HJR 12-CONST. AM: BUDGET RESERVE FUND REPEAL CHAIR WEYHRAUCH announced that the first order of business would be HOUSE JOINT RESOLUTION NO. 12 Proposing amendments to the Constitution of the State of Alaska relating to the repeal of the budget reserve fund. REPRESENTATIVE SAMUELS moved to adopt the proposed committee substitute (CS) HJR 12, Version 24-LS0485\G, Cook, 4/4/05, as the working document. 8:31:59 AM CHAIR WEYHRAUCH explained that Version G changes HJR 12 such that it establishes a capital construction fund that uses the constitutional budget reserve (CBR) essentially for "capital projects." 8:32:49 AM TOM WRIGHT, Staff to Representative John Harris, Alaska State Legislature, related that the sponsor likes the idea of a capital construction account. 8:33:31 AM CHAIR WEYHRAUCH highlighted that Version G still doesn't provide a budget cushion. 8:34:03 AM REPRESENTATIVE SEATON pointed out that Alaska has a constitutional provision requiring that a third of the budget be in capital for which there has been no way in which to do it. Since [Version G] provides that mechanism, he said he supports the idea of a capital construction fund. 8:34:42 AM REPRESENTATIVE WILSON reminded the committee that Alaska's deferred maintenance lists amount to over $1 billion. Therefore, the [capital construction fund will provide relief for many communities in need]. 8:35:38 AM REPRESENTATIVE SEATON turned to subsection (b), lines 11 through 15, which says: Money may be appropriated from the capital construction fund for maintenance of facilities of the State or a subdivision of the state. Money may be appropriated from the fund for payment of the principal and interest on general obligation or revenue bonds issued for the construction of capital projects by the State of a subdivision of the State, including a public corporation. REPRESENTATIVE SEATON said the aforementioned subsection could be problematic because it doesn't specify whether the procedure is to have an ongoing annual source of revenue for capital construction. Therefore, it seems that one legislature could appropriate all the funds and obligate those funds for decades to come. CHAIR WEYHRAUCH surmised that the aforementioned concern is "no doubt a risk." 8:37:29 AM CHAIR WEYHRAUCH, in response to Representative Wilson, said the funds would come from the CBR and there wouldn't be any refunding of the CBR with settlement money. REPRESENTATIVE WILSON charged that such an amount won't be adequate because it will require reliable sources to regenerate the fund. 8:38:23 AM REPRESENTATIVE SAMUELS mentioned that he has spoken with the sponsor regarding HJR 12 including a percent of market value (POMV) methodology to ensure cash flow during market fluctuations. He related that Mr. Wright has indicated the aforementioned can be worked on in the next committee of referral. Representative Samuels said his concerns were similar to those of Representative Seaton in that "all you're doing is issuing bonds off it." Representative Samuels opined that he would be more comfortable with language that allows use of the POMV. MR. WRIGHT related the sponsor's intent is not to spend "one lump sum." The sponsor is also interested in the POMV methodology, he added. 8:39:55 AM REPRESENTATIVE SEATON related he is in favor in the POMV and limiting it to capital projects. 8:40:59 AM REPRESENTATIVE WILSON opined that the $2 billion currently available in the CBR should be set aside for emergency purposes because the state needs that protection. 8:42:47 AM REPRESENTATIVE GRUENBERG opined that many Alaskans would support the concept of a "capital permanent fund" that protects the fund's principal. He turned to the appropriation limit in Article IX, Section 16, which has a one-third requirement and said it isn't unworkable and should be repealed. He noted that the proposed fund has no source of funding aside from the transfer of funds from the CBR. He inquired as to the possibility of endowing this proposed fund with a certain percentage of funds from certain things. Representative Gruenberg then related his belief that the POMV approach is attractive, but it's essential to ensure the fund's principal not be invaded. He highlighted if the intent of this proposed fund is to "finance bonds," setting forth the language to allow the principal to be used to capitalize or finance those bonds is appropriate. He reiterated that in order to "sell" this constitutional amendment to the legislature