SENATE BILL NO. 227 "An Act relating to the limitation of levy of municipal ad valorem taxes in home rule and general law municipalities; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Torgerson stated his intent for the Committee to learn about the upcoming ballot initiative, 99PTAR - An Act providing property tax and assessment relief, which this bill would amend if both measures were adopted into statute. STEVE VAN SANT, State Assessor, Division of Municipal and Regional Assistance, Department of Community and Economic Development testified via teleconference from Anchorage about what the initiative would accomplish. He said the initiative would provide that the assessors will assess property at its market value until 2002 when assessments could be increased but only by two percent annually. He stated that the only exceptions to this was when a property sells or in the case of new construction. He was uncertain whether a major remodel would constitute a change in assessment. Mr. Van Sant listed the second implication of the initiative as a provision that would require a reassessment for properties that decrease in value in order to "follow that decrease down." Mr. Van Sant stated the initiative also requires that municipalities may not levy an ad valorem tax for any purpose in excess of one-percent, which he explained was a change from the current three-percent provision. He detailed that a one-percent ad valorem equaled ten mils and three- percent ad valorem equaled thirty mils. Mr. Van Sant continued that the bonded indebtedness is included in the ten-mil cap under the provisions of the initiative. Currently, he said bonded indebtedness was outside of the thirty-mil ceiling. He elaborated that the average mil rate in the state in 1999 was about 15 1/2 mils. He noted that several municipalities were under the ten mils but that several others were over. Mr. Van Sant pointed out a typographical error in the initiative language made by the measure's sponsor that nonetheless would change the municipalities' ability to assess business inventory based on a monthly assessment as opposed to the current January 1 assessment date. He relayed a question by an Anchorage Assembly Member to a state assessor about changing the city's methodology to the average monthly basis because most retailers tried to reduce most of their inventory as of January 1 and pay less tax. Mr. Van Sant shared that currently, statute requires that "all taxes will be at the same rate." This initiative changes that language, he stated so theoretically, a city could charge a different rate to different property uses, such as commercial property versus personal property. He gave an example of the Kenai Peninsula Borough that might decide to charge commercial facilities at ten mils and residential property at five mils. He said the problem was the ten-mil cap remained. Mr. Van Sant told the Committee that statute does not require property sales to be reported to an assessor, which would make it difficult to track such transactions in order to reassess property values. He stated that he has heard the argument claiming that the passage of the initiative would reduce the amount of staff needed in the assessor's office. He disagreed, saying that tracking property ownership transactions would require a great deal of effort. He added that the initiative still required the assessor to assess property to determine the increased or decreased value every year with the restriction of only raising the assessed value by two-percent per year. Mr. Van Sant relayed another question he has been asked about how much money the state would realize out of oil and gas revenues if the measure passed. His answer was that for the first 5 years, there would not much new revenue from oil and gas. He explained that the North Slope and Valdez garnered the most revenues from "AS.43.56 properties," the oil and gas property. Most of that revenue from the North Slope goes to pay dept service, he noted and if the initiative passed, he predicted that Valdez would realize revenues that would have been received anyway. Co-Chair Torgerson noted the initiative allows a differential rate for commercial and personal property. He asked if the ten-mil provision applied to the total or to each category. He wondered if an average could be applied thus allowing a tax of 15 mils on commercial property and only five mils on personal property so long as the total of the jurisdiction was ten mils. Mr. Van Sant responded that no more than ten mils could be charged because the total amount any local government could charge was ten mils. He did point out that in certain areas of the state governed by both a city and a borough government, the mil rate could be as high as 20 with each governing unit allowed ten mills. He gave an example of the City of Kenai, which could levy ten mils and the Kenai Peninsula Borough, which could levy another ten mils on the same property that was within both jurisdictions. This was allowed under the current thirty mils statutes, but he stressed this has never been realized. He warned that with the other ramifications of the initiative, twenty mils could begin to be levied where