson;  CHERYL FRASCA,  Director, Office  of                                                            
Management and Budget, Office of the Governor                                                                                   
Attending  via  Teleconference:  From  an  Offnet  Site:  DR.  BARRY                                                          
POULSON,  Tax/Spending  Consultant   and Professor,   University  of                                                            
SUMMARY INFORMATION                                                                                                         
Department of Revenue                                                                                                           
Constitutional Budget Reserve Fund Presentation.                                                                                
The Committee  heard from  the Department  of Revenue regarding  the                                                            
establishment  of  a  one billion  dollar  minimum  balance  in  the                                                            
Constitutional Budget Reserve Fund.                                                                                             
SJR 3-CONST AM: APPROPRIATION/SPENDING LIMIT                                                                                    
The  Committee  heard  from  the  bill's  sponsor,   a tax/spending                                                             
consultant,  and  the Administration.  A  committee  substitute  was                                                            
adopted and the bill was held in Committee.                                                                                     
                       Department of Revenue                                                                                    
                Constitutional Budget Reserve Fund                                                                              
BILL CORBUS,  Commissioner, Department  of Revenue, stated  that his                                                            
power-point presentation  [copy on file] would address the status of                                                            
the Constitutional  Budget Reserve (CBR) and the need  to maintain a                                                            
minimal balance  in that  account. A similar  presentation  that had                                                            
included  the  history of  the  CBR and  information  regarding  the                                                            
volatility of the price  of oil had been presented to the Conference                                                            
of Alaskans  at the University  of Alaska  in Fairbanks on  February                                                            
10, 2004. However,  the historical and volatility  information would                                                            
not be  presented today,  as this Committee  is familiar with  these                                                            
issues. He  informed that  no major settlements  resulting  from oil                                                            
tax  or royalty  disputes  would be  received  by the  State in  the                                                            
foreseeable future.                                                                                                             
[NOTE: Co-Chair Wilken assumed chair of the meeting.]                                                                           
AT EASE 1:46 PM / 1:46 PM                                                                                                       
Commissioner  Corbus  stated that  historically,  the  CBR has  been                                                            
utilized  for three  purposes: to  cover budget  deficits; to  cover                                                            
unexpected budget shortfalls  resulting from unexpected downturns in                                                            
oil revenues; and to provide  cash flow to the general fund (GF). He                                                            
noted  that Governor  Frank Murkowski  has announced  his desire  to                                                            
retain a one billion dollar minimum balance in the CBR.                                                                         
Commissioner  Corbus referred  the  Committee to  the graph  titled,                                                            
"Projected  vs. Actual CBR  Draws" on which  a red line depicts  the                                                            
forecasted  CBR draw  that was  projected  for each  year from  1995                                                            
through 2004. The actual  draws for the years 1995 through 1997 were                                                            
below  the forecasted  amount;  however,  the  actual  draw in  1998                                                            
exceeded the projection  due to a downturn in forecasted oil prices.                                                            
Senator  Bunde asked  whether  1998  was the  year that  oil  prices                                                            
dropped to approximately nine dollars a barrel.                                                                                 
Commissioner  Corbus pointed  out that  the average  oil prices  per                                                            
year are depicted  on the chart titled "ANS Oil Price  Differential,                                                            
Change Year-to-Year,  FY 1994-2003."  There  was a $5.04 per  barrel                                                            
decrease  in 1998 as compared  to 1997 prices.  An additional  $3.13                                                            
per barrel decrease occurred in 1999.                                                                                           
Commissioner  Corbus again referred  to the chart titled  "Projected                                                            
vs. Actual  CBR Draws" and noted that  in 1999, the decrease  in the                                                            
price of  oil forced  an additional  $325 million  draw on the  CBR,                                                            
above what was forecast.                                                                                                        
Senator  Bunde understood  from  the  chart that  in  excess of  one                                                            
billion  dollars was  withdrawn from  the CBR in  1999. That  fiscal                                                            
year's  total   budget  was  approximately   $2.3  billion   budget.                                                            
Therefore the  draw that was required  equated to half of  the FY 99                                                            
total budget.                                                                                                                   
Commissioner Corbus  noted that less than the forecasted  amount was                                                            
withdrawn  from the CBR in  2000 and 2001;  the amount withdrawn  in                                                            
2002 exceeded  the forecasted amount;  and the amounts withdrawn  in                                                            
2003 and  2004 were less  than the forecasted  amount. The  point is                                                            
that projecting the price  of oil is not an exact science. A reserve                                                            
must be available to provide  for the years when the price of oil is                                                            
lower than forecast.                                                                                                            
Senator  Bunde  asked  whether   the  total  amount  that  has  been                                                            
withdrawn from the CBR, since its inception, is available.                                                                      
Commissioner  Corbus replied that  a total of $5.5 billion  has been                                                            
Senator  Bunde stated  that according  to law, this  amount must  be                                                            
repaid to the CBR.                                                                                                              
Commissioner Corbus concurred.                                                                                                  
Commissioner Corbus reiterated  that the primary purposes of the CBR                                                            
are  to provide  money  when there  is a  revenue  shortfall and  to                                                            
provide cash flow during  the year for such expenses as construction                                                            
projects  for  which the  State  would  eventually  receive  federal                                                            
reimbursement.  This  borrowing  process is  depicted  on the  chart                                                            
titled  "General Fund  Cash Sufficiency  With  CBR borrowing"  which                                                            
illustrates the  bi-weekly general fund borrowings  from the CBR for                                                            
the  fiscal  year   1997.  The  graph  titled  "General   Fund  Cash                                                            
Sufficiency  Without CBR Borrowing"  depicts how the balance  of the                                                            
GF would have fared without  the CBR borrowings that year. While the                                                            
yearend balance is the  same in either scenario due to the fact that                                                            
the monies  borrowed from  the CBR are entirely  reimbursed,  the GF                                                            
balance  in the second  graph would  have reflected  a cash  deficit                                                            
position in  the summer and fall months.  It is a State policy  that                                                            
the GF balance  not be lower than $100 million dollars.  In summary,                                                            
these two  charts depict  how the  CBR has been  used to provide  "a                                                            
line of  credit to  the State" in  times when  the income  deposited                                                            
into the GF is less than the money being spent.                                                                                 
Senator Bunde,  noting that the CBR is an interest  bearing account,                                                            
asked  whether  the  funds  borrowed  from  it are  paid  back  with                                                            
Commissioner  Corbus  replied  that  interest  is  not paid  on  the                                                            
In response  to a question from Senator  Olson, Commissioner  Corbus                                                            
stated that  the short-term  borrowings from  the CBR are paid  back                                                            
without interest.                                                                                                               
Commissioner  Corbus  expressed  that the  argument  favoring a  one                                                            
billion  dollar minimum  CBR  balance is  further  expressed in  the                                                            
chart titled,  "Should We Set Minimum  for CBR," which depicts  that                                                            
$300  million  to $400  million  is needed  on  an annual  basis  to                                                            
provide for fluctuating  GF cash flows. The additional  $600 million                                                            
to $700 million balance  would maintain the desired CBR balance were                                                            
the price  per barrel  of oil to  decrease by  up to ten-dollars.  A                                                            
one-dollar reduction or  increase in the price per barrel of oil for                                                            
one year would equate to  a loss of or an increase of $65 million to                                                            
the State,  respectfully.  The aforementioned  chart "ANS Oil  Price                                                            
Differential"  depicts the year-to-year change in  the average price                                                            
of oil  from 1995 -2003.  The 1998/1999 cumulative  total loss,  for                                                            
that time period,  was eight dollars  price per barrel of  oil. This                                                            
is one  reason to establish  a $600 million  to $700 million  buffer                                                            
balance in the CBR.                                                                                                             
