HOUSE JOINT RESOLUTION NO. 2 Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit. 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." 1:35:48 PM Co-Chair Foster invited questions on HJR 2 and HB 38. Representative Coulombe asked if revenue put into accounts such as the Permanent Fund Earnings Reserve Account (ERA) would be included in the spending cap. ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION, responded that one of the exclusions to the cap was any appropriation to the Permanent Fund. Any appropriation to the fund was permitted to exceed the cap. In addition, the Legislative Finance Division (LFD) would not include any appropriations in its calculations of the limit that would require further appropriations to spend. For example, putting money into the Statutory Budget Reserve (SBR) would not qualify as an appropriation towards the limit. Representative Coulombe asked if monies put into the higher education fund by the legislature would be subject to the cap. Mr. Painter responded that the situation would invoke the cap because the monies would have to be appropriated out of the fund in order to be spent. Appropriations into the fund would not be subject to the cap but appropriations out of the fund would be subject to the cap. Representative Ortiz asked whether the spending cap included the Permanent Fund Dividend (PFD) and the capital budget. Mr. Painter responded that the cap would not include the PFD, but it would include the capital budget; however, there was the ability to exceed the statutory appropriations limit for capital expenditures with a two- thirds vote. Representative Ortiz asked if it was safe to say that the impact of the constitutional and statutory limit on spending was a limit on the operating budget on its own. Mr. Painter responded, "to some extent, yes," but it would require a two-thirds vote to exceed the limit. Representative Ortiz asked if the bill could still act as an effective spending limit without including the PFD, which was the most significant spending item. Mr. Painter responded that it would act as a limit on expenditures for all other items, but it would not limit how much money could be spent on the PFD. 1:40:12 PM Representative Galvin commented that the state has essentially used the Base Student Allocation (BSA) as a regular formula and oftentimes funds outside of the formula had been incorporated in order to cover costs. She understood that the limit was calculated by looking at the past five years of inflation and averaging the increases. She asked what would happen if there was a significant bump in education costs and wondered if there would need to be a two-thirds vote to increase spending. Mr. Painter responded that the limit was calculated based on a five-year average of gross domestic product (GDP) adjusted for inflation. If there was a spike in inflation in the current year, it would be captured in the inflation adjustment and would impact the prior year's figures. For example, the current year would use the prior year's inflation rate, which was 8 percent. By using prior year inflation, the calculation could be made using a known amount, which was the approach proposed in the legislation. If it was based on projected inflation, the calculation could adjust every minute depending upon what was happening in real time; however, the number would be an estimate as opposed to a known number. There was an inherent tradeoff: the calculation could be based on inflation in the current year but could only be an estimate, or the calculation could be based on the inflation rates in the prior year and be a known number. Representative Galvin understood that the state was not keeping up with inflation rates, particularly in education spending. She wondered what would happen if the numbers were based on figures that were not accurate. For example, she wondered if the state would be at a disadvantage if the increase was only 2.5 percent as it would still not match inflation rates. Mr. Painter responded that it was a policy call. Representative Galvin asked if Mr. Painter would agree that there had not been incremental increases in the last seven years that would have kept up with inflation. Mr. Painter responded that the BSA had increased by $30 in the present year which was the first increase since 2017. Representative Galvin asked what percentage would be represented by the $30 increase. Mr. Painter responded that it was about half a percent. Representative Galvin asked for clarity that it was a 0.5 percent increase. Mr. Painter responded in the affirmative. Representative Galvin noted that the percentage floor was important when it came to education. 1:45:33 PM BERNARD AOTO, STAFF, REPRESENTATIVE STAPP, responded that the five year trending average when applied to the current year would total $21 billion. He explained that the 11 percent figure represented the floor, which would equal about $4.9 billion as proposed by HB 38 and about $5.1 billion as proposed by HJR 2. The floor could be adjusted according to the percentages. Representative Galvin asked Mr. Aoto to translate the figures to BSA dollars. Mr. Aoto responded that a 1 percent increase to the limit would be about $475 million. The proposed $680 increase to the BSA would equal to about a $175 million increase. He suggested that a 1 percent increase would allow for more money to be spent on the BSA. Representative Galvin understood that instead of there being a $175 million incremental increase, there would be a $475 increase if the legislation were to pass. She asked if her understanding was correct. Mr. Aoto