SB 36-APPROPRIATION LIMIT; GOV BUDGET  SJR 4-CONST. AM: APPROP LIMIT  1:33:13 PM CHAIR CLAMAN announced the consideration of: SENATE BILL NO. 36 "An Act relating to an appropriation limit; relating to the budget responsibilities of the governor; and providing for an effective date." and SENATE JOINT RESOLUTION NO. 4 Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit. CHAIR CLAMAN said this is the first hearing of SB 36 and SJR 4 in the Senate Judiciary Committee. He invited the bill sponsor and his staff to identify themselves for the record and begin the presentation. 1:34:10 PM SENATOR JAMES KAUFMAN, District F, Alaska State Legislature, Juneau, Alaska, sponsor of SB 36 and SJR 4, introduced the legislation. He said the spending cap proposal is one component of a suite of legislative proposals discussed within the framework of the Fiscal Policy Working Group. The idea is that the different policy elements might lead to better fiscal management in the state. Those discussions include proposals related to process and performance management, and revenue measures intended to improve how the state finances and manages government services for the betterment of all Alaskans. SENATOR KAUFMAN stated that the existing spending cap is ineffective because it is set well above actual spending levels and does not meaningfully constrain appropriations. He said the intent of a revised spending cap would be to moderate fluctuations in state spending. He explained that, in the past, periods of increased spending, often for capital projects or other beneficial purposes, have occurred in bursts. He suggested that spending moderately would allow the state to better respond to needs if the legislature did not appropriate funds from present-year revenue. He suggested that if the legislature flattened and maintained a moderate level of spending, the change would drive better economic performance. 1:36:35 PM SENATOR KAUFMAN explained that his proposal would measure the state's gross domestic product (GDP) using five of the past six years. He said the model would average five of the previous six years of state GDP to smooth year-to-year fluctuations, similar to the five percent of market value draw used for the Permanent Fund. He explained that using a healthy percentage of that amount would establish a limit for operating budget spending. SENATOR KAUFMAN stated that the second component of the proposal addresses the amount to be segregated for capital project spending, which would require a two-thirds vote. He said the legislature has sought guidance to move the state toward consistent capital project funding, but those efforts have not fully succeeded. 1:37:30 PM SENATOR KAUFMAN noted that Alaska is not revenue limited, so a cap may not have a meaningful immediate effect. However, if the state experiences increased revenue in the future, perhaps new oil and gas prospects, the cap could help prevent rapid increases in spending. In that situation, the excess revenue could be directed toward replenishing the budget reserves, such as the statutory budget reserve (SBR) and the constitutional budget reserve (CBR). He proposed to then make those dollars available for capital funding assuming the state reaches a healthy level of program spending. SENATOR KAUFMAN emphasized that the proposed cap is not intended to impose a rigid ceiling on spending but rather to serve as a moderating influence. The five year average and the measurement of the state GDP would create a smoothing effect and a guiding mechanism. 1:38:47 PM DOMINICK HARNETT, Staff, Senator James Kaufman, Alaska State Legislature, Juneau, Alaska, delivered a presentation on SB 36 and SJR 4 on behalf of the sponsor. MR. HARNETT moved to slide 2, Current Constitutional Limit: [Original punctuation provided.] Current Constitutional Limit  • Constitutional: Article IX, sec. 16 (effective in 1982) • "Appropriations from the treasury made for a fiscal year shall not exceed $2,500,000,000 by more than the cumulative change, derived from federal indices as prescribed by law, in population and inflation since July 1, 1981." • $2.5 B plus inflation and population growth since 1982 • Calculation for FY26 would be over $11 billion • Exemptions to the cap include, PFD's, bond proceeds, debt service payments, non-state sources of revenue, public corporation revenue appropriations, and disaster declarations, school bond debt reimbursement MR. HARNETT stated that Alaska has a constitutional spending limit, but it is so high that the state cannot reach it. The spending limit is established in art. IX, sec. 16, Constitution of the State of Alaska, adopted in 1982. The provision states that appropriations from the treasury made for a fiscal year shall not exceed $2.5 billion by more than the cumulative change derived from federal indices as described by law. It adjusts for population and inflation starting at $2.5 billion. Adjusted to today's dollars, the constitutional limit for fiscal year 2026 would be slightly more than $11 billion. He noted that spending levels are not even close to that. MR. HARNETT further explained that the constitutional spending limit includes several exemptions. He listed exemptions such as permanent fund dividends, bond proceeds, debt service payments, non-state sources of revenue, public corporation revenue appropriations, disaster declarations, and school bond debt reimbursement, which he noted was added later through a court decision. 