Commissioner  Corbus referred  to the  chart titled  "Should We  Set                                                            
Minimum for CBR"  that presents a forecast for the  oil revenue that                                                            
the State might  receive. Revenue  anticipation notes could  be sold                                                            
based on the projected sources of revenue.                                                                                      
Commissioner  Corbus concluded  that the State  is making a  case in                                                            
support  of  maintaining  a  minimum  CBR  balance  of  one  billion                                                            
dollars,  as it  would be  the "appropriate"  amount  with which  to                                                            
provide for  the fluctuations  in oil prices  as well as to  provide                                                            
the required cash flow for the GF.                                                                                              
Senator  Bunde understood  that were  a one  billion dollar  minimum                                                            
balance  mandated  and then  breached  to  provide funding  for  the                                                            
fluctuating  cash   flow,  the  lone  alternate  through   which  to                                                            
reimburse  the  CBR, were  insignificant  revenue  to  be  received,                                                            
"would be for  the Legislature to  follow the law and repay  the CBR                                                            
some of the five billion we owe it."                                                                                            
Commissioner  Corbus  replied  that  that  is a  fair  analysis.  In                                                            
addition, the  comment opens discussion  regarding a "replenishment                                                             
plan" which  is an issue  that has been  raised by financial  rating                                                            
agencies. Another concern  raised is that the State does not have an                                                            
overall   financial  plan.   This  must   be  in   place  before   a                                                            
reimbursement  plan could  be developed.  Absent  these,  specifying                                                            
that the CBR maintain  a one billion dollar balance  "is better than                                                            
Senator  Hoffman,  noting  that  the  presentation   highlights  the                                                            
fluctuating  price of oil, asked whether  the fluctuating  number of                                                            
barrels flowing  through the pipeline  is also an important  factor.                                                            
This would have a correlating affect on the revenue.                                                                            
Commissioner  Corbus noted that one  million barrels a day  has been                                                            
the norm for production.  In the next year, production  is projected                                                            
to be 996,000  barrels a  day and would  be sloping off thereafter.                                                             
Production is not as significant a factor as price.                                                                             
Co-Chair Wilken  surmised that another factor would  be the yield of                                                            
a field. The three pieces  therefore would be price, production, and                                                            
Senator Olson  asked whether there is a penalty for  not reimbursing                                                            
the CBR for the amounts owed.                                                                                                   
Commissioner Corbus stated that there is no penalty.                                                                            
Senator Olson observed  that the chart titled "Should We Set Minimum                                                            
for  CBR,"  depicts  that  revenue   would  be  generated  from  oil                                                            
production in  the Arctic National Wildlife Refuge  (ANWR) beginning                                                            
in approximately 2011.                                                                                                          
Commissioner  Corbus stated  that the chart  depicts all  "possible"                                                            
revenue  sources.  The Governor  Murkowski  Administration  is  very                                                            
committed to developing the State's resources.                                                                                  
Co-Chair  Wilken asked  how fiscal  years 2003 and  2004 would  look                                                            
were a chart similar  to the FY 1997 "General Fund  Cash Sufficiency                                                            
Without CBR Borrowing"  chart developed, specifically  in regards to                                                            
how often the  GF balance would have  "dipped below the zero  line."                                                            
MICHELLE  PREBULA, Cash  Manager, Treasury  Division, Department  of                                                            
Revenue, responded  that during the six years she  has worked in the                                                            
Department, the  State has, annually, been required  to borrow funds                                                            
from the CBR.  She noted that the  chart was developed based  on the                                                            
fact  that  1997  was  a year  in  which  the  budget  balanced.  It                                                            
currently appears that  FY 04 would have a balanced budget; however,                                                            
to date,  $300 million has  been borrowed from  the CBR due  to cash                                                            
flow demands. This amount would be repaid.                                                                                      
Co-Chair Wilken  asked the lowest balance that the  GF has attained,                                                            
during the past six years, before the CBR funds were accessed.                                                                  
Ms. Prebula responded  that in addition to being able  to access CBR                                                            
funds, there is a cash  flow contingency in place to assure that the                                                            
GF  balance would  not  reduce  below zero.  Therefore,  the  lowest                                                            
balance would be approximately $28 million.                                                                                     
Co-Chair Wilken  asked how the GF balance would fare  were there not                                                            
CBR borrowings.                                                                                                                 
Ms. Prebula replied that  without CBR borrowings, the balance of the                                                            
GF would  have dipped  into the  negative territory  each year.  The                                                            
amount would vary by year.  FY 04 would have reached a negative $400                                                            
million were no CBR borrowings conducted.                                                                                       
Co-Chair  Wilken,  noting  that  the  CBR  is  an  interest  bearing                                                            
account,  asked  whether  the  Department  has  a  breakout  of  the                                                            
interest  earnings on the  contributions that  have been made  to it                                                            
for the last five years.                                                                                                        
Commissioner  Corbus responded  that this  information is  available                                                            
and  would  be  provided.  As  he  recalled,  the  return  has  been                                                            
favorable and could be in the five-percent range.                                                                               
Senator Hoffman pointed  out that this information is located in the                                                            
presentation's information  titled "CBR History."  It specifies that                                                            
the "State  has deposited $5.6 billion  into the CBR and  has earned                                                            
$1.6 billion in interest on the money."                                                                                         
Co-Chair  Wilken  asked  that  a breakout  of  this  information  be                                                            
Commissioner  Corbus stated that the  Department would provide  this                                                            
Senator  Bunde asked  whether  the  interest earned  by  the CBR  is                                                            
deposited into the CBR or the GF.                                                                                               
Commissioner Corbus clarified that it is deposited into the CBR.                                                                
Co-Chair Wilken  stated that after it is deposited  into the CBR, it                                                            
would be available to the Legislature.                                                                                          
Senator  Hoffman, in  reference to  the request  that a minimum  one                                                            
billion cash balance  be specified for the CBR, asked  why this high                                                            
level  is required  in  these  days  of such  things  as  electronic                                                            
Ms. Prebula responded  that this amount would be required  to insure                                                            
that sufficient  GF cash flow monies would be available  in order to                                                            
prohibit  the GF  balance from  falling  below a  zero balance.  She                                                            
stated  that  the  State's  accounting  system  would  not  allow  a                                                            
transaction  to be processed  were it to have  the affect of  making                                                            
the  GF balance  to  fall below  zero.  Even with  electronic  funds                                                            
transfers,  it could  be possible  that several  large transactions                                                             
might occur  on the same day as such  things as State payroll,  that                                                            
amounts  to approximately  $75 million,  might  be being  processed.                                                            
Were  that to  occur,  a "tight"  balance  would result  that  could                                                            
prevent a transaction from occurring.                                                                                           
Senator  Hoffman  pointed  out that,  with  CBR borrowings,  the  GF                                                            
balance depicted  for FY 97 had sufficient  cash funds well  above a                                                            
$100  million dollar  level  and even  approached  the $200  million                                                            
level. This "appears to be quite a large buffer."                                                                               
Ms. Prebula  expressed that  the Department  strives to retain  a GF                                                            
balance  with $100  million as  the floor  and $200  million as  the                                                            
ceiling. Were the cash  balance projected to exceed $200 million for                                                            
more than a 30-day time period, the CBR would be repaid.                                                                        
Senator  Seekins  shared that  while  the concern  is  that the  CBR                                                            
balance would  be eventually  be reduced to  zero, in reality,  that                                                            
"zero amount"  would be in  the $400 million  or $500 million  range                                                            
