HOUSE JOINT RESOLUTION NO. 9 Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit and a spending limit. Co-Chair Harris MOVED to ADOPT work draft #23-LS0435\E, Cook, 3/25/04, as the version of the legislation before the Committee. There being NO OBJECTION, it was adopted. PETE ECKLUND, STAFF, REPRESENTATIVE BILL WILLIAMS, explained the changes made to the work draft. Page 2, Line 19, incorporates Amendment #1, passed at a previous hearing. Page 2, Line 23, the previous version had the appropriation going to the Constitutional Budget Reserve (CBR) and being exempt, whereas, the current version places it in a reserve fund established by law. Mr. Ecklund pointed out that there is a legislative obligation to repay $5.5 billion dollars to the Constitutional Budget Reserve (CBR), and cannot be satisfied through direct appropriations but rather through sweeps. If the Legislature chooses to appropriate that amount at this time, it will not go to satisfying the debt obligation. New language would be in place for a future date at which time the legislature would repay the CBR. There are on-going revenue surpluses to the State and any appropriations to the CBR would not be subject to an appropriation limit. Co-Chair Harris asked if it was constitutional, not be able to place money from the general fund back into the CBR. Mr. Ecklund responded that an appropriation to the CBR would not count as a repayment of that obligation. If the money was left in the CBR and was swept, that would count toward the debt. Co-Chair Harris inquired why it would not count toward repayment. Mr. Ecklund explained that was the manner in which the constitutional provision had been constructed. TAMARA COOK, DIRECTOR, LEGISLATIVE LEGAL AND RESEARCH SERVICES, LEGISLATIVE AFFAIRS AGENCY, advised that Section 17, Article 9, establishes the amount available should be deposited into the general reserve fund. Subsection (D) contains that sweep language. If an appropriation is made from the Budget Reserve Fund, until the amount appropriated is repaid, the amount in the general fund available for appropriation at the end of each fiscal year, shall be deposited into the General Reserve Fund. She noted the language used: "Until the amount is repaid". It does stipulate that the repayment comes from a separate appropriation or whether the source of money coming into the sweep may be construed as a growing Budget Reserve Fund. None of Section 17 was drafted in contemplation that there would be appropriations into the Budget Reserve Fund nor does that section specifically prohibit appropriations into that fund. Ms. Cook advised that the question is whether the appropriation is considered to be a repayment or simply a decision made by the Legislature to add more money to the Budget Reserve Fund. The repayment structure suggests that a Court might find that the repayment occurs through a sweep. There is no obligation to repay it and becomes automatic. If money is appropriated out, then money flows back in as it is available. Co-Chair Williams understood that is why there is a reverse sweep. Co-Chair Harris pointed out the information indicates it would be until the amount was repaid, but does not indicate how. If the amount is repaid and satisfied, then the Legislature would not have to do a sweep. Ms. Cook responded that was plausible but she did not know if the Court would accept that. Co-Chair Harris questioned the point made by Ms. Cook that the Legislature would not be allowed to replenish the CBR with general funds. Ms. Cook replied that the Legislature certainly would be allowed to if there were general funds sitting there. There is no question that anything left in the general fund on the last day of the fiscal year, could be swept. The legal question is, if the Legislature does appropriate it, would the Court find that to be an independent task that the Legislature did to grow the fund, but not eliminating the obligation under Section "D". She agreed that could be a possible argument. Co-Chair Harris asked what would happen if the Legislature placed language into the budget to appropriate a certain amount of money to the Constitutional Budget Reserve to satisfy the terms and conditions in the constitutional language under Section 17(D). That is the intent of the Legislature. Ms. Cook thought that would be a good argument to put before the Court. If you could clearly indicate that it is the intent of the Legislature to satisfy the 17(D) requirement, it would make a good case. Co-Chair Harris presented a hypothetical situation in which the State had a natural gas pipeline and the amount of money coming into the State coffers was more than enough to satisfy the needs of the government and then that money was placed into a savings or placed into the CBR to cover the amount taken out over the years. That could satisfy the terms that the Constitution requires to sweep and the CBR could be repaid. Ms. Cook noted that she would be inclined to agree because she would assume that the Legislature also has the power to make the choice to make the appropriation to the CBR or to hold that fund, saying that it is not going to eliminate the sweeping obligation of the general funds. It could create a clear expression of legislative intent, in the particular appropriation act. Representative Stoltze referenced Page 2, Section 19, asking the implications of that language in the amendment. Ms. Cook acknowledged the concerns regarding dueling constitutional provisions. She suspected that the Court would not construe it that way. If there were no POMV amendment, and Section 15 kept the same language, the Court would find that section to be clear, only income available. The enactment of the proposed language could not convince the Court that the Legislature could appropriate from the Permanent Fund for dividends for anything other than the income. Representative Stoltze requested Ms. Cook to research that further. He noted that he did not have the same confidence in the five members of the Supreme Court. He thought that the decisions may be different than what was conceived in 1990. Ms. Cook concurred that the Supreme Court has many facets that change rapidly. She did not ever want to attempt to second-guess how they would face any problems. With the current language, the principal could only be used for investment and the income shall be put in the general fund unless provided otherwise by law. The Legislature has in fact, elected to provide that the income of the Permanent Fund go into a separate account located in the Permanent Fund. However, the Legislature could provide by statute that the income go to an account that is not in the Permanent Fund, which would only take a statute change. If confronted with that