HB 38-APPROPRIATION LIMIT; GOV BUDGET  [Contains discussion of HJR 2.] 1:05:12 PM REPRESENTATIVE VANCE announced that the first order of business would be 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." 1:06:23 PM REPRESENTATIVE WILL STAPP, Alaska State Legislature, introduced HB 38, as the prime sponsor. He paraphrased the sponsor statement [included in the committee packet], which read as follows [original punctuation provided]: One of the most effective ways to ensure a stable economy is to apply common sense solutions to complex problems. An effective appropriation limit is the first of many commonsense solutions that is both uncontroversial and bipartisan. This is not a new revelation. The State of Alaska had already identified the potential for overspending and imposed appropriation limits in 1982. However, that decision was tied to the economy of the time. An economy that was approaching peak oil production which allowed for a reasonable limit that was adjusted for population and inflation. The modern budget of Alaska has been operating without an effective appropriation limit for nearly 40 years, resulting in less than meaningful control of our state spending. HB 38 and its companion resolution HJR 2 work together to create a constitutional and statutory framework for how we limit appropriations. The functional cap that is being proposed uses a factor based upon a five-year trailing average of our private sector economic performance. Specifically, Real GDP less government spending, which measures the value produced within our borders. The five-year averaging will moderate the effects of volatility, leading to stability. This proposal would set a spending cap roughly at current levels and would include a constitutional provision allowing flexibility in the case of unforeseen risks. Our Permanent Fund is a tremendous asset, but it creates a risk that Alaska will be destined to become a "financialized" economy. Instead of maintaining our status as Alaskans that build, add value, and produce, we could become Alaskans that wait and passively watch the market while hoping for the best. A financialized government that is funded increasingly by some portion of the permanent fund will grow to have little to no interest in the private sector. A spending limit tethered to GDP creates a constructive link to our private sector and ensures that government does not outgrow the private sector that it is meant to support. Spending limit reform is one of very few subject matters in which the Comprehensive Fiscal Plan Working Group unanimously agreed to be necessary. This legislation seeks to follow the recommendations of the working group by proposing a structured and flexible appropriations limitation to ensure a prosperous future for Alaska. 1:07:23 PM The committee took a brief at-ease. 1:07:29 PM REPRESENTATIVE STAPP directed attention to a PowerPoint presentation, titled "GDP-Based Spending Cap; An Appropriation Limit Linking Government Spending to Alaska's Productive Economy" [included in the committee packet]. He provided an overview of appropriation limits on slide 2, which read as follows [original punctuation provided]: Structure of an appropriation limit o Exemptions List: Appropriations subject to the limit The Appropriation Limit: Define the calculation factor, starting point, growth rate, and other limit mechanisms o Other: Capital projects or other specific language Current Appropriation Limit o Constitutional: Article IX, §16 (effective in 1982) o Statutory: AS 37.05.540(b) Types of Appropriation Limits Proposed Appropriation Limit (HJR 2 / HB 38) 1:08:44 PM REPRESENTATIVE STAPP reviewed the current constitutional limit on slide 3, which read as follows [original punctuation provided]: Constitutional: Article IX, §16 (effective in 1982) "Appropriations from the treasury made for a fiscal year shall not exceed $2,500,000,000 by more than the cumulative change, derived from federal indices as prescribed by law, in population and inflation since July 1, 1981. " o $2.5 B plus inflation and population growth since 1982 • Calculation for FY 21 would be about $9.8 billion At least 1/3 of limit reserved for Capital Projects and Loans o Can also break the limit for appropriations to Permanent fund, capital projects if signed by governor or approved by the voters, and a state of disaster REPRESENTATIVE STAPP deferred to Senator Kaufman to provide additional context on the bill. 1:09:51 PM SENATOR JAMES KAUFMAN, Alaska State Legislature, prime sponsor of [SB 20], the companion bill in the Senate, said the