HB 141-APPROPRIATION LIMIT; GOV BUDGET  12:23:57 PM REPRESENTATIVE STORY announced that the final order of business would be HOUSE BILL NO. 141, "An Act relating to an appropriation limit; relating to the budget responsibilities of the governor; and providing for an effective date." 12:24:07 PM CHAIR SPOHNHOLZ, as prime sponsor, introduced HB 141. She recounted the robust conversation that stemmed from the previous presenters about the value of a spending cap and whether a constitutional spending cap is the right approach as opposed to updating the statutory spending cap. She pointed out that throughout the entire history of Alaska, the current spending cap has never been reached, as it was set in 1982 when oil revenue was high. Further, the constitutional spending cap allowed for changes based both on population and inflation. She noted that she has been a strong advocate for a comprehensive, sustainable fiscal plan for years, revealing that it was the only reason she entered into public service. She shared a personal anecdote about growing up in Alaska, emphasizing that oil would not solve the state's fiscal problem. She added that Alaska continues to have a structural gap that resulted in spending over $16 billion from savings. The rainy-day fund is essentially drained, she said, as there is only $1 billion in the CBR. She explained that without spending from the ERA, the state has no other funds left to send from; however, she believed that spending from the ERA would be one of the largest strategic risks to Alaska's future. She reported that for every $1 billion spent from the ERA, $50 billion is lost annually in available earnings to spend on both permanent fund dividends (PFDs) and essential government services. CHAIR SPOHNHOLZ stated that the government made significant progress in 2018, when the legislature passed Senate Bill 26, which allowed for the use of permanent funds to pay for essential government services, such as public education, public safety, road/marine highway maintenance operations, the court system, and dividends. Essentially, Senate Bill 26 established a cap on the amount of spending from the permanent fund, which helps to preserve the critical asset that now provides about 65 percent of the state's unrestricted revenue. Further, she shared her belief that a critical part of a comprehensive, sustainable fiscal plan is new revenue, as Alaska's constitutional obligations need to be met to provide for the health, education, and public safety of Alaskans, as well as to keep commerce flowing and to continue developing state resources for the benefit of all Alaskans. She assured the committee that revenue bills would be heard soon; however, she pointed out that many of her colleagues have said they would be reticent to vote on new revenue without addressing spending. 12:30:55 PM CHAIR SPOHNHOLZ opined that state spending is too low. She noted the infrastructure deficit of $22 billion, adding that the state's UGF capital budget had averaged $123 million over the last five years, which is too low to address Alaska's deferred maintenance needs, she said. Additionally, she pointed out that education funding has not been increased in years. She noted that each year education funding is not increased to accommodate inflation, it essentially operates as a cut. She concluded that the state has real needs that must be paid for; however, she argued that when oil prices were high, the state has spent a lot of money on projects that don't always make sense, such as a church in Anchorage, which was developed as a fish processing plant that was paid for by government funds. She opined that when oil was high and cash was flowing through Alaska, the state did not save enough money. The House Special Committee on Ways and Means has passed conservative fiscal policy designed to protect the Alaska Permanent Fund from being overspent, but fiscal policy that increases the amount of funds going to the permanent fund also needs to be advanced, she posited. She shared her belief that a constitutional spending cap should not so tight that it would make it difficult to address Alaska's strategic needs. Accordingly, HB 141 proposes a statutory spending cap. CHAIR SPOHNHOLZ acknowledged that the proposed legislation still needs work. She pointed out that since introducing the bill, challenges were identified that could be strategically dangerous to the state if the spending cap were passed in its current form, for example, the massive infusion of federal funds. She reminded the committee that the legislature is using $700 million dollars in American Rescue Plan Act funds to offset general funds in the current operating budget. She conveyed that if the state were to set the spending cap based only on state spending, a cliff in spending would materialize as a result of offsetting general funds with federal funds. She relayed that as currently drafted, HB 141 would base the statutory spending cap on a three-year average. She recognized that the bill could be made better to allow for more flexibility, adding that she would be proposing changes to the spending cap and encouraged committee members to do the same. She concluded by reiterating that the legislature needs to pass a comprehensive sustainable fiscal plan that allows for adequate funding of essential government services. She stated her belief that advancing a meaningful statutory spending cap is an important element of a broader fiscal plan. 12:35:22 PM ROSE FOLEY, Staff, Representative Ivy Spohnholz, on behalf of Representative Spohnholz, prime sponsor, presented a sectional analysis of HB 141 [included in the committee packet], which read as follows [original punctuation provided]: Section 1: This section updates the existing statutory appropriation limit found in AS 37.05.540(b) to: update appropriations subject to this limit; clarify which fiscal year appropriations are attributed to; and provide a three-calendar year average adjuster to the appropriation limit. This bill includes appropriations for school bond debt and state-declared disasters in the list of items that fall outside of the appropriation limit. This section also changes the calculation of the appropriation limit to include all appropriations made for a fiscal year, rather than in a fiscal year. This change ensures supplemental appropriations are captured as spending in the fiscal year for which they are appropriated, regardless of the timing of the appropriation. Finally, this section allows the limit to be adjusted by the three-year average change in population or inflation to smooth any drastic changes that may occur in a single year. Using a calendar year rather than a fiscal year aligns the appropriation limit with the current data availability on population and inflation figures. Section 2: This section adds the calculation and reporting of the appropriation limit to the responsibilities of the Governor under the Executive Budget Act in AS 37.07. Section 3: This section repeals language related to appropriations from the Budget Reserve Fund for disasters, as this bill in Section 1 excludes spending for declared disasters from the appropriation limit. Section 4: This section notes that sections 1 and 2 of the bill apply to appropriations that are effective in FY23. Section: This section contains transition language clarifying that prior appropriations made for school bond debt reimbursement and state-declared disasters will not be included in the calculation of an appropriation limit for the fiscal years 2023, 2024, and 2025. Section 6: This section establishes an effective date of July 1, 2021. 