SENATE JOINT RESOLUTION NO. 103 Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit. This was the second hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that the Senate Rules Committee at the request of Governor Frank Murkowski sponsors this legislation. The bill would repeal and replace the State's Constitution appropriation limit with a spending limit and would establish a moving three-year average as the basis for the application of the limit. The legislation would terminate on July first, 2009. Senator Dyson asked whether, upon further review, the Office of Management and Budget had identified areas of the bill, other than those identified and discussed during its first hearing that would require discussion. CHERYL FRASCA, Director, Office of Management and Budget, Office of the Governor, stated that the concerns raised in the June 22, 2004 hearing on the bill have been addressed. No additional drafting errors were identified. Senator Dyson reiterated his concern regarding the calculation formula in Section 1, as the language does not appear to support the "no ratchet down" provision that had been specified in SJR 3- CONST AM: APPROPRIATION/SPENDING LIMIT. In this regard, he asked whether eliminating the language "or decrease" in Section 1(a), page one, line nine, would clarify this intent. Ms. Frasca responded that the "no ratchet down" provision is addressed by the fact that were the formula, which is based upon the lesser of the population/inflation factor as detailed in Section 1(a)(1)(A) and (B) or the change in personal income factor as detailed in Section 1(a)(2), to determine a spending limit lower "than the spending limit from the prior year, then the current year's spending limit" would be implemented. This would continue the "no ratchet down" intention of SJR 3. The affect of eliminating the words "or decrease," as proposed by Senator Dyson, must be determined by the Department of Law. Senator Dyson further questioned whether the words "by the lesser of" as specified in Section 1(a) on page nine, would be more appropriately included in Section 1(a)(1)(A, line thirteen. Co-Chair Green commented that the word "or" as specified in Section 1(a)(1)(B), line one, page two, might alleviate Senator Dyson's concern regarding the calculation formula's "no ratchet down" provision, as it would serve to identify whether the formula would be based on the calculation of Section 1(a)(1) or Section 1(a)(2). Senator Dyson continued to voice concern as to whether the language, as presented, would "preserve" the no ratchet down intent. Ms. Frasca expressed that language in SJR 3 might be being confused with HJR 9 language. She clarified that this bill is modeled after HJR 9-CONST AM: APPROPRIATION LIMIT, as amended by this Committee. The Committee could, if desired, amend this bill in order to align it with SJR 3. JIM BALDWIN, Senior Assistant Attorney General, Opinions, Appeals, & Ethics Section, Department of Law, responded to Senator Dyson's question regarding the elimination of the words "or decreased" in Section 1(a), on line nine, page one by stating that removal of the words would not harm the "no ratchet down" intent of the bill. Amendment #3: This amendment eliminates the words "or decreased" in Section 1(a), line nine, on page one. Senator Dyson moved to adopt Amendment #3. Co-Chair Green objected for explanation. Senator Dyson explained that removal of these words would serve to support the intent that the Constitutional spending limit would apply only to the amount that the State's budget could increase. The Constitutional spending limit could not mandate a decrease in the budget. The words proposed for deletion contradict language in Section 1(b) on page two, lines eight and nine. In response to a comment from Co-Chair Green, Senator Dyson explained that rather than clarifying which of the calculations should be used in the formula, as presented in Section 1(a) and (b), the intent of this amendment is to affirm that the end-product of all the calculations would be that "it would not force a decrease below the last year's appropriation level." A forthcoming amendment would address concerns regarding the components of the calculation. Co-Chair Wilken expressed that the conflict being addressed by this amendment begins with the words "if the appropriation limit?." on line five, page two in Section 1(b) as it contradicts language in Section 1(a) on line five, page one. Co-Chair Green removed her objection. Senator Olson asked for confirmation that the Administration is in agreement that the intent of this legislation is to not allow the budget to be reduced in the out years. Ms. Frasca stated that the Administration is willing to support a spending limit that would not ratchet down the budget in a situation where the formula calculations might be negative. There being no further objection, Amendment #3 was ADOPTED. Senator Dyson asked regarding language in Section 1(a)(1), beginning on line ten, page one as he understood that SJR 3 mandated that the formula for determining a spending limit would be based on the sum of the Consumer Price Index (CPI). The sum of the CPI would be limited to a growth factor that would not exceed the income of the State's citizens. He asked Ms. Frasca her interpretation of that bill. Ms. Frasca responded that due to the fact that this legislation was fashioned after HJR 9 as amended by the Senate Finance Committee, she had not reviewed the provisions of SJR 3. She reiterated that the Committee could amend SJR 103. Senator Dyson stated that the confusion arises from the language that specifies that the calculation would be based on the lesser of CPI and population, as specified in Section 1(a)(1) or the