Legislature(2003 - 2004)

03/18/2004 09:06 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     SENATE FINANCE COMMITTEE                                                                                 
                          March 18, 2004                                                                                      
                              9:06 AM                                                                                         
SFC-04 # 48,  Side A                                                                                                            
SFC 04 # 48,  Side B                                                                                                            
SFC 04 # 49,  Side A                                                                                                            
CALL TO ORDER                                                                                                               
Co-Chair Gary Wilken convened  the meeting at approximately 9:06 AM.                                                            
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Lyman Hoffman                                                                                                           
Senator Fred Dyson                                                                                                              
Senator Donny Olson                                                                                                             
Senator Ben Stevens                                                                                                             
Also Attending: SENATOR  JOHN COWDERY, SENATOR BERT STEDMAN, SENATOR                                                          
GARY STEVENS,  SENATOR TOM WAGONER,  SENATOR RALPH SEEKINS,  SENATOR                                                            
HOLLIS  FRENCH; D.H  (DAN)  CUDDY, President,  First  National  Bank                                                            
Alaska;  NEIL FRIED, Economist,  Department  of Labor and  Workforce                                                            
Development; CHRIS  MILLER, Chief, Research & Analysis,  Division of                                                            
Administrative   Services,   Department  of   Labor  and   Workforce                                                            
Development;  LUCKY SCHULTZ,  Staff  to Senator  Fred Dyson;  CHERYL                                                            
FRASCA, Director,  Office  of Management and  Budget, Office  of the                                                            
Attending   via  Teleconference:   There   were  no  teleconference                                                           
SUMMARY INFORMATION                                                                                                         
Conference of Alaskans Resolutions                                                                                              
The Committee  heard presentations from Dan Cuddy,  President, First                                                            
National Bank Alaska and  from the Department of Labor and Workforce                                                            
SJR 3-CONST AM: APPROPRIATION/SPENDING LIMIT                                                                                    
The Committee  heard from the sponsor  and the Office of  Management                                                            
and Budget.  A committee  substitute  was adopted  and the bill  was                                                            
held in Committee.                                                                                                              
                Conference of Alaskans Resolutions                                                                              
Co-Chair  Wilken   noted  that  the   Committee  would  be   hearing                                                            
presentations  from Mr. Dan  Cuddy, President,  First National  Bank                                                            
Alaska and from Mr. Neil  Fried, an economist from the Department of                                                            
Labor and Workforce Development.                                                                                                
Senator  Bunde referenced  information  in a March  17, 2004  letter                                                            
[copy on  file] that Committee  members received  from Bill  Corbus,                                                            
Commissioner  of the  Department of  Revenue. It  is interesting  to                                                            
note that when  equating previous State budgets to  today's dollars,                                                            
there  is a significant  difference.  One example  is that  Governor                                                            
Bill Sheffield's  proposed $2,719,000  FY 87 budget would  equate to                                                            
$7,200,000,000  today  when  adjusted   for  population  growth  and                                                            
Co-Chair Wilken  noted that the two  amendments [copies on  file] to                                                            
the  State Constitution  that  were  suggested  by Mr.  Roger  Cremo                                                            
during his March  17, 2004 testimony have been provided  to Members.                                                            
D.H. (DAN)  CUDDY, President,  First National  Bank Alaska  read his                                                            
presentation as follows.                                                                                                        
     Paying the Cost of Alaska State Government                                                                               
     Thank you for allowing me to come before you today.                                                                        
     The State  of Alaska is not presently  facing a fiscal  crisis.                                                            
     Resources  are presently  available  to pay  the cost of  State                                                            
     Government.  Thanks to the higher price for oil,  state royalty                                                            
     income is much higher  than expected; and, thanks to the wisdom                                                            
     of   the  legislature   in   making   judicious   use  of   the                                                            
     Constitutional  Budget  Reserve,  there are  ample reserves  in                                                            
     addi9ion  to royalties  to  pay the  current  expense of  State                                                            
     Government.  Add to that the  income of the Permanent  Fund and                                                            
     the State  of Alaska has more  than ample resources  to pay for                                                            
     any proposed  version of the  next State Budget. However,  that                                                            
     doesn't solve the current problem, which is UNCERTAINTY.                                                                   
     UNCERTAINTY NOW is  surely contributing to what will become far                                                            
     more  than a "Fiscal  Gap" in  the future;  what will become  a                                                            
     true crisis  of major proportions, if the legislature  does not                                                            
     do  something to  avoid  it now. There  is  uncertainty now  in                                                            
     financial  markets about Alaska's future. There  is uncertainty                                                            
     now  among  oil producers  who  contribute  the bulk  of  State                                                            
     Revenue  in the  form of  royalties.  The same  can be said  of                                                            
     other resource extraction  enterprises. And there's uncertainty                                                            
     among  your constituents about  the economic future  of Alaska,                                                            
     in light of the potential  for seemingly unlimited governmental                                                            
     At  present the  bond rating  of the  State  of Alaska  remains                                                            
     relatively   stable.   The  financial   markets  look   to  the                                                            
     Constitutional   Budget  Reserve  and  the  Permanent  Fund  as                                                            
     security   for  payment  of  the  cost  of  State  Government,                                                             
     including  bonded  indebtedness.  The decision  of the  markets                                                            
     about Alaska's  credit worthiness will change  quickly, and for                                                            
     the worse,  if the Budget Reserve  is further depleted,  or you                                                            
     show reluctance to  resort to income from the Permanent Fund to                                                            
     pay part  of the anticipated  cost of State Government  - worse                                                            
     yet if the  State of Alaska does something permanently  to make                                                            
     Permanent  Fund income unavailable  to pay part of the  cost of                                                            
     State Government when its needed.                                                                                          
     Deterioration   of the  State's  bond  rating  will  of  course                                                            
     increase  the  expense of  bonded indebtedness  -  the cost  of                                                            
     funding  State Government.  What  makes matters  worse is  that                                                            
     that  rating  will  be  deteriorating  at the  same  time  that                                                            
     interest  rates  generally  are increasing.  I  can't tell  you                                                            
     specifically how much  interest rates will increase in the next                                                            
     few  years, or precisely  when  they will start  to go  up. But                                                            
     everyone  with any  knowledge about  current national  economic                                                            
     circumstances  will confirm to you that interest  rates will be                                                            
     on the rise  (they can't go any lower) and soon.  If not at the                                                            
     conclusion  of  national   elections,  then  certainly  as  the                                                            
     national  trade deficit increases  and the value of  the dollar                                                            
     declines  against all major currencies. The impact  on the cost                                                            
     of funding  state government will be doubly bad  unless you act                                                            
     to  bring certainty  to  Alaska's  fiscal situation  now.  That                                                            
     includes  both the source  of State  income for appropriation,                                                             
     and the cost of State Government.                                                                                          
     Talk now  of a change in the  State tax laws affecting  oil and                                                            
     gas  producers in the  State is causing  them to rethink  their                                                            
     strategy  in Alaska. I assure  you that changes in current  tax                                                            
     laws  affecting oil producers  will cause  them to spend  their                                                            