legislation was drafted to create a more beneficial process control around budgeting. He indicated that the purpose of HB 38, in combination with HJR 2, was to determine a beneficial percentage of the private sector's economic activity, which would represent "responsible spending." He believed that subtracting government spending from state gross domestic product (GDP) was the most "holistic" expression of Alaska's economy. He indicated that the statutory limit, as drafted, would cap the appropriation limit at 11.5 percent of the calculated value. The constitutional amendment, as drafted in HJR 2, would cap the statutory limit at 14 percent of the calculated value. He said the two limits would work in tandem to create a "high limit" and an operating limit. He revealed that the bill would include a five-year trailing average to create stability and smooth out overspending when revenues were up. He described the graph on slide 9, indicating that the gold bars reflected spending affected by the cap; the blue line reflected the statutory limit proposed under HB 38; the black line reflected the constitutional limit proposed under HJR 2; and red line reflected the current constitutional limit. He reiterated that the intent was to determine beneficial spending ratios based on Alaska's economic activity averaged over five years to smooth out "boom and bust" fluctuations. He concluded by summarizing the spending that would be subject to the appropriation limit. 1:14:26 PM REPRESENTITIVE STAPP directed attention to slide 10, which provided a side-by-side comparison of spending subject to and excluded from the limit. Slide 10 read as follows [original punctuation provided]: Spending Subject to the Limit: o All UGF [unrestricted general fund] operating expenditures o all UGF Capital Expenditures o Retirement Payments Not Limited by this Proposal: o Permanent Fund Dividends o Appropriations to the Alaska Permanent Fund/ PCE [Power Cost Equalization] Endowment o Appropriations to capitalize state retirement accounts o Direct spending on disaster declaration o Proceeds of bonds approved by the voters 1:15:37 PM CHAIR VANCE invited questions from committee members. 1:15:56 PM REPRESENTATIVE EASTMAN asked whether the bill would be functional without a constitutional amendment. Additionally, he pointed out that the current statutory limit was habitually ignored. He questioned whether the bill sponsor expected the proposed limit to be treated differently. 1:16:21 PM The committee took a brief at-ease. 1:16:33 PM SENATOR KAUFMAN reiterated that that the bill, in combination with HJR 2, would set a "high limit" and an operational limit. He confirmed that the bill required the constitutional amendment proposed under HJR 2, its companion resolution, to function as drafted. 1:17:02 PM REPRESENTATIVE GRAY inferred that the statutory limit could be ignored whereas the constitutional limit would be "the true hard limit." He asked whether that was accurate. REPRESENTATIVE STAPP stated that the goal was for both limits the statutory limit and the constitutional limit to work hand in hand. SENATOR KAUFMAN pointed out that exceeding [the statutory limit] would require a two-thirds vote. He said the purpose was to implement a healthier "bandwidth" of capital spending. He discussed the boom-and-bust sequences of Alaska's economy and spending cycles. REPRESENTATIVE GRAY asked why the Permanent Fund Dividend [PFD] was excluded from the spending cap proposal. SENATOR KAUFMAN responded, "To avoid encroachment into too many areas." He opined that the dividend demanded its own economic and political solution. He suggested that a beneficial spending cap would act as a foundation for solving various issues by referencing the private sector economy and providing capital spending to build up the economy's capability. 1:20:43 PM REPRESENTATIVE GROH pointed out that the Fiscal Policy Working Group (FPWG) had advocated for a comprehensive and simultaneous solution to Alaska's structural deficit. He said he had a number of questions about technical aspects and how the statutory and constitutional spending caps would fit into a comprehensive approach to resolving the deficit. 