change in personal income of State residents as specified in Section 1(a)(2). Ms. Frasca clarified that the language specifies that the spending limit calculation would be based on the rate of change of inflation plus the rate of change in population times .75 percent as specified in Section 1(a)(1). This sum would then be compared to the rate of change in personal income as specified in Section 1(a)(2). Whichever is "the least of those two answers would become the adjustment factor for the limit." Senator Dyson stated that therein lay the confusion, as he understood that both HJR 9 and SJR 3 based their calculation on the growth in population and the lesser of the CPI or the growth in Alaskans' income. Co-Chair Wilken recalled that the Committee had removed the personal income component from those calculations. Senator Dyson agreed, but clarified that the Committee had incorporated language specifying that the CPI component could not exceed the growth in personal income. SFC 04 1st SS #3, Side B 11:35 AM Senator Dyson continued that this provision was included to alleviate fears that otherwise "a huge escalator" might result that would undermine "that budget discipline." Co-Chair Wilken asked, therefore, whether the language in SJR 103 mirrors that as adopted in SJR 3 by the Committee. Ms. Frasca "assumed" that it does not. She reiterated that the language presented in SJR 103 is mirrored after HJR 9, as amended by the Senate Finance Committee. She stated that the Committee could alter the bill's language. Senator Dyson acknowledged. He clarified that the population component and the sum of the lesser of the CPI or income growth were the key elements in SJR 3. He asked regarding the Administration's decision to mirror the components of HJR 9 as opposed to SJR 3. Ms. Frasca responded that an extensive review of which bill's calculation factors would be the best was not conducted, as the Administration determined that, since both HJR 9 and SJR 3 contained the same variables, either approach would arrive "almost to the same place." It used the HJR 9 bill as it had processed further than SJR 3. Therefore, she stated that the weight placed on one variable over another would be the Committee's preference. The Administration would support either approach. Senator Dyson voiced the desire that the legislation would advance from Committee after some forthcoming alternations. Conceptual Amendment #4: This amendment replaces language in Section 1(a)(1)(A) and (2) beginning on line 11, page one through page two, line four, with Section 1(a)(1) and (2) language beginning on line eleven, page one through Section 1(a)(2) ending on line three, page two of CS SJR 3(FIN). This language reads as follows. (1) the percentage rate of change in the Consumer Price Index for all urban consumers for the Anchorage metropolitan area compiled by a federal agency during the two calendar years preceding the calendar year during which the immediately preceding fiscal year began, but not to exceed the percentage change in personal income of State residents during the two calendar years preceding the calendar year during which the immediately preceding fiscal year begins; plus (2) the percentage rate of change in the State population during the two calendar years preceding the calendar year during which the immediately preceding fiscal year began compiled by a State department. In addition, this amendment inserts the words "per capita" into the new language of Section (a)(1) preceding the words "personal income of State residents?". Senator Dyson moved to adopt Conceptual Amendment #4. AT EASE 11:40 AM / 11:47 AM Senator Dyson stated that the inclusion of this language would clarify the intent of the Committee regarding the formula. There being no objection, Amendment #4 was ADOPTED. Amendment #1: This amendment inserts a new paragraph into the bill in Section 1(c) on page three, line 21 as follows. (15) an appropriation for elementary or secondary public school operations. Senator Hoffman moved to adopt Amendment #1. Senator B. Stevens objected. Senator Hoffman explained that this "simple amendment" would remove K-12 education expenditures from the spending limit provision. [NOTE: Co-Chair Green assumed chair of the meeting.] Co-Chair Green stated that the result of this amendment would be that education spending would not be controlled via the Constitutional spending limit, were one imposed. Senator Hoffman expressed that education spending limits would be decided by the Legislature. The Governor could veto Legislative decisions that were considered excessive in this regard. Senator B. Stevens disagreed with Senator Hoffman's comment that this is a simple amendment, as, were it adopted, it would result in the dollar amounts specified in Section 2(a)(1) and (2) on lines one and two, page four being re-calculated. Specifically, it would remove $800 million from those numbers. Were education excluded, it would serve to double the maximum spending limit established by the formula. "It is not a simple amendment." Senator Bunde commented that while education is one of the important services provided by the State, it is not "the only one." Because it is the largest annual State expenditure, it would be inappropriate to exclude it from the spending limit. Doing so would make the spending limit "meaningless". Senator Hoffman stated, in response to Senator B. Stevens concern, that were the amendment adopted, the numbers in Section 2(a)(1) and (2) could be addressed with a technical amendment. He disagreed that the omission of education from the spending limit would double the amount. Co-Chair Green asked the percentage of General Fund dollars in support of education in the FY 04 budget. She