due to the GF  cash flow demands. That would be the  point where the                                                            
account would  cease to be a CBR and would become  primarily "a cash                                                            
management account."                                                                                                            
Commissioner Corbus  stated that the forecast is that  the CBR would                                                            
be exhausted  by May  2007. However,  the Office  of Management  and                                                            
Budget recently  suggested an earlier  date might occur were  a $100                                                            
million minimum GF balance factored in.                                                                                         
Senator  Seekins  stated that  there  are two  issues  that must  be                                                            
considered.  One   is  that,  because  the  Legislature   could  not                                                            
appropriate a deficit budget,  it would depend on the CBR to provide                                                            
funding for a  budget. Second, it is also a dual-purpose  management                                                            
tool in that it serves as a cash flow account for the GF.                                                                       
Commissioner Corbus agreed.                                                                                                     
Senator Seekins  opined that the balance of the CBR,  in its role as                                                            
a  cash management  account,  must  maintain  approximately  a  $400                                                            
million or  $500 million balance in  order to provide for  oil price                                                            
fluctuations and the cash flow.                                                                                                 
Commissioner Corbus  supported there being $300 to  $400 million for                                                            
cash management  purposes  and $600  to $700 million  for oil  price                                                            
Senator  Seekins asserted  that  it would  be irresponsible  of  the                                                            
Legislature to allow the  CBR balance to fall below $400 million, as                                                            
that would negate its ability to provide for cash management.                                                                   
Commissioner  Corbus  stated  that  that  level  would  not  provide                                                            
sufficient  funding to allow for the  unexpected fluctuation  of oil                                                            
Senator Bunde  surmised, therefore, that a $400 million  CBR balance                                                            
should be viewed as a zero balance.                                                                                             
Commissioner Corbus voiced agreement with that concept.                                                                         
Senator  Hoffman asked what  cash management  funding mechanism  was                                                            
utilized prior to 1989 when the CBR was established.                                                                            
Ms. Prebula  understood  that prior  to the creation  of the  CBR, a                                                            
budget deficit was not an issue.                                                                                                
Co-Chair Wilken  surmised that were  the CBR to disappear  tomorrow,                                                            
there would  be alternate  funding options.  The Legislature  could,                                                            
overtime,  establish  a  GF balance  and,  as  a matter  of  policy,                                                            
prohibit  it  from  falling  below $400  million.  The  State  could                                                            
establish  a  line  of  credit  from  the  Alaska   Housing  Finance                                                            
Corporation or  a financial institution. He acknowledged  that while                                                            
it is nice  to have the CBR, were  it to dissipate, the State  would                                                            
have other options available to it.                                                                                             
Mr. Corbus  responded that the only  problem with Co-Chair  Wilken's                                                            
observation  is  that  it  does  not  take  into  consideration  the                                                            
possibility that  a downturn in oil prices might occur.  Speaking on                                                            
behalf of the "conservative  side of the State" he "would prefer not                                                            
to do business that way."                                                                                                       
Co-Chair Wilken acknowledged;  however, stated that with $30 billion                                                            
dollars in  the bank, the State would  have the ability to  secure a                                                            
line of credit.                                                                                                                 
Co-Chair  Green  asked  how  other states  manage  their  cash  flow                                                            
Commissioner Corbus  informed that other states are  also "wrestling                                                            
with  this issue."  However,  while  Alaska is  unique  in that  80-                                                            
percent of its revenue  comes from one industry, other states, "have                                                            
a better balance and more predictable revenue sources."                                                                         
Co-Chair  Wilken noted  that the State  could learn  from how  local                                                            
borough governments  operate in that,  while they might borrow  from                                                            
their fund balance, they always reimburse it.                                                                                   
Senator Olson  recalled that when  the price of oil declined  in the                                                            
mid 1980s,  the Administration  quickly addressed  it by  developing                                                            
some  very creative  funding  alternatives  as  well as  some  "deep                                                            
Commissioner  Corbus  stated that  the  Department  would develop  a                                                            
report depicting  how the State funded its cash flow  needs prior to                                                            
the establishment of the CBR.                                                                                                   
Co-Chair Wilken characterized  the 1980s revenue decline as a period                                                            
that was "not very pretty."                                                                                                     
Senator Bunde  exclaimed that the  actions of the State at  the time                                                            
resulted in a  serious depression: a lot of people  lost their homes                                                            
and numerous businesses closed.                                                                                                 
Co-Chair  Wilken   voiced  that  this  subject  is   worthy  of  the                                                            
discussion  as the  CBR is "our  cushion." He  thanked Commissioner                                                             
Corbus and the Department of Revenue for the presentation.                                                                      
AT EASE: 2:25 PM / 2:38 PM                                                                                                      
     CS FOR SENATE JOINT RESOLUTION NO. 3(JUD)                                                                                  
     Proposing an amendment to the Constitution of the State of                                                                 
     Alaska relating to an appropriation limit and a spending                                                                   
This was  the second  hearing for  this bill in  the Senate  Finance                                                            
Co-Chair Wilken  explained that this legislation would  establish in                                                            
the State's  Constitution a spending  limit based on the  sum of the                                                            
Anchorage Consumer  Price Index (CPI) and the change  in the State's                                                            
population. The State's  budget could exceed the spending limit were                                                            
it determined  by  the Governor,  with concurrence  of a  two-thirds                                                            
vote of the Legislature, that an emergency warrants it.                                                                         
AT EASE: 2:40 PM / 2:41 PM                                                                                                      
Co-Chair  Green moved  to adopt  the Version  23-LS0296\X  committee                                                            
substitute as the working document.                                                                                             
There being  no objection,  Version "X" was  adopted as the  working                                                            
Senator  Dyson, the  bill's sponsor,  apologized  for the  laborious                                                            
process involved  in the development  of this bill. This  version of                                                            
the bill was just completed.  The Department of Revenue has directly                                                            
participated  in the process and has  conducted quality work  in its                                                            
regard.  He stated  that the Committee's  review  of this  committee                                                            
substitute would lend to the development of a better bill.                                                                      
Co-Chair Wilken communicated  that the Committee recognizes that the                                                            
development of this type of legislation "is no small task."                                                                     
Senator  Dyson  commented  that  while  a spending  limit  has  been                                                            
incorporated in  the State's Constitution since 1981,  it really has                                                            
not accomplished  what it was intended  to do. Previous Legislators                                                             
have struggled  to address this issue with no resolve.  Amending the                                                            
State's Constitution  should be conducted in a very  careful manner,                                                            
as it is one of the better Constitutions in the United States.                                                                  
Senator Dyson explained  to the Committee that since 1976, 31 states                                                            
have  introduced  legislation  dealing with  spending  limits.  This                                                            
information  is included  in a Legislative  Research Report,  Report                                                            
Number 03.100,  dated February  11, 2003 [copy  on file]. Alaska  is                                                            
unique in that  it receives little income from broad-based  taxes as                                                            
the majority  of its income  is derived from  oil royalties.  One of                                                            
the changes incorporated  into Version "X" is that the base year for                                                            
the formula is  specified as being two-year's prior  due to the fact                                                            
that the immediate  year's appropriation  information is  incomplete                                                            
until after the year is concluded.                                                                                              
SFC 04 # 42, Side B 02:43 PM                                                                                                    