     resources  for oil and gas production elsewhere.  All at a time                                                            
     when  Alaska can least  afford any further  decline in  oil and                                                            
     gas revenue.  Drive a harder bargain in connection  with future                                                            
     oil  and gas development,  if you think  it prudent. That  will                                                            
     allow the  producers to plan development. Changing  what is, in                                                            
     effect,  a  bargain that  already  exists  will cause  them  to                                                            
     abandon  development  in  Alaska.  The  same  can be  said  for                                                            
     miners. Whether it  be oil and gas or other mineral extraction,                                                            
     development  and  return on  investment, involves  a  long-term                                                            
     process.  One that  will not  go forward  unless variables  are                                                            
     reduced  to a minimum.  If producers cannot  count on  a stable                                                            
     tax  structure for the  life of an oil  field, or a mine,  they                                                            
     won't  begin to  develop  it in the  first  place. By  changing                                                            
     Alaska's   current  bargain   with  the  producers,   you  will                                                            
     jeopardize  prospects  of further  development  and  jeopardize                                                            
     revenue  that will be  critical to the  State of Alaska  in the                                                            
     There is  just as much uncertainty among your  constituents. As                                                            
     long  as  there  is  no  stated  strategy   for  funding  State                                                            
     government   and  no   plan  for  limiting   State   government                                                            
     expenditures,   there  will   be  no  potential  for   economic                                                            
     development  in the State of Alaska. And as long  as there is a                                                            
     common  perception  that there  is  no potential  for  economic                                                            
     development  in the State of  Alaska, the State will  encounter                                                            
     the  same cycle  of booms  and busts,  and  the same  transient                                                            
     population that has  been the constant in Alaska throughout the                                                            
     history of the State.  There will be no economic development or                                                            
     growth  of business in Alaska  able to sustain the anticipated                                                             
     increased  cost of  State Government  as long  as there  is the                                                            
     threat  of broad  based  taxes in  an unspecified  amount.  And                                                            
     there  will be  an immediate  demand by  your constituents  for                                                            
     distribution  of all  of the  income of the  Permanent Fund  as                                                            
     long  as there  is no articulated  strategy  for funding  State                                                            
     Government, and even  more so, as long as there is no potential                                                            
     check on State Government spending.                                                                                        
     I'm sure it occurs  to you. There is no recorded success of any                                                            
     government  fostering  economic development  by instituting  or                                                            
     increasing  an income  tax or sales  tax. And further  economic                                                            
     development  is what  this state  needs to  establish a  stable                                                            
     source of income to pay the cost of State Government.                                                                      
     Just  putting an end  to uncertainty now  about the extent  and                                                            
     means  of  paying  for  State Government  will  be  a  valuable                                                            
     contribution  to the State of Alaska. I warrant  to you that it                                                            
     will reduce the cost  of borrowing to pay for State government,                                                            
     and  foster economic  development in the  State - certainty  in                                                            
     connection  with resource  extraction.   It will also  create a                                                            
     more  favorable  climate  for  small business.  And  that  will                                                            
     attract and keep industrious  people in the State and encourage                                                            
     our children and their  children to live and work here as well.                                                            
     But  like everyone else,  I think you  can do better than  just                                                            
     bring  about  certainty.  I  have  my  own  suggestions  for  a                                                            
     strategy.  A lot of  it is based on  history, and thankfully  I                                                            
     have  a lot  of history  in this State.  I know  because  I was                                                            
     here. The  Permanent Fund was created so that  there would be a                                                            
     source  of  revenue  to pay  a portion  of  the cost  of  State                                                            
     government, when revenues  from oil production declined. No not                                                            
     the principal  portion of the  fund, the income from  the fund.                                                            
     Likewise,  I  know,  because  I was  here,  that  the  dividend                                                            
     program  was  instituted when  there  was seemingly  no  effort                                                            
     whatsoever  to limit government  spending. Since folks  thought                                                            
     that the only thing  that could limit State government spending                                                            
     was a limit  on available revenue for appropriation,  the ideal                                                            
     to pay a  portion of the income of the Permanent  Fund directly                                                            
     to  Alaska residents  was born.  By that means  at least,  some                                                            
     limit on government spending could be imposed.                                                                             
     You can still  achieve all of those objectives.  By judiciously                                                            
     avoiding   appropriation   of  Permanent   Fund  earnings   and                                                            
     inflation proofing  the Fund, you have provided a stable source                                                            
     of income to pay a  portion of the cost of State government and                                                            
     pay a dividend to citizens of Alaska as well.                                                                              
     The Trustees  and staff of the  Permanent Fund have  done their                                                            
     job  as well.  By judiciously  investing  the  principal and  a                                                            
     portion of the annual  income of the fund there is now a source                                                            
     of State Revenue and dividends as well.                                                                                    
     The  Percent   of  Market  Value  approach  to  management   of                                                            
     Permanent  Fund earnings  should  be adopted.  It has been  the                                                            
     successful  means of managing many other endowments,  and there                                                            
     is  every  reason  to  believe  that  it  will  be  an  equally                                                            
     successful  means of managing  the Permanent Fund. What's  even                                                            
     more important  is that it increases  the certainty  of revenue                                                            
     available to pay a  portion of the cost of State Government and                                                            
     a Permanent Fund dividend.  We have seen the potential dramatic                                                            
     effect available revenue  of the current approach to management                                                            
     of  the fund.  Distributions  based  on realized  earnings  are                                                            
     always  a  function  of the  vagaries  of  the market  and  the                                                            
     notions  of  current investment  managers.  The  POMV  approach                                                            
     evens out  those variables over a rolling ten-year  period that                                                            
     lends  predictability to  available revenue  and the degree  of                                                            
     certainty  that financial  markets  demand, if  there is  to be                                                            
     stability in the cost of funding state government.                                                                         
     How  that  income  is  divided  between  State  Government  and                                                            
     residents  should  be left to  the legislature  to decide.  The                                                            
     State's  legislature should have  the opportunity to  determine                                                            
     the  use  of  all available   State income  as  well  as  state                                                            
     spending  .The  legislature  can maintain  that  control if  it                                                            
     adopts  a plan for division  of the  earnings of the  permanent                                                            
     fund and limiting  State spending. An articulated plan to limit                                                            
     budget  increases according to  identifiable indexes  will go a                                                            
     long  way  to  quell uncertainty   among dividend  recipients.                                                             
     Assuming  a POMV approach to management of the  Permanent Fund,                                                            
     and  a plan  for  limiting  budget increases  according  to  an                                                            
     index,  permanent  fund recipients  will  have  some degree  of                                                            
     certainty  not only that a dividend will be paid,  but also the                                                            
     amount  of the dividend  payment they  can expect from  time to                                                            