and the public it should be entitled, "capital permanent fund." 8:47:32 AM REPRESENTATIVE SAMUELS highlighted that if the POMV mechanism is used there will be no principal earnings or interest. He asked what will serve as the state's cash flow if oil drops to $15 per barrel. MR. WRIGHT explained that options for a cushion during the transition are still being discussed. Such options could include placing a portion of [the proposed fund] into a statutory budget reserve. However, in the event that oil drops to $15 per barrel, the CBR wouldn't serve as a cushion to cover the deficit and thus the state would be forced to find alternative measures for revenue. He related his understanding that currently if oil prices fall below $35 per barrel, the state will have to dip into it's reserve accounts. 8:49:15 AM REPRESENTATIVE ROKEBERG recalled, with the exception of three years during his time with the legislature, it has utilized the CBR to balance the budget. He proposed a hypothetical situation in which the state had a $1 billion deficit, and said that neither the CBR or any amount of taxation could cover that debt. Therefore, he didn't believe there are many alternatives without some type of reserve. Representative Rokeberg inquired as to the discussions the sponsor has had with regard to the cushion and the necessity to fill fiscal gaps in the future. MR. WRIGHT related that the sponsor is also concerned about the transition period that would occur until the state adopts a fiscal plan. The main purpose of HJR 12 is to force the legislature to develop a long-range fiscal plan. He offered that a statutory budget reserve could be utilized during a transition period. However, there are alternative options such as the earnings reserve from the permanent fund, which are available by a simple majority vote albeit a political decision. 8:51:59 AM CHAIR WEYHRAUCH explained that HJR 12 would have simply eliminated the CBR with a vote of the public, while Version G offers several options into which the CBR could be appropriated. He informed the committee that he wanted to discuss Representative Rokeberg's proposal to repeal Section 17(c) in order to move both resolutions in tandem. 8:53:41 AM REPRESENTATIVE ROKEBERG said that although he supports the concept of a long-range fiscal plan, he expressed concern with the proposal of including the CBR as an integral part of such a plan for the future. He referred to the concept of "triggers" in which the state could manage cash flow around the CBR by having a tax regime which was triggered when the CBR hit a particular floor. Some have even suggested having a ceiling for the CBR such that once it reaches that ceiling the collection of [certain] taxes would stop. From a political standpoint, perhaps more public buy-in could be generated [with the aforementioned]. In order to accomplish something such as the aforementioned, he opined that there must be a corpus of a fund to reassure the state it can pay its "bills when appropriate." The CBR provides that core cash amount, and therefore he related his reluctance to get rid of it, particularly in the context of creating a long-range fiscal plan. REPRESENTATIVE GRUENBERG said he doesn't support eliminating [Article IX], Section 17(c) because it provides balance between the minority and majority. He related his belief that Representative Rokeberg's concept is an interesting use of the CBR. He suggested that [HJR 12] and Representative Rokeberg's concept be reviewed together as part of the committee's planning for the state. 8:56:47 AM REPRESENTATIVE SEATON suggested that [Section 18, subsection (b)], line 11 should be amended to read, "Money may be appropriated by the POMV method from the capital construction fund." CHAIR WEYHRAUCH indicated that all amendments should be brought before the committee at the next meeting. REPRESENTATIVE SEATON added that he will offer an amendment to [Section 18, subsection (b)], line 12 through 15, to delete "bonding" so the fund is only used for capital construction and maintenance. 