possible. Co-Chair Torgerson did not know why different mil rates could not be charged by category if the provision allowed a differential rate. Mr. Van Sant conceded that Co-Chair Torgerson's comment was an argument that could be made. Mr. Van Sant also pointed out that the initiative read that many service areas could be lost because, under the total ten-mil cap, these areas would push the levy over the ten-mil cap. Something would have to give, he warned, either the service area or revenues for local government. Co-Chair Torgerson then asked about bonded to indebtedness and if the witness had a legal opinion on whether or not voter approved debt would fall under the cap of the jurisdiction. He was unsure if the mill rate cap was constitutional. Mr. Van Sant had not yet received a legal opinion specific to Co-Chair Torgerson's concerns but predicted there would be many legal questions to be resolved including this matter. He shared that the consensus was to wait and see what happened with the election and address the concerns if the measure were adopted. Senator Phillips asked under what authority could an unincorporated resident vote on a measure that would affect only incorporated residents. He relayed that he was receiving complaints from constituents saying that residents of unincorporated areas had no business voting on this initiative. Mr. Van Sant said there were legal questions about this as well, but that the ability to tax was a statewide ability and the proposed tax limit was a statewide limit rather than for a particular local government. Co-Chair Torgerson suggested the Legislature's legal council could give some advice on these concerns. Senator Phillips requested a written legal opinion from the Division of Legal Services. Senator Wilken questioned whether this initiative would actually be approved and placed on the ballot. Mr. Van Sant was unaware of any challenge to placing initiative on the ballot. SENATOR KIM ELTON testified that under the current system, local voters could vote whether to raise or lower their mil rate cap. Under the provisions of the initiative, he stressed the only local choice would be whether to lower the tax rate below ten mils. Senator Elton then addressed SB 227 before the Committee saying it would make two significant amendments to the initiative. First, he said it would allow local voters to set a higher mil rate for their community. Secondly, he continued the bill would remove from the initiative, a portion of the provision that states future bonded debt must be held under the ten-mil cap. He explained that the deleted portion would be debt for schools so that when a school bond is placed on the ballot, voters don't' have to chose between schools and other essential services, such as public safety. Senator Elton agreed with the Alaska Municipal League position that voters in other parts of the state have no right to set tax rates for communities they don't reside in without recourse by local voters. Senator Elton stated that the initiative creates a significant constitutional problem. He referred to Article 10 Section 1. Tape: SFC - 00 #54, Side A 10:36 AM Senator Elton warned that the initiative would discourage communities from consolidating. He used Ketchikan as an example, telling of discussions to merge the borough government and the city government. If the initiative passed and the two governments consolidated, he stated that local government would have lost its ability to tax at a higher than ten-mil rate. He detailed the backup information that included legal opinions from the Division of Legal Services. [Copy on file] One opinion addressed the legislature's ability to amend the language of an initiative. Co-Chair Torgerson asked if that opinion actually said the legislature could amend initiative language. Senator Elton affirmed. Senator Elton continued that the other opinion speaks of whether an effective date of a bill could be predicated upon the passage of an initiative. The Division of Legal Services gave the opinion that the legislature has that ability as well. Senator Elton noted this was not an unusual provision reminding the Committee of the Frank Initiative that was predicated upon voter approval of a capital move. Co-Chair Torgerson asked if the legislature has a history of amending the language of an initiative. Senator Elton was unsure. There was some discussion about previous campaign finance reform issues. Senator Elton continued detailing the backup material that showed different communities, their current tax rates and the effects of the mill rate cap. Co-Chair Torgerson asked if the sponsor's intent with this legislation was to amend the law if the initiative were adopted but not to change the initiative itself. Senator Elton affirmed. KEVIN RITCHIE, Executive Director, Alaska Municipal League testified about the negative affects the initiative would have on municipalities. He stressed that local taxation is a local issue. He added that most of the larger communities in the state already had established tax caps. He listed those boroughs and municipalities that have charter or voter established tax caps. Mr. Ritchie compared the initiative to Proposition 13 that