CS FOR SENATE JOINT RESOLUTION NO. 3(JUD) Proposing an amendment to the Constitution of the State of Alaska relating to an appropriation limit and a spending limit. This was the third hearing for this bill in the Senate Finance Committee. Co-Chair Wilken informed that Version 23-LS0296\B and its accompanying Sectional Analysis is before the Committee. AT EASE 10:07 AM / 10:07 AM Co-Chair Green moved to adopt Version "B" as the working document. There being no objection, Version "B" was adopted as the working document. Senator Dyson, the bill's sponsor, highlighted the changes in the committee substitute to include: in Section 16, page one, lines nine and ten, the elimination of the fractions in the calculations pertaining to population and inflation factors; the addition of language in Subsection 1(c), on page two, lines nine through 22 that would exempt all Permanent Fund appropriations including inflation proofing, as well as other dedicated funds and Trust Funds; the addition of language to Subsection 1(a)(1), on page one, lines ten through 16 that would limit the inflation factor to not exceed the per capita income for Alaskans; and the expansion of the "extraordinary circumstance" definition in Subsection 1(d), on page two, lines 23 through 29. In addition, a section of the bill was deleted "that gave the Governor the responsibility of cutting back the budget if the Legislature had, in my view, acted irresponsibly" and had submitted a high budget. Removal of this language would revert the language to what currently exists in State law. Senator Dyson noted that other issues have been raised to which further language adjustments might apply. Senator Hoffman commented that, in previous testimony, it was mentioned that appropriations made in the prior two years would be a factor. He asked the location of this language. Senator Dyson clarified that either he had misspoken or the issue was confused in translation. In actuality, the timeframe is three years. Senator Hoffman agreed that, while a three-year average was discussed, reference to a prior two-year timeframe was discussed. Senator Dyson noted that confusion arises in respect to the fact that the prior year is not included in the calculation. The two- years, three-years, and four-years previous to that are used to obtain the average. The reason for this is that the data for the immediate prior year is incomplete. This language is located in Section 1, Subsection 16 on page one, line 12 of Version "B". Senator Hoffman asked that consideration be given to including in the calculation the most recent ten-year's consumer price index (CPI) and its comparison to the budget for the last ten years. This would provide an analysis of how the current system is following the CPI; specifically whether it would be larger or smaller were the proposed calculations imposed. LUCKY SCHULTZ, Staff to Senator Fred Dyson, informed that this information is available for the years since 1997. Information prior to that is difficult to incorporate due to different categories of expenses and appropriations. This information is depicted on a handout, prepared by the Division of Legislative Finance, titled "Draft - Spending Limit Proposals" [copy on file] that depicts three charts. Senator Hoffman, noting the multitude of changes that the proposal has undergone, asked whether the information depicted on the charts would continue to apply. Senator Dyson stated that this would be clarified. Senator Bunde referenced an earlier discussion in which it was stated that, were a spending limit previously implemented, the excess funds could have been allocated to the Permanent Fund. This would have served to make it substantially larger. He asked that a graph be provided to reflect that scenario. Senator Dyson responded that a graph could be developed. CHERYL FRASCA, Director, Office of Management and Budget, Office of the Governor, commented that the bill's progress has been substantial and has evolved into a workable framework. As mentioned by Senator Dyson, some changes, including those suggested by Co- Chair Green, would continue to be discussed. Senator Hoffman asked whether further discussion has occurred in regard to establishing a termination date or a review at some future time. Senator Dyson stated that, as specified in Section 3(b) on page three, line 14, this proposal would be placed on the Statewide ballot four-years after its initial adoption. This would force the Legislature to review the outcome of the proposal, as to whether it had become "an unbearable restraint" or assisted the effort to which it was intended. Ms. Frasca pointed out that Section 1, subsection (c) on page two, beginning on line nine, specifies the variety of items that might be exempt from the spending limit. Language in subsection (3) of that section would allow the exemption of such things as money from donations, gifts, or grants to the State for purposes specified by the terms of those donations, gifts, or grants. This language would provide the various departments the ability to receive and expend those monies without affecting their regular budgetary process by "displacing other spending." She noted that this language would address one of Co-Chair Green's concerns. Ms. Frasca also noted that, as specified in Section 3, on page three, line 13, the original proposition language would be placed on the Statewide ballot every four-years. This would allow the Legislators to propose changes as deemed necessary. Senator Hoffman voiced concern that utilization of the average annual percentage rate of change in the Anchorage metropolitan area consumer price index (CPI), as specified in Section 1(1) on page one, line ten and eleven would not be "a true index of the inflation rate" for the balance of the State, as Anchorage's numbers "are always lower" than those of Rural areas. He also voiced concern regarding language on lines 13 through 15 of that section that indicates that the rate must not "exceed the average percentage of the change in the average personal income…" This would, in effect, "tie the rate of increase to how successful the bargaining units are in the State of Alaska," as average incomes are affected by those negotiations. Tying the spending limit to this factor is of concern. Senator Dyson deferred to Ms. Frasca to address the Anchorage CPI concern. However, he noted that due to the fact that Anchorage has half of the State's population, and