HOUSE BILL NO. 38 "An Act relating to an appropriation limit; relating to the budget responsibilities of the governor; and providing for an effective date." 3:01:40 PM REPRESENTATIVE WILL STAPP, SPONSOR, introduced himself and asked his staff to continue with the PowerPoint presentation "HJR2 GDP Based Spending Cap" dated May 2, 2023 (copy on file). He reminded the committee that the bill was previously heard in committee [05/02/23 10:34 A.M.] 3:02:16 PM BERNARD AOTO, STAFF, REPRESENTATIVE WILL STAPP, continued on slide 9 titled Current Statutory Limit: • Currently set under AS 37.05.540(b) • Enacted in 1986 • Mostly aligns with Appropriations Limit under Article IX of the Alaska State Constitution. • "Appropriations from the treasury made in a fiscal year may not exceed appropriations made in the preceding fiscal year by more than five percent plus the change in population and inflation since the beginning of the preceding fiscal year." • Change in population is based on an annual estimate by the Department of Labor & Workforce Development. • Change in inflation is based on Consumer Price Index (CPI) Anchorage as prepares by the US Bureau of Labor Statistics. Mr. Aoto furthered that the statute also carved out the exceptions to the appropriation limit in Article 9, Section 16 of the Alaska Constitution and added exceptions to include the Alaska Mental Heath settlement income account and specific appropriations made to Alaska Mental Health Trust Authority (AMHTA) fund. Mr. Aoto continued on slide 10 titled What does HB 38 do?: • Aligns with the constitutional proposal in HJR 2 and uses the trailing average of the 5 previous calendar years of Real Gross Domestic Product (GDP) for the State as the metric for the limit. • Calculating Real GDP • Takes data for standard GDP calculations by government agencies, subtracts government spending, and adjust for inflation. • 11% of the total average is the limit for all appropriations not listed as exceptions. • If enacted by FY24, that would equal approximately $4.9 B. Mr. Aoto advanced to slide 11 titled "Appropriations Subject to Limit: Subject to Limit: Unrestricted General Funds (UGF) Operating Expenditures UGF Capital Expenditures (some exceptions) Payments for Retirement benefits Not Subject to Limit: Permanent Funds Dividends Appropriations to Permanent Fund/PCE Endowment Appropriations to a State Savings Account (ex. CBR, MHTF*) Appropriations to capitalize state retirement accounts Direct spending from a Disaster Declaration Proceeds of bonds that are approved by voters Appropriations made from Mental Health Trust Settlement Income Account (AS 37.14.036) Mr. Aoto elaborated that HB 38 had the same exceptions as HJR 2, however it maintained the added exceptions for the appropriations made from the Mental Health Trust Settlement Income Account (AS 37.14.036) and the Alaska Mental Health Trust fund. The sponsor had consulted with Legislative Legal Services regarding the exceptions, and it was determined that the exceptions were placed in statute as part of the settlement of the Weiss v State of Alaska case, the Supreme Court decision that established the AMHTA. Mr. Aoto continued to slide 12 [no title]. He noted that the slide contained the same raw data as he presented in the HJR 2 discussion. 3:05:38 PM Mr. Aoto advanced to slide 13 [no title]. He pointed to the graph that depicted the statutory amount and noted that the blue bars were associated with appropriations subject to the limit. He detailed that the bar for FY 2024 was excluded because it included the supplemental amount, which was currently unknown. He pointed out that the current statutory limit had instability and rose and fell which made it difficult to plan year to year. He exemplified the difference between FY 2009 when the appropriation was under $5 billion and in FY 2008 it was over $7 billion. 3:07:25 PM Mr. Aoto turned to slide 14 titled Two Primary Goals: 1. Create an effective appropriations limit to allow the state more stable long term fiscal viability. 2. Align Alaska Statute with Constitutional proposal. Mr. Aoto moved to slide 15 [untitled] that included a graph depicting the current Constitutional Limit and Statutory Limit and proposals in HB 38 and HJR 2. Representative Stapp further explained that the orange line on the graph represented the existing Constitutional limit, and the blue line was the current statutory limit. He pointed out that they were not in alignment; the statutory limit was highly variable versus the Constitutional limit that was more consistent. He argued that the Constitutional limit had rendered itself ineffective. He referenced the FY 2024 limit that was over $10 billion. 