understood that it amounted to between 45 and 50-percent of that budget. Senator Bunde responded that education spending equated to approximately $800 million of the State's FY 04 $2.3 billion budget. Co-Chair Green understood, therefore, that this amendment would exclude approximately 35-percent of the State's expenditures from the provisions of the limit. This would mean that the remaining 65- percent would be responsible for controlling State spending. Senator Hoffman stated that consideration should be provided to how the proposed spending limit would have affected education spending this past year, especially in consideration of the projected Public Employees Retirement System (PERS) and Teachers Retirement System (TRS) obligations which are anticipated for a minimum of another three or four years. Therefore, this legislation would establish a spending "knowing full well that ? we have increases on the horizon," directly related to education. Senator Bunde responded that the spending limit would not prohibit increasing the education budget by $130 million. What it would say is that priorities must be established, and, were education deemed a priority, the money to support its increased budget "would have to come from another area of State spending." "A finite pot of money" would be available. Senator Olson declared that while funding for the University of Alaska system is important, K-12 education should be a higher priority as it affects more people in the State. Therefore K-12 funding "should have equal positioning" to that provided the University. Co-Chair Green expressed that comparing K-12 education to University funding and other exempted components of the spending limit is difficult to do as the K-12 education component does not "generate money that we would even be allowed to exempt. There is nothing to waive." Education is, in a fashion, receiving a waiver, as grants that might be provided "directly to schools" are not included in the proposed spending limit calculation. The University raises its own money; this is different than the 100-percent funding provided to K-12 education. Senator Dyson recalled that the graphs and models relating to this issue that were presented during Committee hearings on the Constitutional spending limits during the Twenty-Third Legislative Session, addressed the Committee's concern regarding whether there sufficient flexibility provided by the spending limit proposal to meet projected State government growth relating to the PERS/TRS issue as well as the Department of Health and Social Services projected growth of the State match that would be required in the Medicaid and Medicare programs. These obligations would present challenges but would be doable. Senator Dyson countered that the argument that K-12 education should be exempt from the spending limit due to the number of people involved could also be applied to ranking investigating and prohibiting crimes against children as a number one priority as the State leads the nation in violations against children. Therefore, what to exempt due to the premise of this numbers' argument, could be a huge discussion. He encouraged a no vote on the amendment, as the fact that the education foundation funding formula, the Constitutional mandate that education be adequately provided for, and the "sympathy" the Legislature has shown in this regard should sufficiently address the issue. A roll call was taken on the motion. IN FAVOR: Senator Hoffman and Senator Olson OPPOSED: Senator Dyson, Senator B. Stevens, Senator Bunde, Co-Chair Wilken and Co-Chair Green The motion FAILED (2-5) Amendment #1 FAILED to be adopted. {NOTE: Co-Chair Wilken assumed chair of the meeting.] Amendment #2: This amendment inserts a new subsection into Section 2 of the bill, on page three, following line 26 as follows. (a) The 2004 amendment relating to an appropriation limit (art. IX, sec. 16) takes effect only if the (1) legislature adopts a resolution proposing an amendment to Section 15 of Article IX to limit appropriations from the Alaska permanent fund based on an averaged percent of the fund market value and to permit appropriations from the fund only for costs of administering the fund, a program of dividend payment for residents of the State established by law, aid to public education, and aid to municipalities and other communities; and (2) proposed amendment described in (1) of this subsection is placed before the voters of the state at the 2004 general election. In addition, the words "Contingent Effect" would be inserted into Section 2 on page three, line 26, following "30". Senator Hoffman moved for the adoption of, and objected to, Amendment #2. Senator Dyson viewed the amendment "as an effort to come to some accommodation." He would support the Amendment if the sponsor would delete language that would serve to enshrine some of the distribution of the earnings of the Permanent Fund in the Constitution. This language is located in the (a)(1) section of the amendment; specifically "and to permit appropriations from the fund only for costs of administering the fund, a program of dividend payment for residents of the State established by law, aid to public education, and aid to municipalities and other communities". While he is sympathetic to these programs, he does not support them being enshrined in the Constitution. Senator Hoffman thought that this language was included in SJR 102, and in that regard, he thought that the amendment would serve "to keep the language in compliance with" that resolution. Perhaps further discussion on SJR102-CONST. AM: PERM FUND P.O.M.V.; DIVIDENDS should occur before this amendment is considered. Amendment-to-Amendment #2: The amendment to the