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 seventh hearing for this resolution in the Senate Finance Committee. Senator Dyson outlined Amendment #5 and Amendment #6. He explained that Amendment #5 would repeal the appropriation limit constitutional amendment in four years and that legislative action and voter approval would be required to reenact the provisions. By contrast, he stated that Amendment #6 would also repeal the language adopted by this resolution, but provides that in four years the Constitution would revert to the current language providing for an appropriation limit, which he noted is no longer valid, and that the existing stipulation that one-third of all appropriations must be for capital projects, would be reenacted. Amendment #5: This amendment deletes "Reconsideration" and inserts "Repeal" on page 3, line 7, deletes "and applies thereafter" on line 9, and replaces the language of Section 30(b) in Section 3 on lines 12-17 of the committee substitute, Version "B". The amended language reads as follows. Sec. 3. Article XV, Constitution of the State of Alaska, is amended by adding a new section to read: Section 30. Application and Repeal. The 2004 amendment relating to an appropriation limit (art. IX, sec. 16) first applies to appropriations made for fiscal year 2006. The 2004 amendment relating to deposits to the budget reserve fund (art. IX, sec. 17(d)) first applies at the end of the fiscal year 2005 and applies thereafter. (b) Section 16 of Article IX (appropriation limit) is repealed on July 1, 2009. Senator Dyson moved for adoption. Co-Chair Wilken objected to allow the Committee an opportunity to comment. There were no comments and he removed his objection. The amendment was ADOPTED without objection. Amendment #6: This amendment deletes "Reconsideration" and inserts "Repeal" on page 3, line 7, deletes "and applies thereafter" on line 9, and replaces the language of Section 30(b) in Section 3 on lines 12-17 of the committee substitute, Version "B". The amended language reads as follows. Sec. 3. Article XV, Constitution of the State of Alaska, is amended by adding a new section to read: Section 30. Application and Repeal. The 2004 amendment relating to an appropriation limit (art. IX, sec. 16) first applies to appropriations made for fiscal year 2006. The 2004 amendment relating to deposits to the budget reserve fund (art. IX, sec. 17(d)) first applies at the end of the fiscal year 2005 and applies thereafter. (b) On July 1, 2009, Section 16 of Article IX (appropriation limit) is repealed and readopted as it read on January 1, 2003. This amendment was NOT OFFERED. AT EASE 9:39 AM / 9:40 AM Amendment #7: This amendment adds "and except as provided in (d), (e), and (f) of this section" to subsection (a) of Article IX, Section 16 of the Constitution of the State of Alaska, repealed and readopted by Section 1 of the committee substitute Version "B". The amended language on page 1, lines 6 - 9 read as follows. Section 16. Appropriation Limit. (a) Subject to (b) of this section, and except as provided in (d), (e), and (f) of this section, appropriations made for a current fiscal year shall not exceed the average amount appropriated for the earliest three of the four fiscal years immediately preceding that current fiscal year by more than the sum of the following: … This amendment also replaces subsection (d) with new language, on page 2, lines 23 - 29 to read as follows. (d) An appropriation that exceeds the appropriation limit under this section may be made for any public purpose identified in a declaration of emergency that is issued by the governor as prescribed by law. (e) If the governor declares that an extraordinary circumstance exists, upon the affirmation vote of at least two-thirds of the members of each house, the legislature may pass an appropriation that exceeds the appropriation limit under this section to address the extraordinary circumstance. The declaration shall identify the specific extraordinary circumstance, specify the amount of each appropriation the governor requests, and identify the time period during which expenditures under each appropriation will be made. (f) If the legislature, by law, declares that an extraordinary circumstance exists, upon the affirmative vote of at least two-thirds of the members of each house, the legislature may pass an appropriation that exceeds the appropriation limit under this section to address the extraordinary circumstance. Notwithstanding Section 17 of Article II, a bill declaring an extraordinary circumstance passed by the legislature may not become law unless signed by the governor. Senator Dyson moved for adoption. Co-Chair Wilken objected for an explanation. LUCKY SCHULTZ, Staff to Senator Dyson, testified that contrary to the provisions in the original version of this resolution, this amendment would provide a legislature to declare an extraordinary circumstance. Co-Chair Wilken gave an example of $100 million Medicaid expenditures as an extraordinary circumstance and asked the process to exceed the spending limit and appropriate funding for unusual expenses. Mr. Schultz explained that a two-thirds majority of both houses must approve such a declaration in the form of an appropriations bill. He noted that unlike regular legislation, the governor must either veto a declaration of extraordinary