HB 58 - ADMINISTRATION OF BUDGET RESERVE FUND Discussion was had with Tam Cook and Jim Baldwin. Amendments 1, 3, and 4 were adopted for incorporation within SCS CSHB 58 (Finance) which was REPORTED OUT of committee with a "do pass" recommendation and zero fiscal notes from the Dept. of Administration and Dept. of Law. Upon convening the meeting, Co-chair Pearce directed that CSHB 58 (Fin)am(efd fld) be brought on for discussion. She then referenced file materials including a bill history, voter pamphlet statements on the ballot measure when it was before the public, and a copy of Sec. 17 budget reserve language from the state constitution. TAM COOK, Director, Legal Services, Legislative Affairs Agency, came before committee. Senator Rieger directed attention to page 2, line 8, and asked if "enacted" refers to the effective date of a bill or the date of passage in the House and Senate and signature by the Governor. Ms. Cook responded, "I think that it's the latter . . . when the Governor either signs or does not veto it, and the period to veto runs." Senator Rieger next directed attention to page 2, line 18, and asked if there was a reason for use of "restricted by law" rather than "appropriated." Is there a technical difference between appropriated funds and moneys restricted by law? Tam Cook deferred formal response to the Dept. of Law. She suggested that "restricted by law" might be broader language. As an example, she pointed to federal funds that are restricted by federal rather than state law. Further, some funds may be restricted by prior agreements but not necessarily appropriated per se. Senator Rieger asked if "restricted by law" includes moneys that have been appropriated. Tam Cook voiced her belief that it is intended to include money that has been appropriated to an account that can be used only for a restricted purpose. Senator Rieger asked if it would cover an unexpired general appropriation from the general fund. Ms. Cook acknowledged that the language is not as inclusive as it could be. It does not specifically address prior year appropriations. Senator Rieger suggested that "not previously appropriated or restricted by law" would be more clear. JIM BALDWIN, Assistant Attorney General, Dept. of Law, next came before committee. He explained that "the intention of the provision is to cover amounts that have already been appropriated." He pointed to page 2, lines 16 through 20, and noted that amounts already appropriated are considered restricted funds. The intent is not to bring already appropriated funds into the calculation. Co-chair Pearce referenced the Alaska Science and Technology account within the general fund and voiced her understanding that moneys in the account would be restricted by the foregoing definition. Mr. Baldwin concurred that since the funding has a purpose assigned by law, it is not generally available because of that restriction. The intent is to only reach revenues attributable to a particular fiscal year and to pick up the cyclical swings in that revenue. The Dept. of Law found support for that in constitutional wording that refers to the amount available for a fiscal year. That approach is further bolstered by the manner in which the amendment was portrayed in the official pamphlet and on the ballot itself. Co-chair Pearce next inquired concerning pass-through moneys. She noted over $1 billion in authorizations for federal highway funds, should the funds materialize. Mr. Baldwin explained that, under the intent of CSHB 58 (Fin)am (efd fld), they would not be figured in the calculation in either the previous or current year. They are accounted for as restricted funds in that they are trust or custodial receipts and should not be part of the calculation. If included, the U.S. Congress would then, in effect, be setting the agenda for when the state may access the budget reserve fund to meet a shortfall in state revenues. Co-chair Pearce asked if PL 874 educational funds would be considered restricted, and Mr. Baldwin responded affirmatively. Senator Rieger directed attention to page 1, and voiced his understanding that Sec. 37.10.420 attempts to define "revenues" as the ongoing operating revenues and any undesignated carry-forwards. Subsection (2) on page 2, effectively ties the spending limit for the next year back to the amount which was spent the prior year. In doing so, it excludes "any appropriation of money which doesn't count." That ensures that the base is not artificially inflated for the next fiscal year. Senator Rieger next noted that what is missing from the foregoing is that in any year in which the constitutional or statutory budget reserve fund is used to stabilize spending, that amount is not described in subsection (2) as part of the base for the next year. The stabilizing purpose of establishing a process by