     One additional  benefit of bringing  about a greater  degree of                                                            
     certainty  now in  respect of  fiscal matters  is that it  will                                                            
     give the  legislature time to  deal with a far greater  problem                                                            
     that will  appear in the future.  That problem is the  unfunded                                                            
     liability  for pension and welfare  benefits that will  be owed                                                            
      to State and Municipal employees in the next ten years.                                                                   
     In my  view there is  a deficit now  in available resources  to                                                            
     pay  those obligations.  My prediction  is  the liability  will                                                            
     grow  worse if  the matter is  left untreated.  I expect  there                                                            
     will  soon be  more retired  government  employees entitled  to                                                            
     benefits than working government employees.                                                                                
     Once again I thank  you for the opportunity to express my views                                                            
     at this time.                                                                                                              
Senator Dyson voiced appreciation  for Mr. Cuddy's wisdom as well as                                                            
his  family's  contributions  to the  State.  He asked  for  further                                                            
details regarding  how a spending  limit would encourage  investment                                                            
in the State.                                                                                                                   
Mr. Cuddy  responded that  the current  budget shortfall,  increased                                                            
spending, discussions regarding  implementing an income tax and/or a                                                            
sales tax,  and the possible  "raiding of  the Permanent Fund"  have                                                            
caused people  and businesses  to be concerned  about the  financial                                                            
condition  of the State.  Allowing the Legislature  to allocate  the                                                            
earnings from  the Permanent Fund to support State  government would                                                            
address this uncertainty.                                                                                                       
Senator Dyson  countered, however,  that individuals and  businesses                                                            
could assume that the Legislature  would increase State spending and                                                            
then  be required  to implement  such things  as  business taxes  to                                                            
supplement  the Permanent Fund money.  This would be a deterrent  to                                                            
future business investments in the State.                                                                                       
Mr. Cuddy responded  that he is correct. This is the  uncertainty of                                                            
which he speaks.                                                                                                                
Senator  Dyson understood  the testimony  to be  that the  Permanent                                                            
Fund  was  established  as  a  mechanism   with  which  to  restrain                                                            
government spending.                                                                                                            
Mr. Cuddy responded that  the Permanent Fund program was established                                                            
as  a result  of this  concern,  for,  were some  of  the money  re-                                                            
directed in that manner, the Legislative could not spend it.                                                                    
Co-Chair Wilken thanked Mr. Cuddy for his presentation.                                                                         
                         Alaska's Economy-                                                                                      
                         The 1980s And Now                                                                                      
NIEL   FRIED,  Economist,   Department   of  Labor   and   Workforce                                                            
Development, presented  a slideshow, titled "Alaska's  Economy - The                                                            
1980s And Now" [copy on file].                                                                                                  
Mr. Fried referred the  Committee to the slide titled, "Alaska is in                                                            
its  16th  year of  Uninterrupted  Growth-the  Longest  Run  in  Our                                                            
History,"  which indicates  that other than  the approximate  three-                                                            
year "economic  bust" that  began in 1986,  the State's economy  has                                                            
steadily climbed.  The State has just  completed its sixteenth  year                                                            
of uninterrupted  economic, or employment,  growth. The next  slide,                                                            
"Since 1985 Alaska's  Rate of Growth has Slowed,"  reflects the fact                                                            
that the  past sixteen  years have  experienced  more steady  growth                                                            
than had occurred  in previous decades.  The average growth  for the                                                            
periods   1960-1970,  1970-1980,   and  1980-1985   was  a   "pretty                                                            
impressive"  six percent.  A two-percent  per year  growth rate  has                                                            
occurred since 1990. "We are in a different environment now."                                                                   
Mr. Fried stated  that in the 1980's real estate was  a major issue,                                                            
as it had a tremendous  run-up, and then in 1986, a dramatic decline                                                            
as  the  economy  fell.  This  is  depicted   in  the  graph  titled                                                            
"Residential  Housing Activity  in  Anchorage." In  1983, more  than                                                            
9,000 residential  building permits  were issued in Anchorage.  This                                                            
is more than the  last five years of building permits  combined. The                                                            
next  graph,  titled  "Fairbanks   Does  Not  Look  Much  Different"                                                            
reflects the fact that  a similar trend occurred in Fairbanks. Other                                                            
communities in the Railbelt area depict similar scenarios.                                                                      
Mr.  Fried   stated  that  the  graph   titled  "AHFC  Foreclosures                                                             
Statewide"  reflects  what happened  in the  housing  market as  the                                                            
number  of foreclosures  climbed  in 1986  and peaked  in 1988.  The                                                            
average price  of condominiums peaked at $100,000  in 1995 then fell                                                            
to approximately $34,000 in 1987 and 1988.                                                                                      
Mr. Fried  stated that  in addition  to the decline  in the  housing                                                            
market, the  overall economy  of the State  declined after  1985. As                                                            
reflected in the graph  titled, "The Boom and Bust Years," the State                                                            
lost 20,000 jobs  between 1985 and 1987. The biggest  loss the State                                                            
has experienced since records  began at Statehood. In the mid-1990s,                                                            
the economy  re-obtained the  employment levels  of 1985. The  chart                                                            
titled "Job Gains and Losses"  reflects the employment losses. Fifty                                                            
percent  of the  jobs lost  were in  the construction  industry,  as                                                            
reflected  in the chart  titled, "Where  the Jobs  Were Lost  in the                                                            
1980s Crash". There are  fewer people employed today in construction                                                            
than   there  were   in  the  1980s.   In  addition,   the   retail,                                                            
finance/insurance/real  estate industries lost a substantial  number                                                            
of jobs.                                                                                                                        
Mr. Fried  stated that  the graph titled,  "Construction Growth  has                                                            
been Very  Difference  During the  Past Decade",  reflects the  fact                                                            
that the  construction industry  is playing  a different role  today                                                            
than  it did  in the  1980s as  it "is  more accommodating"  to  the                                                            
State's  growth, and  as a result,  it does  not have  as severe  an                                                            
impact  on the  State's economy  as  it did  in the  1980s. In  1983                                                            
construction  employment grew by 30-percent,  now a growth  level of                                                            
four or five percent is "pretty impressive."                                                                                    
Mr. Fried stated  that the graph titled,  "Lots of Migration  in the                                                            
1980s,  Much Less  Over the Past  Decade" mirrors  the Construction                                                             
Growth  chart.  This  chart  depicts the  net  migration  of  people                                                            
leaving  and  entering  the  State. The  early  1980s  reflects  the                                                            
strongest influx  of population. A population outflow  occurred from                                                            
1986 through 1989.  The past few years reflect a small  net increase                                                            
in population,  with an overall growth  in the last ten to  15 years                                                            
of about one-percent.                                                                                                           
Mr. Fried stated  that the chart titled,  "Population Growth  During                                                            
the  Past   Decade  Slowed   Considerably"   reflects  the   State's                                                            
population  growth according to the  ten-year census. He  noted that                                                            
it was not until  the 1990-2000 decade that Alaska's  growth aligned                                                            
with national statistics.                                                                                                       