was adopted several years before in the State of California. However, he pointed out that Alaska was not like California in many ways and also that voters in the State of Idaho had rejected a similar measure. Mr. Ritchie detailed the impacts this initiative would have on the State Of Alaska including that the loss in the first year would add $125 to $150 million to the fiscal gap. He shared that the reason the amount was not certain was because of the uncertainty of whether the cap would be a maximum of ten mils or a total of 20 mils depending on the location of the property. According to the Department of Law this matter would most likely be litigated because the premise of a ten-mil cap in some places and a 20-mil cap in others did not make sense, he said. Mr. Ritchie continued with the impacts noting the two- percent assessment increase restriction. He relayed that California has had a 500 percent increase in property values, which was the inspiration behind Proposition 13. However, he noted that while Alaska sometimes has changes in property values these are never increases, only decreases. He referred to the economic difficulties in 1986 when Anchorage property lost approximately 50 percent of the assessed value. Since the property values have recovered, he elaborated existing property owners would have essentially a large tax break while others building new facilities or just bought a new house would not. Therefore, he said the individual tax burdens would be unequal. Mr. Ritchie stated that the initiative's bond provision were radical in that it would require all new bond provisions to be included under the ten-mil property tax cap even if approved by the local voters. He explained that this would require communities to eliminate some teachers and education programs to fund new school construction. Mr. Ritchie described the impacts to each community, specifically Anchorage and the municipality's current mil rate of 17.9 that included a debt service of 3.25 mils and the remainder going to other services. He noted that previous debt service was exempt from the cap under the provisions of the initiative, but noted that the deletion of the remaining 4.9 mils over the cap would cost $73 million dollars the next year. He calculated how this would affect the school district funding. Co-Chair Torgerson clarified that the initiative does not prevent municipalities from imposing a different type of tax. Mr. Ritchie answered that was correct. Senator Phillips asked if the League planned to educate the public on the repercussions of the initiative before the election was held. Mr. Ritchie said it would. Senator Green knew there were many people who were discouraged by the cost of local government and their property taxes. She asked what the implications of the initiative would do to the real estate market saying she thought it was onerous. Mr. Ritchie responded that if the initiative passed, there would be a strong incentive to not sell and to not build new buildings. He doubted there would be much growth in the construction industry. Co-Chair Torgerson noted the bill's effective date is January 1, 2001 and asked if the severability clause in the legislation was standard with an initiative. Mr. Ritchie did not know. BONNIE WILLIAMS, Assembly Member, Fairbanks Northstar Borough, Chair, Finance Committee testified via teleconference from Fairbanks in support of the bill. She encouraged the legislature to take a leadership role after the session ended to get information regarding the initiative to the voters. Ms. Williams detailed the affect of the initiative on her borough. It was noted that a written description of the impacts was in the possession of the Committee. [Copy on file] She stressed that the community would have to come up with $16.9 million, lose road services, fire services and that generally, the ten-mil rate cap was a potential disaster for the borough. She noted that even if all nonessential services were eliminated, such as libraries and parks and recreation, only half of the needed money would be saved. She said the obvious loser would be the local school system because that was the only budget with adequate money to fill the gap. She added that the local voters have always supported funding for education and that the initiative would take away the ability for local support. Ms. Williams noted that the revenue tax had been in place, which has worked well. She stated that the borough attorney has advised the assembly that if the initiative passed both the tax cap and the revenue cap would be in place and the borough would not have an opportunity to obtain alternative revenue sources. Co-Chair Torgerson asked how many jurisdictions have revenue caps. Mr. Ritchie listed the Fairbanks Northstar Borough, the Municipality of Anchorage, the City and Borough of Juneau, the Ketchikan Gateway Borough, Wrangell, Sitka, Petersburg, the Kodiak Island Borough and possibly the Kenai Peninsula Borough. Co-Chair Torgerson stated that Ms. Williams' argument was that other revenues could not be implemented without a change to the local tax code, which would require local voter approval. Co-Chair Torgerson ordered the bill HELD in Committee.