12:37:18 PM MS. FOLEY highlighted differences between HB 141 and the governor's proposed legislation, HJR 6. First, HB 141 proposes a statutory appropriation limit, as opposed to a constitutional spending limit, to ensure that the spending cap works in practice before amending the constitution. Second, HB 141 excludes school bond debt reimbursement from the appropriation limit to treat it similarly to other state debt. Third, HB 141 refers to appropriations made "for" a fiscal year, while the current statutory limit refers to appropriations made "in" a fiscal year. 12:38:44 PM REPRESENTATIVE PRAX asked whether it would be possible to put the proposed legislation to an advisory vote of the people. CHAIR SPOHNHOLZ noted that spending caps are popular. She shared her belief that an updated spending cap would pass an advisory vote. Nonetheless, she opined that it would be an unnecessary effort and expense for the public to vote on a statutory spending cap given that the legislature has the authority to pass one. 12:40:23 PM REPRESENTATIVE PRAX sought to confirm that HB 141 proposes to exclude school bond debt. CHAIR SPOHNHOLZ answered yes. She conveyed that it would be excluded because voters across the state have voted to approve school bond debt; therefore, the state should be required to honor its obligations pertaining to school bond debt to local communities. 12:41:10 PM REPRESENTATIVE PRAX questioned whether that would continue for new bonds. MS. FOLEY noted that currently, there is a moratorium on new school bond debt. Consequently, the exclusion in HB 141 would apply existing school bond debt that was incurred when statute allowed for state reimbursement of that debt. 12:41:53 PM REPRESENTATIVE SCHRAGE, in response to Representative Prax's question regarding the advisory vote, emphasized that the public elected legislators to make decisions for the state rather than opine on the issues. He shared his belief that having a spending cap with no function is problematic, as it is so high that it would never limit spending. However, he pointed out that that the statutory dividend formula has been overridden and asked what role a statutory spending cap would play if the legislature could essentially ignore it. CHAIR SPOHNHOLZ believed that there could be merit in considering a constitutional spending cap in the future; however, putting something so politically popular to a vote of the people before testing it could be risky. Instead, she said she supported updating the statutory spending cap to ensure that it works before amending the constitution in a way that could create unintended consequences. She explained that the current statutory spending cap is largely ignored, as presently, there are no reporting requirements. She noted that HB 141 includes a requirement that the administration report on how their budget meets the proposed spending cap. 12:46:53 PM REPRESENTATIVE SCHRAGE acknowledged the merit and flexibility that this proposal offers. He suggested that another solution would be to limit the available revenue. He pointed out that a spending cap utilizes prior spending to dictate current spending rather than looking at available funds. He opined that constitutionalizing the POMV would provide stability to revenues while serving as a spending cap by limiting the revenue available for appropriation. He asked whether a spending cap would be necessary if available revenues were limited. CHAIR SPOHNHOLZ pointed out that presently, the state has a functional spending cap because the state spent through its savings and lacks enough revenue to offset the budget. She expressed her hope that the legislature would force more revenue into the permanent fund to create a sustainable fiscal plan moving forward. She emphasized that she would not support a spending cap without a broad-based revenue measure, as new revenue could create a risk of unfettered spending on unnecessary projects. Further, she explained that she is agnostic on the three-year moving average, adding her belief that the floor is the problem with the bill in its current form. She opined that without the influx of federal funding, the three-year average would make more sense because adjustors could be changed to allow for more growth. Alternatively, the committee could amend the bill and establish a new floor for the spending cap. Regardless of the policy direction, she advised that the solution should be statutory to allow for the legislature to respond to important issues as they arise. 12:53:14 PM REPRESENTATIVE PRAX expressed his support for the idea [of a spending cap] while noting that he preferred it in the form of a constitutional amendment. Nonetheless, he believed a statutory cap would be a step in the right direction. 12:54:24 PM REPRESENTATIVE STORY discussed the idea of resetting the floor rather than implementing a three-year average; additionally, she highlighted the needs of Alaskan communities. She asked the bill sponsor how the backlog of deferred maintenance and other exclusions would be addressed. 12:56:30 PM MS. FOLEY relayed that in its current form, HB 141 puts all capital spending under the appropriation limit and provides no exclusions for deferred maintenance or extraordinary capital needs. She suggested that a percentage of the cap could be devoted to capital if it were the will of the committee. She concluded that there are plenty of ways to exclude spending that the legislature wishes to prioritize. CHAIR SPOHNHOLZ said she shared Representative Story's concerns. cited Bill Popp's testimony from a previous hearing about making strategic investments in communities to ensure that Alaska is an attractive place to live, work and play. She shared a personal anecdote. She reiterated that the bill is imperfect in its current form and welcomed specific feedback about ways to amend and improve the legislation to allow for strategic investment in the state. 1:00:13 PM REPRESENTATIVE STORY [announced that HB 141 was held over.]