Senator  Dyson  continued  that,  in  addition,  to  specifying  the                                                            
beginning base year, the  formula would be calculated as the average                                                            
of that year and  the two-years prior to that in order  to provide a                                                            
smoothing affect.  Another factor in determining the  spending limit                                                            
would be the number  of people who must be served  and the change in                                                            
the cost of providing services  to that population. This cost factor                                                            
could be  likened to  an inflation  and CPI factor.  He pointed  out                                                            
that  resulting  from the  fact  that  the population  and  cost  of                                                            
services do not  align with each other, Version "X"  would determine                                                            
this calculation based  upon 90-percent of the CPI and 75-percent of                                                            
the population.  While he  acknowledged that  this assumption  might                                                            
not be easy to  defend, what would be "easy to defend"  would be the                                                            
fact that  the cost of  providing services  does not rise in  unison                                                            
with inflation.  For  example, many  of the  State's operations  are                                                            
based on long-term contracts  and fixed prices that are not affected                                                            
by inflation. Similarly,  it could be argued that each person moving                                                            
into  the  state  does  not  increase  the  State's  cost  of  doing                                                            
business. The exception  to this might be the young and the elderly.                                                            
He was convinced that a  one-to-one relationship in these components                                                            
would not adequately portray  the true affect. A spirited discussion                                                            
in regard to this percentage theory would be welcome.                                                                           
Senator Dyson noted that  the components that would be exempted from                                                            
the spending  limit are identified  in Section 1, subsection  (c) on                                                            
page two, beginning  on line ten. Language in Section  1, subsection                                                            
(d) on page  two, beginning on line  22 would allow the Governor  to                                                            
declare an emergency  and expend money beyond that  specified in the                                                            
spending limit,  provided it were to receive an affirmative  vote of                                                            
at least  two-thirds  of the members  of the  Legislature. He  noted                                                            
that  he might  propose an  amendment that  would  replace the  word                                                            
"emergency"  with  the  words  "extraordinary  circumstance"  as  is                                                            
incorporated  into the State  of Connecticut's  Constitution.  Also,                                                            
not  included  in  this version  is  language  that  was  previously                                                            
considered in  similar legislation proposed by Senator  Dave Donley,                                                            
in that the  amount that could be  provided in this manner  could be                                                            
up to two percent  of the budget more, were it approved  by a three-                                                            
quarter vote of the Legislature.                                                                                                
Senator Dyson  also noted that this legislation would  eliminate the                                                            
Constitutional  mandate that one-third  of the budget be  designated                                                            
to support capital projects.  In addition, Version "X" would require                                                            
that any money above the  appropriations limit be deposited into the                                                            
Constitutional Budget Reserve (CBR) fund.                                                                                       
LUCKY SCHULTZ, Staff to  Senator Dyson, explained that currently, in                                                            
regards to the CBR, the  Constitution specifies that any withdrawals                                                            
from  the CBR  must  be repaid.  The  language  in the  Version  "X"                                                            
committee  substitute specifies  that  any excess  funding would  be                                                            
deposited  into the CBR  regardless of whether  any withdrawals  are                                                            
owed or not.                                                                                                                    
Senator  Dyson noted  that the Department  of Law  and the  Governor                                                            
Frank  Murkowski  Administration  "take  exception to"  language  in                                                            
Section  1,  subsection  (e) on  page  two, line  27.  Therefore  he                                                            
assumed that  this language would  be eliminated, as the  concern is                                                            
that  this  language would  allow  the  Legislature  to appropriate                                                             
whatever amount they desired.  This would make the Governor "the bad                                                            
guy" by requiring  him to eliminate items in the budget.  Removal of                                                            
the language would require  both the Governor and the Legislature to                                                            
share  in the budgeting  responsibility.  In  addition, its  removal                                                            
would  eliminate  the  Legislature's  jeopardy  "in  the  Bess  Omar                                                            
     (e)  If appropriations  for  a fiscal  year  exceed the  amount                                                            
     validly  appropriated  under this section,  the governor  shall                                                            
     reduce expenditures  by the executive branch  for its operation                                                            
     and administration  to the extent  necessary to avoid  spending                                                            
     more than the amount validly appropriated.                                                                                 
Co-Chair Wilken  asked whether the  sponsor would like to  entertain                                                            
an amendment to this effect.                                                                                                    
Senator Dyson  preferred to delay action in this regard  until after                                                            
the Administration has presented its testimony.                                                                                 
Senator Dyson  noted that Dr. Poulson,  who is recognized  as one of                                                            
the  nation's  foremost authorities  on  governmental  taxation  and                                                            
spending limit  concepts, would now  present testimony. Dr.  Poulson                                                            
was instrumental  in the development  of Colorado's "Taxpayers  Bill                                                            
of  Rights"  (TABOR),  which  has  been  recognized  as  a  national                                                            
taxation/spending  model.  Furthermore,  Dr.  Poulson  is  "uniquely                                                            
qualified" to  answer Members' questions on policy  matters and what                                                            
concepts have or have not proven successful.                                                                                    
Co-Chair  Wilken  re-capped, for  Dr.  Poulson's benefit,  that  the                                                            
Committee  is conducting  a weeklong  focus on  fiscal planning  and                                                            
methods  through which  to incorporate  the State's  assets in  long                                                            
term  fiscal  budget  planning.  The  bill  being   discussed  would                                                            
implement a Constitutional  spending limit as a method through which                                                            
to address long-term budgeting needs.                                                                                           
DR.  BARRY   POULSON,   Tax/Spending  Consultant,   and   Professor,                                                            
University of Colorado,  testified via teleconference from an offnet                                                            
site  in  Colorado  and stated  that  he  would  share some  of  the                                                            
experiences  that other states  have had in  the development  of tax                                                            
and  spending  limits; would  discuss  Colorado's  TABOR  amendment;                                                            
would  provide  his recommendations   for a  well-designed  tax  and                                                            
spending limit  would entail; and provide comments  regarding SJR 3.                                                            
Dr. Poulson stated  that his conclusion is that spending  limits are                                                            
effective  and,  "if properly  designed,"  would  positively  affect                                                            
fiscal policy. Some policies  have effectively restrained the growth                                                            
of  government,  which  is of  particular  importance  in  times  of                                                            
economic  recession. "States  that have effective  tax and  spending                                                            
limits have  had to rely  less on tax increases  as a way  to offset                                                            
revenue shortfalls."  The crucial  element is the design  of the tax                                                            
and  expenditure  limit  (TEL): some  states  have  poorly  designed                                                            
spending limits and others  have well-designed limits that have been                                                            
eroded due  to Legislative  action or Court  interpretations  of the                                                            
limit. An example  of a poorly designed  spending limit is  one that                                                            
would return any fiscal  year's monetary surplus to the general fund                                                            
as it  serves to  negate any funding  constraints  in the long  run.                                                            
Another  example  would  be  that  special  interest   groups  might                                                            
influence  the  process  and  have  certain  funding  earmarked  and                                                            
exempted from  the spending limit  in order to benefit their  cause.                                                            
Therefore,  in order  to effectively  design a  spending limit,  the                                                            
requirements  are  that  the  language   must  be  included  in  the                                                            
Constitution rather  than in statutory provisions;  the limit itself                                                            
must be defined in terms  of the sum of population and inflation; if                                                            
surplus  revenue  above  the  limit   is  generated,  it  should  be                                                            
immediately refunded  to taxpayers; and TEL would  be most effective                                                            
when  linked  to other  budgetary  rules  such  as  balanced  budget                                                            