responded that the increase in the percentage would increase the allotted spending amount to about $475 million. The legislature would need to make a policy call on how to spend the money. Representative Galvin understood there would be $475 million available, but the legislature would choose the way in which the money would be spent and whether the money would be incorporated into the spending floor for education. Mr. Aoto replied that the legislature had the power of appropriation. Co-Chair Foster suggested that the bill's sponsor respond to the questions. Representative Stapp commented that any type of appropriation limit had to be tied to something. The existing appropriation limit was tied to a "hard number" while the bills before the committee were tied to a percent of the state's gross economic output. He suggested that if the percentages were changed upwards that there would be more space created in the budget to appropriate money for operating and capital expenditures. If the statutory limit in HB 38 was increased, capital expenditures could theoretically fall underneath the appropriation. 1:49:54 PM Representative Josephson recalled the figure $5.4 billion. He understood neither HB 38 nor HJR 2 required a division between capital and operating. Mr. Aoto responded that the 11 percent figure under HJR 2 would be $4.8 billion, and 13 percent would be $5.1 billion. He clarified that the figures represented the dollar amounts if the legislation was implemented by FY 24. Representative Josephson commented that regardless of whether HJR 2 or HB 38 were to pass, the capital and operating expenses would not be divided. Both pieces of legislation proposed a single and unified limit. Mr. Aoto responded that there was a singular limit but there was a provision on page 2, line 4 of HJR 2 stating that a two-thirds vote would be required for the legislature to appropriate an additional amount for capital improvements in excess of the limit. Representative Josephson asked what was anticipated for capital expenditures when the 11 percent and 13 percent figures were decided upon. Representative Stapp responded that the 11 and 13 percent numbers were amended downward in the previous committee of referral [House Ways and Means Committee]. He thought that while it was important to have an appropriation limit, he did not want to implement legislation that would incumber the legislature's ability to make investments in the state. He thought a happy medium could be achieved if the percentages were amended upwards. Representative Josephson thought Representative Stapp must have had a target dollar amount. He clarified that he wanted to know the size of the capital budget under HJR 2 in the event that a two-thirds vote was not achieved. Representative Stapp responded that it would be any type of appropriation that fell within the statutory limit of the bill. He noted that it could be amended. He deferred to his staff to elaborate. 1:53:34 PM Mr. Aoto responded that the total would be about $4.8 billion. The operating budget plus the capital budget would need to equal $4.8 billion if the legislature did not achieve a two-thirds vote. Representative Josephson asked if a legislature could "suffocate" the capital budget and supplant and grow operating budgets. Representative Stapp understood that Representative Josephson was asking if the legislature could effectively spend the entirety of the operating budget up to the spending cap and not have a capital budget. He asked if his understanding of the question was correct. Representative Josephson replied in the affirmative. He wanted information on the de minimis match, which was around $100 million. Representative Stapp responded that it could theoretically be done if there was enough revenue. He did not think the legislature would ever intentionally suffocate the capital budget and argued that the legislature already had the ability to do so if it wanted. Representative Josephson understood that the administration of past Governor Sean Parnell saw revenue that could have "floated all boats." There was $95 million designated to the Susitna-Watana Dam two years in a row under the Parnell Administration. If a similar circumstance occurred in the present day and an individual was advocating for a BSA increase, the individual would be at odds with people who wanted a larger capital budget. He understood that there would be plenty of money to satisfy the capital budget and the public school advocate, but the two parties would be battling for space. He asked if his understanding was correct. Representative Stapp responded that Representative Josephson's description was one way to articulate the situation. He would argue that there was already a battle going on. He thought that a threshold to achieve a capital budget was a more equitable solution for the bulk of the legislature and he would hope that it would be more likely that the legislature would be in favor of a more robust capital budget that met the needs of the entire state rather than a limited amount. Mr. Aoto added that the financial situation the legislature was presently in was not because of a cap, but because of a lack of revenue. Representative Josephson understood that if the legislation were to pass, the legislature could have all the revenue it wanted but could not spend beyond the cap to solve identified problems. Mr. Aoto responded that there was a list of exceptions in which the legislature could appropriate beyond the cap, such as a disaster declaration. The instances that would qualify as exceptions to the limit were subject to the opinion of the legislature. 