HJR 2-CONST. AM: APPROP LIMIT  HB 38-APPROPRIATION LIMIT; GOV BUDGET  6:03:56 PM CHAIR CARPENTER announced that the first order of business would be HOUSE JOINT RESOLUTION NO. 2, Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit. and 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." [Before the committee was CSHJR 2(JUD) and CSHB 38(JUD).] 6:05:05 PM The committee took a brief at-ease at 6:05 p.m. 6:05:47 PM REPRESENTATIVE WILL STAPP, Alaska State Legislature, as prime sponsor, presented HJR 2 and HB 38. He explained that the need for a spending cap is not new in the state's history. 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, and he explained that the problem with this limit is that it does not effectively limit any kinds of appropriations. He further explained that a decade ago, Alaska had $10 billion in revenues and $18 billion in the constitutional budget reserve (CBR) and the statutory budget reserve (SBR). He said that the House Finance Committee had been presented 10-year budget forecasts from the Office of Management and Budget (OMB), and guaranteed to members that in 2012, the 10-year forecasts at that time would not have predicted that the state spent all of its reserves, or would make permanent fund draws to pay for state services. He stated that one of the effective ways to ensure a strong and stable economy is to apply "common sense solutions to complex problems." He further stated that such an appropriation limit would be the first of many commonsense solutions. 6:08:21 PM BERNARD AOTO, Staff, Representative Will Stapp, Alaska State Legislature, on behalf of Representative Stapp, prime sponsor of HJR 2 and HB 38, referred to language from [a portion of Article IX, Section 16, of] the Constitution of the State of Alaska, regarding appropriations, which states that "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." He explained that one-third of the income shall be reserved for capital projects and loan appropriations, and that voter approved projects can exceed the limit. He said HJR 2 sets out to apply a different metric for calculating an appropriations limit by using gross domestic product (GDP). He said that HJR 2 takes a five-year trailing average of real GDP based on calendar years. The calculation takes the five-year average, takes 14 percent, which will then be the spending cap. He advised that if established before fiscal year 2024 (FY 24), the number would be $6.25 billion. He explained that the reason for 14 percent is that it would set a limit near current spending levels and allow stable and predictable spending in the future. 6:10:20 PM MR. AOTO drew attention to a PowerPoint presentation [hard copy included in the committee packet], to slide 3, and presented a table that depicts which expenditures are and are not subject to the proposed limit. He said that unrestricted general funds (UGF) operating expenditures, UGF capital expenditures, and payments for retirement benefits are all subject to the limit. He detailed what is not subject to the limit: permanent fund dividends (PFDs), appropriations to permanent fund/PCE endowment, appropriations to a state savings account, appropriations to capitalize state retirement accounts, direct spending from a disaster declaration, and proceeds of bonds that are approved by voters. 6:11:24 PM MR. AOTO presented a graph on slide 4 illustrating current appropriations subject to the limit as the red lines, the current constitutional limit as an orange line, the limit proposed under HB 38 as a black line, and the proposed limit under HJR 2 as a green line. He noted that the graph accounts for the administration's amended and supplemental FY 24 budgets. He pointed out that while HJR 2 exceeds the cap that HB 38 proposes, it does not exceed the current limit as set by the Alaska Constitution. Mr. Aoto moved to slide 5 and stated that HJR 2 has one primary goal: to create an effective appropriations limit to allow stable long term fiscal viability. 6:12:33 PM MR. AOTO gave the sectional analysis for HJR 2 [included in the committee packet], which read as follows [original punctuation provided, with some formatting changes]: Section 1:  Amends Article IX, sec. 16 of the Constitution of the State of Alaska to slightly revise appropriations subject to the limit as well as the conditions that determine the appropriation limit. Sets a maximum statutory cap at 14% of Real GDP (not including government spending). Exceptions List [Article IX, Sec. 16] • Adds appropriations to the Alaska permanent fund to exceptions list. o Moved from Appropriation Limit Section to Exceptions List • Adds Appropriation of GO Bond proceeds to exceptions list o Moved with slight variation from Appropriation Limit Section to Exceptions List • 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. • Adds 'appropriations to meet