HOUSE JOINT RESOLUTION NO. 9 Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit and a spending limit. Representative Stoltze introduced HJR 9, commenting that this may be the fifteenth hearing on the measure. He stated that a constitutional spending limit is appropriate among the other fiscal plan measures being advanced. He believes that the public will support the measure, bringing an added responsibility to make it especially well crafted. The measure has evolved since he first introduced it and it incorporates provisions requested by the Governor's Office. He has tried to include enough exemptions, accompanied by the limitation, to anticipate the needs of the state along with the anticipated growth in population. He expressed his hope that the measure would allow for the controlled growth of government. TAPE HFC 04 - 57, SIDE B  KELLY HUBER, STAFF TO REPRESENTATIVE STOLTZE, explained the changes in the Judiciary Committee Substitute. Section 1 outlines (indisc. -tape change) Page 2, lines 2-5, state "The total amount of appropriation under this subsection made for a fiscal year may not exceed two percent of the amount appropriated for the fiscal year two years preceding the fiscal year for which the appropriations are made." Ms. Huber noted the exclusions from the calculation of a spending limit that follow on lines 7 through 29 of page 2. Section 2 adds a new section stating that the spending limit would go to the ballot in 2004, be applied to appropriations in FY 06 and be reaffirmed by the voters every six years thereafter. Ms. Huber stated that the constitutional amendment is based on the two preceding fiscal years' average, with the calculations set forward by the Governor's Office.  CHERYL FRASCA, DIRECTOR, DIVISION OF MANAGEMENT & BUDGET, OFFICE OF THE GOVERNOR, stated that spending limit discussions have considered using inflation versus population, instead of this proposal that includes change in the personal income rate. The rationale for using personal income rate as one indicator is that if citizens throughout the state were doing well and their income went up each year, it would be appropriate for the state to increase its spending. Then, if citizens were going through a retrenchment due to recession, the state should cut back as well. Earlier discussions indicated that when the state is in a recession, ironically some of the state costs go up for public assistance and other responsibilities. Ms. Frasca said it's a toss up which indices to use. Costs and revenues don't always go up at the rate of inflation. This measure puts forth using 50% of the rate of change in personal income for three calendar years averaged out, and the percentage equal to the percent of change in the state's population, linking it to the demand for services. Ms. Frasca commented on lines 1-2, page 2, and she encouraged the committee to think seriously about continuing to use a three-fourths vote threshold because no other state requires such a high threshold to exceed a spending limit. In terms of setting 2% spending cap, Ms. Frasca mentioned there might be extraordinary unanticipated events requiring additional spending by the state. Ms. Frasca felt that setting the 2% threshold would bind future legislatures when looking forward to events such as the buildup for a gas pipeline. She questioned whether the Legislature wants to lock that in. Ms. Frasca encouraged selectivity regarding what is excluded from the limit because it sets up an incentive to categorize spending under things that are excluded from the limit. Instead of being considered off budget, items will be considered off limit. One addition in the Judiciary version first excluded University receipts and then narrowed it down to University tuition. She concluded that it is an excellent idea to have re-ratification of the provision in the future to allow the revisiting of concerns. Vice-Chair Meyer asked why six years was chosen for bringing it to a vote again. Representative Stoltze explained that it was a subjective judgment based on a bill before the Senate in 2000 with a provision allowing safety valves. It would give the voters a chance to reaffirm their support or back out of it. Ms. Huber clarified that the current spending limit in the Constitution has only one re-approval by the voters after four years. Vice-Chair Meyer expressed his support for HJR 9. He agreed with Ms. Frasca that a three-fourths vote in each house is a "high hurdle" and asked the sponsor if he intended that. Representative Stoltze replied that it is arbitrary, and he acknowledged that he is cognizant of unintended consequences. Co-Chair Harris asked whether the appropriations to pay general obligation and revenue bonds are included in the spending cap. Representative Stoltze replied it is exempted under (c)(6) on page 2, lines 17-18. Representative Stoltze commented on the 2% limit under the three-fourths vote, and expressed concern about setting any percentage limit. He suggested