HB 245-SCHOOL FUNDING: REQ'D LOCAL CONTRIBUTION  8:02:42 AM CHAIR GATTIS announced that the first order of business would be HOUSE BILL NO. 245, "An Act repealing the required local contribution to school funding; making conforming changes; and providing for an effective date." The committee took a brief at-ease at 8:02 a.m. 8:03:45 AM REPRESENTATIVE TAMMIE WILSON, Alaska State Legislature, introduced HB 245, paraphrasing from the sponsor statement, which read as follows [original punctuation provided]: House Bill 245 would reform the inequitable and onerous state mandate for local contributions for organized areas in the state of Alaska. The State of Alaska has a duty under Article VI, Section 1 of the Constitution of the State of Alaska to "establish and maintain a system of public schools open to all children of the state". The Fiscal burden placed on local governments that must bear that burden is enormous and consuming. The State of Alaska provides only partial funding to organized boroughs, home-rule cities in the unorganized borough, and first-class cities in the unorganized borough to carry out the State's responsibility for education by deducting a "local contribution" of 2.6 mils from the level of state aid as stated in 14.17.410(G)(2). In the area of Alaska outside organized boroughs, home-rule cities in the unorganized boroughs, and first-class cities in the unorganized borough, the State carries out its duties for education through State "educational service areas" established under AS 14.08.031, which exempt them from the required local contribution. There are presently 19 State educational service areas, referred to as regional educational attendance areas (REAAs). In 1963 Alaska State Legislature passed, and Governor Egan signed into law, the "Mandatory Borough Act", dictating that certain regions of Alaska; those encompassing Ketchikan, Juneau, Sitka, Kodiak Island, Kenai Peninsula, Anchorage, the Matanuska Susitna valleys and Fairbanks to form organized boroughs by January 1, 1964. Furthermore, Section 1 of the Mandatory Borough Act promised that, "No area incorporated as an organized borough shall be deprived of state services, revenues, or assistance or be otherwise penalized because of incorporation. HB 245 removes the "required local contribution" penalty imposed by the State of Alaska on organized areas and again fulfills its Constitutional responsibility. 8:06:17 AM REPRESENTATIVE T. WILSON added that HB 245 does not include contributions received by districts, from the federal government, under the Impact Aid law [now Title VIII of the Elementary and Secondary Education Act of 1965 (ESEA)]. She also pointed out that the Mandatory Borough Act (MBA) was not entered into willingly by Fairbanks residents, who voted against having it imposed. Further, she interpreted the intent of the MBA to be a vehicle for the areas to develop and maintain parks and services, such as fire and police departments; the cities would be self-funding and not reliant on the state to support these entities. 8:06:46 AM REPRESENTATIVE T. WILSON provided a historical view of the mil procedure, paraphrasing from a statement, which read as follows [original punctuation provided]: A Little History Lesson First Foundation Formula (Basic Need) - 1/2 (Federal Impact Aid) - 3.5 mil levy = State Allocation to District 1969 North Slope Oil Leases Windfall surplus begins flowing in to the State Treasury Pressure Builds from Organized cities and borough for greater state assistance Legislature begins debates on amending the foundation formula Second Foundation Formula State support starts out at 90 percent of basic need and throughout the 1970's slowly increases to 100 percent by 1980. Oil Price Crash/Local Contribution 1986 oil prices crash to $9.00 a barrel and the State panics State needs as much money as possible and a new formula for education funding is proposed. 1988 Local Contribution is back and at the 4 mil rate. SB 182 (2012) In order to put all organized districts back on an equal playing field the required local contribution was reduced to 2.65 mils and it was based on the Full and True Value. 8:08:08 AM REPRESENTATIVE T. WILSON explained that the 2.65 mill rate was expected to function as an equalizer. Property taxes have, and continue to be, the vehicle for collecting this revenue and many boroughs and cities contribute above the required rate. She opined that it should be incumbent on the state to provide full educational funding based on the established formula. Directing attention to the fiscal note, contained in the committee packet, she indicated that the impact on boroughs and cities equates to $206 million. 