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 sixth hearing for this bill in the Senate Finance Committee. Senator Dyson informed the Committee that the appropriation and spending limit formula that has been developed was based on State budgets that had been adopted for the past several years. Unfortunately, due to the fact that these budgets were relatively flat, when the formula was applied, the unintended result is a flatter budget than is practical for State operations. The Office of Management and Budget would further explain this situation. Co-Chair Wilken clarified that the working document is committee substitute Version 23-LS0296\B, as amended by Amendments #1 and #4. Following action on some forthcoming amendments, a new committee substitute would be developed. CHERYL FRASCA, Director, Office of Management and Budget (OMB), Office of the Governor, informed the Committee that with the assistance of the Division of Legislative Finance, OMB has developed a spreadsheet titled "CS SJR 3" [copy on file] that depicts the outcome of the currently drafted formula. BRUCE TANGEMAN, Fiscal Analyst, Legislative Finance Division pointed out that the formula results are depicted beginning on line "9" which is titled "Avg Growth (existing base yrs)". Ms. Frasca expressed that the information specifies that for fiscal years 2007, 2008, and 2009 there would be zero annual growth, a slight increase in FY 10 and then marginal growth in the subsequent years. She noted that while the State has been able to control expenses for such things as Medicaid in the near term, it is unlikely that this would be possible in future years. A realistic growth level for Medicaid and K-12 spending in the future would be approximately $100 million. Co-Chair Wilken understood therefore that the aforementioned section of the chart depicts the outcome of the formula as currently drafted, using an annual inflation rate of three percent and a one percent population growth rate. In FY 06, the State would be projected to experience an additional general fund growth of $428 million dollars with no further gain until FY 10. LUCKY SCHULTZ, Staff to Senator Dyson, affirmed that is correct with the exception being that the $428 million would reflect total appropriations minus exemptions rather than being specifically general funds. Mr. Shultz stated that the reason the annual growth is reflected as zero in several of the fiscal years is that this Senate bill contains "a no ratchet down provision." The House version of the bill does not include this provision. Ms. Frasca stated that the Administration is offering for consideration the formula beginning on line 23 of the spreadsheet titled "2 yr growth (adjusted base yrs)". This formula reflects a $56 million increase in total appropriation growth in FY 06 and an average of approximately $105 million going forward. Co-Chair Wilken noted that the spreadsheet depicts four different scenarios. Ms. Frasca stated that in addition to the four scenarios being depicted in a line item format section, there is a corresponding chart format at the bottom of the spreadsheet. Senator Hoffman understood that the Public Employees Retirement System/Teachers Retirement System (PERS/TRS) obligation would be approximately $56 million in FY 06. In that case, the proposed formula would reflect flat growth. Therefore, a detailed analysis of the PERS/TRS obligation projections should be developed in order for the Committee to understand its impact. Particularly as the number of retiring State employees is expected to increase in the next few years. Ms. Frasca stated that the numbers presented on the chart "are not the result of an analysis of what spending could be … in terms of spending pressures." For example, in the FY 05 budget, the Administration covered the increase in PERS/TRS expenses by absorbing the expenses through reductions in other areas. Acknowledging that a formula would specify a spending limit, she stated that the budget would continue to be under pressure and choices would be required. This bill is not intended to allow for uncontrolled spending, but rather would require the State to examine how its money would be spent. There would "always be competing wants and competing needs. This would be the challenge going forward." Co-Chair Wilken understood that the PERS expectation for FY 06 would be approximately $100 million. Ms. Frasca responded that that would be the amount including school district and local government expenses, in addition to Executive branch expenses. She agreed that these costs would continue through the next five years unless the State's financial market investments were to rebound. Co-Chair Wilken informed that a detailed PERS/TRS presentation is scheduled for April 6, 2004. Senator Dyson stated that in order to arrive at a workable formula, "fiddling" with the base numbers has had to occur. He asked that Ms. Frasca explain the changes that have been made to the base years. Ms