Mr. Fried stated that in  addition to the economic changes the State                                                            
has experienced,  the chart  titled, "Alaskans  are Getting  Older,"                                                            
reflects  how the State's  population would  look in the future.  In                                                            
1980, the  median age was  26, meaning that  half of the  population                                                            
were younger than  26 and half were older. The State's  citizens are                                                            
aging and Alaska's median  age now is getting closer to the national                                                            
Mr. Fried  also noted that  the chart titled,  "Alaska's  Population                                                            
has Become Much  Less Footloose" reflects the fact  that while still                                                            
being  a transient  population  in  comparison to  the  rest of  the                                                            
country, the number  of those residents who have lived  in the State                                                            
longer  than five years  is increasing.  There are  far more  multi-                                                            
generational families.  This would affect how the State's population                                                            
might react to a large economic event.                                                                                          
Mr. Fried concluded his presentation.                                                                                           
Senator Bunde recalled  a previous Department of Labor and Workforce                                                            
Development  demographic analysis  that had  predicted that,  in the                                                            
year 2015,  the vast majority of Alaskans  would be over  age 65 and                                                            
under age five.  "The producers,"  those between the ages  of 30 and                                                            
50,  would comprise  the  smallest  portion  of the  population.  He                                                            
worried that  this might  result in "an inverted  pyramid of  income                                                            
Mr.  Fried  responded  that  the  largest  growing  segment  of  the                                                            
population  is those  over the age  of 65.  The "dependency  ratio,"                                                            
which  consists  of  those over  65  and  children,  is "definitely                                                             
increasing."  He noted that a new  population overview was  recently                                                            
Senator  Bunde asked  that that  new forecast  be  provided, as  its                                                            
information   is  an  important  factor   in  Legislative   actions;                                                            
particularly   in  regards  to  revenues  and  taxes,  specifically                                                             
considerations regarding an income tax.                                                                                         
Mr. Fried clarified  that while these segments are  rapidly growing,                                                            
they  would  continue   to  be  a  small  percent  of   the  overall                                                            
Senator Bunde  understood, from Department data, that  approximately                                                            
90-percent of  the wages earned in the State are earned  by resident                                                            
Alaskans.  There are  those citizens  who belief  that non-resident                                                             
workers  should be  contributing  more to  the State  and  therefore                                                            
favor the implementation  of an income  tax. However, he  noted that                                                            
non-resident  workers earn less than  is perceived, with  an average                                                            
of approximately $13,000 annually.                                                                                              
Mr. Fried agreed  that the non-resident annual wage  is considerably                                                            
less than that earned by resident workers.                                                                                      
Senator Bunde reiterated that the new data would be valuable.                                                                   
Co-Chair  Wilken requested  that this  information,  to include  the                                                            
percentage of  out-of-state worker and their earnings,  be provided.                                                            
Senator Dyson  asked whether  the average  wage of the non-resident                                                             
worker has significantly declined.                                                                                              
Mr. Fried  suspected  that, with  inflation adjustments,  they  have                                                            
fallen. Wages overall have declined.                                                                                            
Senator Dyson asked whether  the demographic trends projected in the                                                            
Department  of Labor and  Workforce Development  presentation  would                                                            
Mr.  Fried commented  that  the demographic  trends  would  continue                                                            
unless something  every dramatic,  such as  a huge economic  boom or                                                            
influx of young  people, occurred. However were an  economic boom to                                                            
occur, its  impact would  not have as significant  an impact  on the                                                            
economy as  the State's economy has  gotten larger. Economic  growth                                                            
is less predictable than  predicting demographic trends. However, it                                                            
could  be assumed  that the  State would  continue its  16 years  of                                                            
moderate growth.                                                                                                                
Senator  Dyson  asked whether  the  Department  tracks  State  gross                                                            
Mr.  Fried  stated that  this  is  one of  the  economic  indicators                                                            
utilized by  the Department. The price  and production of  oil has a                                                            
tremendous  impact,  however,  he warned  that  this should  not  be                                                            
viewed as the  lone indicator, as  it would appear to indicate  that                                                            
the State's economy has not grown at all.                                                                                       
Senator  Dyson asked  the Department  to develop  a graph  depicting                                                            
gross  State productivity,   to include  an  oil price/productivity                                                             
CHRIS   MILLER,   Chief,   Research    &  Analysis,    Division   of                                                            
Administrative   Services,   Department  of   Labor  and   Workforce                                                            
Development, reaffirmed  that the State's current demographic trends                                                            
mirror the  rest of county in that  the Baby Boomers are  aging. The                                                            
next demographic  group, referred  to as "Generation  X", is  a much                                                            
smaller  group. This  group  is followed  by "the  Boomlets."  These                                                            
smaller groups of people  would be a workforce issue, as there would                                                            
be fewer  workers in  the transition  from the  Baby Boomers  to the                                                            
Boomlet workforce.                                                                                                              
Co-Chair Green  asked whether the demographic data  could be used as                                                            
a school enrollment predictor,  in that the number of students would                                                            
reduce over  time as the population  ages. This would assist  in new                                                            
school planning and district forecasting.                                                                                       
Mr. Miller  affirmed that close watch  of these "age cohorts"  would                                                            
be  required. While  the  number of  children  is growing,  it is  a                                                            
smaller number than experienced in the previous generation.                                                                     
Senator Olson  asked for further information regarding  non-resident                                                            
workers,  as he understood  that the  majority of  these people  are                                                            
part-time/seasonal employees.                                                                                                   
Mr.  Miller  commented  that  the average  wage  for  a year-round,                                                             
"entire economy"  worker is in the mid $30,000 salary  range, while,                                                            
seasonal/part-time workers average in the mid $20,000 range.                                                                    
Senator Olson  asked what the year-round  non-resident salary  would                                                            
be were part-time  and seasonal workers  removed from the  equation.                                                            
Mr. Fried responded that that information would be provided.                                                                    
Mr. Miller  noted that the factors  in this would be that  different                                                            
industries  compensate their employees  at different rates:  the oil                                                            
and construction  industry compensate their seasonal  employees at a                                                            
higher  rate than,  for instance,  the fishing  industry's  seasonal                                                            
Mr. Fried interjected  that the service  industry, such as  tourism,                                                            
also has a low-end wage.                                                                                                        
Senator   Olson  stated  that   this  is   the  reason  that   part-                                                            
time/seasonal  employment should be  excluded from the calculation.                                                             
Senator  Hoffman asked  regarding the  trend in  family size  in the                                                            
most recent decades.                                                                                                            
Mr. Fried responded  that family size has lowered  slightly and that                                                            
as  the  population  has  aged,  there  are  more  families  without                                                            
children. Fertility has  also lowered and leveled off with the aging                                                            