8:09:43 AM REPRESENTATIVE SEATON observed that the bill addresses property tax contributions and does not include impact aid. He asked if 50 percent would still be subtracted from the REAAs, effectively causing those areas to contribute in a greater proportion while exempting municipalities. REPRESENTATIVE T. WILSON clarified that the impact aid is subtracted, currently at the 100 percent level for REAAs, and that would be made the same for eligible municipalities. She directed attention to the committee packet handout provided by the Alaska Department of Education & Early Development (EED), titled "FY 2014 Foundation Projection," dated September 2013, page 9, to point out the labeled columns "D", "Eligible Federal Impact AID," and "E", "Impact AID Percent," respectively, and said that passage of HB 245 would place every area at the 100 percent level; column "E." She pointed out that there are very few communities that do not receive some amount of federal impact aid. REPRESENTATIVE SEATON stated his understanding that many areas are contributing some amount to local schools, and the bill would restrict this contribution to an amount not to exceed 23 percent; possibly resulting in a reduction of allowable local contributions. REPRESENTATIVE T. WILSON explained that the contribution cap would remain in place, hence, some areas would need to reduce the amount currently being collected, but could still exceed the required amount. She said: All this would do, would be basically backfilling that portion that the state, by constitution, should be [paying]. REPRESENTATIVE SEATON noted that, currently, nearly all districts are exceeding the local contribution requirement; "eating into that 23 percent." He expressed concern stating: If the required local contribution, which is greater than the 23 percent is taken away, and only the 23 percent is available, that means that the ability of local residents to contribute to their schools is reduced. REPRESENTATIVE T. WILSON used Fairbanks as an example and said the city contributes $48 million, although the requirement is only $26 million, and the cap allows for an additional $13 million. Under HB 245, she explained, the $26 million would become approximately $20, after deduction of the impact aid. She continued: [The city] would be able to give $13 of that $20, to go up to the cap amount. The additional $7 million dollars that's left over ... they would give ... back to tax payers, but they could [fund] other things that the municipality needs. REPRESENTATIVE T. WILSON emphasized her understanding that this measure would allow an expansion of funding possibilities. REPRESENTATIVE SEATON described his understanding that HB 245 would restrict Fairbanks from contributing over the cap, resulting in the loss of $7 million. REPRESENTATIVE T. WILSON clarified the hypothetical Fairbanks example that the state would be required to contribute the amount currently being paid by the cities 2.6 mil levy; $26 million. Additionally, after receiving the full funding by the state, the city could also contribute $13 million. She theorized that schools would receive more funding in most areas. If a community is already funding to the cap, there would not be a change, but other areas could realize a community option for contributing to the cap or using municipal taxes for other purposes; the tax is already being collected. 8:16:55 AM DAN BOCKHORST, Manager, Ketchikan Gateway Borough, stated support for HB 245, paraphrasing from a written statement, which read as follows [original punctuation provided]: Every good law should have at least the following three characteristics: 1. it should be fair; 2. it should reflect sound public policy; 3. and, of course, it must be constitutional. The law imposing the Required Local Contribution fails on all three points. For that reason, the Ketchikan Gateway Borough strongly supports HB 245, repealing the Required Local Contribution. 8:17:58 AM Let me explain. First, the Required Local Contribution is far from fair. It creates two distinct classes of citizens: 1. Those in 34 municipal governments required by State law to operate school districts; and 2. Those in the remainder of the state - comprising 19 other school districts in Alaska. It imposes a crushing fiscal burden on the 34 municipal governments, shifting to them about twenty percent of the State's constitutional duty to adequately fund schools in those districts. At the same time, the State exempts from the other 19 districts from the Required Local Contribution. There is no rational basis for the disparate treatment of the two classes. Some of the most economically distressed areas of Alaska are among the 34 municipalities subject to the Required Local Contribution, while some of the most prosperous regions of Alaska are among the 19 districts that enjoy exemption from the Required Local Contribution. The Required Local Contribution also fails the fairness test in that it breaches a promise to the citizens of Alaska, expressed in State law in 1963, that boroughs will not be deprived of State revenues or otherwise penalized because of incorporation. Second, the Required Local Contribution fails the sound public policy test. The Required Local Contribution is a grinding public policy that punishes organized boroughs - the foundation for local government in Alaska. The framers of our constitution intended that the State would create inducements for boroughs. 