provisions and budget stabilization funds.                                                                                      
Dr.  Poulson  explained  that  TABOR  was  initially  introduced  in                                                            
Colorado in 1992 and was  enacted in 1997. "TABOR is regarded as the                                                            
most effective  tax  and spending  limit in the  country," and  many                                                            
states  are using  it as  a model.  It has  served  to restrain  the                                                            
growth  of government  spending in  Colorado. In  the years  between                                                            
1997  and 2000,  the  limit  was met  and  more than  three  billion                                                            
dollars  was  rebated  or  refunded  to  Colorado's  citizens.  Some                                                            
problems  that are being  addressed include  developing a  mechanism                                                            
through  which  to  stabilize  the budget  over  a  business  cycle.                                                            
Another thing  that has served to  erode TABOR is the legislature's                                                             
decision to  rebate one year's surplus  revenue the following  year.                                                            
Unfortunately  that  was a year  in which  the State  experienced  a                                                            
revenue  shortfall. This  served to  exacerbate  the state's  fiscal                                                            
crisis. Several  interest groups have also influenced  modifications                                                            
to TABOR  "in ways  that way  eroded its effectiveness,"  as  while,                                                            
currently  most of  Colorado's  surplus  revenue is  generated  from                                                            
broad-based sales and income  taxes, legislation has been introduced                                                            
that would provide rebates to special interest groups.                                                                          
Dr. Poulson concluded  that TABOR has served to align  the growth of                                                            
state government  in Colorado with the state's economy.  California,                                                            
on the other hand, "gutted"  their TEL in the late 1980s and allowed                                                            
state  government spending  to  grow in  double-digit  rates in  the                                                            
1990s. As a  result, when California  experienced its recession  and                                                            
revenue shortfalls,  it was forced  to make "really draconian  cuts"                                                            
or to borrow $20 billion  dollars." Colorado has been able to "avoid                                                            
that kind  of catastrophe,"  and in that aspect,  TABOR has  been an                                                            
important component of the state's policy.                                                                                      
Senator  Hoffman  asked  regarding  Colorado's  growth rate  in  the                                                            
Dr. Poulson  responded that the growth  rate average exceeded  eight                                                            
percent after 1992, and  some years experienced double-digit growth.                                                            
Co-Chair  Wilken  asked for  clarification  whether  that was  eight                                                            
percent growth per year.                                                                                                        
Dr. Poulson  concurred that that was  the average for total  income.                                                            
Dr. Poulson noted  that he has been working in conjunction  with the                                                            
American  Legislative Exchange  Council to  develop a model  TEL. In                                                            
addition, he has worked  with Senator Dyson on this legislation. The                                                            
next  generation  of TEL  should include  the  following  "critical"                                                            
provisions:  it  should  be  a  Constitutional  provision;  must  be                                                            
defined on the  sum of inflation and population growth;  the broader                                                            
the base utilized  in determining  the spending limit the  better as                                                            
it would curb  the ability of special  interest groups to  erode the                                                            
base and "carve  out privileged positions" by having  their spending                                                            
exempted from  the limit; the use of actual and historical  measures                                                            
of expenditures  and  revenues rather  than projected  or  estimated                                                            
amounts;  and to link the  TEL to both a  balanced budget  provision                                                            
and a budget  stabilization fund.  The idea being that a  portion of                                                            
any surplus revenue  would be either rebated or placed  in a reserve                                                            
fund.  The reserve  fund could  be utilized  to  offset any  revenue                                                            
shortfalls  in  periods  of  recession.  "The objective  is  not  to                                                            
restrain the growth  of government but to stabilize  the budget over                                                            
the business cycle."                                                                                                            
Dr.  Poulson  opined  that  the  committee  substitute  Version  "X"                                                            
embodies  these  concepts  and  is  a good  TEL.  In  addition,  the                                                            
committee substitute  provides for spending above  the limit were an                                                            
emergency  situation to  occur. In  addition, it  provides that  any                                                            
money spent  from the reserve  fund must be  repaid. The goal  is to                                                            
arrive at an "optimum  tradeoff between constraining  government and                                                            
stabilizing the budget over the business cycle."                                                                                
Senator Bunde, noting that  he is supportive of this bill, commented                                                            
that rather than  this being a tax and spending limit  bill, this is                                                            
a spending  limit bill, as the State  does not have a broad  general                                                            
tax base.                                                                                                                       
Dr. Poulson responded that  the bill is appropriately titled, as the                                                            
limit refers to  the total amount that could be spent  as determined                                                            
by a  formula that  is tied to  the previous  year's appropriation.                                                             
Given Alaska's recent pattern  of spending, the bill would provide a                                                            
"more stable growth  in spending and certainly constrain  the growth                                                            
"as compared to the spending  that occurred in the previous decades.                                                            
Co-Chair  Green asked  for further  information  regarding the  term                                                            
Dr.  Poulson  explained  that  between  the  years  1997  and  2000,                                                            
Colorado experienced  revenue above the TABOR limit.  TABOR requires                                                            
that this surplus  must be refunded to taxpayers either  in the form                                                            
of tax  cuts or tax rebates.  Reducing the  state's income  tax rate                                                            
from  five-percent  to  four-point-six-seven   percent  lowered  the                                                            
amount  of the  surplus; the  state's sales  tax  rate and  business                                                            
personal property  tax rates were lowered; and a rebate  in the form                                                            
of  a check  was  sent to  taxpayers  based  on a  person's  income.                                                            
Therefore  the  three-point-two-five   billion  dollars  of  surplus                                                            
revenue that  was refunded  to taxpayers was  comprised of  both tax                                                            
cuts and rebates.                                                                                                               
Co-Chair  Green  asked whether  Alaska's  CBR  would equate  to  the                                                            
budget stabilization fund presented in the testimony.                                                                           
Dr. Poulson  responded that one criticism  of the Colorado  TABOR is                                                            
that it does  not have a true budget  stabilization fund  but rather                                                            
has established  numerous funds such as a Medicaid  reserve fund and                                                            
an emergency  reserve fund that could  only be accessed in  the case                                                            
of a  natural disaster.  Efforts are  underway to  establish  a true                                                            
budget stabilization fund  to which a portion of any surplus revenue                                                            
would be allocated in addition to the tax cuts and rebates.                                                                     
Dr. Poulson  understood that  the Version  "X" committee  substitute                                                            
would allocate any surplus  revenue into the CBR, and that any money                                                            
removed  from that  fund must  be  repaid. Therefore,  as  currently                                                            
defined, the  CBR could not be used  as a budget stabilization  fund                                                            
when there  is a period of a decrease  in revenue, but would  rather                                                            
require budget reductions to be made.                                                                                           
Co-Chair  Green asked  whether  Colorado's  reserve  funds could  be                                                            
accessed by a simple-majority.                                                                                                  
Dr. Poulson  responded that  the rules of  how to access money  from                                                            
the  budget stabilization   funds vary  from  state to  state:  some                                                            
authorize  it to be at  the discretion of  the legislature  and some                                                            
have  formulas that  are triggered  by  various factors  that  would                                                            
allocate the funds in a variety of manners.                                                                                     
Senator  Dyson stated  that one of  the criticisms  of the  formulas                                                            
presented in  this bill is the belief  that recent spending  has not                                                            
provided an acceptable or appropriate level of basic services.                                                                  
Dr. Poulson  responded that  in 1992, the  argument in Colorado  was                                                            
that the  TABOR amendment  would result in  draconian reductions  at                                                            
both the state  and local level. In reality, that  has not occurred.                                                            
