HB 3001-APPROPRIATION LIMIT; GOV BUDGET HJR 301-CONST. AM: APPROP LIMIT 3:08:02 PM CHAIR SPOHNHOLZ announced that the first order of business would be HOUSE BILL NO. 3001, "An Act relating to an appropriation limit; relating to the budget responsibilities of the governor; and providing for an effective date" and HOUSE JOINT RESOLUTION NO. 301, Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit; and relating to the budget reserve fund. 3:09:12 PM REPRESENTATIVE JAMES KAUFMAN, Alaska State Legislature, as prime sponsor, introduced HB 3001. He presented the sponsor statement, which read as follows [original punctuation provided]: HJR 301 and its companion bill HB 3001 work together to create a constitutional and statutory framework for how we limit appropriations. 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 can meet that need. Alaska has been operating without an effective appropriation limit for nearly 40 years, resulting in less than meaningful control of our state spending. The current limit was enacted in 1982, when approaching peak oil production. The timing of instituting this cap, plus the population and inflation adjustment, have made the cap so generous that it is longer useful in controlling our appropriations and spending. Successful appropriation limits have boundaries that meet the needs of the unique way that government operates; the right mix of rigidity where it counts and flexibility when and where it's absolutely needed. Alaska's inflation rate often varies from national inflation numbers, our tax structure is unique, and our spending per capita is wildly different than most. If Alaska follows suit in using these common factors, we risk failure because we may use a formula that does not meet our unique needs. Considering what I have outlined above, and all the other things that make our situation unique, I propose a new, functional cap which 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 government must support policy that will enable the growth of our private sector economy if they would like to spend more. 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. We need to create strong links between government and our productive economy before it's too late. We have immense opportunity to solve our structural issues and deliver a better future centered around Alaska's productive economy. Let's be productive and take this opportunity. 3:12:48 PM MATTHEW HARVEY, Staff, Representative James Kaufman, Alaska State Legislature, on behalf of Representative Kaufman, prime sponsor, presented a PowerPoint, titled HJR 301/HB 3001. He began on slide 2, which read as follows [original punctuation provided]: Current Appropriation Limit  $2.5 B plus inflation and population growth since 1982 -Calculation for FY 21 would be about $10 billion 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 At least 1/3 of limit reserved for Capital Projects and Loans Can break the limit for capital projects, if approved by the voters MR. HARVEY described a graph of the proposed appropriation limit pictured on slide 3. He reviewed the proposed appropriation limit on slide 4, which read as follows [original punctuation provided]: Proposed Appropriation Limit  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 -FY22 appropriations were $15.9 Million below 11.5% of the calculated value MR. HARVEY highlighted the proposed exemption list changes on slide 5, which read as follows [original punctuation provided]: Proposed Exemption List Changes Adds payment of principal and interest on revenue bonds to exceptions list Adds "appropriations to a state account or fund that requires a subsequent appropriation from that account or fund as prescribed by law" to exceptions list Removes Capital Project reservation and exemption language 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 CHAIR SPOHNHOLZ inquired about the meaning of capital project reservation. MR. HARVEY said it referred to the money reserved for capital projects. 3:20:00 PM REPRESENTATIVE JOSEPHSON, referring to slide 3, asked whether moneys put into the constitutional budget reserve (CBR) was reflected in the yellow bars on the graph. MR. HARVEY was unsure of the answer. He deferred to Mr. Painter. ALEXEI PAINTER, Director, Legislative Finance Division, stated that the limit excluded appropriations to funds that require further appropriation to spend. He noted that the CBR fell into that category and would be excluded from the limit. REPRESENTATIVE JOSEPHSON sought to clarify whether the yellow bars on slide 3 (reflecting appropriations subject to the limit) included funds appropriated to the statutory budget reserve (SBR) or CBR. MR. PAINTER conveyed that the yellow bars did not include appropriations to the CBR or SBR. 3:22:52 PM REPRESENTATIVE KAUFMAN, in response to Representative Schrage, explained that the intent of the legislation was to link public spending with the success of the private sector economy. He suggested that the bill would implement a smoothing mechanism to tame the volatility in economic performance. REPRESENTATIVE SCHRAGE pondered whether this proposal offered an appropriate basis for a spending cap. 3:26:32 PM REPRESENTATIVE WOOL pointed out that most of Alaska's GDP was in the oil industry; therefore, if oil GDP were to increase, Alaska could theoretically spend more money. However, he noted that oil production on state land was different than oil production on federal land, suggesting that even if the spending limit increased, there wouldn't necessarily be more money to spend. Additionally, if Amazon were to bring in 10,000 employees to Anchorage, GDP