which the legislature could ordinarily spend up to the amount of the prior year but under which it would be extraordinarily difficult to spend beyond the prior year would not be achieved. The Senator acknowledged that the Dept. of Law had prepared an amendment to address the issue, and he asked that Mr. Baldwin speak to the amendment. Mr. Baldwin concurred that the foregoing could be perceived as a "possible problem with the version that was passed by the House." Directing attention to page 2, lines 3 through 5, Mr. Baldwin concurred that the definition of the amount appropriated for the previous fiscal year "only includes amounts that were appropriated from the same revenue sources used to calculate the money available for appropriation for the current fiscal year . . . ." That would not include budget reserve amounts authorized by the legislature. That is consistent with the philosophy of the bill that the calculation does not pick up reserve funds (budget reserve funds, railbelt energy intertie reserve funds, or other statutory reserve funds). The amendment requires that in calculating the previous year's amount available for appropriation (the base year), amounts appropriated from the constitutional and statutory budget reserve funds would be included in the base. The House Finance approach reflects a comparison of the same funding sources year after year. Inclusion of amounts from constitutional and statutory budget reserve funds skews that comparison but interjects a "spending limit-type aspect." That is a policy rather than a legal call. Mr. Baldwin suggested that the committee also hear from the Office of Management and Budget regarding the impact of the amendment on "the bottom line" available from the budget reserve fund. Senator Rieger voiced his belief that moneys from the statutory budget reserve fund should be included within and listed under subsection (1) while appropriations from the constitutional budget reserve should be included in subsection (2). Funds from the statutory reserve fund should be used before the constitutional reserve. Language relating to the statutory reserve should thus be included as (D) under subsection (1), which would then list four sources of amounts available for appropriation. If the constitutional reserve is used to stabilize spending, those expenditures should be part of the carry-forward base for the next year. If that is not the case, the purpose of the constitutional budget reserve fund would not be achieved, and there would merely be a one-year delay before the same problem that use of the fund sought to cure would occur again. Discussion followed between Co-chair Pearce, Senator Rieger, and Mr. Baldwin regarding placement of the Dept. of Law amendment within the House version of the bill. Mr. Baldwin referenced an additional policy call to be made by committee, noting that the second part of the amendment references Art. IX, Sec. 17(b) of the constitution. That does not include amounts appropriated by three-quarter vote under 17(c). As drafted, language would only pick up the majority vote appropriation. Senator Rieger said that the restriction should apply to all of Art. IX., Sec. 17. Co-chair Pearce noted that the House Judiciary version of the bill contained a section defining administrative proceedings involving taxes. She then asked why the section was removed. Mr. Baldwin explained that part of the language defined what constitutes amounts received through settlement or administrative proceedings. Subparagraph (b) spoke to receipts that were not attributable to any particular proceeding. House Finance elected not to include any provisions currently involved in litigation. The House bill only deals with matters upon which issue was not joined in either the superior or supreme court. That strategy was urged by the Dept. of Law and adopted by House Finance. In response to a question from Co-chair Pearce concerning the status of litigation, Mr. Baldwin said that subsection (b) of the Judiciary version relates to recovery of taxes that were not due at the time the administrative proceeding was ongoing. That issue is being argued this week on an expedited basis. An expedited decision by the supreme court is subsequently expected. Co-chair Pearce directed that the meeting be briefly recessed pending arrival of staff from the Office of Management and Budget. RECESS - 10:35 A.M. RECONVENE - 10:50 A.M. Senator Rieger distributed Amendment No. 1 and MOVED for adoption. He explained that the amendment contains language offered by Mr. Baldwin, but with one change. While Dept. of Law language referred to the statutory budget reserve fund as something that could be calculated as part of the base carried forward from the prior year, it did not go far enough. Senator Rieger voiced need to clarify that the statutory budget