8:20:05 AM The Alaska Supreme Court has held that our constitution encourages the formation of boroughs. Jay Hammond -- former State Representative, State Senator, and Governor - offered a far different perspective when he wrote: Attractive enough on paper, in practice, the organized borough concept had little appeal to most communities. After all, why should they tax themselves for services received from the state, gratis? Governor Hammond told it like it is. Consider the following six facts: 1. Today, 55 years after statehood, more than half of Alaska still lies outside the boundaries of organized boroughs. 2. Few have freely chosen to incorporate. Residents of mandatory boroughs make up 95% of all borough residents today. This fact alone makes the need compelling to honor the 1963 promise in State law of equal and fair treatment of boroughs. HB 245 would do much to restore luster to that promise. 3. Today, 55 years after statehood, those who have freely chosen to form boroughs are outnumbered by those who have freely chosen to not be in a borough by a margin of more than 2 to 1. 4. Seven years ago, voters in one region with resources described by the State Attorney General's office as "the envy of most organized boroughs" rejected borough incorporation by a margin of more than 9 to 1. 5. Having written and sponsored the 1963 Mandatory Borough Act, former Representative John Rader, repudiated the measure years later. 6. Today State officials speak in terms of the "misery of boroughs" rather than the vision of those who wrote our constitution. These circumstances are the "canary in the coal mine" telling you that the Required Local Contribution is terrible public policy that weighs heavily on students, taxpayers, and other citizens of organized boroughs. Third, the Required Local Contribution is unconstitutional. After six years of study and analyses -- after six years of attempts to accomplish what is proposed by HB 245 - the Ketchikan Gateway Borough filed suit last month over unconstitutional aspects of the Required Local Contribution. The law setting out the Required Local Contribution dedicates public funds to a particular purpose, thereby violating Article 9, Section 7 of our Constitution - the "Anti-Dedication Clause." The Required Local Contribution also operates in a manner such that the dedicated funds are never subject to legislative appropriation, which violates Article 9, Section 13. Further, the Required Local Contribution law circumvents the Governor's veto authority, in violation of Article 2, Section 15. 8:24:18 AM In conclusion, the Required Local Contribution: is not fair, is poor public policy, and is clearly unconstitutional. Therefore, I urge passage of HB 245. 8:24:46 AM REPRESENTATIVE DRUMMOND noted that the Anchorage contribution totals appear to be close to the cap, as indicated on the previously cited EED handout. She asked what the funding source would be to make up the difference under the proposed legislation, pointing out that several hundred million dollars would need to be found in the current, deficit budget. REPRESENTATIVE T. WILSON stated her belief that municipalities should not be required to pick-up where the state fails to meet constitutional obligations; despite deficit conditions. She said funding alternatives could be considered, such as reinstating the now defunct head-tax. At a recent community discussion in Nenana regarding whether or not to organize as a borough, she reported, the topic was discussed regarding the 2.6 mil requirement. The general sentiment of the group questioned why Nenana should organize considering the imposition that would require collection of a levy to cover costs that are currently being paid for by the state. The issue created a stumbling block for the community, as citizens discussed options for better local services, and the costs involved, and the debt that could be incurred as a municipality, due to the education costs passed on by the state. She said: That really is the issue at this point: Constitutional[ly] what do you believe - is it the responsibility of the state to fulfill this mandate, or is it only the responsibility of the state when they have funds. 8:27:35 AM REPRESENTATIVE LEDOUX said she served as Mayor of the Kodiak Island Borough, and recalled discussions that arose regarding REAAs not being required to contribute local funds for education and the seeming unfairness of the situation; however, the constitutionality was never questioned. The impact on the state budget could be a concern, but, having reviewed the Ketchikan Gateway Borough v. State of Alaska, Case No. 1KE-14-16 CI (2014), she opined that the courts could find in the city's favor and the state would be required to comply. REPRESENTATIVE T. WILSON clarified that impact aid does represent a variable and it would be erroneous to say that the REAAs do not contribute; however, means exists to bring equality throughout the state and remove the penalty to organize areas and form boroughs. She stressed that the question is not about affordability, but rather state responsibility; HB 245 does not advocate mandatory boroughs but removes a major barrier. She stressed that organizing an area should bring focus to the services a borough can provide not a penalty that puts a newly formed area immediately into a financial hole. To a follow-up question she said Alaska appears to be unique, among the United States, in the requirements and mandates it places on organized areas. 