Senator Hoffman  inquired as  to how this  compares to the  national                                                            
Mr. Fried responded  that Alaska continues  to be more fertile  than                                                            
the national average,  and that Alaskan family size  continues to be                                                            
larger than the national average household size.                                                                                
Co-Chair Green noted that  future projections are a consideration in                                                            
the State budgeting process.                                                                                                    
SFC 04 # 48, Side B 09:53 AM                                                                                                    
Co-Chair  Green   asked  whether  the  Department,   in  making  its                                                            
projections,  reviews or  incorporates other  indicators that  might                                                            
influence  the price of oil,  as the State  has a fairly poor  track                                                            
record in regards  to forecasts verses the actual.  "While it is the                                                            
nature  of the  beast," is  there any  mechanism  through which  oil                                                            
projections  could   be  more  accurate  as  this   is  the  primary                                                            
projection utilized in determining the State budget.                                                                            
Mr. Fried  replied that employment  and population  data would  be a                                                            
better  indicator  of what  is  happening  in the  State's  economy.                                                            
However,  he was  unsure  how these  could  be utilized  to  support                                                            
budget decisions.                                                                                                               
Co-Chair  Green asked  whether  a formula  could  be developed  that                                                            
could factor in this data,  as it historically has remained reliable                                                            
and steady.                                                                                                                     
Mr. Miller responded  that population and labor force  trends "react                                                            
more slowly than  other international economic events  which are out                                                            
of our  control and  unfortunately"  could have  a very significant                                                             
economic  impact  on  the  value  of  State  resources.   While  the                                                            
Department  could provide fairly accurate  population and  workforce                                                            
trends,  the   value  of  products   such  as  oil  are   oftentimes                                                            
SENATOR TOM  WAGONER asked  whether an overlay  could be applied  to                                                            
the "Growth  in Jobs"  chart that  could depict  the trend,  average                                                            
number of jobs, and income  that is experienced due to the influx of                                                            
box  stores that  have lower  paying  jobs without  benefits.  These                                                            
types of jobs  place another form  of pressure on the government  to                                                            
provide services.                                                                                                               
Mr. Fried  responded that  this information  is included in  a graph                                                            
[copy not provided]  that compares  the State's average annual  wage                                                            
to the national average.  In 1995, the State's wages were 28-percent                                                            
above the national average.  Today, the State's wages are comparable                                                            
to the national  average. He noted that the cost of  living has also                                                            
decreased. This is a significant  trend and has a definite affect on                                                            
the State's economy.                                                                                                            
Senator  Wagoner stated  that  while job  growth  is important,  the                                                            
types  of  those  jobs is  also  important,  as  it  could  indicate                                                            
increased  costs to the  government.  He asked that  a copy  of that                                                            
chart be provided.                                                                                                              
Mr. Fried stated that the chart would be provided.                                                                              
SENATOR BERT STEDMAN asked  for an explanation regarding how fishing                                                            
industry   wages  are  factored   into  the   economic  trends,   as                                                            
oftentimes, the  industry's wages are not included  in wage analysis                                                            
due to  the complexity  of the  associated calculations.  He  stated                                                            
that this industry has a huge impact on the State.                                                                              
Mr. Miller affirmed  that, while the fish harvesting  industry has a                                                            
significant  part  in the  State's  economy,  by definition,  it  is                                                            
considered  a  non-agricultural   industry,  and  as  such,  is  not                                                            
included  in the  routine data  collection the  Department  conducts                                                            
with the US  Bureau of Labor & Statistics.  However, the  Department                                                            
is  working with  the  Department  of Fish  and  Game  to develop  a                                                            
process  whereby   estimates  could  be  made  in   regards  to  the                                                            
harvesting  sector. This is  an ongoing process.  The Department  of                                                            
Fish and Game does have revenue reports.                                                                                        
Senator  Stedman asked whether  a rough  calculation reflecting  the                                                            
industry's percent of the economy could be developed.                                                                           
Mr. Miller stated that this could be possible.                                                                                  
Senator Stedman  asked how the recent downturn in  fish prices might                                                            
affect recent year's income data.                                                                                               
Mr. Miller responded that  declining fish prices is a trend that has                                                            
resulted in some people leaving the industry.                                                                                   
Mr.  Fried   stated  that  the  Department   recently  developed   a                                                            
population  trend  overview  that  indicates  that  population  out-                                                            
migrations are  occurring in areas that historically  have supported                                                            
the fishing industry.                                                                                                           
Senator Bunde asked whether  information regarding the net return of                                                            
the fishing industry to the State is available.                                                                                 
Mr.  Miller expressed  that  the Department  of Revenue  could  best                                                            
provide that answer.                                                                                                            
Senator Hoffman asked whether  a job growth chart could be developed                                                            
that would reflect the growth of State government employees.                                                                    
Mr. Fried replied in the affirmative.                                                                                           
Senator  Dyson asked  that  such a  chart  also depict  federal  and                                                            
municipal  employee  growth. He  asked  that the  federal  workforce                                                            
chart include military employees.                                                                                               
Senator Bunde  additionally requested that these charts  reflect the                                                            
trend from 1980 to the present.                                                                                                 
Co-Chair  Wilken voiced  appreciation  for the manner  in which  Mr.                                                            
Fried conducts his presentations.                                                                                               
Senator  Dyson asked  whether  there is  validity  to the  "Laughfer                                                            
Curve" theory.                                                                                                                  
Mr.  Fried responded  that  this theory  is  difficult  to apply  to                                                            
Alaska as it consists of large economic theories.                                                                               
Senator Dyson  asked whether  it might be  applicable in the  future                                                            
were the State  to implement a variety of taxation  methodologies to                                                            
increase revenue.                                                                                                               
Mr. Fried was uncertain.                                                                                                        
Co-Chair Wilken stated that this concludes the presentation.                                                                    
     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 third  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair   Wilken  informed   that  Version   23-LS0296\B  and   its                                                            
accompanying Sectional Analysis is before the Committee.                                                                        
AT EASE 10:07 AM / 10:07 AM                                                                                                     
Co-Chair Green  moved to adopt Version "B" as the  working document.                                                            
There being  no objection,  Version "B" was  adopted as the  working                                                            
Senator Dyson,  the bill's sponsor,  highlighted the changes  in the                                                            
committee  substitute to  include: in  Section 16,  page one,  lines                                                            
nine and ten,  the elimination of the fractions in  the calculations                                                            
pertaining  to population  and inflation  factors;  the addition  of                                                            