because "it is so difficult to conduct CPI data in other areas," "it still ends up being quite accurate." In addition to being influenced by bargaining contracts, State spending is also driven by such things, as Medicaid, Medicare, and other health care cost changes. "All of these are volatile components of State spending." Ms. Frasca stated that the United States Bureau of Labor & Statistics develops the data used for the Anchorage CPI. The Anchorage CPI information is the lone element that is available and as such is the one commonly utilized. Senator Hoffman acknowledged that; however, continued to question whether this is fair representation of the rest of the State. He contended that it is not a true indicator, and therefore, the growth rate should not be tied to it. Ms. Frasca expressed that it would be difficult to find a replacement, as this is "the only reported indicator." The challenge is to have an appropriation limit that would establish a ceiling on State spending from one year to the next. "It is not a precise science." The Department of Labor and Workforce Development presentation indicated that there are approximately 300,000 employed people in the State, of which approximately 19,000 are State employees. Senator Hoffman argued that this language would calculate on the low end rather than the mean average. This could potentially create a problem as it relates to growth. Senator Dyson stated that this concern is one reason that he removed the point-nine percentage factor associated with the inflation calculation. He stated that it could be successfully argued that the requirement for delivery of State services does not always align with the change in the CPI. The point-nine percentage factor would have been at the low end of it and changing that to "unity" would better provide a more generous limit that would take into account the fact that delivery of service in Rural areas does inflate faster than urban areas. He also noted that, were it thought to be more accurate, discussion in regard to increasing the percentage factor to one-point-one times the inflation rate would be welcome. Senator B. Stevens asked, in reference to Senator Hoffman's question about the influence of bargaining units, the number of workers in the State who are members of a collective bargaining unit. Also, that the number be divided into State and non-State employees. He anticipated that, of the total number employed, the percentage of collective bargaining unit employees would not be a large number. Senator Hoffman questioned why, were that the case, this language should be included. Mr. Schultz stated that some of the parameters that the Division of Legislative Finance was asked to include in its research was population and CPI as well as "population and keeping the CPI below personal income." Data in this regard is only available from 1997 forward. As depicted on the aforementioned chart, there is no significance difference between these two variables to this point. The reason the language was included is because of the high rate inflation in the 1980s. This would be a concern in regards to the appropriations limit. Mr. Schultz stated that the aforementioned chart reflects three different scenarios in determining the base year. The first chart uses the fixed base year of FY 96 and a three-year floating average for variables. While the chart appears favorable, "there is a ratcheting down effect" realized in the first few years. This has been determined to have a negative impact on the state economy in other states. The second chart reflects a base year of two years prior and a three-year floating average for variables. This has proven to have the negative affect of making it difficult to determine what the limit would be for the following year. Therefore, the third chart was developed utilizing a base year of the average of the three prior years and a three-year floating average for variables. Since this would provide a more predictable limit, it should be "more attractive" to businesses and residents. Senator Hoffman stated that his suggestion for a ten-year timeframe was based on the fact that "these years include the quarter of a billion dollar reduction" that the State experienced. As a result of this monetary reduction, the legislature implemented a plan to hold the level of government spending, and, for five of these years, the mandate was to reduce government spending quarter of a billion dollars. The time periods utilized in this formula incorporate "the lowest standards of growth in Alaska's history" and do not accurately portray a true growth in State government. Senator Dyson asked whether Senator Hoffman would desire charts developed that would reflect how these proposals would appear were they based on those years' budgets as proposed by the Governor. Senator Hoffman preferred that the charts be developed based on actuals for a ten-year span as opposed to ones based on hypothetical information that was not acted upon. Charts based on actuals would provide "a true indicator of growth." Senator Dyson determined that three different charts could be developed: one reflecting State growth were there no $250,000,000 reduction; one based on actuals; and one to depict the billion dollar increase as proposed by the Governor. Senator Bunde recalled that while there was a quarter of a billion dollar reduction over a five-year period, that money was reinstated during the sixth year. In addition, use of the Anchorage CPI as a base could be valid due to the fact that the Port of Anchorage serves 80-percent of the State, and therefore, it could be stated that 80-percent of the State's economy is dependent on what's going on in Anchorage. Senator Dyson stated that that might be; however, Senator Hoffman raises a valid point. Perhaps utilizing the federal CPI would negate the accusation that the State government's calculation was slanted in order to allow or disallow more spending. Co-Chair Green stated that when the Version 23-LS0296\Y committee substitute was being discussed, her staff had developed a ten-year look-back population/inflation/per capita income statistic analysis that compared the growth per year. She assumed that that information could be updated to reflect the language included in Version "B" and thereby, might provide the information requested by Senator Hoffman. She noted that it would be interesting to view that chart as, while numbers might