Frasca pointed out that part of the challenge includes the fact that the total spending for FY 04 has not yet been concluded, and that the budget for FY 05 has not been finalized. Therefore, "crafting a limit for going forward" by utilizing the look-back mechanism is difficult. Senator Dyson voiced that it might be that "the fiddled with numbers" would not be far from reality. Mr. Tangeman declared that the numbers, as depicted in the current formula, beginning on line nine of the spreadsheet titled "Avg Growth (existing base years)," are not too far from what is expected. FY 06 calculations are based on FY 02, FY 03, and FY 04 appropriations which each reflect $100 million appropriation reductions. Therefore the first year is based on years of reduced appropriations. "Plugging set numbers for FY 04 and FY 05" was conducted "in order to alleviate the question of what might actually happen at the end of this Session to allow uniform growth." Therefore, the inclusion of $100 million in appropriation growth for FY 04 and FY 05 would probably be close to where those budgets would "end up." This would provide a better idea of where FY 06 would actually be. The PERS/TRS obligations for FY 04 are approximately $3.1 billion, and the FY 05 budget submitted by the Governor calculates that $2.9 billion would be required. This reflects a substantial decrease. Were an amendment specifying that the PERS/TRS appropriation for FY 04 and FY 05 be between $3.3 billion and $3.4 billion adopted, it would allow "plenty of headroom for the PERS/TRS issue going forward" as the current projection for FY 05 is $2.9 billion. This would allow for increased growth going forward. Co-Chair Wilken stated that were a forthcoming amendment adopted that would repeal this legislation in four years, perhaps consideration could be given to setting aside the PERS/TRS issue for a few years. Senator Bunde pointed out that even were a spending limit established, the entirety of that money would not be required to be appropriated. However, he noted that the Legislature "has never left a dollar on the table," as such things as public pressure would be ever-present. Therefore, he contended that the upper limit "would also be the base." Co-Chair Wilken acknowledged the remark. Senator Hoffman disagreed. He stated that the State currently has a spending limit that is substantially higher than what is being appropriated today. Co-Chair Wilken pointed out that the State currently has "a huge deficit and a slush fund that allows us to do that." Senator B. Stevens declared that were the PERS/TRS obligation to increase to a level exceeding the limit, the Legislature could recognize it as an "extraordinary circumstance" and address it in such a manner "as the situation, which created it, occurred outside the realm of the control of the Administration or the Legislature, or control of anybody for that matter." Therefore, he asked whether the PERS/TRS situation might qualify under the parameters of an extraordinary circumstance definition. Mr. Schultz responded that this question had been asked previously, and that upon investigation, it was discovered that the State of Connecticut specifically does not define extraordinary circumstances as they desired the interpretation to be left up to the Governor and the Legislature. An extraordinary circumstance has not been invoked in that State since this directive was established in 1992. Co-Chair Wilken stated that further discussion regarding the extraordinary circumstance issue must ensue. Senator Dyson asked for further Committee feedback regarding the appropriateness of placing a Statewide ballot measure before the people that would be "based on numbers that have been adjusted in order to make the formula work." While the argument is compelling, the formula must work and be practical into the future without being less credible. Provided no objection to this approach were forthcoming, a new committee substitute would be developed that would encompasses the Administration's proposal. In addition, he noted his intention to specify a four-year termination date in the legislation. However, he noted that at the end of this four-year period, there would be two alternatives: the first being that the "ineffective spending" limit that is currently in the Constitution would be re-instituted along with the Constitutional requirement that specifies that one-third of the budget be appropriated to support capital projects or that those two components and the formula terminate in four years. The second choice is his preference. Co-Chair Wilken suggested that the Committee consider additional amendments and then develop a committee substitute. Senator Bunde, responding to Senator Dyson's request for Committee feedback, stated that he would prefer a system based on reality rather than theory. He would also support abolishment of all three components at the end of four years. The bill was HELD in Committee for further consideration.