that it should be part of the committee's discussion whether the 2% becomes a cap or a floor. Ms. Huber noted that debt service may not be excluded under the Judiciary version, but it was excluded in a previous version. In response to a question by Co-Chair Harris, Ms. Frasca clarified that (c)(6) excludes the revenue bond proceeds. One consideration for discussion is that this does exclude the proceeds from the bonds. She advised that increased costs of debt service don't mean increased revenues to the state. Under the spending limit, debt service would still need to be paid, which competes with everything else for the same dollars. Co-Chair Harris expressed that the public has voted for a revenue bond appropriation in an election that authorizes the incurrence of this debt, and he asserted that it should be placed outside of a spending cap imposed on the Legislature. Ms. Frasca replied that it would create the incentive to incur debt to pay for costs because it's outside the spending limit, as opposed to paying cash. Co- Chair Harris argued that the public has voted to do that, and should understand that whenever it votes on general obligation bonds. Representative Croft agreed with Ms. Frasca that the proceeds in general obligation and revenue bonds are excluded, but it is only the revenue bond appropriation that is excluded. He felt that general obligation (GO) debt service makes more sense than revenue bond debt service. He asked why the appropriation to pay GO bonds is not excluded along with the appropriation for revenue bonds. Ms. Frasca explained that revenue bond proceeds are excluded from the spending limit because an outside entity, such as an airport, would be collecting the revenues to pay for that debt. Co-Chair Harris expressed concern with the spending cap and how to keep under control the costs of services that lack a continuous source of income. He noted that a revenue bond generates its own revenue by charging fees. If there is no payment of fees, there is no service. He reiterated that if the public votes to incur debt service, they have informed the Legislature of their wishes. Representative Stoltze commented that the Anchorage tax cap exempts debt service. Ms. Frasca agreed, but explained that the voters are approving additional taxes to be collected from them to pay the debt service. Representative Croft asked if the tobacco settlement involved revenue bonds. Ms. Frasca affirmed. He then asked if the student loan that was recently sold would be considered a revenue bond under this measure. Ms. Frasca affirmed. Representative Croft noted that he understands revenue bond exemptions for airports, but questioned the tobacco settlement and student loans being under this exemption. Ms. Frasca explained that the tobacco bond debt service is being paid by the tobacco settlement. The repayments of student loans are paying the student loan corporation bond debt service. She made the distinction that in each case, an external entity is providing the revenues to pay the debt service, as contrasted with GO bonds or school reimbursement bonds where the state comes up with general revenues or a mix of other sources, including corporate receipts or dividends. Representative Croft questioned exempting AHFC, AIDA, or the student loan corporation, which he feels are almost an interchangeable source of General Funds. He asked if exempting them creates an incentive, pointing out that that the student loan corporation can either pay a dividend included in the spending limit, or it can bond on that revenue stream and it won't be included in the appropriation limit. He asked if it doesn't create a way around the spending limit. Ms. Frasca replied it is important to distinguish that this proposal is an appropriation limit on the spending side. A corporate dividend from AHFC is a fund source, while revenue bonds and the federal government are distinct revenues from external sources. It is prescribed how they can be spent and these are excluded from the spending limit. Representative Croft noted that in (c)(5) the proceeds are exempt, and in (c)(6) the appropriations made each year to pay for the bonding are exempt. He questioned if this isn't a way around the spending limit itself. Ms. Frasca said that he was correct, that in this measure, the tobacco settlement in the future would be a way to circumvent the spending limit. She said that AHFC is different, in terms of revenues generated for general government purposes that are fungible. Representative Croft asked why AHFC is different. Ms. Frasca clarified that (c)(5) relates to revenue bonds, and the mechanism by which you raise the money and repay the cost. The annual AHFC dividend is calculated on a statutory formula, and it's not tied to selling bonds. The state ends up paying AHFC's debt service on their bonds out of the dividends. This governs the appropriation. Revenue bonds where a third party pays debt service are excluded under this. The chairman has indicated