a state of disaster declared by the governor as prescribed by law' to exceptions list. o Moved from Appropriation Limit Section to Exceptions List • Removes "Appropriation of Revenue of a public enterprise or public corporation. of the state that issues revenue bonds" Appropriation Limit Conditions [Article IX, Sec. 16] • Adds (Appropriations Not to Exceed) an amount prescribed by law equal to a percentage of the average Real GDP (not including government spending) for the first five of the last six years. This measure of Real GDP is estimated by state government as prescribed by law. • Removes Old appropriation limit anchored to $2.5 Billion + Pop. and infl. (since 7/1/81) • Removes language reserving 1/3 for capital projects and loan appropriations. • Removes language adding exceptions to appropriations subject to the limit from this Appropriation Limit Conditions section and moves these to the exceptions list. section. • Removes specific language surrounding Capital projects exemptions. Section 2:    Adds a new section to Article XV of the Constitution of the State of Alaska (Schedule of Transitional Measures), section 30, which sets an 'effective date' of the end of the fiscal year immediately following the next possible opportunity for Alaskans to ratify a proposed amendment to the constitution. Section 3:    Includes the provision that the constitutional amendments proposed by this resolution must be placed before the voters at the next general election. 6:15:20 PM REPRESENTATIVE GRAY requested Representative Stapp to state the purpose of HJR 2. REPRESENTATIVE STAPP explained that the intent of HJR 2 is to smooth out the boom and bust cycles in the state's budgeting, in order to ensure long-term viability and establish fiscal certainty in Alaska. He said this could also help private sector performance, where private sector entities are wary of investing while the state struggles to create the kind of stability that attracts long-term investment. REPRESENTATIVE GRAY asked if it is fair to say that HJR 2 would help control spending, or rather, help to avoid overspending. REPRESENTATIVE STAPP responded, "That's a fair assessment." In response to a question from Representative Gray about the reason the PFD is not included in the spending limit, said there's been contention in the state over the last eight years over the PFD, and from his perspective the PFD "needs its own solution." He said HJR 2 is setting out to solve a larger fiscal problem that has existed in the state longer than the PFD "tug-of-war." He pointed out that the struggle over the PFD ebbs and flows. 6:18:00 PM REPRESENTATIVE STAPP, in response to a question from Representative Allard, explained that HJR 2 contains an exception for PFD appropriations. He said the legislature would have the ability to take funds that are not within the cap and appropriate them as they so choose whether that be to pay the dividend or repay draws from the constitutional budget reserve. 6:19:39 PM REPRESENTATIVE MCCABE brought up the Fiscal Policy Working Group's recommendations, pointing out that the group had separated the PFD intentionally, as well as proposed a separate spending limit. He opined that the PFD does not belong in the budget. He surmised that Representative Stapp wrote HJR 2 as is, because there are already solutions to the PFD that are working. REPRESENTATIVE STAPP responded, regarding the fiscal policy working group, that a spending cap was one of the proposals. He pointed out that a spending cap is not dependent on any other aspect of the situation. He said that he is not opposed to people seeking a holistic solution, but when he speaks to the merits of HJR 2 and HB 38, the bills stand independently. REPRESENTATIVE MCCABE stressed that the fiscal policy working group did not want to "cherry-pick," in that the group knew the proposals were going to be separate but wanted all the proposals to march together. He noted that the group did state that a constitutional spending limit is important, and he thanked Representative Stapp for bringing HJR 2 forward and said the matter bears investigating. 6:22:24 PM REPRESENTATIVE TILTON asked Representative Stapp to elaborate on using the GDP formula over population plus inflation. She also asked him to explain the funding limit's design. REPRESENTATIVE STAPP stated that the private sector tie is important. He said that in various countries in Europe, like the Nordic countries, there is a strong private economy. He stated that in Alaska's case regarding historic private sector growth, the state has had an anemic private sector economy. He suggested that to get to a holistic economy in Alaska, members in the house must take measures towards a strong private sector economy. He commented that it's not so much looking at today but instead decades ahead. 