HOUSE JOINT RESOLUTION NO. 8 Proposing amendments to the Constitution of the State of Alaska limiting appropriations from certain mineral revenue, relating to the balanced budget account, and relating to an appropriation limit. 3:02:01 PM REPRESENTATIVE MIKE KELLY, SPONSOR, introduced the proposal to change the constitution to include a balanced budget mechanism. He believed Alaska was moving in the direction of revenue shortages and cuts in government services because of declining oil revenue and growth in state budget at the rate of 10 percent per year. He stated concerns about possible consequences. Representative Kelly noted that Alaskans had signaled their desire to have costs controlled in 1982 with a spending limit measure and in 1990 with a Constitutional Budget Reserve (CBR) measure. He asserted that neither of the mechanisms had solved the fiscal problems. Representative Kelly reminded the committee about a previous attempt at ten-year forecasting legislation. He referred to other work on the unfunded liability, which saved municipalities from sinking and set a course to repay the debt over a 25-year period. He believed more should be done. DEREK MILLER, STAFF, REPRESENTATIVE MIKE KELLY, introduced a PowerPoint presentation, "HJR 8, Balanced Budget Resolution, March 18, 2010" (copy on file), beginning with Slides 2 and 3: · In 1982, voters approved an amendment to the Alaska Constitution to control state spending. · The amendment established an annual appropriation limit of $2.5 billion plus adjustments for changes in population and inflation. · In today's dollars: For FY 09, the Office of Management and Budget estimated the limit to be approximately $8.3 billion. Mr. Miller turned to the FY 09 budget passed (Slide 4): · The unsustainable FY 09 budget passed by the legislature after vetoes was $6.7 billion (unrestricted General Fund revenue), or $1.6 billion less than the 1982 constitutional spending limit. · Translation: The 1982 spending limit passed by voters is ineffective; or, we're doing a great job of controlling government growth. Mr. Miller spoke to the Constitutional Budget Reserve Fund, (Slides 5 and 6): · In 1990, another attempt was made by voters to impose budget stability. Voters approved a Constitutional Amendment creating the Constitutional Budget Reserve Fund (CBRF). · The CBRF was created to receive and protect excess revenues generated in high revenue years rather than leaving excess funds in the General Fund (where they could be easily spent). Taking money from the CBRF requires a supermajority ¾ vote, making it more difficult to tap and therefore arguably a spending controller. Mr. Miller turned to a graph on Slide 7 depicting through a steadily rising line what state general fund spending would have been FY 1990 through FY 2010 if it had been simply adjusted for inflation at 3 percent. Mr. Miller described the graph on Slide 8, with a second, contrasting line depicting actual general fund spending throughout the same period. The second line is volatile and erratic compared to the steady inflation-adjusted line. He noted the sharp rise in recent years when the price of oil went up and there was more money to be appropriated. 3:08:48 PM Mr. Miller pointed to a third graph on Slide 9 with a third, green line added illustrating the total general fund revenue (including non-mineral revenue). He highlighted the sharp peak in the green line for FY 08 and argued that mineral revenue, including mineral lease rentals, royalties, bonuses, and production taxes on oil and gas, are the most volatile part of the state's revenue base. Mr. Miller turned to Slide 10, the same graph with a fourth, black line added in order to compare what spending would have looked like over the time period if HJR 8 had been imposed in 2000. He noted that spending would have been significantly lower than what was actually spent over the period until FY 10. In FY 10, the state would have been able to access account funds. Mr. Miller described Slide 11 as a clear visual of what the measure would do. The left column shows revenue from oil after the permanent fund is paid. The five-year average is calculated and if revenue from the year is lower than the five-year average, funds could simply be transferred from the Balanced Budget Account (BBA) by the legislature up to the five-year limit. Revenue received during the year in excess of the five-year average is automatically transferred back into the BBA, which the legislature can access during low-revenue years. Mr. Miller assured the committee that the BBA does not touch certain "Sacred Cows" (Slide 12): • Permanent Fund Dividend • Permanent Fund Corpus • Permanent Fund Earnings • Amerada Hess Mr. Miller also assured the committee that the BBA is not subject to the CBR sweep. He pointed to a bar graph (Slide 14) covering calendar years (CY) 2006 through 2010. Adding the numbers from CY 2006 through CY 1200 and dividing by five produces the five-year average. • HJR 8 transfers funds into the BBA when oil prices are high and, with a simple majority vote, transfers funds out of the BBA to fill the gap when oil prices are low. When the balance of BBA exceeds 2 years of appropriations, excess will be transferred into the CBR. Mr. Miller spoke regarding a similar graph on Slide 15. He then turned to Slide 16 and detailed the relationship between the BBA and CBR: · The BBA is limited to a maximum amount equal to oil appropriations for 2 years. Any excess will be transferred to the CBR. · The CBR: HJR 8 transfers funds into the CBR when the BBA exceeds its 2 year limit. The legislature would still need a ¾ vote to access the CBR. 3:12:12 PM Mr. Miller stressed that HJR 8 is about fiscal responsibility (Slide 17): • Encourages a better budgeting system than "when you have it, spend it - when you don't, cut." • Provides a simple but effective mechanism to help save budget surpluses and avoid deficits while encouraging government to live within its means. • Eliminates need for complicated "rat holing" and "parking" of excess funds to avoid ¾ vote. Mr. Miller addressed the issue of why the budget should be a constitutional amendment (Slide 18): • The legislature can easily overpower, ignore or change statutory appropriation constraints. • Let the people speak concerning this simple fiscal framework. It may be the only fiscal plan they will endorse at this time. Mr. Miller maintained that the measure would dovetail with a Percent of Market Value (POMV) approach to funding government. He concluded with excerpts from Brandner's Legislative Digest No. 29/07 Dec. 19, 200& (Slide 20): • Fiscal policy is more than savings and sound bites; it requires long-haul skilled political crafting. • Long term fiscal policy has been elusive in Alaska, especially since the beginning [of] the pipeline flow and the flow of easy money. The citizen taxpayer close scrutiny faltered and was replaced by all of us with our hands out. There are reasons why we have failed, and continue to do so. • We play the budget game from the seat of our pants. • Lawmakers are besieged with demands to spend, especially when there is the perception or the reality as is the current case, that there is money on the table. Fiscal restraint then becomes someone else's business, or the business of tomorrow, although tomorrow brings the same appetites. • The same people who demand that they see a critical need in their community, or in relation to their institution or industry, will still say the Legislature "spends too much." 3:13:15 PM Representative Kelly summarized by calling the proposed measure a gentle movement towards fiscal stability. He calculated that the state's savings would have generated about $4 billion more if HJR 8 had been in effect since 2000. He pointed out that change thus far had assured that the state's revenue-sharing dollars are average now; he believed the proposed legislation would have the same sort of impact. Co-Chair Stoltze recalled taking up similar legislation in the past. He commended the work done. Representative Austerman agreed and believed the proposal fit into discussions that the committee had been having. Vice-Chair Thomas commented that the fiscal framework was not simple. HJR 8 was HEARD and HELD in Committee for further consideration.