SB 196-APPROPRIATION LIMIT; BUDGET RESERVE FUND  4:16:28 PM CHAIR KREISS-TOMKINS announced that the final order of business would be CS FOR SENATE BILL NO. 196(FIN)(efd fld), "An Act relating to an appropriation limit; and relating to the budget responsibilities of the governor." 4:16:39 PM SENATOR PETER MICCICHE, Alaska State Legislature, pointed out that the sponsors conducted some statewide polling and he found it interesting the percentage of people who support a spending limit. He noted that the high level of support was not specific to party, region, or demographic, and every region was above 75 percent [of the people polled]. The state relies on a single commodity to fund more than 85 percent of the state's governmental services, and although the operating capital budgets have been cut by over $3 billion in the last four fiscal years, the state continues to draw from its savings accounts to fill the gap between revenue and expenditures. He advised that this legislation sets an appropriation limit and referred to a chart titled "SB 196 Appropriation Limit" demonstrating the spending limit plotted in a couple of different ways. He explained that the top purple line is the existing statutory appropriation limit, the red line is the actual spend. There are two parallel lines, the blue line is deflating from the current spend back to around 1999, and the green line is inflating at this appropriation limit trend through today. SENATOR MICCICHE advised that the chart demonstrates why this is important, "we've gotten back into this band and had we avoided getting out of this band, we would have approximately $15 billion more in saving right now. We wouldn't have reduced dividends, we wouldn't have been talking about broad-based taxes, and we have would have been delivering quality constitutionally protected services in the meantime." This bill requires the legislature to prioritize state spending going forward so it does not find itself in the same situation, he remarked. 4:19:51 PM SENATOR NATASHA VON IMHOF, Alaska State Legislature, described that Alaskans are living in a "feast or famine" environment with the primary single source of revenue being oil. Alaskans can effectively live in that environment if there is control over spending whereby the state's spending does not necessarily match the revenue that may jump or fall over the course of time. She noted that history has revealed that the state had huge jumps in revenue between fiscal years 2010 and 2014, that there have been feasts and famines in the past. Over the last 25 years, she pointed out, the state put money into the constitutional budget reserve (CBR) and borrowed from the CBR during the times it was necessary to fund the deficit. She acknowledged that between the years 2010 and 2014, the state did not control its spending and the state matched its spending to revenue; and when revenue started falling in 2015 and the state could not contract its spending fast enough. As a result, she offered, to what Senator Micciche stated, approximately $15 billion was left on the table by money that was not put into savings during the good years, and additional money was removed to cover large deficits because the state had large budgets during the falling revenue years. This legislation, she related, helps future growth in spending in order to avoid the big jumps and big falls in spending, which creates much anxiety and uncertainty in the state. She explained that the bill grows spending over time in a predictable rate based on what most other states use, which is usually the consumer price index (CPI) for their state. It is an agreed upon set of principles that the entire bodies of the legislature agree to set their budgets on each year, she commented. A spending cap brings predictability and sustainability to Alaska's budget process and is a key ingredient in a bi-annual budget, which is a two-year budget. She opined that that will avoid this type of conversation with pink slips for educators, and so forth. This legislation is meant to ease the anxiety and provide predictability and sustainability, she described. 4:22:42 PM REPRESENTATIVE LEDOUX advised that she supports the concept of a spending limit and asked why Senator Micciche believes the legislature will adhere to a spending limit because it is in statute, any more than it has adhered to paying out the permanent fund dividend (PFD) according to the formula set in statute, for example. The legislature's track record in following the statutes is sometimes not 100 percent, she commented. SENATOR MICCICHE responded that the Senate Majority discussed the fact that this is a test and the real objective is that this translates into a constitutional spending limit. He stressed that the goal is to make sure it is right, so it has a look back and he is hesitant to change the Alaska State Constitution until it is somewhat time tested. He commented that, "If we find that we are successful ... so soon after we pass statutory items that the legislature weighs in on heavily and heavily supports, we have a tendency to stay very close to that." In time, as the new legislators come in, they are not particularly married to that past statutory structure. Although, he opined, the legislature has time to determine within the next two years whether this proves to be the right trend of spend going forward, and subsequently, hopefully there would be a constitutional amendment the people of Alaska would support. 4:24:31 PM REPRESENTATIVE BIRCH commented that he thinks "this is great," and at the municipal level there are tax caps with some sort of institutional limits or boundaries on spending. He reiterated that this is good, it could possibly be modified over time, but it is helpful to have a road map on spending. REPRESENTATIVE KNOPP noted that he agrees with the sponsor statement in creating exemptions for the payment of permanent funds, capitol projects, state debt obligations, but he is concerned about the receipt supported services. He pointed out that the state does not have diversified growth funds (DGF) and every department now has receipt supported services. This legislation does not appear to cap receipt supported services, and over the last couple of years, almost every department has raised fees in one form or another. He asked whether that issue should have "fallen under unrestricted general fund (UGF). You know we've really strayed I think, from what we said is not general fund (GGF), but we're calling it GGF." SENATOR VON IMHOF responded that there were discussions about what a spending cap might include, such as, UGF only or all state funds including DGF and other state funds. The decision was UGF because it is important to provide the departments and the university with flexibility to raise fees and what they believe the market will bear. President Jim Johnsen, University of Alaska, stated on the record that the University of Alaska is subsidized by the state more than any other Western university. In the event the university decides to raise tuition, the state should allow them to do so and not necessarily be stymied by a spending cap, the same goes for hunting fees and fishing regulations. There is a point where market equilibrium will dictate whether a price is too high, and it is more appropriate for the departments to retain that autonomy and flexibility. 