circumstances bill or sign it into law, as it could not become law without gubernatorial action. Senator Hoffman furthered that if the governor vetoed the appropriation bill or utilized line-item veto authority to reduce expenditures, a three-quarters vote of both house would be required to override the governor's action. Co-Chair Wilken stated that the legislation would be addressed as a normal appropriation bill with the exception of the three-quarters, or super majority, vote requirement. Co-Chair Green cautioned that this legislation would create a new "class" that would subsequently allow the legislature to declare an extraordinary circumstance and is therefore "treading on dangerous ground". She relayed five or six examples have been posed as situations that could be constituted as extraordinary circumstances. She did not consider Medicaid expenditures extraordinary. She was reminded of the legislature's difficulty in changing the definition of "disaster" in legislation considered in a previous session. She warned against not clearly defining "extraordinary circumstances". Senator Dyson appreciated Co-Chair Green remarks, sharing that he has "struggled" to anticipate the situations that could arise necessitating additional funding than stipulated by the spending limit. He decided against changing the definition of "emergency", opting instead that the governor should address disaster declarations as currently provided. He noted this is the reason to require a super majority legislative vote to increase appropriations. He informed that the state of Connecticut has this provision in its spending limit constitutional amendment. He qualified that he inadvertently gave incorrect information relating to the system implemented in Connecticut. Mr. Schultz corrected comments made at the previous hearing that the extraordinary circumstances provision has not been invoked in the state of Connecticut. He stated that the governor has invoked the provision four times when excess revenues were appropriated to pay off debt incurred in previous years. Senator Hoffman asked if extraordinary expenses could be contained in the normal operating budget legislation with some sections of the bill requiring a three-quarter vote, similar to the current system in which a three-quarter vote is required for some sections of the operation budget legislation to authorize appropriations from the Constitutional Budget Reserve (CBR) fund. Senator Bunde commented that Co-Chair Green's concerns were valid. He reminded that the "genius" of the Alaska Constitution is that it did not stipulate specifics, but instead provided flexibility for future legislatures. Although he opposed a "loophole" he was assured that the powers provided in this amendment would be limited, and stressed that future legislatures should be granted as least as much confidence as current legislatures are provided. Co-Chair Green wanted the Committee to avoid unintentionally defining extraordinary circumstances in the various examples given during these discussions. Co-Chair Wilken shared this concern, and questioned whether the stipulation of a two-thirds majority vote itself could provide a threshold of an extraordinary circumstance. Senator Bunde agreed with Co-Chair Green that the record should reflect that the examples used in discussions on this resolution are not indications that the current Senate Finance Committee considers them to be extraordinary circumstances. He explained that the use of certain examples should not establish a precedence of factors constituting an extraordinary circumstance. Senator Dyson surmised that the provisions of an extraordinary circumstance could be defined in statute by either the current or a future legislature. Co-Chair Wilken suggested this could be considered as a conceptual amendment. Senator Dyson affirmed this is an option, but he preferred the Committee adopt the current language proposed in the amendment. Co-Chair Wilken removed his objection to the adoption of the amendment and Amendment #7 was ADOPTED. SFC 04 # 64, Side B 09:52 AM Amendment #8: This amendment adds a new subsection to Article IX, Section 16 (c) in Section 1 of the committee substitute on page 2, following line 21 to read as follows. (9) of money previously appropriated for a different purpose or to a different recipient; and Senator Dyson moved for adoption. Co-Chair Wilken objected for discussion purposes. Senator Dyson informed that this amendment is offered at the request of the Murkowski Administration and would clarify language relating to duplicate payments. BRUCE TANGEMAN, Fiscal Analyst, Division of Legislative Finance, testified that the current language refers to interagency receipts, and defined this as general funds appropriated to one agency and authority to receive those funds from that agency is authorized to another agency. He stated the intent is that these transactions should not be counted twice. The amendment, he noted, would incorporate interagency receipts as well as other funding sources. Senator Dyson characterized these transactions as almost intergovernmental transfers that therefore should not be counted twice. Mr. Tangeman affirmed. Co-Chair Wilken removed his objection and the amendment was ADOPTED. Amendment #9: This amendment inserts "Transition" in the title of Section 30 of Article XV of