6:24:13 PM MR. AOTO relayed that the current population plus inflation formula needs to be tied to a figure in order to be effective, and the current figure it is tied to is $2.5 billion dollars. He said the difficulty with applying the formula with any figure - especially when enshrining a figure into the constitution - is that in 10 years the figure could balloon out of control, which he said is happening now with the current limit set out in the Alaska Constitution. He pointed to the graph on slide 7 and said it illustrates how the current constitutional spending limit formula has led to spending levels the state could not even hope to achieve at its current economic level. He explained that a one-year dip in population and inflation could drastically affect the current formula limit. Alternatively, the formula that HJR 2 proposes bases the limit on five trailing years, which allows one bad year to not be an issue. He surmised that if there were five years of economic decline, the legislature would try to take action to reverse the decline to avoid the "shock value" that resulted from a decline in oil prices in 2015. 6:26:02 PM REPRESENTATIVE GROH noted the comments around the Fiscal Policy Working Group. He asked Representative Stapp if he is aware that the group recommended "revising Alaska's spending limits as part of a comprehensive solution," but without actually offering what that solution would be. REPRESENTATIVE STAPP responded that the answers to those questions are the prerogative of the committee. 6:27:17 PM CHAIR CARPENTER commented that if it is being characterized that that fiscal policy working group had recommended an action item - whether a bill or spending limit - then that would be a mischaracterization of the group's report. He said the report put forward a revision to the concept of Alaska's spending limits, since the limits are not effective. He asked Representative Stapp what the relationship is between HJR 2 and HB 38. 6:27:57 PM MR. AOTO explained that the connection between HJR 2 and HB 38 is that the bills are designed to coincide with one another and mimic each other's language. He said this provides an aligning and stable spending limit, with the main difference being percentages. He contrasted the current 14 percent and the proposed statutory 11.5 percent, in that the statutory limit sets a two-thirds vote requirement for the legislature to exceed the limit. CHAIR CARPENTER asked if it is for any need or only for capital spending. 6:29:00 PM REPRESENTATIVE STAPP responded that, conceptually, it would be for capital spending, but money could be appropriated for other means. He said his intention is to ensure that [the state] has the ability to maintain a level of revenue that could be appropriated for capital spending for the future. 6:29:39 PM MR. AOTO, at the invitation of Chair Carpenter, offered information regarding HB 38, which he highlighted is the statutory companion to HJR 2. He explained the current statutory limit, set under AS 37.05.540(b), mostly aligns with the appropriations limit under Article IX of the Alaska Constitution: "Appropriations from the treasury made in a fiscal year may not exceed appropriations made in the preceding fiscal year by more than five percent plus the change in population and inflation since the beginning of the preceding fiscal year." He further explained that the change in population is based on an annual estimate by the Department of Labor & Workforce Development (DLWD) and that the change in inflation is based on the consumer price index (CPI) as prepared by the U.S. Bureau of Labor Statistics. MR. AOTO said HB 38 uses the trailing average of the 5 previous calendar years of Real GDP for the state as the metric for the limit. Real GDP would be calculated by taking data for standard GDP calculations by government agencies, subtracting government spending, and adjusting for inflation, and 11.5 percent of the total average is the limit for all appropriations not listed as exceptions. He noted that if enacted by FY 24, that figure would be $5.1 billion. He explained that the appropriations subject to the limit under HB 38 mimic the provisions under HJR 2. The only difference is that HB 38 adds an additional exemption of appropriations made from the Alaska Mental Health Trust Authority settlement income account. He said that was put into HB 38 because of the Weiss v. State case, and the language was left unaltered at the advice of Legislative Legal Services that any change to it may subject the legislature to litigation and re-open litigation in Weiss v. State. 