1:22:49 PM The committee took a brief at-ease. 1:23:49 PM REPRESENTATIVE GREY asked whether the governor's FY24 budget would fall underneath the proposed spending cap. 1:24:01 PM BERNARD AOTO, Staff, Representative Will Stapp, Alaska State Legislature, shared his understanding that the governor's proposed budget would not fall under the spending cap. REPRESENTATIVE GRAY sought to confirm that if HB 38 had been enacted, the governor would need to cut his proposed budget. MR. AOTO indicated that if enacted by the legislature, the governor would need to follow the statutory spending cap. 1:24:52 PM REPRESENTATIVE GROH asked why the legislature was proceeding with proposals for a statutory and constitutional spending limit when the FPWG had recommended a simultaneous and comprehensive solution. 1:25:25 PM MATTHEW HARVEY, Staff, Senator James Kaufman, Alaska State Legislature, responded that the House was free to consider additional proposals. He added, "This is the proposal that's currently in front of the body." REPRESENTATIVE GROH referenced the graphs on slides 6-7, which reflected the history of Unrestricted General Fund (UGF) spending. He explained that he had taken the liberty to have the graph updated and extended past FY19. He offered to provide this information to the committee. He sought to confirm that the state was not in a period of a peak spending. MR. HARVEY said he had not had the chance to consider the graphic shared by Representative Groh. REPRESENTATIVE GROH confirmed that Alaska was not in a period of peak spending, of which there been multiple in past years. He asked whether, based on the graphic, it appeared that overall spending in addition to spending on agency operations were the biggest issues in the state. 1:29:10 PM REPRESENTATIVE CARPENTER pointed out that the graphic referenced by Representative Groh did not come from the Legislative Finance Division (LFD), Legislative Agencies and Offices. He asked where it came from. REPRESENTATIVE GROH explained that in preparation for hearings on HB 38, he had arranged and paid for the work to be completed before session started. He noted that he had showed the graphic to Alexei Painter, Director of LFD, who analyzed and agreed with the information provided. 1:29:59 PM CHAIR VANCE said she would allow some leniency today, as it was the first meeting of the House Judiciary Standing Committee; however, she advised members to, in the future, arrange the sharing of documents with her staff in advance. She emphasized the importance of citing sources of information. 1:30:45 PM MR. AOTO returned attention to the PowerPoint presentation, noting that he would be covering the policy driven aspects while Mr. Harvey would cover the mechanical aspects of the legislation. MR. HARVEY resumed the presentation on slide 4, which outlined the exemptions included in the current constitutional limit. Slide 4 read as follows [original punctuation provided]: "Except for appropriations for Alaska permanent fund dividends, appropriations of revenue bond proceeds, appropriations required to pay the principal and interest on general obligation bonds, and appropriations of money received from a non-State source in trust for a specific purpose, including revenues of a public enterprise or a public corporation of the State that issues revenue bond? No other appropriation in excess of this limit may be made except to meet a state of disaster declared by the governor as prescribed by law." Creates exemptions for fund sources as well as purposes Current limit applies to all UGF, most statewide items, and some DGF items Excludes PFDs, bond proceeds, debt service payments, non-State sources of revenue, public corporation revenues, and disaster declarations School Bond Debt Reimbursement is excluded from the limit MR. HARVEY reviewed the current statutory limit on slide 5, which read as follows [original punctuation provided]: Enacted in 1986 Based on appropriations made in a fiscal year, not for a fiscal year o Counts supplementals in the year appropriated, not effective Limits spending growth to population plus inflation plus 5% o The use of both factors to calculate the limit has caused the limit to outgrow effectiveness o The timing of data for calculation of this limit does not work well with the budget process. The limit is not known before the annual budget process 1:33:39 PM MR. HARVEY turned to slide 6, which provided a graph of UGF spending history. Key milestones and peak spending periods, in addition to peak oil production, were noted on the graph. He continued to slide 7, which featured a graph of inflation and population adjusted UGF spending. He noted that the existing constitutional spending limit was passed during the highest rate of spending in Alaska's history. 