1:40:04 PM MR. HARNETT moved to slide 3, Current Statutory Limit: Current Statutory Limit  • AS 37.05.540 - Enacted in 1986 • Based on appropriations made in a fiscal year, not for a fiscal year • Counts supplementals in the year appropriated, not effective • Limits spending growth to population plus inflation plus 5 percent • The use of both factors to calculate the limit has caused the limit to outgrow effectiveness • The timing of data for calculation of this limit does not work well with the budget process. The limit is not known before the annual budget process MR. HARNETT stated that the statutory spending limit, enacted in 1986, is codified in AS 37.05.540. He explained that the statutory limit is based on two factors: • Appropriations are made "in a fiscal year" rather than "for a fiscal year." Meaning, supplemental appropriations are counted in the year they are made, which makes them a little less effective. • The statute limits spending growth to the population plus five percent of the previous year's budget. MR. HARNETT said the spending limit has outgrown its effectiveness because it uses both of those factors. 1:40:38 PM MR. HARNETT explained the problems with the statutory spending limit. He said the timing of the data used to calculate the limit presents challenges. He explained that population and consumer price index (CPI) data are calculated at the beginning of the year, while the governor releases the proposed budget in December, creating a timing mismatch in the application of the formula. He said the next slide explains the proposed statutory limit. 1:40:58 PM MR. HARNETT moved to slide 4, Proposed Appropriation Limit: [Original punctuation provided.] Proposed Appropriation Limit  • Calculated by subtracting government spending from historical State GDP values and adjusting for inflation • Stability is improved by averaging these values over the previous full five fiscal years • Constitutional Cap, upper limit, would cap spending at 15 percent of GDP • Statutory Cap, lower limit, caps spending at 12 percent of GDP MR. HARNETT explained that the proposed legislation calculates the statutory spending limit using historical state GDP. He said the calculation would use the average of five of the previous six years of GDP and would subtract government spending from that figure. He stated that the resulting number would be based on current-dollar values for that fiscal year. 1:41:17 PM MR. HARNETT stated that using a five-year average helps prevent fluctuation and stabilizes the calculation. The state GDP can fluctuate significantly from year to year, particularly in Alaska, due to changes in oil prices. He said averaging five of the previous six years creates a stabilizing mechanism. MR. HARNETT said the proposed legislation establishes a constitutional cap as the upper limit and a statutory cap as the lower limit. He said the constitutional cap is set at 15 percent of GDP, while the statutory cap is set at 12 percent of GDP. 1:41:53 PM SENATOR CLAMAN asked why the proposal excludes government spending when calculating gross domestic product. 1:42:08 PM SENATOR KAUFMAN replied that the measurement focuses on private- sector economic activity because the aim is to have a beneficial focus on the health of that sector. He noted that Alaska receives substantial federal funding and operates many government programs, but the proposed approach intends to measure the portion of the economy the state hopes to grow. He said a common principle in business management is that if something is important, it should be measured and then managed accordingly. SENATOR KAUFMAN stated that the proposal focuses on the portion of the economy that would benefit the state if it grows. He said the goal is to grow the underlying private-sector economy rather than expand the government sector. He acknowledged that government spending is a factor and produces peripheral economic effects. For example, employees working in a government office may purchase goods from nearby businesses, which indirectly supports private-sector activity. 1:43:25 PM SENATOR CLAMAN stated that certain activities, such as road construction projects, are largely funded with public funds but carried out by private-sector contractors. He said those projects involve government spending but still support private- sector economic activity. He noted that he was not advocating for growth of the government but suggested that including those expenditures could potentially provide a more accurate reflection of overall economic health. 1:44:03 PM SENATOR MYERS said the example of road construction illustrates the distinction between measuring government spending and measuring private-sector economic growth. If the goal is simply to increase overall spending totals, the state could fund projects without regard to whether they produce long-term economic benefits. He stated that focusing on private-sector growth encourages policymakers to consider whether government spending, such as road construction, supports long-term economic development rather than only short-term employment. SENATOR MYERS said that measuring private-sector activity may encourage the state to consider how projects contribute to economic growth over a longer period, such as ten or twenty years. 