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 fourth hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this legislation would allow a Constitutional spending limit proposal to be placed on a Statewide election ballot. Amendment #1: This amendment deletes language in Section 1, page two, subsection (c)(3) and replaces it with new language as follows. (3) of money received by the State from a source other than the State or federal government that is restricted to a specific use by the terms of a gift, grant, bequest, or contract; In addition, following ";" in Section 1, subsection (c)(8) on page two, line 21 the word "and" is deleted and a new paragraph is inserted to read as follows. (9) of money for expenditure by a State agency to provide services to another State agency that has also received an appropriation of the same money; and LUCKY SHULTZ, Staff to Senator Dyson, explained that in response to Members' concerns regarding the appropriateness of language in Version 23-LS0296\B pertaining to the appropriation calculation exemption "of donations, gift, and grants to the State for specific purposes," Amendment #1 would replace that language "with more appropriate language" pertaining to the exemption of such statutory designated program receipts as gifts, grants, bequests, and specifically, contracts. Senator Dyson moved to adopt Amendment #1. Co-Chair Wilken objected for explanation. CHERYL FRASCA, Director, Office of Management and Budget, Office of the Governor, clarified that this amendment would align the bill's language with current State Statutes pertaining to statutory designated program receipts. Mr. Schultz continued that the amendment would also incorporate a new exemption into the bill in order to allow for an exchange of interagency receipts in that one State agency could expend money in order to provide services to another State agency. This is not additional income and should therefore be appropriately reflected. The amendment would also address reimbursable agreements. AT EASE 9:39 AM / 9:39 AM Senator Hoffman inquired as to the necessity of addressing the interagency receipt language, as, were the funds already included in one department's budget, they would be incorporated into the allocation base. Ms. Frasca responded that the amendment would address the issue of duplicated expenditures. She explained that when developing a fiscal summary that compares one year's budget to the next, there is a line item element through which to identify components that should be backed out or would reduce duplicated expenditures that had been appropriated twice. The proposed language would serve "to exclude the duplication so they count only once under the limit." Examples would include "highway working capital fund appropriations to the Internal Services Fund for telecommunications" as well as interagency receipts. Co-Chair Green asked regarding a component of the Department of Health and Social Services budget that would be affected by the proposed statutory designated program receipts language. Ms. Frasca responded that the amendment would address the pro- share/fair share component in the Department as these funds are categorized as a contractual relationship between a health facility through which federal Medicaid funds are received and then returned to the State. The amendment would address this contractual issue. Co-Chair Green asked whether "this implies that it is a contract with the State." Ms. Frasca clarified that it is a contractual agreement between a hospital and the State. Co-Chair Green understood therefore that it is not a contractual agreement between the hospital and the federal government. Ms. Frasca affirmed that, when pertaining to the fair share/pro share arrangement, it is not. Co-Chair Wilken removed his objection. There being no further objection, Amendment #1 was ADOPTED. Amendment #2: This amendment inserts new language into Section 2, subsection (d) on page three, line three following the word "fund" as follows. if the balance in the fund is less than $2,000,000,000. The amount deposited into the budget reserve fund under this subsection shall not exceed the amount that, when added to the balance in the fund before the deposit, equals $2,000,000,000. After deposit is made under this subsection, any excess general fund money shall be deposited into a budget reserve fund established by statute Senator Dyson moved to adopt Amendment #2. Co-Chair Wilken objected for explanation. Senator Dyson explained that this amendment would address the question of how to deal with excess funds were the money available for appropriation to exceed the limit. The original version of the bill decried that the excess funds must be deposited into the Constitutional Budget Reserve (CBR). However, utilizing these funds to rebuild the CBR to approximately a seven billion dollar level has not been viewed as the "wisest public policy." Therefore, rebuilding the CBR to some acceptable or prudent level would serve to strengthen the State's bond rating and provide flexibility with which to respond "to foreseen and unforeseen fluctuations in revenue." This Amendment would specify a CBR limit of two billion dollars. This would be one billion dollars beyond Governor Frank Murkowski's recommendation that a one billion dollar minimum balance be established. Additional revenue beyond the two billion dollars would be deposited into the existing Statutory Budget Reserve (SBR) fund. He voiced support for the amendment. Co-Chair