8:30:53 AM REPRESENTATIVE P. WILSON asked for a definition of basic education needs, suggested that the state may be meeting those requirements, and opined that other costs may be considered add- ons. REPRESENTATIVE T. WILSON indicated that basic educational need requirements are a purview of legislative oversight; residing within the jurisdiction of this committee. 8:32:20 AM REPRESENTATIVE REINBOLD referred to the previously cited EED handout to clarify the Anchorage area contributions. 8:33:28 AM REPRESENTATIVE SEATON asked whether the scope of HB 245 would require the state to build schools, which would change the current 70:30 bonding structure and eliminate the 60:40 local contribution for building and zoning schools. REPRESENTATIVE T. WILSON responded that the bill has no impact on bonding or capitol project funding structures or maintenance requirements. The bill requires the state to fully fund districts based on the education formula; the municipalities would continue to fund building/maintenance in accordance with current practices. REPRESENTATIVE SEATON offered that the state has been found by court to be adequately funding basic education. He noted that additional, supplemental components have been added to enrich the educational experience and provide learning options. However, limiting the ability of borough tax payers to contribute to local schools based on a percentage of the cap could require the state to "back-fill" as much as $200 million, which he predicted would not occur. Further, districts not yet contributing to the cap maximum already have the option to increase the local budget. Overall, he opined, it appears that this bill would reduce funding to the education system. REPRESENTATIVE T. WILSON emphasized that no district would receive less funding, should HB 245 pass. The distinction lies in where the money is sourced, and she said it's a matter of "who's going to pitch in more," the state or the municipality. The constitution stipulates that it is the responsibility of the state to provide a basic education, funding aside, and residents were promised that this service would be a benefit of organizing an area as a borough. The Fairbanks North Star Borough would prefer to not be in that standing, considering the services currently being received, she opined, and further stated that Alaskan government is unduly placing a financial burden on municipalities. The state may have funding problems but passing deficits onto communities is not fair, resulting in collection of property taxes which in turn subtracts dollars from local economies, she finished. 8:39:42 AM REPRESENTATIVE LEDOUX questioned the variable percentages used by districts to calculate the municipality v. state share of school building costs, and asked whether that should not also become part of the argument. REPRESENTATIVE T. WILSON acknowledged that the required building contribution ratios have changed over the years, but the question is not addressed in this bill. 8:41:41 AM REPRESENTATIVE P. WILSON noted that if the bill were to pass and the state fully fund education, the municipalities would not be mandated to contribute, and she opined it would be wonderful for the cities to have more money. However, consideration must be given first to the effects this legislation would have on the state budget and subsequent control of the schools; and second the legislature is required to consider funding of all programs, including schools. She suggested that the municipalities would probably need to pick up the deficit in another service area. Unintended circumstances tend to arise, and she stressed the need to proceed with caution. It is important for the committee to consider policy, but the legislative as a whole must address budgetary concerns. 8:44:09 AM REPRESENTATIVE T. WILSON opined that the municipal contributions do not entitle the cities to have added local control of the schools. She then reiterated the previously detailed points that this legislation addresses: a state constitutional responsibility reneged upon, an unfair mandatory borough act, and the resulting financial burden placed on municipalities. She underscored that it is not a matter of funding, but fulfilling a promise made to the residents of the state. 8:46:13 AM REPRESENTATIVE LEDOUX asked if there is a means to skirt the cap and asked whether it is a state or federal mandated. REPRESENTATIVE T. WILSON expressed her understanding that prior to the cap, differing amounts were collected and some areas could not afford to contribute. The federal government stepped in to help equalize the situation. 8:47:05 AM REPRESENTATIVE P. WILSON pointed out that the state laws are changed on a regular basis and promises once made are sometimes amended. She held firm that unintended consequences arise and the financial reality of the state must be considered. REPRESENTATIVE T. WILSON stated her belief that the constitution holds a separate standard than other statues that are amended. 