appear to be steady, they could become volatile depending on what factors are incorporated. She stated that this chart would be updated and provided to Members. Senator Dyson understood that Senator Stedman has produced a chart [copy not provided] that also might be helpful to the discussion. Co-Chair Wilken asked that, prior to any further material being provided to the Committee, information should be updated to reflect Version "B" language. Senator B. Stevens noted that, historically, State spending, including such things as payroll and government cost of living allowance allocations for regions has been benchmarked on the Anchorage CPI indicator. Therefore, he understood that any adjustments in the Anchorage rates would, by utilizing a geo- differential, affect Rural areas. Co-Chair Wilken voiced being uncertain as to how to develop the baseline requested by Senator Hoffman. Senator B. Stevens responded that were the Anchorage benchmark adjusted to reflect inflation and then a geo-differential applied to that rate, it would affect Government spending in other areas of the State. Senator Hoffman stated that he would be more comfortable with tying the rate to the "breadbasket measure" which is currently available for cost comparisons for grocery items in Anchorage, Fairbanks, Juneau, Bethel, and Nome. This would provide more accuracy in regards to the true cost of living in various regions of the State. For example, it is documented that a grocery item might cost one dollar in Anchorage, $1.80 in Bethel and $1.90 in Nome. He noted that the wages of correctional officers in Bethel are 1.3 times those paid in Anchorage. SFC 04 # 49, Side A 10:42 AM Senator Dyson expressed that while the cost of fuel and food might affect a family's budget, these costs do not significantly affect the cost of delivering State services. Senator Dyson stated that adjusting costs up ten percent, as proposed in the Version "B" committee substitute, would adequately address the cost differentials of Rural Alaska, particularly as it is unlikely that the cost of State government services would increase ten percent in those areas. Co-Chair Green understood that this language is applicable to the total expenditure rather than being region specific. Co-Chair Green referred the Committee to language in Section 2, on page two, beginning on line 30 that addresses appropriations to the Constitutional Budget Reserve (CBR). She asked regarding the reason that the Legislature should support the deposit of any money in the General Fund that is available for appropriation at the end of each fiscal year into the CBR, particularly in a year in which the State experienced "another windfall" and had received a substantial amount of money. Senator Dyson replied that presently, the Constitution mandates that any excess funds be deposited into an account that bears interest. This is true of the CBR. As presented in recent testimony by nationally renowned economist, Dr. Poulson, it was stated that the most successful State programs having spending limits, are those that implement a "shock absorber" or rainy day account that could provide funds or replenish funds as incomes rise and fall. The CBR could provide this "very valuable" function. It would also provide substance to favorable bond ratings. He cautioned against depositing money into the CBR as a mechanism to prevent "political difficulties." In addition, were the CBR to reach a point that would support bond ratings and sufficiently address State funding needs, then consideration could be given to determining whether excess funds could be deposited into an alternate account. In summary, he stated that the CBR is a good place to place those excess funds. It would also replenish the money that was borrowed from the CBR, that have not, of yet, been reimbursed. This process would also provide funds with which the State could address "extraordinary circumstances" such as earthquakes or support infrastructure and major projects such as a gas pipeline or a road to the Arctic National Wildlife Refuge [ANWR]. Co-Chair Wilken shared Co-Chair Green's concern that money that could be accessed by a majority vote would be deposited into a savings account that could "create turmoil in the budgeting process." Senator Bunde opined that, "the maximum allowable growth rate would become the minimal growth rate." In the future, Legislators might decide that a two-percent growth rate is too much. Therefore, he argued that perhaps it is a good thing that the funds in the CBR could not be leveraged. This could serve to prevent additional spending that might not be overwhelmingly supported. The sword does "cut both ways." Co-Chair Wilken asked how this legislation would allow for unexpected and uncontrollable expenses such as a $80 million Medicaid bill or, more recently, the $94 million Public Employee Retirement System (PERS) and Teachers Retirement System (TRS) debt. Ms. Frasca stated that the appropriation limit does not solely apply to General Fund spending. She cautioned that while expenses might increase, revenues do not always follow. In those cases, choices must be made. This year for example, in order to provide funds for the PERS/TRS expenses, reductions were required in other areas. This is the reality of having limited resources. This legislation would assure voters that government "would not go on a spending spree and grow" were significantly more revenue to transpire. This would force the government to make choices. Co-Chair Wilken voiced concern "that an avenue" would be available through which the Legislature could address unexpected and extraordinary expenses without negatively affecting other priorities. Mr. Frasca understood that the section of the bill regarding extraordinary circumstances would address this concern. Co-Chair Wilken stated that further discussion ensue in this regard. Co-Chair Wilken noted that another concern is that the bill provides no distinction between the capital and operating budgets. "The operating budget builds bureaucracy and the capital budget builds Alaska." Therefore, he argued that further distinction should be included in this regard. Senator Dyson stated that this Constitutional amendment would eliminate the Constitutional mandate that requires one-third of the budget to be allocated to the capital budget. He doubted, however, that this mandate has been upheld. Co-Chair Wilken ordered the bill HELD in Committee.