6:32:34 PM MR. AOTO showed a graph depicting the current statutory limit, represented by a light blue line, and the [darker] blue lines represent appropriations subject to the statutory limit. He said the figure varies when compared to appropriations subject to the constitutional limit. He offered further details, then noted that any supplementals that are made in a fiscal year court toward that fiscal year. Mr. Aoto stated the two primary goals of HB 38 are to create an effective appropriations limit to allow the state more stable long-term fiscal viability and to align Alaska statute with the constitutional proposal. He then presented a graph with a red bar that represents appropriations subject to the constitutional limit and a blue bar that represents appropriations subject the statutory spending limit. Further, there is an orange line that represents the current limit, a green line that represents the limit under HJR 2, and a black line that represents the limit under HB 38. He noted that, historically, the constitutional limit is stable at an incline; the statutory limit is volatile due to the metric designed for the limit. 6:35:09 PM MR. AOTO explained that Section 1 of HB 38 amends AS 37.05.540(b) to conform to changes made by HJR 2. Changes affect the list of appropriations subject to the limit as well as the conditions that determine the appropriation limit. The bill defines a calculation for an appropriation cap at 11.5% of a trailing average of Real GDP, not including government spending. Under exceptions, AS 37.05.540(b), it adds the following to the exceptions list: appropriation 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"; and "appropriations to meet a state of disaster declared by the governor as prescribed by law". Under appropriation limit conditions, AS 37.05.540(b) it adds appropriations not to exceed 11.5 percent of the average Real GDP, not including government spending, for the first five of the last six years. It removes the following: the old cap of 5 percent more than last year plus the change in population and inflation since the beginning of the preceding fiscal year; language describing determination of change in population based on annual estimate by DLWD; and language describing the change in inflation based on CPI for all urban consumers for Anchorage. MR. AOTO explained that Section 2 of HB 38 adds a new subsection (f) to AS 37.07.020 which requires a comparison of the governor's budget requests, supplemental requests, and budget amendments to the calculated appropriation limit. Section 3 repeals AS 37.05.540(e) due to Section 1 of HB 38, adding disaster response spending to the exceptions list in subsection (b). Section 4 adds a new section to uncodified law of the State of Alaska which ensures that this Act is contingent upon the ratification of an amendment to Article IX, Section 16 of the Alaska Constitution. Section 5 sets an "effective date" of the beginning of the fiscal year with the contingent set forth in Section 4. 6:36:46 PM REPRESENTATIVE STAPP pointed to the aforementioned blue line on a graph, the current statutory limit, and characterized it as a roller coaster. He echoed Mr. Aoto's comments that because of the design of the current statutory appropriations limit, it can be violated without even knowing due to the nature of the supplemental budget process. He further pointed out that due to how the current statutory limit is calculated, there could be a $3 billion dollar swing in one fiscal year, which he said he imagines is not what the legislature wishes to encourage when trying to find long-term fiscal stability. 6:38:17 PM REPRESENTATIVE GROH asked Representative Stapp to describe the theory behind a constitutional and statutory spending limit. He noted that a constitutional limit is effective, but asked what the purpose is of the statutory limit with differing metrics. REPRESENTATIVE STAPP explained that the purpose of the statutory limit is to have a mechanism to ensure effective capital spending without reaching the constitutional limit. He reiterated that the goal is to ensure future fiscal stability, which he said comes from a sound appropriations process. He noted that Alaska already has constitutional and statutory limits, so the idea is to make the current limits effective and work hand in hand. REPRESENTATIVE GROH asked if the reason to have a separate statutory limit is because that is where there is room for additional capital spending. REPRESENTATIVE STAPP replied, "Not necessarily." He said there can be effective capital spending within a statutory limit; it just depends on how the legislature decides to appropriate funding. He said there may be years where all spending falls under the statutory limit when there is year over year private sector growth. 6:40:13 PM MR. AOTO noted that the limit also requires two-thirds of the legislature to go over the 11.5 percent limit. He said that theoretically, capital spending could be used but would also still require a two-thirds vote of support from the legislature. 6:40:47 PM CHAIR CARPENTER announced that HJR 2 and HB 38 were held over.