8:49:00 AM REPRESENTATIVE LEDOUX asked whether the Alaska Municipal League (AML) supports the bill. REPRESENTATIVE T. WILSON had no comment, as the AML has not weighed in on the issue. 8:49:52 AM REPRESENTATIVE SEATON referred to the fiscal note, indicating designated reserves and endowments, and asked about the plausibility and source for funding HB 245, should it pass; $200 million above the endowment amount would be needed. ELIZABETH SWEENEY NUDELMAN, Director, School Finance and Facilities Section, Department of Education and Early Development (EED), said funds are not currently available to meet the requirements of the bill. To a follow-up question regarding the source of the funding, as required by the proposed legislation, she offered to provide further information. 8:51:48 AM REPRESENTATIVE REINBOLD asked for the total dollar amount that is paid for a kindergarten through twelfth grade education; all contributors combined. MS. NUDELMAN offered to provide the information, and suggested that the website for the department provides the information, as well. 8:53:20 AM REPRESENTATIVE LEDOUX asked what considerations would be given to fund this legislation should it pass. MS. NUDELMAN suggested that the question is one for the legislature to take up. The constitutionality has not been determined. REPRESENTATIVE LEDOUX asked whether the governor's budget provides funding. MS. NUDELMAN said HB 245 was filed after the governor issued his budget. 8:55:05 AM MIKE COONS, stated support for HB 245, paraphrasing from a prepared statement, which read as follows [original punctuation provided]: I fully endorse Representative Tammie Wilson's HB 245. I have read the bill and except for a couple non- substantive proposed changes in wording, I fully agree that changing from, shall to may for cities/municipalities and boroughs paying additional education funding is one of the tenants of conservative thought, less government and more local control. 8:56:00 AM In point of fact, should this bill pass and be signed into law, I would suggest that the local communities, if they want to continue with funding, change who pays for education from the property taxes. I would suggest that those of us who do not have children in school, either because the children are grown up and out of the district, parents use private or home schooling or like myself, no children, make education at the local level, truly a user fee. Then I would suggest this then leaves the boroughs the opportunity to help protect the public with having a Sheriff form of law enforcement. The last numbers I heard was that 60 percent of my property tax goes to education, I would have no problem with paying for a Sheriff Department. I would dare say the cost would not come to that previous 60 percent, which then gives me a decrease in property taxes and gives me better public safety on top of the State Troopers! As to those who will scream and holler about their increased property taxes for their children, I respond with the following. In many cases at assembly meetings, I have heard the parents demand for full funding of education and many times I've heard, "I'll pay more taxes to get my kid's education!" This is a good opportunity for those people to; as Vice President Joe Biden likes to say: "Get some skin in the game." Now is a good time to put up. I would dare say that the additional offshoot to this would be more parental/taxpayer involvement in their child's education. I am sure that NEA will have lot's to say negatively about this. For this will potentially make School Boards trim the budgets to be more student friendly than NEA Alaska friendly. This bill along with HB 196 will undoubtedly reduce or take away NEA's power over the School Districts. Add to that, Senator Dunleavy's proposed Constitutional Amendment SJR 9 and we potentially have a "perfect storm" to really do something substantive toward better local control, less NEA Union control and a more student defined approach to education that will have students more ready for life vs being pegs filling holes like Common Cores approach and the new standards are pushing for. In closing, costs can be and if all bills on education are passed this session the cost of education should drop while performance standards are increased. 8:59:06 AM DIANE HUTCHISON, Member, Fairbanks North Star Borough City Assembly, indicated that the city has not as yet taken a formal stance on HB 245; however, she said her intention is to introduce a letter of support for the assembly's approval. She continued, paraphrasing from a prepared statement, which read as follows [original punctuation provided]: I am Diane Hutchison and I currently serve on the Fairbanks North Star Borough Assembly and was the Presiding Officer the past two years. The Assembly has not yet taken a position on this bill, but I can relay to you that a Resolution co-sponsored by myself, the Borough Mayor, and the current Presiding Officer will be brought for a vote at our next regular Assembly meeting next Thursday, asking our Assembly to join the Ketchikan Gateway Borough's lawsuit as an