reserve fund should be used before the constitutional budget reserve is tapped. Inclusion of language relating to the statutory reserve as a new subsection (D) under Sec. 37.10.420 clarifies the priority of the two funds. At the request of Co-chair Pearce, JACK KREINHEDER, Office of Management and Budget, joined members at the committee table. Mr. Baldwin voiced need to ensure that amounts from the statutory budget reserve are counted in both the amount available in the current year as well as the amount available from the previous year. (Co-chair Frank arrived at this time.) In response to a question from Co-chair Pearce concerning the status of an AHFC dividend, Mr. Baldwin explained that dividends flow to the general fund without restriction. Senator Rieger noted the distinction between AHFC earnings and equity which has been appropriated. Mr. Baldwin pointed to annual budget language that reappropriates AHFC earnings for the corporation's uses and purposes. Those moneys are appropriated funds and would not be considered available. Senator Rieger voiced his understanding that should the legislature elect to appropriate a portion of AHFC's underlying equity, it would not become part of the carry- forward base to the next year's spending limit for use of the budget reserve fund with a simple majority. Mr. Baldwin concurred. He agreed that the legislature's ability to make such an appropriation would not be impaired and that such an appropriation would not affect the calculation that determines when amounts may be expended from the budget reserve fund. The legislature is not forced to spend from restricted revenue sources before it can spend from the constitutional budget reserve fund. Co-chair Pearce called for objections to Amendment No. 1. No objection having been raised, it was ADOPTED. Senator Sharp MOVED for adoption of Amendment No. 2 for discussion purposes. Mr. Baldwin explained that language comprising the amendment was taken from the House Judiciary version of the bill. Section (A) of the amendment defines terms in the constitutional amendment referring to funds received as a result of settlement or termination of an administrative proceeding. Section (B) is new language prepared at the request of House Finance at the end of the last legislative session but which was not added to any bill. It describes recoveries not attributable to any administrative proceeding. This issue is presently pending before the supreme court in arguments over when and where the line should be drawn for when the state is involved in an administrative proceeding. The state contends the line should be drawn when a formal administrative proceeding is convened. The court contends that it may be at the level of informal conference. Arguments are ongoing concerning whether the line should be set further back to when the assessment is issued. The proposed language establishes the line at the informal conference level. Discussion followed between Co-chair Pearce and Mr. Baldwin concerning the application of Section (B). Mr. Baldwin pointed to contract interpretations associated with royalty oil settlements and stressed that moneys received as a result of those interpretations should not flow to reserves. Only amounts in actual dispute through that proceeding should accrue to reserve funds. Mr. Baldwin acknowledged that Section (B) has a restricting impact on amounts that would be considered covered by administrative proceedings, but it is more liberal than the demarkation line advanced in the state's "opinion of 92." Discussion followed between Senator Rieger and Mr. Baldwin regarding when taxes are technically due. Mr. Baldwin said they are due when the return is filed. Co-chair Drue Pearce pointed to clarity problems in the last three lines of Amendment No. 2. Discussion followed regarding corrective wording. The Co-chair subsequently directed that the meeting be briefly recessed for rewriting and clarification of the language. RECESS - 11:25 a.m. RECONVENE - 11:35 a.m. (End, SFC-94, #16, Side 1) (Begin, SFC-94, #16, Side 2) Senator Rieger voiced discomfort with Amendment No. 2 since it refers only to taxes and not royalties. He further noted that there had not been sufficient time to consider all "the ramifications of what's being swept in or excluded." (Senator Kerttula arrived at this time.) (At this point in the meeting, a call was placed upon the Senate, and the Sergeant-at-Arms and a page escorted committee members to the Senate Chambers.) RECESS - 11:40 a.m. RECONVENE - 12:10 P.M. The meeting was reconvened at approximately 12:10 p.m. with all members but Senator Kelly in attendance. Senator Sharp MOVED to WITHDRAW his MOTION for adoption of Amendment No. 2. No objection having been raised, the motion was WITHDRAWN. He then MOVED for adoption of Amendment No. 3. Mr. Baldwin