SENATE JOINT RESOLUTION NO. 23 Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit and a spending limit. This was the second hearing for this bill in the Senate Finance Committee. Co-Chair Donley restated the intent of the resolution to replace the current constitutional appropriation, or spending limit. He noted the current spending limit amendment to the Alaska Constitution was adopted in 1982 by voters and was intended to limit state government spending and require that one-third of all appropriations are allocated to the capital budget items. He opined that this constitutional amendment "has never worked" because the amount is "simply set too high". He explained that although the $2.5 billion figure is specified in the amendment, annual adjustment for population and inflation raises the amount to over $6 billion for the current year. He pointed out the amount subject to the provisions of the constitutional amendment is approximately $3.1 billion. This, he noted results in a $3 billion "cushion". Co-Chair Donley added that a court decision on the matter "completely turned on its head," the meaning of the one-third capital appropriation provision. This one-third requirement, he said, has never been followed. He surmised citizens reading the constitution "are led to believe" there exists a $2.5 billion limit, which he stressed is actually $6 billion, and that the capital budget is almost $1 billion general funds annually, which is also not the case. Co-Chair Donley expressed, "Given that the existing provisions have never worked and is not understandable to any average person…it's clear that that provision of the constitution is certainly broken." This resolution, he said, replaces the "broken language" with a provision that is effective. Co-Chair Donley explained the FY 00 budget of $3.1 billion is used to set a new baseline. He noted that although this seems to be an increase of $600 million from the language adopted in 1982, it is actually a decrease of almost $3 billion from the population and inflation adjusted amount. Co-Chair Donley stated that this resolution attempts to prevent the problems of the 1982 provision by clarifying which funds are included in the spending limit. He added that this resolution limits the growth in spending to a percentage of population and inflation. He referred a spreadsheet, Appropriation Limit, showing the changes to the base limit and growth limit of 50 percent of population and inflation. [Copy on file.] He surmised this approach would hold down the growth more effectively. Co-Chair Donley also noted a provision is added allowing, through a super majority vote of the legislature, that .25 percent inflationary growth could be accessed. He pointed out in the first year after this resolution takes effect, the amount would be approximately $31 million. He termed this to be a safety valve. Co-Chair Donley continued that an additional safety valve is the option of general obligations (GO) bonds to finance capital projects. He described how, if the legislature identifies an important need, a GO bond proposal could be placed on the ballot, and if approved by voters at the next general election, could relieve pressure on the operating budget. He surmised that this is an appropriate method to allow for large capital expenditures. Co-Chair Donley also noted the resolution contains a repeal provision in the form of placing a question before voters in the 2010 general election as to whether this constitutional amendment should remain a part of the constitution. He noted that this encourages legislative review of the provision as well. Co-Chair Kelly asked if there are other provisions in the state constitution that come up for public review. Co-Chair Donley replied there are several and gave the constitutional convention as an example, explaining how the question of whether to hold a constitutional convention is placed before the voters every ten years. Senator Ward expressed his support for this resolution and told how he had made earlier attempts to support Co-Chair Donley in these efforts in previous legislative sessions. Senator Ward commented that if this issue had been placed on the ballot earlier, he believed Alaskans "would have taken a different attitude toward income tax, sales tax, permanent funds, petroleum taxes, a whole host of things." He stated there is currently "a blank check in government." He titled this constitutional amendment as the beginning of "the Alaskan Plan" and said it does not compare to the Republican Party's five-year budget plan that concluded the previous fiscal year. He stressed this is what the citizens of Alaskans have demanded and that "they want us to live within our means and right now they know that there is no limit" to state government spending. He surmised that if this resolution were placed on a future ballot, voters would become more involved in the long-range fiscal plan for state government. He warned there must be a limit to government spending so citizens would have faith in their government. He concluded this resolution is the answer to the failed ballot measure in the 1999 special election to use a portion of the earnings of the permanent fund to pay for some government services. Co-Chair Kelly commented that whenever a constitutional amendment pertaining to government spending there would always be difficulties. He noted that although Co-Chair Donley gave a complete presentation of this resolution, there might still be minor issues to address. However, he remarked that the House of Representatives committee process has progressed "frightenly slow" this session and he was concerned that the resolution would not complete the process in the next year and qualify for placement on the 2002 General Election ballot. He therefore asked for Senate Finance Committee leeway to expedite the resolution through the Senate this year so it could be transmitted to the House as soon as possible. He preferred this resolution receive necessary scrutiny in House committees rather than be delayed then rushed through during the last days of the legislative session. Senator Hoffman referenced page 2, lines 13 and 14, "The operating expenditures of each of the principal departments established by law under Section 22 of Article III shall be reduced by an equal percentage." He asserted that whenever the matter of reducing state government has been considered, the method of across the board reductions to all services was a last result option. He stressed that across the board reductions "don't make much sense" and a better approach is to examine and prioritize specific services. Therefore, he asked why an across the board method is imposed in this