4:27:31 PM REPRESENTATIVE WOOL referred to the previously described chart, and when Senate Micciche said "we've left the band" he assumed that is between the parallel green line and the parallel blue line, and the red line is state spending. He commented that it looks like "we're actually back in the band the last couple of years." SENATOR MICCICHE answered that Representative Wool was correct, the $15 billion that disappeared is the difference between the blue line and the red line when the red line is outside of the two parallel lines. 4:28:14 PM REPRESENTATIVE WOOL referred to the statement that 85 percent of Alaska's governmental services rely upon a single commodity and advised that that statement is probably no longer valid "and may not be for some time in the foreseeable future." He asked how Senator Micciche would adjust that statement. SENATOR MICCICHE replied that he did not know that he would because if a percent of market value (POMV) passes, or any other arrangement that will pay the state's bills, it is still a single commodity generated with the escalation from earnings. He related that Representative Wool was converting production from the past into funding for the future, so "I don't know that you've moved outside of that band. I think you picked up a higher proportion of that band and likely will in perpetuity. Particularly, if we can get an agreement on what our spending should look like today and how it should escalate in the future." The primary point of the chart is, "with relatively little discomfort we are back in that band." Obviously, he advised, it is doable because "as a team we've done it together with UGF spending. If we can maintain being within that band in the future, we can avoid those spikes in spending with some outlets for things that when we do have high revenues, we have the ability to catch up on things like deferred maintenance and other projects that may be lagging at the moment." 4:29:51 PM REPRESENTATIVE WOOL surmised that this legislation proposes that the $4.1 billion will not include capital projects and asked whether the red line of spending also follows that same exclusion of capital projects. He opined that that is a big part of the deduction from FY14 through FY18, for example. SENATOR MICCICHE described that this discussion is apples to apples on operating. 4:30:23 PM CHAIR KREISS-TOMKINS asked whether there have been any discussions about extending the spending cap to the capital budget. SENATOR VON IMHOF answered that there have been some discussions about a potential waterfall if oil revenues or other revenues exceed the spending cap. For example, she advised, what has priority on a certain percentage, or a certain dollar amount when there are competing interests, such as PERS and TERS, debt payments, repayment to the constitutional budget reserve (CBR), capital, possibly school education, building, matching funds, and things of that nature. Those discussions have taken place and "we have not necessarily landed on anything at this point, and we are open to feedback." SENATOR VON IMHOF, in response to Representative Wool's question, advised that he is correct that past oil revenues have been a much higher percentage of revenue, absent of a POMV, and it still remains the highest or dominate revenue force. She commented that one would argue that even with a POMV, in its own way it is from oil revenue in its origin. Moving forward, it is believed that starting with a "4.1 UGF" is realistic based in the world market of what the state can afford with the current oil revenue, production, and opportunities through SB 21, the oil tax legislation. She related that this is realistic and makes sense based upon current information, but as Senator Micciche advised, this is a trial period with a three-year lookback, and at that time there will be a determination as to whether the rate makes sense. The rate in the Alaska State Constitution currently "is a little high," it is both population and CPI and it is too big of a growth rate, it does not work. This should have probably been reviewed 20 years ago, she offered. 4:33:08 PM REPRESENTATIVE WOOL offered appreciation for the statement that the source of revenue originally was oil, the revenue went into a fund, the fund is invested, and the state uses that as its number one source of revenue. He surmised that it is not direct oil revenue, but that oil is on the fund. He asked whether the CPI takes into account surging healthcare costs that are higher than inflation. SENATOR VON IMHOF advised that that CPI is everything and the Anchorage CPI is, in essence, the statewide CPI. Alaska is one of the few states that has the dominant city representing the state. She said that she has a 30-year lookback available, and advised that in 2016, the CPI range was negative point one, all the way to approximately 4.6 in one given year. The CPI does fluxuate when the price of oil and the price of housing and healthcare rises, but then it goes down, and when looking at it over time it is "pretty level and our numbers work," she advised. 4:34:46 PM CHAIR KREISS-TOMKINS asked whether there is any other sort of idiosyncrasy in the CPI where there could be a CPI calculated for Anchorage that in any way has a large delta from what the sort of de facto statewide CPI would be. SENATOR MICCICHE answered as follows: So, a very direct example of that was right went the price of oil went from $107 a barrel down to $29. You are going to see an offset, you are going to see a state that is used to a very high level of revenue, many more high-paying jobs, rents were up, renting a storefront, many materials were at a much higher price and suddenly you had a revenue drop. There are times when there is a lag, but considering it is the actual costs of the primary drivers due to the cost of living in Anchorage, it generally catches up in a relatively short order. The reason that capital is excluded, is because you can shut it off like a faucet, like we did. That is not our problem in spending. It can be a problem in spending when you are building community centers in the middle of nowhere that, unfortunately, have operating dollars attached to them. That can be a problem. But, as you saw in 2014 and 2015, we were able to make that immediate reduction. You don't have bodies attached to it, you don't have employees and their families attached to it, you don't have their healthcare and their retirement, and all that other burden that's so difficult to reduce. So, UGF spend in our operating budget is the key exposure and that is what made this so uncomfortable over the last couple of years. And where, in my view, we are still not spending at the place where we should be spending for a state of 740,000 people. 4:37:19 PM SENATOR MICCICHE pointed to the sectional analysis [contained within the committee packet] and offered to answer questions prior to the next hearing. [SB 196 was held over.]