language  in Subsection  1(c), on  page two, lines  nine through  22                                                            
that  would  exempt  all Permanent  Fund  appropriations   including                                                            
inflation  proofing,  as well  as other  dedicated  funds and  Trust                                                            
Funds; the addition of  language to Subsection 1(a)(1), on page one,                                                            
lines ten through  16 that would limit  the inflation factor  to not                                                            
exceed the per capita income  for Alaskans; and the expansion of the                                                            
"extraordinary circumstance"  definition in Subsection 1(d), on page                                                            
two, lines  23 through 29.  In addition, a  section of the  bill was                                                            
deleted "that  gave the Governor the responsibility  of cutting back                                                            
the budget if the Legislature  had, in my view, acted irresponsibly"                                                            
and had  submitted a  high budget.  Removal of  this language  would                                                            
revert the language to what currently exists in State law.                                                                      
Senator  Dyson noted  that other issues  have been  raised to  which                                                            
further language adjustments might apply.                                                                                       
Senator  Hoffman  commented  that,  in previous  testimony,  it  was                                                            
mentioned that  appropriations made in the prior two  years would be                                                            
a factor. He asked the location of this language.                                                                               
Senator Dyson  clarified that either  he had misspoken or  the issue                                                            
was confused  in translation. In actuality,  the timeframe  is three                                                            
Senator  Hoffman  agreed  that,  while   a three-year   average  was                                                            
discussed,  reference to a prior two-year  timeframe was  discussed.                                                            
Senator Dyson  noted that  confusion arises  in respect to  the fact                                                            
that the  prior year is  not included in  the calculation.  The two-                                                            
years,  three-years, and  four-years  previous to  that are used  to                                                            
obtain the  average. The reason  for this is  that the data  for the                                                            
immediate  prior year  is incomplete.  This language  is located  in                                                            
Section 1, Subsection 16 on page one, line 12 of Version "B".                                                                   
Senator Hoffman  asked that consideration  be given to including  in                                                            
the calculation  the  most recent  ten-year's  consumer price  index                                                            
(CPI) and its comparison  to the budget for the last ten years. This                                                            
would provide  an analysis  of how the current  system is  following                                                            
the CPI;  specifically whether  it would be  larger or smaller  were                                                            
the proposed calculations imposed.                                                                                              
LUCKY  SCHULTZ, Staff  to  Senator Fred  Dyson, informed  that  this                                                            
information  is available  for  the  years since  1997. Information                                                             
prior  to  that  is  difficult  to  incorporate   due  to  different                                                            
categories  of  expenses and  appropriations.  This  information  is                                                            
depicted  on a  handout, prepared  by  the Division  of Legislative                                                             
Finance, titled  "Draft - Spending  Limit Proposals" [copy  on file]                                                            
that depicts three charts.                                                                                                      
Senator Hoffman,  noting the multitude of changes  that the proposal                                                            
has undergone, asked whether  the information depicted on the charts                                                            
would continue to apply.                                                                                                        
Senator Dyson stated that this would be clarified.                                                                              
Senator  Bunde referenced  an  earlier discussion  in  which it  was                                                            
stated  that, were  a  spending limit  previously  implemented,  the                                                            
excess funds could  have been allocated to the Permanent  Fund. This                                                            
would have served  to make it substantially larger.  He asked that a                                                            
graph be provided to reflect that scenario.                                                                                     
Senator Dyson responded that a graph could be developed.                                                                        
CHERYL FRASCA, Director,  Office of Management and Budget, Office of                                                            
the  Governor,   commented  that   the  bill's  progress   has  been                                                            
substantial and has evolved  into a workable framework. As mentioned                                                            
by Senator  Dyson, some  changes, including  those suggested  by Co-                                                            
Chair Green, would continue to be discussed.                                                                                    
Senator  Hoffman asked whether  further discussion  has occurred  in                                                            
regard  to establishing  a  termination  date or  a  review at  some                                                            
future time.                                                                                                                    
Senator  Dyson stated  that, as specified  in Section  3(b) on  page                                                            
three,  line 14,  this proposal  would  be placed  on the  Statewide                                                            
ballot four-years  after its initial adoption. This  would force the                                                            
Legislature to review the  outcome of the proposal, as to whether it                                                            
had  become "an  unbearable  restraint" or  assisted  the effort  to                                                            
which it was intended.                                                                                                          
Ms. Frasca pointed  out that Section 1, subsection  (c) on page two,                                                            
beginning on  line nine, specifies  the variety of items  that might                                                            
be exempt  from the spending  limit. Language  in subsection  (3) of                                                            
that section would allow  the exemption of such things as money from                                                            
donations, gifts,  or grants to the State for purposes  specified by                                                            
the terms of those donations,  gifts, or grants. This language would                                                            
provide the  various departments the  ability to receive  and expend                                                            
those monies  without affecting their  regular budgetary  process by                                                            
"displacing  other spending."  She  noted that  this language  would                                                            
address one of Co-Chair Green's concerns.                                                                                       
Ms. Frasca  also  noted that,  as specified  in Section  3, on  page                                                            
three, line  13, the original proposition  language would  be placed                                                            
on the  Statewide  ballot  every four-years.  This  would allow  the                                                            
Legislators to propose changes as deemed necessary.                                                                             
Senator  Hoffman  voiced concern  that  utilization  of the  average                                                            
annual percentage rate  of change in the Anchorage metropolitan area                                                            
consumer  price index (CPI),  as specified  in Section 1(1)  on page                                                            
one,  line  ten and  eleven  would  not  be  "a true  index  of  the                                                            
inflation  rate"  for  the balance  of  the  State,  as Anchorage's                                                             
numbers  "are always  lower"  than  those of  Rural  areas. He  also                                                            
voiced concern  regarding language  on lines  13 through 15  of that                                                            
section that  indicates that the rate  must not "exceed the  average                                                            
percentage  of the  change  in the  average personal  incomeā€¦"  This                                                            
would, in effect,  "tie the rate of  increase to how successful  the                                                            
bargaining  units are in  the State of Alaska,"  as average  incomes                                                            
are affected  by those  negotiations.  Tying the  spending limit  to                                                            
this factor is of concern.                                                                                                      
Senator Dyson  deferred to Ms. Frasca  to address the Anchorage  CPI                                                            
concern. However,  he noted that due to the fact that  Anchorage has                                                            
half of the State's  population, and because "it is  so difficult to                                                            
conduct  CPI data in  other areas,"  "it still  ends up being  quite                                                            
accurate." In addition  to being influenced by bargaining contracts,                                                            
State  spending  is  also  driven  by  such  things,   as  Medicaid,                                                            
Medicare,  and other  health care  cost changes.  "All of these  are                                                            
volatile components of State spending."                                                                                         
Ms.  Frasca  stated  that  the  United  States  Bureau  of  Labor  &                                                            
Statistics  develops  the  data  used for  the  Anchorage  CPI.  The                                                            
Anchorage CPI information  is the lone element that is available and                                                            
as such is the one commonly utilized.                                                                                           