amicus curiae party. Following the vote on that resolution, I plan to co-sponsor a resolution in support of Rep. Wilson's bill - brought forth with appropriate wording regarding the previous resolution's vote. The reasons I personally support the lawsuit and Rep. Wilson's bill are as follows: For FY 2014 - the FNSB budgeted local contribution to the schools was around $48M and out of that $48M, almost $27M is the required local contribution and the budgeted additional supplementary funding is over $21M. I believe that the $27M in required local contribution is a defacto State tax on the residents of the FNSB that is not imposed on all residents of our state. After Ketchikan Gateway Borough presented to our Assembly in December, I asked how many people in the room paid a state income tax - no one raised their hand, but when I asked how many paid local property taxes (including the required local contribution to the school district, everyone in the room raised their hands. The point is that every time the state mandates more basic need proportional funding on the municipalities that support school districts, the municipalities have to tax their residents to pay a State "mandated tax". I believe this State "mandated tax" is unconstitutional, unfair and a disincentive for any unincorporated area to ever form a Borough again. Last year, our Borough passed bond issues to fund construction of a new school and fund major renovations on others. These were projects that we had come to Juneau and asked for capital funding - the new school to replace a junior high that has been seismically condemned and we are trying structural reinforcements just to keep it usable for the students to be safe. The funding was denied by the legislature as it often is. We came as a local government with our hands out to Juneau, when we could be paying for these projects ourselves, without indebting future generations to pay off bond issues - if the state would fulfill its obligation to fund basic need and let us fulfill our obligation to the local taxpayers of supplemental education funding, investing in local capital projects and reducing some of the tax burden on people who are strapped by their property taxes and high energy costs. 9:03:40 AM We just heard yesterday that Flint Hills Resources (the FNSB's 4th largest taxpayer), is discontinuing its refining operations in North Pole. I am in full support of SB 21 - we need to get increased throughput in TAPS and I think that SB 21 will help do that - BUT that does not relieve the State of its constitutional duty to fund basic education - for everyone in the State, no matter what area of the state they reside in. Thank you for listening and for your service to our state. I hope you will give HB 245 serious consideration because I believe the taxpayers in the State of Alaska - in all areas of the State, will start realizing how big of an issue this is. PLEASE REMEMBER - THE ONLY NON-CORPORATE TAXPAYERS IN THIS STATE ARE RESIDENTS OF MUNICIPALITIES WHO AS INDIVIDUALS PAY FOR STATE SERVICES THROUGH THEIR PROPERTY TAXES WHENEVER THE STATE TRIES TO SHIFT ITS BURDEN TO LOCAL GOVERNMENTS AND FORCES THEM TO BECOME STATE TAX COLLECTORS. IT IS A MATTER OF FAIRNESS TO ALL THE RESIDENTS OF THE STATE AND THE PROMISE THAT BOROUGHS WOULD NOT BE PENALIZED OR DEPRIVED OF STATE SERVICES BY BECOMING BOROUGHS - BUT THAT IS EXACTLY WHAT HAPPENS EVERY TIME THE LEGISLATURE TRIES TO BALANCE THE STATE BUDGET ON THE BACK OF LOCAL GOVERNMENT. She opined that this is an unconstitutional action, as brought by the bill sponsor. 9:05:22 AM REPRESENTATIVE SEATON opined that the greatest issue appears to be that REAA's are funded via impact aid versus municipality tax. He suggested that a statewide property tax could be invoked as an equalizer, and asked if that would be an acceptable alternative. MS. HUTCHISON responded yes, and said a statewide property tax would be appropriate. Otherwise incorporated state properties are the only contributors. 9:07:55 AM REPRESENTATIVE T. WILSON reminded the committee that the bill is focused on ensuring that the state is upholding a constitutional mandate; not discovery of funding sources. 9:10:42 AM DAVID NEES stated support for HB 245 and referred to a 1961 Anchorage newspaper article regarding the Anchorage school district. At that time, he reported, Anchorage had a mill rate of 11.1 and the budget was split 47 percent from the state and 47 percent local contributions. He said the bill places responsibility back on the state's shoulders. He said how this bill is funded is for the legislature to solve, and opined that it would be good to handle this now, prior to being mandated by court order. 9:12:12 AM POSIE BOGGS stated support for HB 245 and said the requirements as stated in the constitution should be followed. She continued, asking the committee to consider the cost that illiteracy represents. The impact of students not fulfilling learning requirements creates a cost to the state. 9:14:38 AM BARBARA HANEY stated support for HB 245, and said it is important for the state to fulfill its obligations. CHAIR GATTIS announced HB 245 was held over.