amendment amends language in (a)(1) of the amendment so that the language would read as follows. (a) The 2004 amendment relating to an appropriation limit (art. IX, sec. 16) takes effect only if the (1) legislature adopts a resolution proposing an amendment to Section 15 of Article IX to limit appropriations from the Alaska permanent fund based on an averaged percent of the fund market value; and (2) proposed amendment described in (1) of this subsection is placed before the voters of the state at the 2004 general election. Senator Bunde moved to Amend Amendment #2. He stated that this would reflect one of the resolutions being presented to the Committee. Senator Hoffman stated that while he would not object to the amendment to the amendment, he might consider including this language in SJR 102. Senator Dyson observed that many Legislators have stated that any discussion of new revenues to the State government should have a Constitutional spending limit as their "cornerstone." He commended Senator Hoffman's efforts in support of adopting a POMV plan. Therefore, he understood that Senator Hoffman's amendment is an effort to establish agreement in order to make that happen. Acceptance of Senator Hoffman's amendment by "those of us who want a spending" limit would indicate a reciprocal willingness that "we would work with you to get the POMV before the people." He applauded the "spirit of that." Senator Bunde noted that Senator Dyson has stated that there are those who would not "go anywhere without a complete plan." However, the situation has become one in which supporters of the POMV and supporters of a spending limit are waiting for the other to take the first step. This might "indeed be an opportunity for us to step together." He also accepted that there are those who argue that a spending limit would not be considered without addressing how the State would acquire new revenue. That is as valid an argument as that a spending limit would not be accepted without a spending plan. Approval of the amendment to the amendment might provide hope of moving forward. Senator Hoffman reiterated that his support of the amendment to the amendment and his support of the establishment of a spending limit would be contingent on what occurs with SJR 102. Senator Dyson understood Senator Hoffman's remarks to be that were an acceptable version of SJR 102 not to advance, Senator Hoffman would not support this legislation, "even as amended." Were that the case, Senator Dyson would offer a motion on the Senate floor "to delete the amendment that we just made." However, he hoped that some common ground would be acquired that would march both sides "forward together." Senator Olson commended Senator Dyson on his perception that working together might advance a plan. He voiced support of the Governor's proposal as outlined in SJR 102. He reminded that the final decision would be with the voters. Senator Dyson encouraged the Committee to recognize that methods could be considered that would allow the proposals to be implemented via statutory rather than Constitutional measures. He urged that compromising efforts be exerted. Co-Chair Green objected to the Amendment-to-Amendment #2. Co-Chair Green removed her objection to the Amendment-to-Amendment #2. There being no further objection, the Amendment to Amendment #2 was ADOPTED. Amendment #2, as Amended, was before the Committee. A roll call was taken on the motion to adopt Amendment #2, as amended. IN FAVOR: Senator Olson, Senator Bunde, Senator Dyson, and Senator Hoffman OPPOSED: Senator B. Stevens, Co-Chair Green, and Co-Chair Wilken The motion PASSED (4-3) Amendment #2, as Amended was ADOPTED. Amendment #5: This amendment inserts a new paragraph into Section 1, subsection (d) on page three, following line 21 as follows. (15) an appropriation to fund State employee retirement benefits. Senator Hoffman moved to adopt Amendment #5 and objected for discussion. He stated that in consideration of the concern raised in opposition to Amendment #1 that eliminating K-12 education funding from the spending limit would be too large a component, this amendment would remove a smaller component of K-12 funding; specifically that funding specific to the K-12 PERS/TRS obligations. Senator Hoffman removed his objection. Co-Chair Wilken objected for further discussion. Co-Chair Green remarked that the State would experience some unanticipated expense every year. While PERS/TRS expenses are currently an issue, in a few years it would be something else. For that reason, the inclusion of "hot button issues of the time" would not be a wise move. Co-Chair Wilken recalled that a forecast was developed that reflected the PERS/TRS expenses for FY 06 and FY 07. He asked Senator Dyson to speak to that point. Senator Dyson stated that the projection models depicted that forward education expenses could be absorbed within the spending limit, as proposed. This surprised many. A roll call was taken on the motion. IN FAVOR: Senator Hoffman and Senator Olson OPPOSED: Senator Bunde, Senator B. Stevens, Senator Dyson, Co-Chair Green, and Co-Chair Wilken The motion FAILED (2-5) Amendment #5 FAILED to be adopted. Co-Chair Wilken asked for confirmation that the exemptions provided to the University of Alaska in SJR 3 and HJR 9 remain intact in this legislation. Ms. Frasca assured Co-Chair Wilken that the exemptions provided to the University are contained in the bill. Senator Dyson moved to report the bill, as amended, from Committee, with individual recommendations and accompanying fiscal note. There being no objection, CS SJR 103(FIN) was REPORTED from Committee with the Division of Elections $1,500 fiscal note #1, dated June 18, 2004. RECESS 12:26 PM / 2:10 PM