1:58:03 PM Co-Chair Johnson asked if the green section of slide 12 [in the previously presented PowerPoint presentation titled "HJR2 GDP Based Spending Cap" (copy on file)] represented the full amount of the percent of market value (POMV) revenue that would be drawn. She wondered if the amount was split out in any way. Mr. Painter responded in the affirmative. The entire POMV draw was shown as unrestricted general fund (UGF) revenue and the PFD was shown as the unfunded expenditure. Co-Chair Johnson understood that some were concerned about there being taxes without a spending limit and that the PFD was not subject to the limit. She did not think the PFD was being considered in the equation if 50 percent of revenue was not taken out for the PFD. She asked Representative Stapp to expand on the contradiction that some individuals did not want any new taxes unless there was a spending limit, but the PFD was not subject to the spending limit. She asked him to elaborate on the way in which the PFD's exclusion would impact taxes and the spending limit. Representative Stapp responded that slide 13 of the presentation addressed the question. The slide showed the governor's proposed 15 percent constitutional limit on GDP. The constitutional limit would effectively put all available revenue within the spending cap. The proposed 15 percent of GDP constitutional limit could theoretically allow for all money to be appropriated through government expenditures if there was a $0 PFD. He recognized that the PFD was the largest appropriation the legislature made. If half of the POMV was appropriated towards the PFD, there would not be enough revenue to reach the current limits unless new revenues were added. Co-Chair Johnson understood that excluding the dividend from the cap would have a different effect because it was tied to GDP. She thought information was being conflated and wanted to ensure that it was noted that it was tied to GDP and was not based on traditional elements of the spending cap. 2:03:04 PM Mr. Painter commented that appropriations were often constrained by revenue and any spending limit would not be as important when revenue was the constraint. A situation in which a spending limit would have made a difference was in the prior year's session because revenue was not as much of a constraint. Instead of a revenue constraint, the constraint was the desire to not spend all of the money. A spending limit would serve to cap the years with high revenue. There could also be a cap set on oil which would provide a different constraint. Mr. Aoto responded that the value of using a GDP-based spending cap was that it would capture a number of different aspects of the economy that should be monitored by the legislature, such as general population and inflation. It also would allow the legislature to factor in elements such as consumer spending, business spending, net imports, and net exports when deciding how to appropriate funds. There were previous iterations of spending caps that tried to use one aspect of population inflation that resulted in a more draconian and restrictive spending cap than the one proposed by HJR 2. Co-Chair Johnson asked if a floor was not needed because of the existence of the POMV. She did not want to craft a situation in which the spending cap would force austerity on the state. She understood that the Permanent Fund draw would always provide the needed funds if it were based on a balanced budget. She asked if there was ever a time in which the GDP spending limit would be so low that the legislature would not be able to meet the needs of Alaskans. Representative Stapp responded that in the event of a fiscal disaster in which there were multiple years of declining GDP growth, it would be more likely that there would be a revenue limit and not a spending limit. If there was a serious drop in GDP over a five-year period, there would also be a significant drop in the spending limit and there would be an increase in out-migration from the state. The government adjusted its spending downward when there was a major out-migration in state in the 1980s and he thought the same strategy could be implemented if the situation were to happen again. He thought it would be wise to reevaluate spending levels if there was another surge in out-migration. He did not foresee the scenario occurring but suggested that Mr. Painter elaborate on the question. Mr. Painter commented that when the limit was set in FY 83, expenditures were close to the limit in the first few years and then spending was flat for nearly two decades; therefore, the limit was not a meaningful factor. A similar situation could occur with a GDP limit, but the limit likely would not have grown as quickly as the figure representing population plus inflation because GDP would have also been impacted. In the 1980s, revenue was the reason for the state's limited expenditures. 