explained that Sections (A) and (B) of Amendment No. 2 are included in Amendment No. 3, but Section (B) has been rewritten. It no longer commences with qualifying phrases but instead incorporates qualifying language within subsections (1), (2), and (3). The intent is to make the language more easily understood. Senator Rieger questioned whether language relating to lack of a request for an informal conference should be added to subsection (3). Mr. Baldwin noted that notice of appeal is made on a form that includes a request for an informal conference or formal proceeding. Senator Kerttula requested a copy of the form. In further discussion with Senator Rieger, Mr. Baldwin clarified that Section (B) language seeks to cover situations wherein ongoing proceedings are eventually settled and "then other years are brought in as well." It seeks to clarify that those other years are not budget- reserve-fund eligible. Co-chair Pearce called for objections to adoption of Amendment No. 3. Senator Kerttula objected. The Co-chair called for a show of hands, and Amendment No. 3 was ADOPTED on a vote of 5 to 1. Senator Rieger distributed Amendment No. 4 and MOVED for adoption for discussion purposes. He then referenced bill language at page 2, line 7, dealing with when the constitutional budget reserve fund may be used. Constitutional language allows use of the reserve "to go up to the level of appropriations made in the previous calendar year." That level is too broad and too high for actual intent. The intent was that the budget reserve fund could be used only "to go up to the level of general fund, unrestricted spending in the prior year, plus any budget reserve fund moneys which were used in the prior year . . ." The amendment would restrict the amount to which the budget reserve could be used to that level defined in (2), page 2, lines 3 through 5, to bring it up to the prior year's base. Mr. Baldwin said he had no objection to Amendment No. 3 since it appears to be clarifying in nature and does not drastically alter the philosophy of the bill. Co-chair Pearce called for a show of hands on adoption of Amendment No. 3. The amendment was ADOPTED on a vote of 6 to 0. Senator Kerttula requested additional explanation of Section (B) of Amendment No. 3. Mr. Baldwin said that provisions are intended to cover circumstances wherein the state receives amounts from taxpayers in connection with administrative proceedings but which amounts are not directly in dispute at the time. Sometimes, as a consequence of a dispute with a taxpayer, the state receives amounts for additional years or on additional issues. The amendment lists three circumstances under which such amounts would not be considered received as a result of termination of an administrative proceeding and therefore would not flow to the budget reserve fund. Mr. Baldwin cited royalty settlement interpretations extending into future years as an example. Senator Rieger voiced his understanding that disputes over royalties do not include an informal conference proceeding. They go directly to litigation. Although the amendment does not speak to that issue, it is implied that royalty proceeds will clearly flow to the budget reserve fund if there is any dispute at all. He said that without that clear understanding, he would object to Amendment No. 3. Senator Rieger next noted that the amendment is not all inclusive. Issues on which the language is silent remain for resolution at a later time. Mr. Baldwin said that language within Amendment No. 3 was drafted at the time the Dept. of Law was attempting to draft legislation consistent with the opinion issued by Former Attorney General Cole. The language advances an interpretation different from the department opinion. Language in Section (A) is consistent with the manner in which the supreme court interpreted the constitutional amendment. Mr. Baldwin concurred that not every circumstance that could arise has been considered. Language in Section (B) is new ground, yet to be argued before the supreme court. Co-chair Pearce directed that the three amendments be incorporated within a Senate Finance Committee Substitute for the bill. She then queried members regarding disposition. Co-chair Frank MOVED that SCS CSHB 58 (Fin) pass from committee with individual recommendations and accompanying zero fiscal notes. Senator Kerttula OBJECTED. Co-chair Pearce called for a show of hands. The motion CARRIED on a vote of 5 to 1, and SCS CSHB 58 (Fin) was REPORTED OUT of committee with zero fiscal notes from the Dept. of Administration and the Dept. of Law. Co-chairs Pearce and Frank and Senators Jacko, Rieger, and Sharp signed the committee report with a "do pass" recommendation. Senator Kerttula signed "Do not pass, violates constitution." ADJOURNMENT The meeting was adjourned at approximately 12:30 p.m.