An important  provision  in the  Colorado TABOR  amendment is  that,                                                            
were  the legislature  to  determine  that  the TEL  is  too low  to                                                            
support  services,  the  issue   could  be  presented  as  a  ballot                                                            
initiative  to the people  either to  approve a  tax increase  or to                                                            
approve spending above  the limit. A tax increase was turned down by                                                            
the voters  in 1992 and the fact that  none has been approved  since                                                            
is a good indicator that  the public accepts the current TEL. Recent                                                            
surveys  indicate that  people  approve of  the TABOR  amendment.  A                                                            
proposal to increase the  spending limit was placed on the ballot in                                                            
1997 and  voters, also, rejected  it. Were  the State to include  in                                                            
this legislation,  the ability to place taxation and  spending limit                                                            
issues on a  statewide ballot, the  voters could provide  the answer                                                            
as to whether the limits were appropriate.                                                                                      
Dr. Poulson noted that  Colorado's TABOR amendment also limits local                                                            
government  TAL. They have been more  successful in acquiring  voter                                                            
approval of local taxation  or spending limit increases. The smaller                                                            
the  government,  the more  likely  voter  approval of  taxation  or                                                            
spending increases.  In summary, he stated that TEL  "returns direct                                                            
democracy to  citizens in deciding  how much taxes they are  willing                                                            
to pay and what levels  of revenues and spending they are willing to                                                            
see at both the local and state level."                                                                                         
Senator Bunde  understood that economists  "generally" believe  that                                                            
taxation  and spending  limits  are "inappropriate  or  bad for  the                                                            
Dr. Poulson  shared  that one of  the nation's  leading economists,                                                             
Richard Bedder  of Ohio State University,  has compared states  that                                                            
have successful  TEL programs  to states  that have not implemented                                                             
successful  ones  and found  that  the successful  states  are  out-                                                            
performing  the  others.  They  are  more  successful  in  terms  of                                                            
attracting business  and in-migration. Therefore,  the best economic                                                            
analysis suggests  that TEL could be "a very important  part of your                                                            
fiscal discipline."                                                                                                             
Senator Dyson  originally  thought that the  formula should  work in                                                            
reverse,  in  that  were  there a  net  decrease  in  population  or                                                            
deflation it "would ratchet  down the State's spending." However, he                                                            
negated  that  approach  as he  realized  that  the State  might  be                                                            
required to increase services  in the event of a downturn. Therefore                                                            
the ratchet down factor was eliminated.                                                                                         
Dr.  Poulson agreed  that  when a  recession is  being experienced,                                                             
providing the legislature  with sufficient flexibility with which to                                                            
offset some  portion of the revenue  shortfall funds from  the rainy                                                            
day or reserve  fund would be desirable.  He stated that  Colorado's                                                            
"TABOR  amendment  is  pretty  stringent  in that  it  does  ratchet                                                            
revenue and spending down"  as the limit is required to be the lower                                                            
of  either the  limit  set by  inflation  and population  growth  or                                                            
actual  revenues.   In  recent  years,  the  state's   revenues  and                                                            
expenditures have  been ratcheted down approximately  19-percent due                                                            
to  revenue shortfalls.  One  of  the changes  being  considered  in                                                            
Colorado is  that in times of a revenue  shortfall the limit  should                                                            
either be suspended  or remain constant  until such a time  revenues                                                            
exceed the  level that occurred prior  to the shortfall.  This would                                                            
assist in stabilizing the budget over the business cycle.                                                                       
Dr.  Poulson  stated that  the  proposed  legislation  contains  two                                                            
provisions,  not included  in the TABOR amendment:  the first  being                                                            
that Alaska  has a no ratchet  down provision  and the second  being                                                            
that Alaska has a CBR whereas Colorado does not.                                                                                
Senator Dyson  noted that Version  "X" contains language  that would                                                            
allow for exceeding the  spending limit in the case of an emergency.                                                            
Consideration   is  being   given  to  changing   the  language   to                                                            
"extraordinary   circumstance"  in  order  to  expand   spending  in                                                            
situations  in which  the  State should  expend  a large  amount  of                                                            
money, such  as in support of an Alaska  gas-line. In that  case, it                                                            
might take  a few  years to regain  sufficient  funds with which  to                                                            
repay the rainy day account.                                                                                                    
Dr. Poulson  stated  that Colorado  approaches this  in a  different                                                            
manner as the  TABOR amendment specifies that, upon  voter approval,                                                            
a tax increase  or an amount exceeding  the spending limit  could be                                                            
implemented in  a given year. He expressed that a  vote might result                                                            
either by a citizen  or legislative initiative. In  one instance, an                                                            
amendment to the  constitution was adopted that specified  that some                                                            
spending  for  K-12 education  would  be  exempt from  the  spending                                                            
limit.  Therefore,   numerous  options  are  available   to  address                                                            
specific needs.  The state of Michigan  has established a  system in                                                            
which surplus  money is deposited  into a  rainy day account,  which                                                            
could be accessed  to fund an emergency.  He preferred the  Colorado                                                            
mode of providing emergency  funding, because rather than a decision                                                            
being made  by the Governor  with support  from the Legislature,  it                                                            
would also require the State's citizens' approval.                                                                              
Senator Dyson  shared that the Administration  has suggested  that a                                                            
termination   or   re-ratification   date   be  included   in   this                                                            
Dr. Poulson voiced support  for this suggestion, for, in the case of                                                            
Colorado,  citizen approval  has increased  over time. In  addition,                                                            
local governments  in the state have approved provisions  that would                                                            
allow  some components  of  the spending  limit  to exceed  it on  a                                                            
permanent basis.                                                                                                                
Senator Dyson  asked whether  there is any  method through  which to                                                            
prohibit state  government from downloading responsibility  to lower                                                            
governments  in order to allow the  state government to spend  money                                                            
is a desired fashion.                                                                                                           
Dr. Poulson responded  that Colorado and other state's  TELs contain                                                            
provisions  that preclude  this  from occurring  in  that, were  the                                                            
state to  impose mandates  that would require  local governments  to                                                            
increase spending,  the State must  provide the additional  funding.                                                            
For example,  when Colorado lowered  its business personal  property                                                            
tax, the action  negatively affected local revenues.  TABOR required                                                            
the State  to "backfill  that loss  of revenue"  with State  general                                                            
fund revenue.  This provision "has  been successfully upheld  in the                                                            
courts."  It is important  that the  state not  shift the burden  of                                                            
programs to local governments.                                                                                                  
Senator Dyson  countered, however,  that certain programs  should be                                                            
administered at the local level.                                                                                                
SFC 04 # 43, Side A 03:31 PM                                                                                                    
Senator  Dyson continued  that,  while  some communities  could  and                                                            
should provide  certain services, as long as the State  is providing                                                            
those  functions, the  local  entity does  not assume  them.  Police                                                            
protection  is  an example  of  a  program that  should  be  managed                                                            
locally. Therefore,  mirroring the Colorado format  might not in the                                                            
best public policy for  Alaska, particularly as it is a fairly young                                                            
Dr.  Poulson agreed  that  local governments  best  administer  some                                                            
programs such as law enforcement.  He stated that most states are in                                                            