2:09:11 PM Representative Hannan wanted more information about the idea of excluding the PFD from the spending caps. She understood the thought process in comparison to the current spending cap; however, the proposed spending cap seemed to be higher than some of the state's constitutionally mandated spends. She asked for more information on the reason for holding the PFD outside of the spending cap. Representative Stapp opined that the PFD was a separate political issue that warranted its own resolution. He thought that if the percentages of the cap were to be amended to 14 percent or 15 percent, it would include all available revenue. He thought it was interesting to note that the PFD had been subject to a significant swing in variation of appropriation. If a hard limit was fixed in the bill, it would effectively require a policy call on the dividend within the spending cap. If all available revenue fell under the cap, a dividend amount could be inferred within the cap. Representative Hannan asked if Representative Stapp found any jurisdictions in which a spending cap was separate from a taxation policy. She acknowledged that there were no individual taxes implemented in Alaska and that most states that had taken on a spending cap did so in order to govern a sales tax, income tax, or property tax. She wondered if Representative Stapp's research found any jurisdictions where revenues and spending caps were separate. Representative Stapp asked for clarification on whether Representative Hannan was asking if had found a spending cap in his research that was divorced from taxation. Representative Hannan responded in the affirmative. Representative Stapp replied that the current spending cap in the state had no bearing on taxation and any variation in spending caps that were indexed at population and inflation had no impact on tax policy. He thought GDP was a better metric to use when coordinating a tax policy because if there was a more robust private sector, there would be a better base upon which to implement taxes. Representative Hannan suggested ignoring Alaska as the state was the exception and not the rule. She offered Colorado as an example and explained that an implemented spending cap was immediately followed by tax increases. She asked if there was any state apart from Alaska that had set a spending cap without also addressing taxation policy in the state. Representative Stapp responded that unlike every other state, Alaska did not have a broad based tax. The concept behind the limit was to encourage responsible government appropriations. He could not think of an example of another state apart from Alaska that had implemented a spending cap withing addressing taxation policy because Alaska did not have a broad based tax. 2:14:13 PM Representative Galvin wondered whether a spending cap would bring about more transparency, accountability, and responsiveness, which is what she thought Alaskan voters wanted. She was aware of a paper by the Economic Policy Institute that argued that spending caps were not necessarily beneficial in achieving the goal of transparency. When there was a shock to the economic system such as the 2008 recession, Alaska was not impacted as strongly as other states because Alaska was able to quickly invest. She recalled that in 2008, Alaska invested around 25 percent into the nation's economy and saved over 700,000 jobs. She asked Mr. Painter to speak about the ways in which the state would be impacted if there was a similar event in the future, but the state had implemented a spending cap. She also asked how a disaster would be defined and how it was determined that a situation was dire enough to warrant spending beyond the cap. Mr. Painter responded that the definition of disaster was in statute and the governor had the power to declare disasters in response to natural disasters, diseases, war, or other similar events. He did not think economic disasters were included in the definition. He thought that if the GDP crashed and a disaster was severe enough, a GDP- based spending limit could potentially mean that Alaska could not respond; however, it was based on a five-year average with a lag. If a GDP-based spending limit was in place during the current session, the data used to determine the limit would be the previous year's GDP and it would not necessarily be restrictive. If the statutory limit was set close to the current expenditures and the constitutional limit was set higher, the expenditures for economic disasters would likely be capital spending, which was the case in 2008. The capital funds could be spent with a two-thirds majority under the spending cap. It could become problematic if there was a significant long-term disaster, but the state would have had to have significant savings in order to spend the funds in the first place. The spending limit would not be the limiting factor if there was a multi-year depression. The statutory limit could also be amended by future legislatures with a simple majority vote of both bodies. Representative Galvin asked how long the recession in 2015 lasted in Alaska. Mr. Painter responded that he did not know as far as a formal definition of recession from a macro-economic perspective. There were deficits from FY 15 through FY 21, but that alone did not necessarily qualify the time period as a recession. Representative Galvin asked if Alaska was sensitive to extreme fluctuations. Mr. Painter responded that the economy in the state was more volatile than most states. It was also not necessarily correlated to the nation's economy. Alaska had a relatively volatile economy because of its dependence on a volatile resource. 