SENATE BILL NO. 337 "An Act relating to the mandatory incorporation of certain boroughs in the unorganized borough and to certain third class boroughs; and providing for an effective date." Co-chair Sharp convened the committee meeting and reviewed the agenda. He noted that the evening meeting on SB 337 for the taking of public testimony was scheduled for 6:00 p.m. LIO participation at this hearing was "listen only" and included Anchorage, Delta, Fairbanks, Tok, Kenai and also off-net radio. However, HB 53 would include public testimony via teleconference. Marilyn Wilson, staff to co-chair Sharp was invited to join the committee. She read a short sponsor statement to SCR 11 into the record. It was noted that as Alaska's senior community grew it was necessary to plan for the long-term care and needs of these citizens. The cost of providing long-term care is becoming insurmountable to the State and to private citizens. SCR 11 would create a long-term care task force with a mission to review the findings of the working group established in 1996 and to develop an equitable plan to provide a sound and affordable long-term care option for all Alaska's senior citizens. It was urged the committee pass SCR 11. Senator Torgerson MOVED amendment #1 and WITHOUT OBJECTION it was ADOPTED. Senator Adams MOVED amendment #2. Co-chair Sharp requested that some line numbers be inserted on page three line fifteen and Senator Adams concurred. (pause on record) Senator Donley OBJECTED for discussion purposes. Senator Adams said rural elders were being moved into Anchorage and basically the services needed to be coordinated. He wanted a review of the existing elder care services in rural Alaska to make it compatible with the pioneer home system. Senator Donley voiced his concern with the setting up of a task force under the Administration because he felt they grasped for something that was not originally intended by the Legislature or statutes. Senator Parnell voiced his concern along similar lines. He recommended the deletion of "rural" because the care should be provided all elders throughout the State. Senator Phillips MOVED amended amendment #2 to delete after "demands" and insert "." WITHOUT OBJECTION it was ADOPTED. Senator Donley MOVED amended amendment #2 to delete "rural" and insert "including rural Alaska". WITHOUT OBJECTION it was ADOPTED. Co-chair Sharp asked the committee if there was any objection to amended amendment #2 and WITHOUT OBJECTION it was ADOPTED. Senator Phillips MOVED amendment #3 and referred to page two, line twenty-one. Senator Adams requested the amendment be submitted in writing. Senator Phillips indicated that he would have the drafters come up with the appropriate amendment #3 to be submitted on the Senate Floor. There being no objection, Senator Phillips MOVED SCR 11(FIN) out of committee and WITHOUT OBJECTION it was REPORTED OUT with included conceptual amendment #3 and accompanying fiscal notes: LAA/Leg. Council, $20.7; Gov./Exec.Operation, zero; and Department of Commerce and Economic Development, zero. SENATE BILL NO. 337 "An Act relating to the mandatory incorporation of certain boroughs in the unorganized borough and to certain third class boroughs; and providing for an effective date." Co-chair Sharp recalled SB 337 before the committee. He noted the section summary in the file provided by Tam Cook from Legislative Legal. Senator Adams voiced concern over the propriety of the bill before this committee. He said it should properly be before Community and Regional Affairs committee with like bill, SB 30. The debate regarding mandatory boroughs was already before this committee. Co-chair Sharp noted the concern of Senator Adams and also that objection was voiced on the Senate Floor. Tam Cook, Director, Legal Services, Legislative Affairs Agency was invited to join the committee. She briefly walked the committee through the section summary. She noted that there have been mandatory borough proposals before the Legislature since the Fourteenth Legislative Session. She explained that the bill required the incorporation of areas currently in the unorganized borough into third class boroughs, but it would treat the third class borough differently with respect to providing education. She said as far as she was aware the Legislature had never considered a bill such as this. Essentially, the bill required incorporation of third class boroughs along the lines that the local boundary commission has recommended for borough incorporation but would preserve home rule cities and first class cities within the new third class boroughs the power to continue to be independent school districts. The bill contemplated the creation of a type of third class borough such as Haines. It would not allow the borough, however, to take over the education responsibility that is now being provided by home rule and first class cities in the unorganized boroughs. She noted the cities would be part of the borough but would continue to operate the school districts same as presently. Technical changes were made in this bill to treat these particular types of cities in the new boroughs as though