constitutional amendment. Senator Hoffman continued to page 2, lines 14 through 16, "This subsection does not apply to expenditures that are approved by a resolution concurred in by at least two-thirds of the members of each house." He wanted to know if such a resolution could be considered and adopted at the same time the budget is under consideration. Co-Chair Donley answered yes to Senator Hoffman's second question. He noted the final result would still be a requirement that the growth remain less than the population and inflation requirements. Co-Chair Donley addressed the first question saying that although he agreed the equal reduction approach is not a good idea for general budget practice, he recommends it for this situation because it is a provision to be implemented only if the legislature violates the spending limits imposed in this constitutional amendment. He expressed this provision would encourage the legislature to stay within the spending limit, to prioritize services and would also avoid costly litigation. He explained that in a situation where the legislature "ignored its constitutional duty" to appropriate within the limit or inadvertently appropriated more than the limit allows, a court would have to determine appropriate reductions. He stated this provision in the constitutional amendment provides the court specific guidelines for making those reductions and also gives the legislature "clear notice" of the consequences of violating the spending limit. He predicted that this provision actually addresses Senator Hoffman's concerns about unprioritized reductions because the legislature would be encouraged to make budget decisions within the constraints rather then allow for an arbitrary across the board reduction. Senator Hoffman estimated the proposed FY 02 budget would exceed the spending limit imposed by this constitutional amendment if it existed today. He requested the Division of Legislative Finance confirm this. Co-Chair Donley agreed to this, and classified the FY 02 budget as a "moving target" since it had not yet passed the legislature. Co-Chair Kelly asked for clarification of the equal reduction provision imposed if the legislature appropriated an amount higher than the spending limit. Co-Chair Donley reiterated how the budget would be reduced in equal proportions to each department in the event of a lawsuit filed and won against the legislature for over-spending. He pointed out that the governor is also responsible for any over-spending since the budget must be signed into law before funds could be appropriated. He surmised that the amount of money involved in these instances would be minimal. Co-Chair Kelly asked if the appropriation reductions would be made through a court action. Co-Chair Donley affirmed and explained the court would order each department to reduce its budget and the specifics would be determined by the commissioners of each department. Co-Chair Kelly asked if the commissioners would have flexibility to make these reductions within the Budget Request Units (BRU). Co-Chair Donley answered by reading from page 2, lines 10 and 11, "…the governor shall reduce expenditures by the executive branch for its operation and administration to the extent necessary to avoid spending more than the amount that may be appropriated…" Senator Hoffman opined that in actuality, the governor would review the budget passed by the legislature to ensure the appropriations are within the limit. In the event they are higher, Senator Hoffman continued, the governor would prioritize and make necessary line item reductions at this time. Co-Chair Donley agreed this is true, "within the perimeters of the constitutional provision, which requires it to be equal by department." He asserted the way to avoid this situation is to not violate the spending limits. Amendment #1: This conceptual amendment deletes a sentence from Section 1 (c), on page 2, lines 13 and 14 of the resolution, which reads, "The operating expenditures of each of the principal departments established by law under Section 22 of Article III shall be reduced by an equal percentage." Co-Chair Kelly expressed his concern that some items such as contracts negotiated in good faith and entitlements, would be a priority and could not be reduced, but that other, less desirable reductions would be required elsewhere. He predicted there would be a small number of budget items available to incur the full reduction. He also warned that the legislature would be unable to make these budget decisions. Co-Chair Donley noted several events would have to occur before this provision would be activated. He listed: the legislature would pass a budget higher then the appropriation limit, the governor would not exercise veto authority in reducing appropriations to meet the limit, a lawsuit would be filed against the state, and the court would rule against the state in this suit. Only at this time, he explained, would the governor be required to make the equal reductions in accordance to the constitutional amendment and the court order. Senator Green understood the primary intent of the appropriation limit is to become the "guiding principal" by which, the budget is formulated and policies set. By knowing the appropriation limit at the start of the budget process, she surmised the department representatives would have to submit proposed budgets that meet the predetermined amount. She stated the message would be sent to the executive branch, "This is the principal under which we're going to operate. You have some information and you work from that principal." She expressed this method starts with the governor's office. If nothing else, she predicted this intent of the constitutional amendment would ensure there is leadership in the budget process rather then a compilation of reactions. Co-Chair Donley applauded this point, and noted that in the last six years, the governor has been proposing large budget increases. Under the appropriation limit, Co-Chair Donley stated, the governor would have to meet the cap or there could be consequences. He noted this also addresses Senator Hoffman's concerns about prioritizing expenditures. Co-Chair Donley stated he had no objection to the deletion of the sentence as proposed. Co-Chair Donley moved for adoption of Amendment #1. Without objection the amendment was ADOPTED. Co-Chair Donley requested Committee advice on the last sentence in Section 2 on page 2, lines 23 through 25, "If the majority of those voting on the proposition rejects the amendment, the amendment shall be repealed and Section 16 of Article IX shall be reenacted to read exactly as it did when it was first adopted in 1982." He explained