an opposite  position  as  the state  government  has mandated  that                                                            
local  governments   provide  certain  services  without   providing                                                            
adequate  funding. He  would provide  a more  thorough answer  after                                                            
further research.                                                                                                               
Senator Dyson agreed that the Alaska has unique situations.                                                                     
Senator Dyson  understood that  every state  that has TEL has  based                                                            
its  formula  on  the  sum  of  inflation  and  population   growth.                                                            
Therefore,  he  asked  Dr. Poulson's  opinion  of  the  proposal  to                                                            
utilize the  sum of 90-percent inflation  and 75-percent  population                                                            
growth as the  growth of government  and demand for services  should                                                            
not be on a one-to-one ratio with these two factors.                                                                            
Dr.  Poulson responded  that  inflation  and population  growth  are                                                            
"stringent  limits" that have "certainly  constrained the  growth of                                                            
government in  states" that utilize these factors  in their formula,                                                            
particularly  the states of Washington  and Colorado. In  periods of                                                            
economic growth,  a one to one TEL would serve to  hold governmental                                                            
revenues  and spending  below the  level of income  and the  private                                                            
economy;  however, this  might not be  true in  a time of  recession                                                            
these  factors might  permit  a growth  of government  in excess  of                                                            
private  income.   He  voiced  being  unsure  whether   utilizing  a                                                            
percentage  of these factors  would be necessary  as the one  to one                                                            
formula is stringent.                                                                                                           
Co-Chair Wilken  noticed that while Colorado's formula  utilizes the                                                            
sum of 100-percent  of both inflation  and population, the  spending                                                            
is limited to a maximum six-percent increase.                                                                                   
Dr. Poulson stated that  at the time TABOR was being voted on by the                                                            
state's  citizens,  the  Colorado  legislature  adopted  a  separate                                                            
general fund statutory  spending limit with a maximum  growth of six                                                            
percent.  Therefore the State  has a Constitutional  spending  limit                                                            
that  is based  on  population  and  inflation  and a  general  fund                                                            
statutory  spending  limit   of six  percent.   TABOR  implements  a                                                            
Constitutional  spending limit  to total revenue  and spending.  The                                                            
six  percent  statutory  limit  applies  only to  the  general  fund                                                            
spending per year.                                                                                                              
Co-Chair Wilken  asked, therefore,  how a half a billion  dollars of                                                            
federal  funding  could be  utilized  were  the TABOR  amendment  in                                                            
Dr. Poulson  clarified that  federal funds  and debt repayments  are                                                            
both excluded  from the provisions  of the  TABOR formula.  With the                                                            
exception of exemption  of money received in the form of tuition for                                                            
the University  of Alaska,  the other  exemptions  denoted in  SJR 3                                                            
mirror that of TABOR.                                                                                                           
Senator Bunde  voiced that the term  "Alaska Disconnect"  is defined                                                            
as being  that the State  spends approximately  $6,000 per  each new                                                            
person in  the State whereas  each citizen  generates approximately                                                             
$5,000  in income.  New  research  conducted  by the  University  of                                                            
Alaska indicates that each  new job in the State costs the State and                                                            
local governments approximately  $6,300 while it generates $5,200 in                                                            
tax and  revenue. This  is the  Alaska Disconnect.  He voiced  being                                                            
unsure  whether   this  information  supports  the  percentages   of                                                            
inflation and population growth proposed in the bill.                                                                           
Co-Chair Wilken referenced  language in Section 1, subsection (a)(1)                                                            
on page one, beginning on line ten that reads as follows.                                                                       
     (1) the lesser of                                                                                                          
          A) ninety percent of the average annual percentage rate                                                               
     of change  in the Consumer Price Index for all  urban consumers                                                            
     for  the Anchorage  metropolitan  area  compiled  by a  federal                                                            
     agency  for  the  second,  third,  and  fourth  calendar  years                                                            
     preceding  the  calendar  year  during  which  the immediately                                                             
     preceding fiscal year began; or                                                                                            
          (B) the average percentage of the change in the average                                                               
     personal  income of State residents for the second,  third, and                                                            
     fourth calendar years  preceding the calendar year during which                                                            
     the immediately preceding fiscal year begins; plus                                                                         
Co-Chair  Wilken stated this  language would  balance the lesser  of                                                            
(A) which  is the CPI against  (B) which is  the change in  personal                                                            
income. The  sum would result  from adding  one of those two  to the                                                            
75-percent  of the average annual  percentage rate of change  in the                                                            
State  population   for  those  same  years.  Therefore,   he  asked                                                            
regarding   the  connection  between   personal  income   and  State                                                            
Senator Dyson  stated that Cheryl Frasca, the Director  of Office of                                                            
Management and Budget,  had suggested that rather than incorporating                                                            
an  inflation   factor,   growth  in  personal   income  should   be                                                            
substituted.  However, he decided,  upon review, that the  growth in                                                            
personal income would not  increase, but would in fact decrease, the                                                            
demand or need for government services.                                                                                         
Senator  Dyson stated  that in a  prior draft,  the calculation  was                                                            
that  the growth  in CPI  could not  exceed the  growth in  personal                                                            
income. It was his intent  that the growth in personal income "would                                                            
be a limiter rather than  choosing the less of." This would have the                                                            
same  result.  He  stated  that  Ms.  Frasca's   comments  would  be                                                            
Co-Chair  Wilken,   referencing  the   fact  that  the  legislation                                                             
discounts inflation  and population,  asked Dr. Poulson whether  any                                                            
other state has done likewise.                                                                                                  
Dr.  Poulson replied  that  Washington  and Colorado  utilize  total                                                            
inflation and population  growth. Other states have incorporated the                                                            
less stringent limit of  the rate of growth in personal income, as a                                                            
state that is  experiencing a rapid growth in personal  income could                                                            
permit a large  increase in revenues  and spending. He also  advised                                                            
that this could present  the problem as experienced in Florida where                                                            
for  three  years there  was  a growth  in  personal  income,  which                                                            
resulted  in three years  of an increase  in revenues and  spending.                                                            
This period was  then followed by a recession and  a downturn in the                                                            
economy. Therefore,  while revenue was declining,  spending was not.                                                            
He was not  supportive of this approach.  Therefore the design  of a                                                            
tax  and spending  limit  is  crucial.  He voiced  support  for  the                                                            
approach being presented in SJR 3.                                                                                              
Senator Dyson  conveyed that he was  intrigued with the development                                                             
of the formula,  particularly when he recalled the  economic expanse                                                            
and decline  experienced  in the State  in the  1980s. He would  not                                                            
support the inflation portion of the formula driving the limit.                                                                 
Co-Chair Wilken voiced  appreciation for Dr. Poulson's presentation.                                                            
CHERYL FRASCA,  Director,  Office of Management  and Budget,  voiced                                                            
that Governor  Frank  Murkowski is  supportive  of a Constitutional                                                             
spending limit.  It is difficult to  compare Alaska to other  states                                                            
as they have more revenues  generated by taxation. Another challenge                                                            
is the expectation  "that revenues  would automatically increase  to                                                            
the level approved  in the spending limit." This "is  not always the                                                            
case." As referenced  by Dr. Poulson,  when a list of exemptions  is                                                            
developed, there is a tendency  to categorize under those categories                                                            
and thereby, increase  the number of exemptions. In  addition, there                                                            