they were not in a borough for the purpose of exercising their own local taxing ability. The obvious dilemma posed by the bill is the fact that in a third class borough the borough assembly serves as the school board for that type of municipality. Under this bill, the cities, which would be operating independent school districts, will none the less be part of the borough, and those individuals would presumably be voting for the borough assembly members. She said there was no proposed solution for that result at this time. However, this was the most interesting legal and practical problem the bill raised at this time. Senator Adams asked that the bill be reviewed section by section. He said he had further problem with the assembly acting as a school board. Ms. Cook said the findings and purpose was self-explanatory. The second section was the heart of the mechanism that would be used to form the new borough. It placed the duty upon Community and Regional Affairs to prepare incorporation proposals for each of the model boroughs that have already been identified by the local boundary commission. During this process there is a public hearing requirement. The proposal would outline the specifics that would apply to each individual borough. The State Assessor was required to make an estimate of the true and full value of taxable property in each of these boroughs within a fairly short time period, by 1 January 1999. However, the actual boroughs would be phased in by Community and Regional Affairs, depending on the size of the borough, over a four- year period. Receiving all the proposals at the same time overwhelms neither the department nor the local boundary commission. The Constitution requires there be standards for borough incorporation and those standards are actually set out in statute. If the local boundary commission determines that a particular proposal does meet the standards then the borough is set for incorporation. They can request changes to a proposal and send it back to Community and Regional Affairs. Once a proposal is accepted by the local boundary commission then there is an election of initial officers and there are time periods within which the election must be held. The borough essentially will be incorporated once those initial officers have been elected. Senator Adams asked what would happen if no one ran for any of the elected seats, there were no officers and they did not want to be a borough. Ms. Cook indicated there was no mechanism to address that possibility in the bill. Senator Phillips asked about a write-in possibility. Ms. Cook reiterated that possibility was not addressed. She noted that section five contained technical changes to existing law, which included a change to the chapter dealing with education. She noted the different treatment for home rule and first class cities in the new boroughs and the fact that they would continue to be independent municipal school districts. The new third class boroughs would also be school districts. Section six was a technical amendment to define the term "non-area wide". Section seven was cleanup language. Section eight referred to property tax and the taxing powers of cities located within boroughs. She removed the application of this section to third class boroughs organized after a certain date. Section nine was a new amendment noting the assessment of taxes. Senator Adams, with reference to section eight, asked if cities within a borough under present law would remain the same if the bill were to pass? Ms. Cook said only those types of cities within the new boroughs would be affected. It would not change existing situations with respect to boroughs and cities currently in existence. That was achieved by saying the provisions only applied to third class boroughs incorporated after a certain point in time, i.e. 1 January 1999. Therefore the present bill did not alter the relationship in Haines between its city and its borough. She explained that existing law did not allow the formation of any new third class boroughs. Haines was the only one being preserved with a slightly different relationship as between the cities and the boroughs. Section ten was the sales and use tax provision. She explained that it had been attempted in this section to keep the home rule and first class cities independent of the borough with respect to their power to collect sales and use taxes. Senator Adams referring to home rule and first class cities that collected the levy on sales and use tax, asked if it went directly to them? Ms. Cook concurred. In further response to Senator Adams she indicated that under existing law a borough that imposes a tax on an area wide basis was required to use that tax for an area wide service. One that collects a tax on a non-area wide basis was required to use that tax for a non-area wide service. Senator Adams further inquired if a third class was area wide if there was only one power and that was education? Ms. Cook concurred. Co-chair Sharp asked if establishing enclaves of present cities, for school purposes, out of the new borough that would be formed, what powers would that particular