1:35:01 PM MR. AOTO outlined the proposed appropriation limit on slide 8, which read as follows [original punctuation provided]: Calculated by subtracting government spending from historical State GDP values and adjusting for inflation Stability is improved by averaging these values over the previous full five fiscal years Constitutional amendment, as drafted, caps the statutory limit at 14% of the calculated value Statutory limit, as drafted, caps appropriations at 11.5% of value o FY22 appropriations were roughly $16 Million below 11.5% of the calculated value (the statutory limit) MR. AOTO described the graph of the proposed appropriation limit featured on slide 9. He summarized the spending that would be subject to and excluded from the cap on slide 10, which the bill sponsor had reviewed earlier. He concluded by discussing the benefits of the proposal on slide 11, which read as follows [original punctuation provided]: Effective and Reasonable o This proposal would set the cap roughly at current levels and would include a constitutional provision for some flexibility in the case of unforeseen risks Stable and Predictable o The 5-year trailing average creates stability, smooths out overspending when revenues are up, allows government spending to fall much slower than GDP during poor years, and the limit is known before the budget process begins Private-Sector Focused o Open the discussion to outcomes during the budget process 1:38:39 PM REPRESENTATIVE ALLARD, referring to slide 11, highlighted the spending not limited by this proposal, specifically the proceeds of bonds approved by the voters. She asked, "Is there a reason you don't want this statute actually proposed and voted on by voters as well with the 11.5 percent?" MR. HARVEY confirmed that the proceeds of a general obligation bond would not be subject to the limit. He explained that, because general obligation bonds were ratified by the voters, the bill sponsor did not want to limit the amount subject to the appropriation limit. 1:41:10 PM REPRESENTATIVE JOHNSON posed several questions to be answered at a future hearing. He asked how GDP was figured and how "trailing it is to reality." He considered an example of the state granting a contract to a private individual for a road and surmised that the contract would be under the cap; however, he asked whether the money spent by the contractor would be figured into GDP. He asked whether the state was effectually "double dipping" and artificially increasing the GDP with state money. 1:42:02 PM REPRESENTATIVE GRAY requested examples of other states that had implemented a spending cap based on GDP. MR. HARVEY reported that other states had enacted spending caps based on economic indicators and productive economy. He noted that over the last 10 years, the U.S. Bureau of Economic Analysis (BEA) improved its data quality by renewing the process for calculating GDP. He shared his understanding that states had been successful in implementing economic-based spending caps. REPRESENTATIVE GRAY sought to confirm that Alaska would be the first to directly tie a state spending cap to GDP if HB 38 were to pass. MR. HARVEY answered yes. 1:43:34 PM REPRESENTATIVE GRAY emphasized his philosophical concern about this proposal. He explained that if [the legislature] wanted to increase spending to stimulate the economy during a recession that caused a dramatic drop in GDP, the proposed spending cap would "tie [the state's] hands" and require larger cuts. MR. HARVEY responded by pointing out that if Alaska's GDP took a massive hit, the five-year trailing average would prevent the spending cap from being severely impacted. He indicated that the five-year trailing average would effectually produce lags and leads in the spending cap compared to private sector growth. 1:45:39 PM REPRESENTATIVE GROH inquired about the difference between the exceptions proposed under [HJR 2] and HB 38. 1:46:54 PM MR. HARVEY directed attention to Section 1 of the bill, noting that several exceptions were being added to those listed under AS 37.05.540(b): appropriations of general obligation bond proceeds; payment of principal and interest on revenue bonds; appropriations to a state account or fund that requires a subsequent appropriation from that account or fund as prescribed by law, which includes appropriations to the Constitutional Budget Reserve (CBR) and appropriations to capitalize the Alaska Permanent Fund and retirement funds; and appropriations to meet a state of disaster declared by the governor, as prescribed by law. REPRESENTATIVE GROH noted that he shared the concerns expressed by Representative Gray. 1:48:28 PM CHAIR VANCE announced that HB 38 would be held over. 1:49:01 PM The committee took a brief at-ease.