language, an appropriation from the Permanent Fund provides payment of the dividends to State residents. At that point, you could not appropriate from the Permanent Fund because it does not permit that. If the Legislature appropriated from the general fund, that appropriation might not be exempt under that exemption and the limit might not apply. The problem is the fact that it might undo the spending limit itself. Representative Stoltze cautioned that future legislatures could play chicken with the courts with regards to the use of the permanent fund earnings. Ms. Cook understood that Representative Stoltze feared that the language might allow an appropriation from the principal of the Permanent Fund. She did not think a Court would reach that decision. A Court might find that an appropriation from the Permanent Fund from a different source is not exempt from the spending limit. Ms. Cook did not see that the Court would find that if an appropriation occurred, the purposes of the spending limit would have any authority to actually make the appropriation. That is not what the language does. The language only says how to calculate an amount available for an expenditure for a succeeding fiscal year. The worst case scenario that could occur is that the State would elect to set up some program of Permanent Fund payments funded from a different source and be included within the spending limit calculation. Representative Stoltze MOVED conceptual Amendment #3 to Page 2, Line 19, deleting "from the" and inserting "of", to read: "An appropriation of the Alaska permanent fund for payments of permanent fund dividends to State residents." Representative Hawker OBJECTED. In response to a question by Representative Hawker, Ms. Cook advised that most likely, a Court would still find it subject to exclusion if moved to a POMV. If it could be demonstrated particularly to a specific year that the POMV formula actually invaded some of the principal, then someone might be able to present a case to the Court. Representative Hawker spoke against the amendment, suggesting that it was more generic verbiage that encompassed to wide of possible latitudes. Mr. Ecklund offered alternative language: Page 2, Line 19, deleting: "From the Alaska Permanent Fund". Representative Stoltze WITHDREW Amendment #3. Vice Chair Meyer MOVED to ADOPT new Amendment #3: Page 2, Line 19, deleting "from the Alaska Permanent Fund". There being NO OBJECTION, the new Amendment #3 was adopted. Mr. Ecklund spoke to the next change in the work draft, Page 3, Line 10, Subparagraph (13), adding an exemption to the limit. That language would describe the reverse sweep, and would not count against the appropriation limit. He asked Representative Hawker to describe the change made to Page 1. Representative Hawker referenced the graph "CS HJR 9 (FIN) Spending Limit; Base Year of 3 prior year average and 3 year floating average for variables". (Copy on File). He discussed the basis for the accommodation of the spending limit and how much spending increase showed being allowed on an annual basis. Representative Hawker stated that in the previous version of the bill, the index was created from a combination of what the average rate of change is in the State's population and personal income. The personal income line has risen substantially, which has pulled up the spending level line, if the spending limit was based on the cost of living and population increase. The committee substitute adopts the base spending inflator, the average rate in the growth of the population and the consumer price index and would provide a slower growth curve. He emphasized the importance of the personal income line, inflation and that the proposed limit recognizes the importance of that information. The work draft proposes to use the base inflation factor; the average population and the consumer price index (CPI). However, the manner in which the language is written makes it limited to the percent of change in personal income. Representative Croft suggested that would be the most restrictive approach that could be taken. Representative Hawker replied that under the economic conditions that have existed in the past few years, it would not result in the lowest increment. He had extracted that methodology from the legislative exchange council's recommendation for standardized language. Representative Croft countered, it indicates that the language was used because we have a tax system that is generally based on a personal income and we would not want spending to go up higher than that. Alaska is not based on that, but instead based on oil. It will be based on something totally independent from personal income in the future. He reiterated that other states have radically different fiscal systems. Representative Hawker stressed that there is a need to look to other sources of revenue in the future. Interest is to provide the greatest assurance and possible protection with a practiced spending limit. The intent is to not let the government grow faster than the personal income does. In response to Representative Croft's query, Representative Hawker explained that you would need to average the rate of change in the Consumer Price Index (CPI) and the rate of change in population. Representative Croft commented that the reason to tie the spending limit to personal income is that it would limit the amount taken from statewide residents. He agreed that there must be some limit in running government services. He did not think it would limit, cap, stop or defer any tax, any use of Permanent Fund earnings or any change in the dividend structure. It caps what government can do. He emphasized that he would rather limit the growth of government by how much is taken from his pocket. Government is limited in what it can spend, but not in taxation, which limits the amount that can be put into schools and other services. Representative Hawker asked if Representative Croft's concern is the surrender of taxation. He stressed that the intent is to maintain a growth rate without tying the hands of future legislatures from appropriation or taxation. Representative Croft interjected that the hands of future legislatures are not tied on taxation, but they should be. Instead, we are binding the hands of future legislatures to appropriate for schools and public safety. He stressed that the wrong things would be protected. Representative Hawker shared Representative Croft's concern. He voiced concern that there is no way to know the future. He stressed that nothing should be done to restrict the future and noted that a forced renewal by the people would force a review of these issues. HJR 9 was HEARD and HELD in Committee for further consideration. TAPE HFC 04 - 68, Side A