that he also wants to exclude the state paying the debt service. Representative Croft reiterated his concerns about AHFC using revenue bond proceeds on the capital budget, which would be excluded from the limit. He questioned whether always revenue or GO bonding the capital would circumvent the appropriation limit. Ms. Frasca indicated that she couldn't track his scenario, but explained there are rules governing revenue bonds. There must be a source to repay the bonds, and GO bonds can only be used for certain purposes. She couldn't say if the AHFC dividend, which is a fund source, would be excluded from the appropriation limit. Representative Croft brought up a past proposal to borrow against future federal transportation money in order to fund big projects. He asked if that was a revenue bond. Ms. Frasca explained that it was the GARVEES and that the debt service was paid by the state. She was unsure if the Department of Revenue categorized it as a revenue bond. She commented that voters approved it on the ballot, and there were competing opinions by the attorneys general. A discussion ensued between Representatives Stoltze and Fate and Co-Chair Harris. Ms. Frasca noted that it was the kind of debt service that concerns the chairman. Co-Chair Harris walked through the spending limit, noting that an increase in the appropriation would require a three- fourths vote of both bodies to increase it by 2%. He asked if it is 2% above the amount appropriated two years previously plus 2%. [Answer indisc.] Co-Chair Harris asked the sponsor if he had considered a stair-step provision, noting that a three-fourths vote is a high threshold. He suggested having one spending increase requiring a two-thirds vote and a higher benchmark at three- fourths. Representative Stoltze asked Representative Hawker if he had explored it in a Ways and Means Committee version of the proposal. Representative Hawker stated that Ways & Means reported out a version with a stair-step mechanism of a fixed 2% at a fifty percent vote, another 2% increase at a two-thirds vote, and an additional 2% increase at a three-fourths vote. Co-Chair Harris asked how much a 2% increase would total today, and then noted that it would be $40 million of $2 billion dollars. He asked if it is cumulative. Representative Stoltze replied that it is. Representative Hawker advised that this draft has changed substantially since last session. He explained that it would be cumulative only on the amount of increase that actually occurred. It would be cumulative but not compounding. Representative Croft asked in Section 16(a) if the numbers were negative in both the population growth and personal income, would it bring the appropriation limit down. He discussed a scenario of a net increase of zero if population and personal income zero each other out, resulting in a zero increase appropriation. Representative Stoltze commented that the limit must also counterbalance where the money is coming from. Co-Chair Harris expressed that there is no negative downside in the amount of money that could be spent. He quoted "Appropriations made for a current fiscal year shall not exceed the amount appropriated for the fiscal year two years immediately preceding by more than fifty percent," --of those two factors. He stated that there would be a "ceiling" that you couldn't go above, but you wouldn't have to go below it either. Representative Croft asked for a technical explanation when there are negative numbers for population or income in (1) or (2). Co-Chair Harris responded that it means the appropriation can't be more than in the previous year. BRUCE TANGEMAN, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION responded to Representative Croft that based on his scenario, the appropriation could go down. Representative Croft asked for clarification on whether negative numbers in (1) and (2) would reduce the base. Mr. Tangeman replied yes, it is possible that the appropriation limit would go down if both income and population are going down, and the previous three-year average is added together and halved. Representative Croft commented that this could mean the appropriations have to be reduced from the base year. Mr. Tangeman briefly noted that 37 states have spending limits. Their revenue sources are income or sales taxes, or both. If their population or personal incomes decrease, the states generate less tax, or revenue, and the spending limits would need to go down. He said that Alaska is unique because it is not linking the spending limit to revenue, although this measure is using similar scenarios. Representative Croft noted that the University of Alaska federal research grants are excluded, and asked if research grants from nonprofits are also excluded. Representative Stoltze replied (c)(10) probably addresses it. Ms. Frasca recalled that the example she had discussed with Representative Stoltze was the University Foundation, not research grants from nonprofits. She confirmed