SENATE JOINT RESOLUTION NO. 23 Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit and a spending limit. This was the first hearing for this resolution in the Senate Finance Committee. Co-Chair Donley gave a history of a previous constitutional amendment adopted by the legislature in 1981 that established an appropriation limit. It received voter approval, he said, and is contained in Article 9 Section 16 of the Alaska Constitution. Unfortunately, he noted, the appropriation limit "has never worked the way it was intended." He explained that initially the limit was set at a level never reached and also contained a clause that allows an escalation based on cost of living and inflation figures. As a result, he said the current limit is over $6 billion, approximately $3 billion greater than the actual spending of the general fund. Co-Chair Donley opined that the language of this constitutional provision is unconstitutional, misleading, confusing and also contains a provision that should be interpreted to require one- third of the state budget is for capital expenditures. He noted this provision has never been implemented and that a court decision reinterpreted the language as "it didn't really mean what it said" and that the budget does not have to consist of one-third capital expenditures. Co-Chair Donley shared that he has never heard this constitutional amendment defended but rather has heard that it should be changed. The resolution before the Committee, he stated, is an attempt to correct the existing provisions with language that could be more easily comprehended and by implementing a lower appropriation limit. Co-Chair Donley explained the proposed appropriation limit would use the $3.1 billion general fund appropriation of FY 00 as a starting base and would allow for population and inflationary increases. He said an additional provision allows an additional 25 percent increase with two-thirds approval from both legislative bodies. Co-Chair Donley referenced a chart entitled, Appropriation Limit. [Copy on file.] He detailed the variables and shared that others could be calculated as the Committee desired. Co-Chair Donley surmised that population and inflationary increases would have less impact than exists in the current constitutional amendment. Co-Chair Donley pointed out that general obligation (GO) bonds are not included in the appropriation limit and that voters could approve such bonds if the need arose. He deemed this a "safety valve" in case of an unforeseen need or economic boom arises. He compared this to many municipal governments that operate under a tax cap, but allows the issuance of bonds not constrained in the spending limits. Co-Chair Donley added that the resolution also contains automatic voter reconsideration in 2010. He suggested that the actual date could be changed. He surmised that the absence of this reconsideration provision is a fault in the current appropriation limit. He expressed, "it is so difficult to get a two-thirds vote of the legislature to get a constitutional amendment on the ballot" and suggested this is the reason the existing constitutional amendment has not been corrected. He stressed that if the proposed constitutional amendment does not work, the voters are guaranteed an opportunity to eliminate it. Co-Chair Donley spoke from a political science and public administration standpoint saying, "democratic institutions are just not well adapted at controlling spending." He emphasized the pressures on these institutions to increase spending. Co-Chair Donley stressed the importance of addressing "the current fiscal crisis that is looming on the horizon." He expressed gratitude that the Constitutional Budget Reserve (CBR) fund was established. Co-Chair Donley concluded that this resolution is a "useful tool to help restrain the on-going interest in ever increasing spending and force the continued consideration of hard decisions regarding how to make government run smarter with what we already have." Co-Chair Kelly relayed an earlier conversation he had with Co-Chair Donley in which Co-Chair Donley stated that the just-completed five year fiscal plan to reduce or maintain government spending exercised by the legislative majority is unprecedented and does not exist anywhere else in the United States. Co-Chair Kelly remarked that he had not previously supported a constitutional spending limit because the existing provision does not work and also because of the unforeseen consequences encountered in utilizing the CBR. He said this resolution is a "workable" solution, particularly because of the stipulation requiring reassessment by the voters. Senator Austerman also supported the idea of modifying the existing spending limit. However, as a layman, he was unsure if the public understood the issue. Therefore, he predicted it would be the legislature's duty to educate the public, including the language in the resolution. He surmised that most voters would only give the issue a quick review, which he did not think explains the issue, and as a result, not support the amendment. He asked how this could be rectified. Co-Chair Donley predicted that the voters would only look at the dollar amounts, which is the reason he selected the FY 00 appropriation as the base. He detailed the calculations necessary to understand the existing methods. He agreed that a major education campaign would be necessary to inform voters that although the proposed base amount is increased from the $2.5 billion currently named in the constitution, the actual appropriation limit is $6 billion after accounting for inflation and population growth. He stressed that the resolution proposes a $3 billion decrease, which would be need to be explained to voters. Co-Chair Kelly asked if the appropriation limitation includes all general fund spending, but not permanent fund dividends, Alaska Railroad expenditures and emergency expenses. Co-Chair Donley clarified the current constitutional amendment inclusions are, "a little more exclusive." He stated that additional information would be provided to the Committee that would better explain this issue. Senator Austerman calculated that after removing permanent fund dividends, federal funds and special appropriations, the operating and capital budgets contain less than two billion general fund dollars. He reiterated the need to simplify the resolution