1:45:02 PM SENATOR KAUFMAN acknowledged that government-funded projects, such as road construction, do contribute to the economy. He explained that when individuals employed on those projects spend their wages in the private sector, those dollars flow into private-sector economic activity. Such spending can generate indirect economic effects, such as workers purchasing vehicles or other goods, which support businesses in the private sector. He noted from his experience in the fabrication industry that increased work activity was often evident in the parking lot, where employees had parked their new pickup trucks. He emphasized that these types of secondary economic effects are reflected in the broader economy, but not through direct government expenditure. Rather, they occur through indirect effects on the economy. 1:46:00 PM SENATOR MYERS noted that the proposal for a constitutional amendment has gone through several iterations over the past four years and asked about the change in the proposed percentage limit. He recalled that earlier versions used a limit of 14 percent of private-sector GDP and asked why the proposed version uses 15 percent. SENATOR KAUFMAN responded that the specific percentages changed over time as the proposal evolved in prior discussions. The exact percentages remain part of the broader policy discussion and negotiation. He said the goal is to set the limit within a reasonable range. He explained that the proposal aims to establish a workable spending range and that determining the precise percentages will likely involve continued discussions with legislative finance staff and others. 1:47:20 PM SENATOR MYERS asked whether changes in the proposed legislation were influenced by developments in the private sector or by legislative considerations during prior committee deliberations. SENATOR KAUFMAN responded that there may have been discussion at one point about matching the percentage to spending levels in a prior year. He said the legislation has evolved over several legislatures. 1:48:24 PM SENATOR KIEHL remarked that he is a little intrigued by the fact that the proposed legislation ties the spending cap to the state GDP and that the private-sector economy is the main focus. He noted that when he reads the Alaska State Constitution, including its preamble, it does not define the primary purpose of state government as promoting private-sector economic growth. SENATOR KIEHL acknowledged the importance of maintaining a strong and healthy private-sector economy. He said the state should support that goal and build incentives that do not exist today. He suggested a possible alternative to consider is to link state revenues to economic performance in a strong, healthy private-sector economy. SENATOR KIEHL stated that the Alaska State Constitution outlines a range of responsibilities for state government that relate to the overall well-being of Alaskans. He said those responsibilities include economic well-being but also encompass broader public services and obligations. He said that, as the Alaska State Constitution reads, the proposed constitutional amendment should not prioritize the private-sector economy over all other public-sector workers, public services, or the good of Alaskans as a whole. 1:50:06 PM SENATOR KAUFMAN responded that the intention is not to diminish the importance of the public sector. However, the state funds government services through economic activity generated by the private sector, and a healthy, vibrant private-sector economy provides the resources needed to support public programs. SENATOR KAUFMAN said that while the Alaska State Constitution expresses the intent of promoting the well-being of Alaskans, the question for policymakers is how best to achieve that intent. He suggested that policies encouraging private-sector economic growth are a great way to help provide the revenues necessary to fund public services and programs. SENATOR KAUFMAN noted that strengthening the private sector could also reduce reliance on government services by creating employment opportunities. He stated that the proposal seeks to create mechanisms that keep the legislature focused on the overall health of the economy. 1:51:17 PM SENATOR KAUFMAN said there is another piece to the discussion. He expressed concern that as the permanent fund continues to grow, the state could increasingly rely on investment income to finance government operations rather than private-sector economic activity. He cautioned that such a shift could lead to a system in which government services are funded primarily through financial returns rather than through a productive private-sector economy. SENATOR KAUFMAN emphasized that employment provides more than income; it contributes to an individual's self-worth and other values. He said the proposal aims to strengthen the economic foundation supporting public services. SENATOR KIEHL remarked that he had never heard a better argument for income tax. 1:52:21 PM SENATOR KAUFMAN acknowledged the remark, noting that the senator made a similar comment the first time the legislation was proposed. SENATOR KIEHL responded that the sponsor is just as convincing this time. 1:52:32 PM CHAIR CLAMAN recalled that when similar legislation was in the Senate Judiciary Committee the previous legislature, it was amended in committee to use a broader measure of GDP. He said it went to the next committee of referral, the Senate Finance Committee, and he did not know what happened from there. SENATOR KAUFMAN responded that although the proposal has undergone several iterations, he remains open to suggestions and further input. He said the central concept is to measure it as holistically as possible, average it, then identify healthy ratios that guide responsible fiscal behavior. SENATOR KAUFMAN noted that earlier discussions also raised questions about whether the permanent fund dividend should be included within the spending cap calculation. He said that has been a big topic in Alaska. He explained that determining a spending limit is difficult without a clear estimate of the permanent fund dividend amount. The disagreement over the dividend made it challenging to incorporate it directly into the proposed cap calculation. The proposal leaves the dividend outside the cap framework for that reason. 