is a tendency  to exclude funds for  special interest groups.  Other                                                            
than the  exemption  of tuition for  the University  of Alaska,  the                                                            
Version "X" committee substitute  does not list specific exemptions.                                                            
Some  elements  that  should  be  considered  as  additions  to  the                                                            
exemption list  would be Trust funds, the inflation  proofing of the                                                            
Permanent Fund, and dedicated fund sources.                                                                                     
Ms.   Frasca  echoed   Senator   Dyson's  comments   regarding   the                                                            
Administration's  concern about  language in  Section 1,  subsection                                                            
(e)  on page  two,  lines  27  through  30 that  would  require  the                                                            
Governor  to singly  make reductions  to programs  rather than  that                                                            
being conducted by both the Governor and the Legislature.                                                                       
Ms. Frasca  spoke in favor  of the re-ratification  language  in the                                                            
bill.  She also  voiced  that  an area  of  concern in  the  current                                                            
Constitutional  spending  limit language  is  that each  year it  is                                                            
ratcheted up dependent  on the prior year's limit  rather than being                                                            
based on  actual expenditures.  Therefore,  consideration should  be                                                            
given "to  making the limit  realistic" by  basing the limit  on the                                                            
actual appropriations.                                                                                                          
Senator  Dyson agreed  that this  is the  problem  with the  current                                                            
Constitutional spending  limit. It "accelerates toward infinity." In                                                            
contrast, the  SJR 3 proposal is based  on the average of  the prior                                                            
three  years'  appropriations  in combination  with  population  and                                                            
inflation  percentages. Were  it strictly based  on, for example,  a                                                            
two-percent  population  and  inflation  increase, the  growth  rate                                                            
would equate to  four-percent. He agreed that careful  consideration                                                            
to the formula must occur.                                                                                                      
Ms. Frasca reiterated that  even though the limit might be increased                                                            
five-percent,  "the  reality  is  we may  only  have  a one-percent                                                             
increase  in our  budget and  so the idea  is that  the next  year's                                                            
limit would  be based  on that  one-percent increase  not the  five-                                                            
percent."  She  stressed   that  this  process  should   be  clearly                                                            
Ms. Frasca  stated that in  its approach  to developing the  factors                                                            
that  would  influence  a spending  limit,  the  Administration  had                                                            
considered  a fifty-percent  change in the  rate of personal  income                                                            
growth as the  theory was that were  individual Alaskans  doing well                                                            
in terms  of the economy  then the State should  be able to  spend a                                                            
little  more.  Upon  consideration,   the  Administration   accepted                                                            
Senator Dyson's  argument that in times of a recession,  there could                                                            
be an  increase  of State  program  assistance as  people's  incomes                                                            
reduce.  In summary,  the approach  taken by  the Administration  as                                                            
compared to that taken  by Senator Dyson is very similar in terms of                                                            
the  outcome,  and   that  population  and  inflation   factors  are                                                            
Co-Chair Wilken  mentioned that in a memorandum [copy  not provided]                                                            
he had received  from Ms. Frasca,  it was mentioned that  a drafting                                                            
error has been identified in the bill.                                                                                          
Ms. Frasca responded  that the error in question was  in the Version                                                            
"B" committee  substitute  and has since  been corrected. She  noted                                                            
that the only other Administration  suggestion would be that further                                                            
consideration  be given to providing  flexibility in the  process of                                                            
exceeding  the limit. She  noted that this  State, unlike  Colorado,                                                            
does   not  provide   its   citizens   the   ability   to  vote   on                                                            
appropriations.  She also noted that  the Municipality of  Anchorage                                                            
has a limit on  the annual percentage increase that  could be levied                                                            
on  all taxes  so  that  its  spending  is limited  to  its  revenue                                                            
sources. Colorado  has two limits; one as mandated  by TABOR and the                                                            
spending limit  as reflected in regulation. It should  be noted that                                                            
in both Anchorage  and Fairbanks, when a bond proposal  is approved,                                                            
the amount  of funding needed for  maintenance of the project  would                                                            
be exempt from the limit.                                                                                                       
Co-Chair Green  asked about language  in Section 1, subsection  (d),                                                            
beginning on page two, line 22.                                                                                                 
     (d)  An appropriation   that exceeds  the  appropriation  limit                                                            
     under  this  section   may  be  made  for  any  public  purpose                                                            
     identified  by the Governor in a declaration  of emergency upon                                                            
     affirmative vote of  at least two-thirds of the members of each                                                            
     house of the legislature.  Appropriations under this subsection                                                            
     may  be  made  only  for  a  fiscal  year   identified  in  the                                                            
     declaration of emergency.                                                                                                  
Co-Chair  Green noted that  this language might  be a conflict  with                                                            
existing statute and suggested  that this section be reviewed by the                                                            
Department  of Military and Veterans  Affairs and the Department  of                                                            
Ms. Frasca  asked for  confirmation  that the conflict  would  be in                                                            
regard to the  process through which  the Governor would  declare an                                                            
Co-Chair Green affirmed  and stated that another concern would be in                                                            
regards to how an emergency would be financed.                                                                                  
Senator Dyson  asked the Administration  to review this language  as                                                            
it might pertain  to the State undertaking  a huge building  project                                                            
such as  a gas  pipeline or  a road and  the efforts  that would  be                                                            
required in advance of that endeavor.                                                                                           
Ms. Frasca concurred.                                                                                                           
Co-Chair Wilken  asked how this language would effect  action in the                                                            
case of an emergency such as a major earthquake.                                                                                
Ms Frasca stated that currently  the process through which the costs                                                            
of responding to an emergency  such as an earthquake is conducted in                                                            
via a ratification  process, "after  the fact." The only  difference                                                            
is that  the two-thirds  vote of  the Legislature,  as specified  in                                                            
this legislation  were the situation  to exceed the spending  limit,                                                            
is not currently required.                                                                                                      
Co-Chair  Wilken  understood  that this  legislation  would  require                                                            
something akin  to "a super supplemental"  to be ratified  by a two-                                                            
thirds vote of the Legislature.                                                                                                 
Ms. Frasca confirmed.                                                                                                           
Co-Chair  Wilken  stated that  the  issues  brought forward  by  the                                                            
Administration would be considered.                                                                                             
Senator  Dyson stated  that he "is  encouraged"  by the progress  of                                                            
this legislation.                                                                                                               
Co-Chair  Wilken noted  that Senator  Bert Stedman  has developed  a                                                            
"sensitivity analysis"  [copy not provided] and noted  that a change                                                            
in variables does affect funding.                                                                                               
Senator Dyson  appreciated Senator Stedman's professional  input. In                                                            
addition, he shared  that comments from the oil industry  indicate a                                                            
desire  that  the  State  strive  to  develop   a stable   financial                                                            
environment.  He stated  that this  and other  industries should  be                                                            
encouraged that,  were the State to experience a new  economic boom,                                                            
the State's  spending would  not be extreme.  Echoing Dr.  Poulson's                                                            
comments, he stated that those states that have effective spending                                                              
limits have been exceeding the average national growth.                                                                         
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
Co-Chair Gary Wilken adjourned the meeting at 04:02 PM                                                                          

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