this applies to the provision placing the constitutional amendment, if initially adopted, back before voters for reconsideration in the year 2010 and every eight years thereafter. He commented that the language adopted in 1982 is "pretty bad" and thought it might be preferable to completely repeal the constitutional amendment rather then revert to the previous language. Co-Chair Kelly asked for clarification of how this resolution would affect the existing constitutional amendment. Co-Chair Donley explained if this resolution were adopted, and its provisions incorporated into the constitutional amendment governing spending limits, but the voters later elected to repeal these provisions, the constitutional amendment would remain but the language would revert to that in the original constitutional amendment. An alternative, he said, is to provide that the constitutional amendment is repealed in its entirety if voters fail to retain the language contained in this resolution. Co-Chair Kelly recommended repealing the entire constitutional amendment, saying it is ineffectual. Senator Leman agreed. He stated the provision proposed in the resolution could be confusing and he wanted to keep the constitution as simple as possible. Senator Leman referred to the "safety valve" language on page 2, lines 14 through 16, "This subsection does not apply to expenditures that are approved by a resolution concurred in by at least two-thirds of the members of each house." He asked if this provision would preclude the current legislative practice of separately voting to pass the budget and the subsequent withdrawal from the Constitutional Budget Reserve fund (CBR) to pay the difference between available funds and the total budget expenditures. He noted this method is established in statute and wanted to know if an additional resolution would be required before funds could be withdrawn from the CBR. Co-Chair Donley replied that a resolution "keeps the power with the legislature" with regard to CBR draws. He explained if the CBR withdrawal were included in the budget legislation, it would be subject to a line-item veto. He gave a scenario of a budget bill passed that included the CBR withdrawal. He warned that the governor could veto this section of the bill, which would activate the budget reduction provision and the governor would determine the reductions rather then the legislature. Senator Leman asked how this compares to the Alaska Supreme Court interpretation of the existing constitutional amendment. Co-Chair Donley replied this resolution specifically authorizes the legislature's intent that the governor could not veto legislative approval of CBR draws. Amendment #2: This amendment deletes, "…and Section 16 of Article IX shall be reenacted to read exactly as it did when it was first adopted in 1982." from Section 2, page 2, lines 24 and 25 of the resolution. Co-Chair Donley moved for adoption. There was no objection and the amendment was ADOPTED. Senator Wilken stated that he would support reporting this resolution from Committee, but stressed that it is a work in progress. He voiced concerns with "the half and half" provision that calculates the allowable spending increases based on population and inflation, saying it is too ambitious and too low. He admitted he did not have a recommendation as to what the amount should be. He noted the predicted 13 percent per capita reduction over nine years and emphasized the difficulty in making one-percent budget reductions under the Republican's five year budget plan, which concluded the previous year. He thought the issue could be addressed with an additional safety valve; one that would be easier to enact then the currently proposed provision. Senator Wilken expressed there is a need to address capital spending versus operating expenditures. He opined that the operating budget is the result of an "arduous process that serves to restrain government." He remarked this is entirely different from the process of allocation for capital expenditures, which are intended to encourage the state's economy. He stressed Alaskans need to understand that the intent in funding operation items is one of restraining government but the intent in funding capital items is to build Alaska. He characterized the two budgets as mutually exclusive. He was concerned with the proposal to combine the two into one spending limit provision. He warned that the result could be favoring government at the expense of building Alaska. Co-Chair Kelly concurred. Senator Wilken listed that his third concern relates to the University of Alaska, which he was unsure if it was subject to the spending limits. He predicted if tuitions were increased, "we're back to the old statutory designated receipts problem," explaining that any revenue increases with the intent of funding specific state services would affect the total appropriation amount in relation to the spending limits. He stated there are other instances where additional revenues could be generated to assist in paying for and expanding a service. Senator Wilken shared his final concern with "federal indices" as it appears in Section 1 (a). He pointed out there are few federal indices for comparison and those impacted by this resolution should be clarified. Senator Wilken assured he is "fully supportive" of the constitutional spending limit, stressing he wanted to guarantee the one adopted is acceptable. Senator Austerman associated himself with Senator Wilken's comments. He emphasized, "the devil is in the details" on any such proposal. He considered this resolution "a tool for us to start getting a handle on where we're going on government." He noted his interest in pursuing a long-term financial plan and stressed this is a key element to that plan. He was reassured that because this resolution requires a two-thirds vote from each body, the problems would be adequately addressed before it passed. He hoped there would be constructive discussions on the matter in the House of Representatives over the interim. Co-Chair Kelly noted Co-Chair Donley's tendency to "work on a lot of projects all very much in depth." He requested the sponsor work on this resolution with the same intensity given to his other legislation. Senator Austerman invited Co-Chair Donley to participate in the long-term financial planning group. Senator Ward offered a motion to move from Committee SJR 23, as amended, with a zero fiscal note from the Division of Elections, Office of the Lieutenant Governor. Co-Chair Donley remarked he was in agreement with all the comments raised during this hearing and that he would continue to work on this resolution. Without objection the bill MOVED from Committee.