warning that the ballot measure would easily fail if there were any organized opposition. Co-Chair Kelly agreed and relayed his experience during his last campaign for office where his opponent stated that spending had increased by billions of dollars. Co-Chair Kelly emphasized that his opponent had been using permanent fund earnings and federal funding in his calculations. Senator Austerman suggested that the Appropriation Limit chart should include an additional column to list the status quo. Co-Chair Donley responded this could be added, but noted that the real issue would be predicting the status quo in future years. Senator Hoffman stated that the requirement to spend one-third of general fund appropriation on capital projects is not observed and should be addressed. He opined that establishing a fiscal spending plan is the next largest issue before the legislature. He asserted that once such a plan is in place, future spending limits could be determined. He asserted that the requirement that the legislature provide a balanced budget each year is appropriate and should remain. He reiterated that the most important issue to Alaskans is that there is a fiscal plan. Co-Chair Kelly countered that with various legislation and proposed constitutional amendments, "there is a fiscal plan." He expressed that he would always be in opposition to a "ledger sheet that goes out in the future" because legislatures are prohibited from requiring future legislatures to abide by spending guidelines. Instead he said Co-Chair Donley's proposal is the appropriate method to bind future legislatures through a constitutional amendment. Co-Chair Kelly noted that statutory changes, such as SB 180 relating to geographical pay differentials, also are a part of establishing a fiscal plan. SFC 01 # 75, Side B 10:05 AM Senator Green referenced Medicaid as one of several entitlement programs and asked if under the proposed system, these programs would take priority over all discretionary expenditures. She warned that by imposing an appropriation limit, entitlement programs would be the only expenditures remaining and that there would be no funds for capital projects. Senator Green asserted that until the Administration adopts and practices a fiscal plan, any efforts the legislature makes are irrelevant. Co-Chair Kelly agreed and commented that in the seven years he has served in the legislature, efforts have been made to restrain and decrease government growth. However, he stressed that the legislature would never have all the information required to make this happen. He noted the majority votes required to adopt a budget. He compared this to "performing surgery in the dark while wearing mittens." He stated that corporate boards of directors do not make detailed financial decisions, but rather are presented with a fiscal plan by the company executives for approval. Senator Green asked how university funding and mental health funds are related to the appropriation limitation. She suggested that the Mental Health Trust Authority (MHTA), through its income earning capacity, has the potential for future self-sufficiency and she wondered if developing this ability should be the priority. Co-Chair Kelly agreed with Senator Green's earlier comments saying, "Medicaid drives our budget." He shared that he has been disturbed by the conflicts of funding state-operated programs and that he has never heard opposition to the importance of education or a capital project program that meets the needs of a young and growing state. However, he stressed that funding for these programs are contingent on the entitlement programs' budgets. Co-Chair Kelly opined that while the Medicaid program is necessary, it is a program that gets abused and that along with deserving recipients, there are "free-loaders." He expressed that these free loaders "push out" capital projects and university, education, and public safety funding. He qualified that Medicaid is a federal program, which the state has little control over. Senator Green invited Co-Chair Kelly to join the Senate Health, Education and Social Services Committee subcommittee formed to research Medicaid spending. Co-Chair Donley interjected that capital projects would not suffer since G.O. bonds could be issued. He noted that this was how the state addressed all capital projects before oil and gas revenues were generated. Senator Green shared that before she was a member of the legislature, she would read a list of proposed capital projects on the ballot and ask herself, "Why would anyone think I know that that's the priority and why am I voting on it." She stated that voters did not have background information on the proposed projects to enable them to make an informed decision. Co-Chair Donley suggested that since the 1970s, when G.O. bonds were last issued on a regular basis, technology has advanced and that background details could be provided on any proposed projects included in a G.O. bond package. Co-Chair Donley assured that the proposed $1.3 billion limitation does not include many funding sources, such as the Alaska Industrial Development and Export Authority (AIDEA) dividends and the Alaska Housing Finance Corporation (AHFC) dividends and University of Alaska tuition, which would increase the total amount of general fund spending. He stated that it would be reasonable to debate the inclusion of these variables to the resolution and adjust the appropriation limitation accordingly. However he recommended keeping the language broad to allow for unforeseen circumstances, such as a major natural disaster, and the Alaska Railroad, which functions independently. Co-Chair Kelly suggested inserting language in the resolution to allow earnings from future public corporations to be excluded from the spending limit by a two-thirds legislative vote at the formation of that corporation. Co-Chair Donley stated this would be consistent with other constitutional requirements to "fine tune" new public corporations through statute. Senator Austerman added that the constitution should not be "micro managed" and become too specific to allow for future decisions. Co-Chair Kelly commented that discussions such as this are important to hold when considering constitutional amendments. Co-Chair Donley invited further discussions and suggestions for improvements. Co-Chair Kelly ordered the bill HELD in Committee.