1:54:27 PM CHAIR CLAMAN said that he is not sure if there is a right answer. He said if government spending includes the GDP, the percentage decreases because the GDP would be larger. He noted that different approaches might produce different percentages while ultimately reaching similar spending limits. CHAIR CLAMAN invited Mr. Harnett to proceed with the presentation. 1:55:38 PM MR. HARNETT moved to graph on slide 5, Proposed Appropriation Limit. The graph shows how from FY04 - FY26Gov: • The unrestricted general fund spending appropriations, subject to limit, never exceeded the present-day constitutional limit. • Appropriations subject to the limit have been nowhere near the constitutional cap for over a decade. • The statutory limit of 12 percent proposed in SB 36 and the constitutional limit of 15 percent proposed in SJR 4 intersect with and smooth out appropriations spending. 1:56:10 PM SENATOR KAUFMAN elaborated on the graph. He explained that the red line shows the proposed 15 percent constitutional cap, which cuts across the gold bar from FY06 through FY14, and the years when spending exceeds the proposed 15 percent constitutional cap during periods of high revenue. He noted that during those years, the state addressed significant backlogs of deferred maintenance and other infrastructure needs. SENATOR KAUFMAN stated that while those expenditures supported worthwhile projects, spreading the spending over a longer period might have produced more sustainable outcomes. He explained that distributing the spending more gradually could have helped maintain workforce stability. He said that when spending occurs in large bursts during high-revenue years, it can create gaps in subsequent years when revenue declines. He stated that the goal of the proposed cap is to introduce a smoothing factor that moderates the boom-and-bust nature of Alaska's fiscal cycles. 1:57:29 PM SENATOR KAUFMAN explained that using a five-year trailing average would help moderate fluctuations by allowing the spending limit to adjust gradually. He said the mechanism allows some flexibility during revenue declines while also preventing excessive increases during periods of strong revenue. SENATOR KAUFMAN said that spreading capital spending and maintenance projects over time could improve efficiency by reducing workforce shortages and preventing spikes in project costs. He stated that a steadier approach could provide better value, help maintain skilled workers in the state, and support private-sector economic activity. 1:58:49 PM SENATOR KIEHL recalled comments in a previous presentation about smoothing spending by clipping off the peaks and filling in some of the valleys. He said that approach assumes the state already has a healthy level of program spending, and he expressed uncertainty about whether the state has met that condition. SENATOR KIEHL stated that many of his constituents think spending levels are already quite low. He recalled that, if his memory serves, the administration estimated it could require approximately $80 million to $120 million to implement a salary adjustment intended to bring state employee compensation to competitive levels. He referenced constitutionally required education funding, asking how policymakers would know when appropriate levels of program spending had been reached and when it would be time to start clipping the peaks. 1:59:57 PM SENATOR KAUFMAN replied that the legislature can look to historical spending levels and past fiscal ratios. He said determining what constitutes a healthy level of spending is part of the grand policy discussion and would require continued committee deliberation. SENATOR KAUFMAN stated that financial modeling could help evaluate the appropriate level for the cap. He noted that such modeling would require the committee to decide which elements to include within the spending limit, such as the dividend. He expanded on the idea, stating that when he served in the House, the Ways and Means Committee examined spending cap models. Many states use formulas based on population and inflation, which are among the more common approaches. He said the committee reviewed the relative behaviors and noticed two outcomes. Either they would become very harsh or free float off into space. He stated that models based on averaging economic indicators and measuring spending relative to overall economic activity often performed reasonably well. He said it surprised many committee members. He acknowledged that policymakers sometimes worry whether such mechanisms would allow spending enough on programs or leaving enough resources for capital funding. SENATOR KAUFMAN said, ultimately, the committee could do some modeling and determine whether the proposed mechanism is appropriate, identify the best ratios and structure that would best guide fiscal policy. 