that federal grants are excluded but was unsure how nonprofit research grants are categorized. Representative Hawker questioned (c)(11) exempting tuition. The University of Alaska creates receipt authority and appropriates money in excess of what they expect to receive, and not just federal receipt authority but in the area of private contributions and funding. He recalled that it is more than $65 million. He said it would seem that receipt authority is subject to the spending limit, and it might be one of the first to go, setting the University up with the inability to receive private grant monies. Ms. Frasca explained that the assumption is that the $65 million in "empty receipt authority" would be the base for the future spending limit. Only when the University got up to $65 million in actual receipts would it be limited by the percentage change in the spending limit in the future. In previous versions, University receipts were excluded. She predicted that in the future, new expenditures would get categorized as University receipts. She advised that any time an off-limit category is set up, there is an incentive to recategorize spending, and she urged caution in deciding what is excluded from the limit. Representative Hawker posed a hypothetical dilemma, asking whether the Legislature would increase Medicaid or keep this empty receipt authority at the University, and he suggested that the Legislature would sacrifice the empty receipt authority. It would pump up the Medicaid appropriation in the current budget by $65 million but in the following year, there would no receipt authority. He advised using extreme caution Representative Hawker noted that (c)(10) is extremely vague and asked what is money held in trust. Ms. Frasca gave the example of the public school trust fund, which has a dedicated stream. She said there aren't a lot of trust funds. Representative Hawker observed that the Mental Health Trust is a true trust fund. He asked if "money held in trust by the state" isn't much broader language. He suggested that designated funds are also monies held in trust. Ms. Frasca offered to check with the Department of Revenue, but she didn't expect that designated fund sources would fall into that category. In response to a question by Representative Hawker, Ms. Frasca concurred that the legal intent of the language in (c)(10) is to tie down specific trusts. Representative Hawker pointed out that money held by debt covenant or by other legal covenants of the state would clearly be money held in trust. Representative Hawker brought up the base formula in Section 16(a)(1) and (2) on page 1, and agreed with Representative Croft that with mathematical logic, it has the potential to go negative. He asked the number for this year and the projections for the next two years. Ms. Frasca stated that it was calculated for FY 06 at a 3.47% increase. Representative Croft asked who estimated personal income. Ms. Frasca replied the source is the U.S. Bureau of Economic Analysis. The data for 2003 will not be available until this April. Representative Hawker requested a hypothetical projection using the numbers through 2002, with 3.47% for FY 06 and extrapolating on the presumption that would remain steady. He asked if there have been any attempts to contrast it to increasing state expenditures that are known and quantifiable. He noted that there is a footnote on all the projections stating, "this projection is based on level General Fund spending of $2.3 billion dollars a year." He argued that there is a fallacy in that presumption, with 15% compounding increases in Medicaid and the issue of the public retirement systems. TAPE HFC 04 - 58, Side A  Representative Hawker continued. He asked if the State would be "setting itself up" with the budget spending limit to have to close schools because there isn't money to meet the State's contractual obligations. Mr. Tangeman explained that he had gone backward to 1996 to determine the projection. Representative Hawker argued that there were forward projections the last time this measure was discussed. Representative Fate brought up the University of Alaska research grants and pointed out that the Board of Regents has broad constitutional powers to determine how the accounting is done. He thought it was problematic to place it in a spending limit because of those constitutional powers, absent any statutory language demanding the University do that. If the language exists, then the University must comply, but he was not aware of any existing language. Co-Chair Harris thought the concern was that the Legislature provides yearly authorization to the University to spend and receive. All monies the University receives must come through the Legislature. He voiced concern with the amount of general funds authorized from year to year without knowing what the recurring revenue sources will be, saying some revenues are a one-time occurrence that shouldn't be built into the base. Ms. Frasca stated that