borough have that the cities would participate in other than schools? Was not the only purpose of those boroughs going to be schools? Ms. Cook responded that essentially that was correct. Third class boroughs do have the power to establish service areas. A service area could include a city or a portion or a city. She explained this was with respect to existing law having to do with third class boroughs. They had a very limited governmental authority, the most limited of all the municipalities in the State. They can only exercise the power of taxation and the power of education on an area wide basis. They do, however, have the power to exercise other municipal functions on a service area basis. Ms. Cook continued to section twelve, which made the act conditional upon the passage of SB 36, which is now presently in the House, and would change the formula funding. If a version of SB 36 did not pass in conjunction with the way this bill was drafted, it would not take effect. Section thirteen noted an effective date of 1 July 1998. Senator Adams asked if the version of SB 36 referred to by Ms. Cook was the same version, which passed the Senate? Ms. Cook indicated that it was not. However, she said that the way the present bill was drafted it stated that if any version of SB 36 passed. She said the committee may want to alter this provision. Co-chair Sharp thanked Ms. Cook for her time and assistance to the committee. Senator Adams asked if someone was available from the Department of Community and Regional Affairs to testify on the bill. Co-chair Sharp indicated that Pat Poland was present. Pat Poland, Director, Division of Municipal and Regional Assistance, Department of Community and Regional Affairs testified before the committee via teleconference from Anchorage. He noted that Steve Van Sant, State Assessor was also present via teleconference. He said the department had many major policy concerns regarding the mechanisms proposed by this legislation. These included equal protection issues, incompatibility with the concept of borough government in Alaska, fiscal impacts on first class and home rule cities in the unorganized borough. He noted that while the bill may enhance the fundamental right of equal protection in some regards, it would significantly diminish it in other respects. For example, he noted that the bill stipulated that each home rule and first class city within a third class borough incorporated after 1 January 1999 must operate a city school district. The same duty or authority was denied to home rule and first class cities in third class boroughs formed prior to 2 January 1999. It also was denied to all other organized boroughs. The department is unaware of any rational basis for treating home rule and third class cities in third class boroughs formed after 1 January 1999 differently. Another significant concern regarding equal protection exists with respect to the election and operation of the assemblies of those boroughs created under this legislation that would include home rule and first class cities. Those assemblies would be comprised of residents of the entire borough, including individuals living in home rule and first class cities within the borough. Yet, those assemblies would be almost exclusively governing matters with respect to education and taxation. In a number of instances, home rule and first class cities in the boroughs to be formed under this legislation would comprise of substantial or even majority population of the borough; this circumstance being the result of a grossly inappropriate form of local representation. As written, the bill leaves in place the provision of AS 29.20.300(b), which stipulates the assembly of a third class borough was also the school board for the borough. Residents of the borough created under this bill, who live inside home rule or first class cities would seem to be unqualified or at least inappropriate for the borough school board, since they would be residents of a separate school district. The department further believed that this present bill was incompatible with the traditional concept of borough government in Alaska. He said the intent of the legislation was to provide for the uniform requirement of local contributions and support of schools in all regions of the State. The legislation accomplishes that end by abandoning the borough government concept in at least ten prospective boroughs, which would include sixteen separate home rule or first class cities. (Tape #81, Side B switched to Tape #82, Side A.) Mr. Poland continued circumstances appeared to conflict with the intent of Article 10, Section 7 of the Constitution, which provides in relevant part that, "City shall be a part of the borough in which they are located." He noted that borough governments were intended to provide essential services on a regional basis and to use regional resources; to serve both urban and rural areas. He said SB 337 disregarded these fundamental principles. The department believed that third-class boroughs were not viable institutions. He referred to Haines and said they were the only third class borough formed between 