2:02:35 PM SENATOR KIEHL stated that while economic modeling may help, he is also interested in the broader question of government structure. He said that, in practice, elections currently function as the state's effective spending cap. He explained that the legislature periodically reassesses whether certain government functions should be reduced or expanded, particularly when structural changes occur in the economy. He offered the example of child care, noting that the Alaska Chamber of Commerce advocates for significantly increased state involvement in addressing child care costs. Child care costs have increased substantially and can now consume a large share of a family's income, which in turn affects the state's workforce and economy. He stated that this illustrates how new challenges may arise that lead voters, businesses, or policymakers to request expanded government involvement in areas where the state previously played a smaller role. SENATOR KIEHL asked how the legislature can determine that it has set the appropriate level of government spending when future needs may arise decades later that could require additional state involvement. 2:04:25 PM CHAIR CLAMAN said that he would treat that as a statement not a question. 2:04:28 PM SENATOR KAUFMAN indicated that he would like to respond, stating that the proposal includes a constitutional and a statutory component. He explained that the lower spending limit is statutory and is not locked in the constitution. If the concern is about total available spending, the constitutional limit would govern. SENATOR KAUFMAN stated that the purpose of the constitutional limit is to set a cap that allows policymakers to capture value during peak revenue years. He reiterated that the lower limit is not constitutionally locked in, explaining that is why the legislation comes in two parts. There are constitutional and statutory parts. It does not have to be perfect on day one. The part of the legislation that would be put in place is the constitutional upper limit, which requires ratification by the people. The statutory limit is available for policymakers to adjust as need be. The only aspect at risk is getting into "all program and no capital spending" by expanding too much. 2:05:40 PM SENATOR KAUFMAN said there are two limits. One is the limit of what is possible with available money; that is where the legislature is. The other is to maintain a reasonable level of program spending while also preserving the ability to fund capital projects more consistently. He cautioned that if program spending expands too rapidly during periods of temporary peak revenue increases, it can crowd out capital investment when revenue declines. SENATOR KAUFMAN said the proposal aims to create a more durable fiscal structure that moderates spending increases during revenue spikes and preserves funding capacity for capital projects over time. 2:06:20 PM SENATOR MYERS stated that one difference between government and business is that businesses operate within clearly defined limits, whereas government resources are limited, but public needs are not. He asked how a spending cap might help the legislature prioritize some of those needs. 2:06:40 PM SENATOR KAUFMAN replied that legislators do it now, facing the need to prioritize among competing needs. He said that when meeting with constituents, legislators regularly hear compelling stories and requests related to education, health care, and other public services, but ultimately must decide which priorities to fund. He stated that a spending cap would not eliminate that process but would require the legislature to make those choices within a defined limit rather than relying solely on available revenue. He said the purpose is to preserve some funding capacity for capital funding by encouraging more deliberate prioritization. 2:07:30 PM SENATOR KAUFMAN acknowledged that Alaska faces revenue constraints and that the proposed cap is not designed primarily for the present fiscal environment. Instead, the proposal is intended for future opportunities, when state revenues may increase, so that the state will have a mechanism to encourage replenishment of funds. SENATOR KAUFMAN reiterated that the legislature could amend the proposed statutory portion of the cap through the normal legislative process. He explained that the framework would create a range between the statutory and constitutional limits, with the intent that the legislature could, with a two-thirds vote, direct funding between those levels toward capital projects. 2:08:22 PM MR. HARNETT moved to slide 6, Spending Subject to Limit: [Original punctuation provided.] Spending Subject to Limit  Spending Subject to the Limit_ Not Limited by the Proposal_______ All UGF Operating Permanent Fund Dividends Expenditures All UGF Capital Appropriations to Permanent Fund/ Expenditures PCE Endowment Retirement Appropriations to a state savings Payments account (e.g. CBR) Appropriations to capitalize state retirement accounts Direct Spending on a Disaster Declaration Proceeds of bonds approved by the voters MR. HARNETT explained the types of spending included and excluded under the proposed spending limit. He stated that spending subject to the limit would include all unrestricted general fund (UGF) operating expenditures as well as capital expenditures. 2:08:38 PM MR. HARNETT explained that the proposal would not limit several categories of appropriations. He said appropriations not included in the limit are the permanent fund dividend payments, appropriations to savings accounts such as the constitutional budget reserve and the statutory budget reserve, capitalization of state retirement accounts, disaster declarations issued by the governor, and bonds approved by a vote of the people. 