the Alaska Constitution, in Section 3 of the committee substitute. This amendment also inserts language in subsection (a) of Section 30 on page 3, line 9, following "thereafter", and places the remaining language of subsection (a) into a new subsection. The amended language of Section 30, on page 3, following line 6 reads as follows. Section 30. Application, Transition, and Reconsideration. (a) The 2004 amendment relating to an appropriation limit (art. IX, sec. 16) first applies to appropriations made for fiscal year 2006 and applies thereafter. However, for purposes of making calculations under the appropriation limit for fiscal years 2006 through 2008 it shall be assumed that, excluding appropriations listed under Section 16 (c) of Article IX, the amount appropriated for (1) fiscal year 2004 equals $3,300,000,000; and (2) fiscal year 2005 equals $3,400,000,000. (b) The 2004 amendment relating to deposits to the budget reserve fund (art. IX, sec. 17(d)) first applies at the end of fiscal year 2005 and applies thereafter. (c) If the 2004 amendment relating to an appropriation limit (art. IX, sec. 16) is adopted, the lieutenant governor shall place the same 2004 proposition for amendment on the ballot every four years. However, notwithstanding Section 1 of Article XIII, if the voters reject the proposition, Section 16 of Article IX shall be readopted as it read on January 1, 2003, and the lieutenant governor shall not again place the 2004 proposition on the ballot under this subsection. Senator Dyson moved for adoption. Co-Chair Wilken objected for discussion purposes. Senator Dyson remarked this amendment would address "what I inappropriately" termed as "fiddling with the base numbers in order to get the results we wanted." He predicted that the final budget for FY 04 and the amount approved would likely reduce the amount of adjustments necessary. He explained this amendment would "smooth the curve and eliminate the flat first two or three years because of the budget reductions that were done." He relayed this amendment is the request of the Murkowski Administration to allow flexibility for the first years this spending limit is in place and to allow for reasonable growth from inflation and population. Mr. Schultz furthered that the other states with tax and spending limits, that have allowed "the number to go negative" have experienced economic distress. Therefore, the advice has been to never allow the "numbers to go negative" as it would adversely impact the economy of the State. Instead, he relayed the recommendation that in years that would otherwise by "negative" the "numbers" should be held at the same level as the previous year. He predicted that Alaska would incur several years of level spending. He referenced the graph accompanying the amendment [copy on file] to demonstrate this point. Co-Chair Wilken asked for clarification of the information on the graph. Mr. Schultz further detailed and explained the spreadsheet and graph. Senator Hoffman understood from discussions at the previous hearing on this resolution that the spending limit would include a two-year transition period. Mr. Schultz replied that the purpose of this amendment is to adjust the base year and is in response to a request by the Administration citing that $50 million would not be sufficient. Co-Chair Wilken asked how the provisions of Amendment #10 are reflected in the data shown on the graph. Senator Hoffman recalled two-year growth as adjusted base years. He had understood that the amounts were "ratcheting down", although the amendment shows that amounts are the same. Mr. Schultz clarified the earlier discussion regarding the two-year growth period would be addressed in Amendment #10. Amendment #9 he stated, adjusts the base year amount. Senator Dyson appreciated Senator Hoffman's observation. Senator Dyson stated that this adjustment to the base year amount would provide the Administration with the flexibility for "what they believe to be reasonable budget growth". He informed the two amendments would accomplish the Administration's goals. Co-Chair Wilken withdrew his objection to the adoption of the amendment and Amendment #9 was ADOPTED. Amendment #10: This amendment deletes language and inserts new language in subsections (1) and (2) of Article IX, Section 16(a) in Section 1 of the committee substitute. Deleted language is as follows: page 1, line 10, "average annual"; line 12, "for the second, third and fourth"; line 14, "average percentage of the change in the average personal income of State residents for"; line 15, "third, and fourth"; page 2, line 1, "average annual"; line 2, "for the second, third, and fourth". The amended language on page 1, following line 5, reads as follows. (1) the percentage rate of change in the Consumer Price Index for all urban consumers for the Anchorage metropolitan area complied by a federal agency during the second and third calendar years preceding the calendar year during which the immediately preceding fiscal year began, but not to exceed the percentage change in personal income of State residents during the second and third calendar years preceding the calendar year during which the immediately preceding fiscal year begins; plus (2) the percentage rate of change in the State population during the second and third calendar years during which the immediately