Senator Hoffman  acknowledged that;  however, continued to  question                                                            
whether this  is fair representation  of the  rest of the State.  He                                                            
contended  that  it is  not a  true indicator,  and  therefore,  the                                                            
growth rate should not be tied to it.                                                                                           
Ms.  Frasca  expressed  that   it  would  be  difficult  to  find  a                                                            
replacement,   as  this  is  "the  only  reported  indicator."   The                                                            
challenge is to  have an appropriation limit that  would establish a                                                            
ceiling on  State spending from one  year to the next. "It  is not a                                                            
precise science." The Department  of Labor and Workforce Development                                                            
presentation   indicated  that  there   are  approximately   300,000                                                            
employed  people in  the State,  of which approximately  19,000  are                                                            
State employees.                                                                                                                
Senator Hoffman  argued that  this language  would calculate  on the                                                            
low end rather than the  mean average. This could potentially create                                                            
a problem as it relates to growth.                                                                                              
Senator  Dyson  stated  that this  concern  is  one reason  that  he                                                            
removed  the  point-nine  percentage   factor  associated  with  the                                                            
inflation  calculation.  He stated  that  it could  be successfully                                                             
argued that the requirement  for delivery of State services does not                                                            
always align with  the change in the CPI. The point-nine  percentage                                                            
factor would  have been at  the low end of  it and changing  that to                                                            
"unity" would  better provide a more generous limit  that would take                                                            
into account the  fact that delivery of service in  Rural areas does                                                            
inflate  faster  than urban  areas.  He  also  noted that,  were  it                                                            
thought to be more accurate,  discussion in regard to increasing the                                                            
percentage  factor to one-point-one  times the inflation  rate would                                                            
be welcome.                                                                                                                     
Senator  B.  Stevens  asked,  in  reference   to Senator   Hoffman's                                                            
question  about the  influence of  bargaining units,  the number  of                                                            
workers  in the State  who are  members of  a collective  bargaining                                                            
unit. Also,  that the  number be  divided into  State and  non-State                                                            
employees.  He anticipated that, of  the total number employed,  the                                                            
percentage  of collective bargaining  unit employees would  not be a                                                            
large number.                                                                                                                   
Senator Hoffman  questioned why, were  that the case, this  language                                                            
should be included.                                                                                                             
Mr. Schultz stated that  some of the parameters that the Division of                                                            
Legislative  Finance  was  asked  to include  in  its  research  was                                                            
population and CPI as well  as "population and keeping the CPI below                                                            
personal income."  Data in this regard  is only available  from 1997                                                            
forward.  As depicted  on  the  aforementioned  chart,  there is  no                                                            
significance difference  between these two variables  to this point.                                                            
The reason  the language  was included is  because of the high  rate                                                            
inflation in  the 1980s. This would  be a concern in regards  to the                                                            
appropriations limit.                                                                                                           
Mr. Schultz  stated  that the  aforementioned  chart reflects  three                                                            
different scenarios  in determining  the base year. The first  chart                                                            
uses the fixed base year  of FY 96 and a three-year floating average                                                            
for  variables.  While the  chart  appears  favorable,  "there is  a                                                            
ratcheting  down effect" realized  in the first few years.  This has                                                            
been determined  to have a negative  impact on the state  economy in                                                            
other states.  The second  chart reflects a  base year of two  years                                                            
prior  and a three-year  floating  average for  variables. This  has                                                            
proven  to  have the  negative  affect  of making  it  difficult  to                                                            
determine  what   the  limit  would  be  for  the  following   year.                                                            
Therefore,  the third chart was developed  utilizing a base  year of                                                            
the average  of  the three  prior years  and a  three-year  floating                                                            
average for variables.  Since this would provide a  more predictable                                                            
limit, it should  be "more attractive" to businesses  and residents.                                                            
Senator Hoffman stated  that his suggestion for a ten-year timeframe                                                            
was based  on the fact that  "these years  include the quarter  of a                                                            
billion dollar  reduction" that the  State experienced. As  a result                                                            
of this monetary  reduction, the legislature  implemented  a plan to                                                            
hold  the level  of  government spending,  and,  for  five of  these                                                            
years, the  mandate was to reduce  government spending quarter  of a                                                            
billion  dollars.   The  time  periods  utilized  in   this  formula                                                            
incorporate  "the lowest  standards of growth  in Alaska's  history"                                                            
and do not accurately portray a true growth in State government.                                                                
Senator  Dyson asked  whether Senator  Hoffman  would desire  charts                                                            
developed that  would reflect how these proposals  would appear were                                                            
they based on those years' budgets as proposed by the Governor.                                                                 
Senator  Hoffman preferred  that the  charts be  developed based  on                                                            
actuals  for   a  ten-year  span   as  opposed  to  ones   based  on                                                            
hypothetical  information that was  not acted upon. Charts  based on                                                            
actuals would provide "a true indicator of growth."                                                                             
Senator  Dyson  determined  that three  different  charts  could  be                                                            
developed:  one reflecting State growth  were there no $250,000,000                                                             
reduction;  one based  on actuals;  and  one to  depict the  billion                                                            
dollar increase as proposed by the Governor.                                                                                    
Senator Bunde  recalled that while there was a quarter  of a billion                                                            
dollar reduction over a  five-year period, that money was reinstated                                                            
during the  sixth year. In addition,  use of the Anchorage  CPI as a                                                            
base could  be valid  due to  the fact  that the  Port of  Anchorage                                                            
serves 80-percent  of the State, and  therefore, it could  be stated                                                            
that 80-percent of the  State's economy is dependent on what's going                                                            
on in Anchorage.                                                                                                                
Senator Dyson  stated that that might  be; however, Senator  Hoffman                                                            
raises  a valid  point.  Perhaps  utilizing  the federal  CPI  would                                                            
negate the  accusation that the State  government's calculation  was                                                            
slanted in order to allow or disallow more spending.                                                                            
Co-Chair Green  stated that when the  Version 23-LS0296\Y  committee                                                            
substitute was  being discussed, her staff had developed  a ten-year                                                            
look-back population/inflation/per  capita income statistic analysis                                                            
that  compared   the  growth  per   year.  She  assumed   that  that                                                            
information  could be updated  to reflect  the language included  in                                                            
Version "B" and thereby,  might provide the information requested by                                                            
Senator  Hoffman. She  noted that  it would be  interesting to  view                                                            
that chart as,  while numbers might appear to be steady,  they could                                                            
become  volatile depending  on what  factors  are incorporated.  She                                                            
stated that this chart would be updated and provided to Members.                                                                
Senator Dyson  understood that Senator Stedman has  produced a chart                                                            
[copy not provided]  that also might  be helpful to the discussion.                                                             
Co-Chair  Wilken asked  that, prior  to any  further material  being                                                            