Wilken recalled that prior to the State's withdrawing funds from the CBR beginning in 1994, money from the SBR was utilized between 1990 and 1994. The balance currently is the SBR is minimal. Senator Dyson read Section 2, subsection (d), as it would read were the amendment adopted. (d) The amount of money in the general fund available for appropriation at the end of each fiscal year shall be deposited in the budget reserve fund if the balance in the fund is less than $2,000,000,000. The amount deposited into the budget reserve fund under this subsection shall not exceed the amount that, when added to the balance in the fund before the deposit, equals $2,000,000,000. After deposit is made under this subsection, any excess general fund money shall be deposited into a budget reserve fund established by statute. Co-Chair Wilken understood that adoption of the amendment would limit the CBR balance to two billion dollars and anything beyond that amount would be deposited into the SBR. He asked whether the language stating that, "any excess general fund money shall be deposited into a budget reserve fund established by statute" should be amended to clarify that this fund is the SBR. Ms. Frasca suggested that amendment language specifying the general fund also be deleted, as such things as excess Permanent Fund earnings should also be deposited into the budget reserve fund. Senator B. Stevens noted that, in response to his question as to whether the Permanent Fund Earnings Reserve Account was a subaccount of the general fund or the Permanent Fund, the position of the Department of Revenue's Commissioner was that it was a subaccount of the Permanent Fund. As a result of the Commissioner's remarks, he understood that those earnings would not available for appropriation as a general fund subaccount. Therefore, the Permanent Fund earnings reserve account would not be a consideration in this bill. Ms. Frasca agreed that this would be the case "in terms of the categorization;" however, she stated that a future Legislature could appropriate the balance of the Permanent Fund earnings reserve account into the general fund. Senator B. Stevens acknowledged. He noted that this legislation differs from separate earnings reserve account legislation that he has proposed, in that, by specifying that excess general funds would fund the earnings reserve account, there is a different funding mechanism. Co-Chair Wilken suggested therefore that the general fund language in the amendment remain as is with the option of revisiting it as the bill progresses. Senator Dyson stated that amending the language to specifically denote SBR is worthy of consideration. Senator Dyson asked Ms. Frasca whether the language specifying that general fund money would be available for appropriation should be revisited. Ms. Frasca asked that additional time be provided before that determination is made. Senator Dyson asked the Members and Ms. Frasca to reflect upon whether two billion dollars is an appropriate CBR limit. Ms. Frasca requested that she be provided sufficient time to be able to confer with the Department of Revenue in that regard. SFC 04 # 55, Side B 09:51 AM Senator Bunde asked the rationale behind designating two billion dollars as the CBR limit, particularly as the State typically requires, annually, half a billion to provide for cash flow issues aside from sufficient funding with which to provide for such things as a downturn in revenue or a catastrophic event. In addition, the fact that the State borrowed five billion dollars from the CBR and has yet to fully reimburse that amount is an irritant. Senator Dyson voiced appreciation for that concern. He also voiced appreciation for the efforts being exerted by Senator B. Stevens to present legislation to reimburse the CBR. Senator Dyson voiced the understanding that the ability of the CBR to reach a five billion balance was unanticipated, and that the Governor's recommendation that a one billion dollar CBR limit be specified as the account "floor" or level that must not be breached was the amount required to maintain such things as the State's bond rating. In addition, he referenced separate testimony pertaining to loan rates, inflation, the financial market and the impact that such things incur on the State's financial situation. Senator B. Stevens expressed the hope that someday the Legislature could face the problem of what to do with an excess balance in the CBR. He also stressed that reimbursing the CBR is "a constitutional obligation" and unless that issue were resolved, either by changing the Constitution or by repaying the amount borrowed, the establishment of a one billion dollar floor as recommended by the Governor or a two billion dollar floor as suggested in this amendment would serve to prohibit that reimbursement as future Legislators could appropriate excess funds elsewhere. Senator Dyson clarified that rather than establishing a two billion dollar floor, this amendment would establish that amount as the maximum CBR "ceiling" or limit. Senator B. Stevens understood that this limit would only apply to the amount of general fund contributions to the CBR. Senator Dyson clarified that the two billion dollar limit would apply to total funds in the account regardless of where they originated. He requested Members to contemplate whether a two billion dollar balance in the CBR combined with the money that might be deposited into the SBR would qualify as a reimbursement of the money the State has borrowed from the budget