8:59:15 AM REPRESENTATIVE ROKEBERG, in response to Representative Wilson, said $400 million was needed as a cash flow cushion. REPRESENTATIVE WILSON opined that a fiscal plan is essential in order for the legislature to be responsible and set enough aside for cash flow reasons. CHAIR WEYHRAUCH related his belief that this resolution doesn't address [cash flow issues] but rather diverges from it. 9:01:29 AM REPRESENTATIVE SEATON recalled that previous testimony from the Department of Revenue related other options to address the cash flow account without the CBR. REPRESENTATIVE GRUENBERG commented this resolution should explicitly state this money can be used for bonding, therefore, he discouraged any deletion of the term. CHAIR WEYHRAUCH added that the committee needs to review potential alternatives to meet the long-term fiscal problem. 9:02:55 AM REPRESENTATIVE SEATON related his problem with paying off obligation bonds is that one legislature has the potential of tying up the entire revenue stream for the next 20 years. The idea of the capital construction fund is to have the ability to use an amount to be used for projects and maintenance. If one legislature can bond for large projects and dedicate the funding stream to pay off the debt, then there is a one-time capital bond and a mechanism to pay off the bonded indebtedness. These are two different philosophies. REPRESENTATIVE GRUENBERG said that is not the way he interprets the language. He related his belief that the bonds wouldn't be dedicated revenue bonds, but rather they would be used for "financing." Therefore, one legislature couldn't tie-up the vast majority of the fund in perpetuity but rather those bonds could serve as a financing source for projects. The state uses a similar system for floating general obligation (GO) bonds or other financing or lease bonds, he added. 9:05:30 AM REPRESENTATIVE JOHN HARRIS, Alaska State Legislature, speaking as the sponsor of HJR 12, related this CS does not offer the same "bipartisan spirit" originally proposed. The purpose of HJR 12 was to eliminate the CBR, its three-quarter vote and reverse sweep principle. He offered that a constitutional fund could be established as a cash flow mechanism by allocating $500 million from the CBR. Furthermore, the legislature could also capitalize on the earnings on the fund with a POMV methodology if it so chooses. The [idea behind this] is to generate $100- $150 million annually for capital. He noted that he has another draft [version] to bring to the committee. 9:08:33 AM REPRESENTATIVE WILSON inquired as to how the [capital construction] fund would be replenished on a regular basis. REPRESENTATIVE HARRIS pointed out that the POMV would do that. He explained that high interest rates will allow the fund to grow. Furthermore, the legislature could deposit money into the account [during times of surplus] similar to what is done with the permanent fund. If the state receives some infusion of cash, it's probably not a bad idea to place it into a constitutionally protected fund such that the legislature can use its earnings regularly. 9:10:27 AM REPRESENTATIVE WILSON related that she had the notion that it would grow more than from the interest. Perhaps a certain percentage of the [earnings] from the gas pipeline could be placed into the fund. She suggested that the fund should have additional revenue sources in order to meet the states ongoing needs, which amount to more than $100 million annually for maintenance alone. 9:11:27 AM CHAIR WEYHRAUCH, in response to Representative Rokeberg, relayed that the intent of the resolution is to provide the money for revenue bonds. However, it's problematic because the entire principal could be obligated at one time, which he didn't believe to be good policy. REPRESENTATIVE ROKEBERG mentioned that this resolution could be problematic in that it obligates future legislatures. Representative Rokeberg highlighted the difficulties the CBR has faced due to its short-term horizon of the cash management principles. Therefore, the proposal [encompassed in Version G] is that a longer term horizon policy similar to the Alaska Permanent Fund's policy could be utilized. Therefore, a statutory constitutional draw could generate higher yields. REPRESENTATIVE GRUENBERG opined that if there's a constitutional capital fund then there will be political choices annually as to whether the legislature wishes to deposit excess funds solely into the permanent fund or into a combination of the two funds. CHAIR WEYHRAUCH added [that the legislature could also appropriate those excess funds] into a statutory reserve fund. REPRESENTATIVE HARRIS opined that the aforementioned situation "is a good problem to have." 9:15:54 AM REPRESENTATIVE GRUENBERG opined this is an important issue, and therefore he urged the chair to take the time necessary to focus on this matter.