2:09:07 PM SENATOR MYERS asked about the revenue bonds, which were listed as exemptions. He asked what the justification is for including revenue bonds among the exemptions. SENATOR KAUFMAN expressed his belief that just came about in conversations, again, about being approved by a vote of the people. 2:09:31 PM SENATOR MYERS stated that revenue bonds are not approved by a vote of the people. They are the one bond the legislature may authorize without voter approval. SENATOR KAUFMAN clarified that "proceeds of bonds approved by the voters" was inserted. SENATOR MYERS noted that statutory language reads "principal and interest of general obligation bonds," but the text of SJR 4 adds "principal and interest of revenue bonds." SENATOR KAUFMAN replied that he would review the language further. 2:10:17 PM MR. HARNETT moved to slide 7, Benefits. He summarized the proposed benefits of the spending cap: [Original punctuation provided.] Benefits  • Effective and Reasonable • This proposal would set the cap roughly at current levels and would include a constitutional provision for some flexibility in the case of unforeseen risks • Stable and Predictable • The 5-year trailing average creates stability and predictability by smoothing out annual volatility in oil prices and financial markets. • GDP factor creates a private-sector focus 2:10:58 PM SENATOR MYERS said given the legislation's emphasis on using a private-sector focus using the GDP factor, he asked whether the legislature uses any incentives today that focus on private- sector economic growth. 2:11:10 PM SENATOR KAUFMAN expressed his belief that the legislature does but said it could improve those incentives. He said one of the good things about Alaska is that the state is not as politically divided as some places, particularly Washington, D.C. Alaskans are a bit more cordial, in part, because residents have a tighter bond. Alaskans are inherently aware of and recognize the importance of resource revenue projects and other economic activities that help fund the state. He expressed his belief that it is better to strengthen that focus. He said that policymakers may become a little satisfied with the financialized proceeds of the permanent fund if it grows larger and pays for most state operations. He cautioned that, as the permanent fund contributes a larger share of annual state revenue, legislators may risk becoming overly dependent on its returns rather than focusing on deeper economic opportunities. He expressed concern that legislators may become satisfied with the financialized proceeds of the permanent fund to pay for most state operations, along with some service-sector and tourism revenue. And, as a result, lose sight of the deeper economic activity that actually produces economic prosperity among the populace. He said to focus on policy that helps drive underlying economic activity. It is important not just for state revenue or money in people's pockets, but for the deep personal satisfaction that comes from those difficult and varied jobs in the private sector. 2:13:20 PM SENATOR MYERS sought confirmation that he understood the sponsor's message, specifically that Alaska has bonds that tie the legislature to the people. Those bonds are becoming strained as the permanent fund's share of the state's revenue grows. SENATOR KAUFMAN clarified that he would not characterize the relationship as strained, but there is potential for it in the future. The proposed legislation intends to anticipate potential future circumstances. He explained that the legislation's design anticipates a scenario in which the permanent fund continues to grow and may provide a larger share of state revenue. Coupled with the revenue from the permanent fund, a large influx of revenue could result from future economic development, such as a gasline and related value-added industries. In such a scenario, the state could experience a significant increase in revenue. 2:14:30 PM SENATOR KAUFMAN stated that the proposed legislation aims to capture the benefits of potential future revenue increases while encouraging responsible fiscal behavior. He explained that the proposed mechanism could allow the state to fund programs while retaining measured slices of revenue for capital projects that boost the private-sector economy and open up opportunities. It creates a "virtuous cycle" that is inherent in a moderating mechanism that measures what matters. 2:15:28 PM SENATOR MYERS asked how the state would respond to a revenue surplus under the proposed spending cap compared with present- day practices. 