would increase thus increasing the spending limit according to this proposal; however, the new Amazon employees would use state services, such as schools and roads, thereby costing the government more money without bringing in additional revenue. REPRESENTATIVE KAUFMAN pointed out that the Amazon employees would become part of the "economic fabric" of the community by buying houses, purchasing vehicles, paying taxes, eating in restaurants, etcetera; consequently, their presence would feed into the GDP. REPRESENTATIVE WOOL pointed out that those employees wouldn't pay taxes. He reiterated that although the spending limit would go up due to the increased GDP, there wouldnt be additional revenue to match. He asked if that was correct. REPRESENTATIVE KAUFMAN maintained his belief that there would be a stimulative effect on the local economy. He discussed inflation targeting. 3:31:31 PM REPRESENTATIVE STORY questioned how an increased GDP would increase state revenue without an income tax or sales tax. REPRESENTATIVE KAUFMAN remarked, I believe we could find other ways for it to link back in so that what we're spending is in relation to what we're receiving. 3:32:41 PM CHAIR SPOHNHOLZ, referring to slide 3, observed eight or nine years where state spending would have surpassed the proposed appropriation limit. She asked Representative Kaufman to explain why he had proposed a spending cap that would be lower than historically low levels of spending. REPRESENTATIVE KAUFMAN believed that smoothing the capital projects would smooth the ensuing maintenance projects. CHAIR SPOHNHOLZ maintained her belief that the proposed spending cap was too low. She asked the bill sponsor why he chose 14 percent and 11.5 percent as the benchmarks for the appropriation limit. REPRESENTATIVE KAUFMAN pointed out that the Fiscal Policy Working Group had recommended that the legislature seek reductions in spending. Further, he indicated that this proposal was just a starting point. He deferred to Mr. Harvey. MR. HARVEY stated that the statutory limit assumed a market price was set at current spending levels, whereas the constitutional limit provided enough headroom, as well as a level of savings while exhibiting a contracyclical effect with GDP. 3:38:50 PM REPRESENTATIVE JOSEPHSON sought to confirm that capital expenditures would be subject to the spending cap. MR. HARVEY answered yes, as long as they're not subject to any other exemptions. For example, federal spend on a capital project would not be subject to the cap. REPRESENTATIVE JOSEPHSON pointed out that the Republican Party had supported large capital budgets to improve private sector opportunities. He wondered whether a miner or a timber operator, for example, would oppose putting their share of capital spending under the limit. MR. HARVEY indicated that it would be a policy call. 3:41:04 PM CHAIR SPOHNHOLZ asked how GDP [as the measure of spending] would be impacted by changes in oil development. She considered a scenario in which the population stayed the same while inflation continued to grow, and GDP were to decline. REPRESENTATIVE KAUFMAN acknowledged that there would be challenges without finding a way to preserve the local economy. CHAIR SPOHNHOLZ considered a scenario in which oil development was declining while a new Amazon fulfillment center in Alaska brought a surge in new jobs without an effect on the GDP. She asked how the public safety, health, and education for the new workers would be provided for under the proposed legislation. REPRESENTATIVE KAUFMAN suggested that the statutory limit could be changed. He offered to follow up with a response. 3:45:21 PM REPRESENTATIVE JOSEPHSON inquired about the absence of expenditures that exceed the limit. REPRESENTATIVE KAUFMAN remarked, There could be mechanisms that address space for capital projects within the limit. Additionally, he suggested that the statutory language could allow for a rapid response. He reiterated the importance of the smoothing effect. 3:49:12 PM REPRESENTATIVE PRAX shared his understanding that capital spending was included in the limit. If there were a need for capital spending above the limit, he asked whether the option to issue a [general obligation] bond would be available. REPRESENTATIVE KAUFMAN answered yes. REPRESENTATIVE PRAX asked whether Wielechowski v. State of Alaska had any legal impact on this proposal. REPRESENTATIVE KAUFMAN answered no. He noted that there had been some discussion of amendments on that topic in the Senate. MR. HARVEY explained that a legal interpretation had suggested that the statutory limit in the bill may not be enforceable. He added that the Senate was working on an amendment to address that issue. CHAIR SPOHNHOLZ asked what language would be used enforce the statutory limit. MR. HARVEY said currently, the language "as provided by law" would apply to appropriation bills; therefore, exempting appropriation bills would tighten up the language. 3:52:22 PM REPRESENTATIVE KAUFMAN, in response to Representative Eastman, maintained that the purpose of the proposed legislation was to increase stability in state spending, as opposed to direct state spending. REPRESENTATIVE EASTMAN sought to confirm that the intent was to produce higher lows and lower highs, as opposed to the current volatility. REPRESENTATIVE KAUFMAN confirmed. 3:56:59 PM CHAIR SPOHNHOLZ reminded listeners that in addition to the constitutional spending cap, a statutory spending cap already existed. Additionally, she pointed out that a committee appropriations cap had been drafted. She announced that HB 3001 and HJR 301 were held over.