2:20:33 PM Representative Josephson asked what the current constitutional limit from 1982 would be as a percent of GDP. Representative Stapp responded that he would guess it would be around 25 percent or 26 percent. He deferred to Mr. Painter. Mr. Painter replied that he thought it would be approaching 50 percent because the 13 percent level represented about $5.8 billion and the current constitutional limit was about $11.3 billion. If the figures were doubled it would total about 50 percent. He was not certain of the figure and would return to the committee with a more precise calculation. Representative Josephson noted that Representative Stapp had mentioned a five-year economic downturn. He asked Representative Stapp to repeat his comments. Representative Stapp responded that the GDP was based on a five-year rolling average. If there was a severe economic downturn for five consecutive years, downward pressure would be placed on a GDP-based spending limit based on an average. Representative Josephson noted that there was an economic downturn from 1933 through 1938 and the Roosevelt Recession immediately followed in 1937. He relayed that the response at the time was a Keynesian approach to prime the public and get the economy going and to avoid the European experience of complete political disruption. He noted that the situation would not occur in the same way in Alaska because it was a state and not a country; however, given the countercyclical nature of the state and the fact that the 2008 recession was a "blip" to Alaska, he asked if there would be circumstances in which the state was unable to respond and it would be watching events unfold that the state could theoretically resolve but could not take action. Representative Stapp responded that the big difference was that the state could control fiscal policy but not monetary policy. In the event of a recession, the state would be limited by a collapse in all available revenue and there would be massive out-migration. He thought that the best way to prepare for a disaster scenario would be to amend the percentages upward. He reiterated that he was not worried about a spending cap having a negative impact on the state in a disaster because there would be a collapse in all revenue and the spending cap would be the least of the state's worries. Representative Josephson replied that there was a strong governor model in the state and the legislature would need a two-thirds vote to override a veto. In a crisis, it was a limitation on legislative prerogative. 2:25:14 PM Representative Ortiz wondered if it would be better to suspend the idea of a spending cap until the question of revenue was resolved. He thought that revenue was in essence the current spending cap and that it had been a successful model. The legislature was able to address capital projects and deferred maintenance when the state had more revenue in the prior year. He did not understand why a spending cap would be tied to GDP when revenue was not tied to GDP. Representative Stapp responded that the main issue was how the state allocated the existing revenue it already had. He thought the most valuable information from Mr. Painter on the history of the cap was that both the constitutional limit and statutory limit for appropriations had been violated by the legislature on multiple occasions. He suggested that when a limit existed in statute or in the constitution that had been repeatedly violated, the legislature had the responsibility to do its due diligence to reform the issue and increase accountability to citizens. It was possible to have a tie in terms of overall GDP that would allow for future conversations on revenue and on the PFD amount. The main goal of the bill was to smooth out the boom and bust cycle that was Alaska's revenue picture. He argued that the state likely allocated money in high revenue years such as FY 12 and FY 15 for good purposes, but he thought the state also wasted a lot of money. 2:29:28 PM Representative Coulombe asked how the current spending cap related to the private sector. Mr. Painter responded that the spending cap was tied to a fixed number that grew by population and inflation. The cap did not directly reference the size of the economy in any way. Representative Coulombe asked if the state needed to respond to the spending occurring within the private sector. Mr. Painter responded that the spending cap was based on a fixed number which grew by population and it did not matter if the population was employed. However, revenue did originate from the private sector. Representative Coulombe asked how the proposed spending cap would incorporate the private sector into the equation. Mr. Aoto responded that the cap would use state GDP and that some of the elements of state GDP were business expenses, business spending, net imports, and net exports, which were all directly related to the private sector. Representative Coulombe commented that many examples had been brought up during the meeting on what could happen in extreme situations. She thought that the state's revenue had been historically volatile, and Alaska was not financially disciplined in high revenue years. She thought that there would be fewer emergencies if the state invested in a more regimented manner. There would be more stability in the savings accounts to increase education spending and it would encourage savings and "rainy day" finances. She liked the idea of a spending cap because it would force the legislature to think about the future and it would smooth out emergency spending and big deposits. Representative Tomaszewski thanked Representative Stapp for bringing forth the bill and he thought that it was exactly what the state needed. He thought the state needed the ability to control spending and the cap would allow for steady funding and decreased dependence upon digging into its savings accounts. He commended Representative Stapp for his responses to the questions of other committee members and he looked forward to hearing more about the legislation. HJR 2 was HEARD and HELD in committee for further consideration. HB 38 was HEARD and HELD in committee for further consideration.