2:15:44 PM SENATOR KAUFMAN responded that should the state experience increased revenue from economic activity, the legislature could choose to moderate draws from the permanent fund, allowing the fund to grow and generate additional revenue in the future. Primarily, the legislature could populate state reserves, rebuilding the statutory budget reserve fund and the constitutional budget reserve fund to strengthen the state's fiscal cushion. He said that if the legislature could get those funds flush, they could get the state out of a pinch. The options could be many, depending on the potential magnitude of revenue. If the earnings reserve fund and the permanent fund were conjoined, the legislature would no longer need to implement the inflation-proofing mechanism because, in managing an endowment for total return, that process is inherent in its growth, and it is attached to the withdrawal rate." SENATOR KAUFMAN said if the state suddenly had an influx of revenue and it was not spent as fast as possible, legislators could put that revenue into different funds, such as: • the state budget reserve (SBR) • the constitutional budget reserve (CBR) • program funding • capital projects funding SENATOR KAUFMAN said those reserves could carry forward into the future in the form of the SBR and CBR with money in them. 2:17:17 PM SENATOR MYERS referred to his colleague's comment that elections, in many ways, drive spending limits. He offered a hypothetical scenario in which the state experiences multiple years of surpluses above the spending cap, with excess funds deposited into savings accounts such as the CBR, SBR, and the permanent fund. He asked whether that could lead the electorate to favor candidates who would abolish the cap. SENATOR KAUFMAN asked for clarification as to whether the question referred to the constitutional cap or the statutory cap. 2:18:16 PM SENATOR MYERS replied that it could apply to either limit, depending on the situation. He said the state could experience sustained surpluses while spending remained constrained by the cap. He asked about the plausibility that voters, based on their wants or needs, might support candidates willing to increase spending by modifying or bypassing either the statutory or constitutional cap. SENATOR KAUFMAN responded that he cannot anticipate how voters might respond. He noted the legislature has adopted moderate budgets and exercised spending restraint, in part due to fiscal necessity. He said that if voters wished to change the spending cap, they would need to elect legislators and advance a constitutional amendment, which would then require voter approval. He said that he was unclear about the direction of the question. 2:20:57 PM SENATOR MYERS continued exploring the area of focus, stating the proposed spending cap is aimed at the future. He said that he is speculating on what else could come in the future. He can foresee a situation where the private-sector economy is not doing well but the permanent fund is strong. In that situation, the state government is doing well while the residents are not. He asked whether there is a "safety valve" that would allow funds outside of the spending cap and outside of government spending to reach the public directly in such a scenario. SENATOR KAUFMAN responded that the scenario involves several speculative conditions and that he did not have an answer. He said he would consider the issue further and suggested it could be discussed in more detail. 2:22:19 PM SENATOR MYERS clarified his question by referencing a recent event in Fairbanks. He said Fairbanks has a revenue cap, not a spending cap, and when the assembly sought to exceed that cap, the issue was placed before voters, who ultimately rejected it because they did not want higher taxes. SENATOR MYERS expressed concern that the proposed spending cap lacks a similar backstop. He explained that, in most states, there is a natural tension between taxation and spending; however, Alaska generally does not tax residents, so that tension is absent. As a result, there is a "full steam ahead" on the spending side. He stated his support for spending caps as a way for the legislature to put some tension back in, helping restore the natural balance. SENATOR MYERS further expressed concern that, as state revenues increase, particularly from the permanent fund, the appetite for spending could overrun the cap. He suggested that keeping the permanent fund dividend outside the proposed cap provides a safety valve by directing funds to residents, supporting the private sector, and reducing pressure to override the cap. He suggested that keeping the permanent fund dividend (PFD) outside the cap serves as a safety valve, directing funds to residents. That would help grow the private sector if it's in an anemic spot, and at the same time, provide some relief so people have less interest in overriding the cap. SENATOR KAUFMAN replied that there is a host of concerns and ideas rolled up in that, some of which are outside of the discussion of the proposed legislation. 2:25:00 PM SENATOR MYERS referred to the presentation, mentioning a court decision that included school bond debt reimbursement under the cap, and asked for background on that. SENATOR KAUFMAN said that he would provide the committee with legal memos on that. 2:25:41 PM SENATOR MYERS commented that the legislation has gone through different iterations, and there has been a kind of argument about appropriations "in a fiscal year" versus "for a fiscal year." He noted the proposed legislation reads "for" in SJR 4. He asked the sponsor to expand on that policy decision. SENATOR KAUFMAN expressed his belief that it largely has to do with managing supplementals. He stated that the proposed language reflects how the legislature treats them. He said he would follow up with details. 2:26:32 PM CHAIR CLAMAN asked whether there were further questions. 2:26:40 PM SENATOR KIEHL indicated that he was considering the distinction between "in a fiscal year" and "for a fiscal year" and their effects on whether supplemental appropriations level out over time. He said he would continue to consider the question. 2:26:54 PM CHAIR CLAMAN held SB 36 and SJR 4 in committee.