1968 - 1985. Due to inadequacies the Legislature repealed the law allowing the incorporation of third-class boroughs thirteen years ago. Some inadequacies were lack of area-wide planning, platting and land use regulations, inability of third-class boroughs to provide any area-wide service or function other than education and taxation. Further limitations on the third- class borough have resulted in proliferation of service areas to meet the needs of residents; conflicts within the City of Haines which has effectively been forced to provide certain services with benefit the entire Haines Borough, specifically tourism activities. Due to these conflicts, both the City of Haines and the Haines Borough are developing a petition to dissolve both local governments and consolidate under home rule borough. It was felt that if a third-class borough could not function adequately under such small circumstances, then it cannot be expected to function adequately in a region encompassing vast areas with diverse populations. In referring to first class borough and home rule cities the fiscal impact would be significant. Certain State and Federal funds would be eliminated. The obligation to provide education would continue, however, the funding loss by the cities and gained by the new boroughs would be required to be used to provide education services in areas outside the cities only. Unorganized areas would feel these impacts most strongly. Some impacts that could be experienced were illustrated as follows: Wrangell- Petersburg would lose fifty percent of raw fish tax revenues now being received based on fish processing occurring within respective city boundaries. Based on a five year average Petersburg would lose $385,000 and Wrangell about $35,000. These cities would no longer be eligible for Federal payments under the National Forest Receipts Program or the Federal Payment in Lieu of Taxes Program. The combined annual loss to these cities would be $700,000 for Petersburg and $500,000 for Wrangell. He further noted that the Aleutians West Borough would annually lose $1.4 million in fish tax. Unalaska would lose $1.5 million; Cordova and Valdez would lose their fish tax and also their Federal National Forest Receipts Program; Craig, Klawock and Hydaburg would suffer similar losses. The creation of boroughs would cause much resentment and animosity. In wrapping up, Mr. Poland said provisions penalizing the formation of boroughs should be removed. Co-chair Sharp thanked Mr. Poland for reading his testimony into the record and asked that a written copy be submitted to the committee. He asked how it could be justified mandatory borough formations stifled economic development when noting that borough formation was mandated back in the '70's, even after public votes of two and three times against it. Senator Phillips referred to a public outcry against paying of local taxes a couple of weeks ago. The answer was definitely "no" in unorganized areas for education purposes. (It is noted a malfunction in Senator Phillips' microphone.) ...at least this way they have local control how and where money was being spent with regards to education. Co-chair Sharp noted that there would be public testimony this evening from 6:00 p.m. - 8:30 p.m. Senator Adams noted that the State Assessor was present and asked regarding page two, line eighteen wherein the State Assessor shall estimate the full and true value of the property tax. He said that in the past a mixture of communities had been taken in order to try to get the full and true value. Specifically, he asked how would the department get the true value of communities down in Lower Kuskokwim? Steve Van Sant, State Assessor, Department of Community and Regional Affairs testified via teleconference from Anchorage. He explained the Lower Kuskokwim would be difficult. The assessment would be more formula generated as opposed to specific property evaluation. Senator Adams further asked if the formation of third-class boroughs would cause the State of Alaska to lose any money to new boroughs that would be formed; i.e. any pipeline tax? Mr. Van Sant said the possibility certainly existed along the pipeline corridor if more communities decided to levy a property tax. One recommendation by the department would be that if the third-class boroughs are required to have a four mill equivalency for local contribution for education, that the evaluation of the pipeline corridor be excluded from that full value. Otherwise, it would force them to levy a property tax, which would take the money out of the State's general fund and put it into a local tax base. Senator Adams said the way the legislation was presently written it provided for people throughout Alaska more government and more taxes. He asked if this would stifle economic development; i.e. a mine in his district or Delta Junction, by having to put taxes on the project or its workers? Mr. Van Sant said he could not answer this question. Co-chair Sharp set aside this bill in and said it would be taken up again this evening at 6:00 p.m. in order to hear the public testimony scheduled at that time. He called HB 53.