3:09:23 PM Representative Ortiz asked if the bars on slide 15 included past or current spending on the Permanent Fund Dividend (PFD). Mr. Aoto responded that the PFD was an exception to the appropriations limit and was not reflected in the bars. Representative Ortiz thought it was odd that the largest expenditure was not a part of the appropriation limit. Representative Stapp responded that prior to the Wielechowski case, the PFD appropriation was never part of GF. He agreed that the PFD appropriation was the largest each year. However, he argued that the year to year inconsistency in the appropriation warranted a separate solution and if it was included in the modeling, the bill would be taking a position what the amount of the dividend should be. He offered to include it in the model if it helped answer the question. Representative Ortiz understood that it was a big issue and likely should be kept separate. However, if the overall goal was a spending cap, it seemed that the amount spent on the PFD should be considered. 3:11:36 PM Representative Galvin thought the bill was a good exercise in realizing the need to level out the states spending. She cited the graph lines for HB 38 and HJR 2 and noted her concern that it was inadequate for education spending. She appreciated the need for a reliable spending limit, especially to promote trust in government, but she observed that education spending had not grown to keep pace with costs. She shared that among her two children that were born 10 years apart, the older one had much more educational opportunities in public education than her younger child. She asked for comment. Representative Stapp reminded Representative Galvin that the green and black lines were amended downward in a previous committee of referral. He was attempting to provide structural balance and consistency to long-term appropriations and government. The lines changed if the percentages were amended and might be conducive to Representative Galvins concerns. He reiterated that the blue and orange lines were not consistent and opined that they incentivized bad behavior. He wanted a long-term vision for future Alaskans by operating under fiscal constraints. Representative Galvin recalled that the bill included an appropriation amount that correlated to roughly the Consumer Price Index (CPI.) She opined that the legislature needed to determine the appropriate level of education spending and also an acknowledgement that government spending could not remain flat considering inflationary costs. She asked whether Representative Stapp agreed. 3:15:21 PM Mr. Aoto answered that she was correct. He added that both of the current limits each presented a different challenge because the metric had to be anchored to something. He elaborated that the Constitutional limit was anchored to a set amount on a set date that only allowed it to increase and not adjust to different economic drivers. The statutory limit changed so drastically from year to year being predicated on the prior years spending that it could not be consistently accounted for. He commented that the bills offered a set amount that adjusted to economic drivers, which was the Gross Domestic Product (GDP). Representative Stapp interjected that the benefits of the bills were that it adjusted the limit based off of performance based metrics. He reported that the Constitutional limit stipulated that one-third of the appropriation limit should be allocated towards capital investments in the state. He deduced that the authors were considering building Alaskas future. Representative Ortiz also believed that considering the long-term interests of the state was beneficial. He pointed to the HB 38 limit line on the graph and calculated that in FY 2023 the state appropriated an amount that was higher than what was in the states long-term interest. He deduced that Representative Stapp was inferring that spending above the limit was money ill-spent. Representative Stapp reminded Representative Ortiz that in a prior committee the metrics were amended downward and in the original bills the line did not exceed the graph. 3:18:59 PM Co-Chair Foster asked if Representative Stapp could provide a copy of what the prior graph looked like prior to the amendments. Representative Stapp agreed to provide the information and he believed that there was a happy medium that could be found to apply a structural limitation to budgetary practices and not intentionally apply excessive downward pressure on the states current situation. 3:19:55 PM Co-Chair Foster set an amendment deadline for HB 38 and HJR 2 for the following Wednesday May 10, 2023, at 5:00 P.M. in order to allow for some modeling and further discussion. HB 38 was HEARD and HELD in committee for further consideration.