she had misspoken regarding the funds held in trust, clarifying that those are retirement appropriations for the administration of retirement programs for FICA, PERS and TRS, JRS, National Guard retirement system, and the Mental Health Trust. Representative Croft asked if the Marine Highway Fund and oil spill contingency are held in trust. Ms. Frasca did not think that any of those would apply. Representative Hawker stated that it is a definition issue of "trust and agency funds." Co-Chair Harris stated that if the funds are spent, they are not recurring sources of revenue. Representative Croft asked if appropriations into the trust would still be within the appropriation limit. Ms. Frasca replied that deposits into the endowment would also count in the limit, but not the endowment balance itself. Representative Croft asked if there was a firmer definition of "trust," because he was curious about Power Cost Equalization (PCE) and the Marine Highways. Representative Croft noted excess authority in the Kodiak Launch Facility. He asked if it would be exempt. Ms. Frasca replied that they are primarily federally funded and statutorily designated. Representative Croft thought that the Facility could be increasing the civilian satellite launches from a base of 5 launches per year. He expressed concern that with the constitutional amendment, $50 million would need to cut from other areas because Kodiak received $50 million in business. Ms. Frasca stated that it does not appear that Kodiak would be excluded. Representative Croft thought that it did not make much sense. Co-Chair Harris expressed concern with the definition of general funds. He stressed that when there is not a known source of revenue, the Legislature should not depend on it. He suggested that the revenue sources should be defined. Representative Stoltze interjected that when the measure was conceived, it attempted to grasp actual funding. There are drafting challenges and the original version addresses the general fund spending. Co-Chair Harris asked if this is an attempt to address annual spending when there is not the backup for the money. He thought that grants and business charges should be encouraged. He noted that the Kodiak Launch Facility operates on the amount of business it can generate even though it receives authority to spend money. A parallel example is the receipt authority given to the University for general funds while being expected to raise tuition and apply for grants. He did not want to discourage that. Ms. Frasca stated that the challenge is to determine if the Legislature wants to limit the growth of government, which HJR 9 addresses, or to limit how much the spending from certain revenue sources can increase from one year to the next. She gave the example of the tax limit in Anchorage, which limits how much taxes can go up from one year to the next. It is a limit on a fund source. She cautioned that the proliferation of designated fund sources over the past decade has eroded the General Fund and set up gross in non- General Fund areas. Those monies go to particular programs. The pure general funds tend to be spent on the traditional responsibilities of government that include education, transportation maintenance and operation, corrections, public safety, the Legislature, the Governor's Office, and the court system. The challenge, she said, is whether to apply the limit to only the general fund portion, and allow the non-general fund activity to go unchecked. It would create an incentive to re-categorize funding. Co-Chair Harris noted that the difference is that the Legislature has the appropriation authority to determine where the money will be spent. He commented on the small cost of operating the Division of Motor Vehicles while the receipts charged to the public are relatively large. It is general funds, but annual revenue that is counted on. He questioned how to control the costs but not penalize the agencies. Mr. Tangeman commented that it is Alaska's dilemma compared to other states whose appropriation is directly connected to their revenue source. Other states generate new revenues. Representative Stoltze agreed to continue discussion of the measure with Representative Hawker and other committee members. Co-Chair Harris stated that he is supportive of the concept of containment of government growth but expressed that it is a difficult concept to address. Representative Fate noted that there had been discussion regarding revenues rather than expenditures. He voiced appreciation of the revenue approach discussion, and applauded Representative Stoltze's work on the bill. Representative Croft asked if the bills would be moved at the next meeting. Co-Chair Harris stated that they each measure needs a fair amount of work before being reported out of Committee. Co-Chair Williams asked Representative Croft for his changes before the next meeting. Co-Chair Williams stated that HJR 9 would be HELD in Committee for further consideration.