reserve. Senator B. Stevens responded that time would be required to appropriately consider the situation. However, he voiced discomfort that the Legislature might allocate funds in excess of the proposed two billion dollar mark to other savings accounts rather than repaying the entirety of the money owed to the CBR. This mechanism could displace the State's debt obligation to the CBR. Senator Hoffman asked whether this language would serve to repeal the CBR repayment language. This would be contrary to the original intent of Legislators who, acting upon a vote of the people, allowed funds to be borrowed from the CBR with the understanding that the money would be repaid. He stated that, years ago, the Legislature, without success, inquired of the Administration at the time, as to whether settlement money the State received from oil companies could be utilized to repay the CBR. Therefore, he agreed with Senator B. Stevens that the entire amount of money that has been borrowed from the CBR should be repaid. This bill, he continued, in addition to establishing a spending limit, would also attempt to amend, by establishing a spending cap, a vote of the people that specified that the CBR should be reimbursed. Senator Olson asked whether a majority vote of the Legislature would be required in order to access funds from the SBR as opposed to the three-quarter vote that is required to access the CBR. Co-Chair Wilken affirmed that a majority vote could access the SBR. Senator Dyson, in response to Senator Hoffman's concern, asked for clarification regarding whether the adoption of this amendment would eliminate the Constitutional requirement that the CBR be reimbursed to the level it was at the time the Constitution was amended to allow funds to be borrowed from the CBR. Mr. Schultz responded that the Version "B" committee substitute contains language that would repeal Article IX, Section 17(d) of the Constitutional budget language that specifies that any withdrawal of funds from the CBR must be repaid. Amendment #2 would add new language to Section 17(d). Senator Dyson therefore stated that it must be clarified that were the people of the State to approve language as presented in this legislation, the voters would be changing language that they had previously approved in this regard. He stated that, provided that it is clearly communicated to the people of the State, Legislators have the right to determine an appropriate CBR fund level. The real discussion should be what is an appropriate level for the CBR. Senator Hoffman stated that the single subject rule should be applied in this instance, as the language contained in the Amendment regarding a specified CBR level is a completely different topic that should require a separate Constitutional amendment aside from the spending limit. While it does pertain to managing the State's funds, aligning it with a spending limit might be a stretch. Senator Bunde understood that the reason that a two billion dollar limitation is being presented is to provide sufficient funding above the Governor's one billion dollar "floor" recommendation that supports the State's credit rating. Therefore, in addition to maintaining a one billion dollar floor, $500,000,000 is required to support cash flow issues throughout the year and another $500,000,000 would be available to address claustrophobic events or such things as financial market fluctuations and oil price declines. Senator Bunde stated that the position of maintaining a one billion dollar floor to insure the State's credit rating has also been questioned as the State has other options through which to support its bond ratings such as acquiring a line of credit from a financial institution. The problem with doing that, he professed, is that it would incur additional debt service whereas maintaining one billion dollar balance in the CBR would not cost the State anything. It would also garner interest earnings even though utilizing the CBR in this manner would tie up a lot of money. Knowing which position to advance is a dilemma. Co-Chair Wilken asked that Senator Dyson consider holding this amendment for further discussion. Senator Dyson agreed. He also acknowledged Senator Hoffman's point about the single subject rule and stated that further research in that regard would be undertaken. Senator Dyson stated that an amendment that would specify a four- year termination date on this proposal is being considered, with a provision that it could be re-authorized. Co-Chair Wilken asked what the fee might be were the State to arrange for a one billion or half a billion dollar line of credit with a major financial institution. He considered this a viable option and suggested that it might be less expensive than the cost associated with investing the CBR on a short-term rather than long- term basis. With $28 billion in the bank, the fee for a line of credit should be "relatively" reasonable. Perhaps an informal inquiry could be made. Ms. Frasca stated that information in this regard would be forthcoming. Senator Dyson voiced uncertainty as to whether providing $500,000,000 to address such things as fluctuations in the financial markets or the price of oil is sufficient. He asked Ms. Frasca or the Department of Revenue to provide further information to the Committee in this regard. Senator Dyson moved to withdraw the motion to adopt Amendment #2. There being no objection, Amendment #2 was WITHDRAWN from consideration. Co-Chair Wilken ordered the bill HELD in Committee.