provided to the Committee,  information should be updated to reflect                                                            
Version "B" language.                                                                                                           
Senator  B.  Stevens  noted  that,  historically,   State  spending,                                                            
including  such things  as  payroll and  government  cost of  living                                                            
allowance  allocations  for  regions  has been  benchmarked  on  the                                                            
Anchorage   CPI  indicator.  Therefore,   he  understood   that  any                                                            
adjustments  in  the Anchorage  rates  would,  by utilizing  a  geo-                                                            
differential, affect Rural areas.                                                                                               
Co-Chair  Wilken voiced  being uncertain  as to  how to develop  the                                                            
baseline requested by Senator Hoffman.                                                                                          
Senator  B. Stevens  responded  that  were the  Anchorage  benchmark                                                            
adjusted to  reflect inflation and  then a geo-differential  applied                                                            
to that rate, it would  affect Government spending in other areas of                                                            
the State.                                                                                                                      
Senator Hoffman stated  that he would be more comfortable with tying                                                            
the rate to the  "breadbasket measure" which is currently  available                                                            
for cost  comparisons  for grocery  items in  Anchorage,  Fairbanks,                                                            
Juneau,  Bethel,  and Nome.  This  would  provide more  accuracy  in                                                            
regards to the true cost  of living in various regions of the State.                                                            
For example,  it is documented  that a grocery  item might  cost one                                                            
dollar in  Anchorage, $1.80  in Bethel and  $1.90 in Nome.  He noted                                                            
that the  wages of  correctional officers  in Bethel  are 1.3  times                                                            
those paid in Anchorage.                                                                                                        
SFC 04 # 49, Side A 10:42 AM                                                                                                    
Senator Dyson  expressed that while the cost of fuel  and food might                                                            
affect a family's  budget, these costs  do not significantly  affect                                                            
the cost of delivering State services.                                                                                          
Senator  Dyson  stated  that  adjusting  costs up  ten  percent,  as                                                            
proposed in the  Version "B" committee substitute,  would adequately                                                            
address the cost  differentials of Rural Alaska, particularly  as it                                                            
is  unlikely  that  the cost  of  State  government  services  would                                                            
increase ten percent in those areas.                                                                                            
Co-Chair Green  understood that this  language is applicable  to the                                                            
total expenditure rather than being region specific.                                                                            
Co-Chair Green  referred the Committee to language  in Section 2, on                                                            
page two, beginning on  line 30 that addresses appropriations to the                                                            
Constitutional Budget Reserve  (CBR). She asked regarding the reason                                                            
that the Legislature should  support the deposit of any money in the                                                            
General Fund that is available  for appropriation at the end of each                                                            
fiscal year into the CBR,  particularly in a year in which the State                                                            
experienced  "another  windfall"  and  had  received  a substantial                                                             
amount of money.                                                                                                                
Senator  Dyson replied  that presently,  the  Constitution  mandates                                                            
that  any excess  funds  be deposited  into  an account  that  bears                                                            
interest. This is true  of the CBR. As presented in recent testimony                                                            
by nationally  renowned economist,  Dr. Poulson, it was stated  that                                                            
the  most successful  State  programs  having spending  limits,  are                                                            
those that  implement a "shock absorber"  or rainy day account  that                                                            
could provide  funds or replenish  funds as  incomes rise and  fall.                                                            
The CBR could  provide this "very valuable" function.  It would also                                                            
provide substance  to favorable bond  ratings. He cautioned  against                                                            
depositing money  into the CBR as a mechanism to prevent  "political                                                            
difficulties."  In addition,  were  the CBR  to reach  a point  that                                                            
would support  bond ratings and sufficiently  address State  funding                                                            
needs,  then consideration  could  be given to  determining  whether                                                            
excess  funds  could be  deposited  into  an alternate  account.  In                                                            
summary,  he stated  that the  CBR is a  good place  to place  those                                                            
excess funds.  It would also replenish  the money that was  borrowed                                                            
from the CBR,  that have not, of yet, been reimbursed.  This process                                                            
would  also  provide  funds  with  which  the  State  could  address                                                            
"extraordinary   circumstances"  such  as  earthquakes   or  support                                                            
infrastructure  and major projects such as a gas pipeline  or a road                                                            
to the Arctic National Wildlife Refuge [ANWR].                                                                                  
Co-Chair  Wilken shared  Co-Chair  Green's concern  that money  that                                                            
could  be accessed  by a  majority vote  would be  deposited into  a                                                            
savings  account  that  could  "create   turmoil  in  the  budgeting                                                            
Senator Bunde opined that,  "the maximum allowable growth rate would                                                            
become the  minimal growth rate."  In the future, Legislators  might                                                            
decide that  a two-percent  growth rate is  too much. Therefore,  he                                                            
argued that  perhaps it is  a good thing that  the funds in  the CBR                                                            
could  not be  leveraged.  This could  serve to  prevent  additional                                                            
spending that might not  be overwhelmingly supported. The sword does                                                            
"cut both ways."                                                                                                                
Co-Chair  Wilken   asked  how  this  legislation  would   allow  for                                                            
unexpected  and  uncontrollable  expenses  such  as  a  $80  million                                                            
Medicaid  bill or, more  recently, the $94  million Public  Employee                                                            
Retirement System (PERS)  and Teachers Retirement System (TRS) debt.                                                            
Ms.  Frasca stated  that the  appropriation  limit  does not  solely                                                            
apply to General  Fund spending. She  cautioned that while  expenses                                                            
might  increase, revenues  do  not always  follow.  In those  cases,                                                            
choices must  be made. This  year for example,  in order to  provide                                                            
funds for the  PERS/TRS expenses, reductions were  required in other                                                            
areas.  This  is the  reality  of  having  limited  resources.  This                                                            
legislation would  assure voters that government "would  not go on a                                                            
spending  spree  and  grow"  were  significantly   more  revenue  to                                                            
transpire. This would force the government to make choices.                                                                     
Co-Chair Wilken  voiced concern "that an avenue" would  be available                                                            
through  which   the  Legislature   could  address  unexpected   and                                                            
extraordinary   expenses   without   negatively    affecting   other                                                            
Mr.  Frasca  understood  that  the section  of  the  bill  regarding                                                            
extraordinary circumstances would address this concern.                                                                         
Co-Chair  Wilken  stated  that  further  discussion  ensue  in  this                                                            
Co-Chair  Wilken  noted  that  another  concern  is  that  the  bill                                                            
provides no distinction  between the capital and operating  budgets.                                                            
"The operating  budget  builds bureaucracy  and  the capital  budget                                                            
builds  Alaska."  Therefore,  he  argued  that  further distinction                                                             
should be included in this regard.                                                                                              
Senator  Dyson  stated  that  this Constitutional   amendment  would                                                            
eliminate the Constitutional  mandate that requires one-third of the                                                            
budget to be allocated  to the capital budget. He  doubted, however,                                                            
that this mandate has been upheld.                                                                                              
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
Co-Chair Gary Wilken adjourned the meeting at 10:54 AM                                                                          

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