preceding fiscal year began compiled by a State department. Senator Dyson moved for adoption. Co-Chair Wilken objected for discussion purposes. Senator Dyson explained this amendment would change the averaging based on population and inflation from three years to two years and would provide more rational results. CHERYL FRASCA, Director, Office of Management and Budget, Office of the Governor, deferred to Mr. Tangeman to detail this amendment. Mr. Tangeman explained that the bill as is currently written would use an average annual growth for population and inflation calculated for three of last four years. This applied to the base, he stated, gives a substantially lower growth than expected. He gave an example of population and inflation growth of four percent each year over three years, the average would be four percent, which would calculate at 1.3 percent each year applied to the base year of FY 03 to determine the base amount for FY 06. He stated this would total approximately $50 million each year, which he determined is too low. The proposed amendment, he explained would provide for two years cumulative growth. He assured this would still be added to the base year of FY 03, but would add 8 percent growth, or 2.6 percent, resulting in approximately $100 million each year. Senator Hoffman remarked the intent of the amendment would be correct provided that inflation increases each year. He cautioned that if inflation were to decrease one year, the growth rate would be slower over a two-year average than a three-year average would allow. Mr. Tangeman responded that as the committee substitute is currently drafted, the growth rate would be even lower. Senator Hoffman surmised that growth rate would be higher utilizing a three-year average if the rate of inflation declined during one year. Mr. Tangeman qualified that the average growth rate could be lower, but the average would be applied to a base year of three years ago, so growth rate would be even lower. He stated he would research this. He pointed out the language in the bill that would not allow a decrease in the amount of appropriated from year to year, which could address this concern. Co-Chair Wilken requested a timeline graph to demonstrate the look- back portion. Ms. Frasca relayed an explanation Mr. Tangeman provided her earlier. This added the cumulative average of the last two fiscal years to the spending amount of three years ago. Co-Chair Wilken asked for an example assuming the plan were in place currently. Mr. Tangeman, Senator Hoffman and Mr. Schultz determined that population and inflation for the years FY 02 and FY 03 would be applied to an average of FY 01, FY 02 and FY 03 for the base year. Senator Hoffman asked about the stipulation of calendar year. Mr. Schultz pointed out that language on page 1 line 10 the bill pertains to the use of the fiscal year calendar to determine inflation and language on line 12 stipulates that population data would be calculated using the calendar year. Co-Chair Wilken asked how the spending limit amount for FY 05 would be calculated. Mr. Tangeman replied that federal data on population and inflation for calendar years 2002 and 2003 would be added and applied to the base year average of FY 01, FY 02 and FY 03. Co-Chair Wilken asked how the population changes during FY 03 would be determined. Mr. Schultz responded that population estimates for each calendar year are published in July of that year. Mr. Tangeman informed that the Department of Labor and Workforce Development provides this information. Co-Chair Wilken asked if an annual population estimate is therefore established then confirmed with the US census every ten years. Co-Chair Wilken asked if the inflation consumer price index utilized in the calculations would also be an estimate. Mr. Schultz replied this information is provided at end of each calendar year for that year. Co-Chair Wilken understood this information is delayed. Ms. Frasca clarified that the figures are finalized in April for the previous calendar year. Co-Chair Wilken asked how the legislature would we be able to begin drafting a budget in January of each year. Mr. Schultz responded that the look-back is two years for this reason. Co-Chair Wilken understood the population statistics of two years prior and the inflation rates of one-year prior would be utilized. He asked how a budget would be drafted before the inflation rates are known. Ms. Frasca corrected her earlier statement and listed inflation rates are determined in February, population rates in March, and personal income data is available in April. Mr. Tangeman furthered that data is compiled quarterly, therefore estimates would be available. Co-Chair Wilken pointed out that the administration is required to complete a budget proposal by December 15 and that valid data would not be available at that time. Ms. Frasca agreed. She stated that a budget would be prepared utilizing the estimates. She noted this is currently done with budgets prepared using projections from the Department of Revenue and other sources. Senator Dyson clarified that if the amendment is adopted Co-Chair Wilken is requesting a graph demonstrating when the data on population and inflation would be available. Senator Dyson expressed the execution of this spending limit should be based on the needs of Alaska, and that spending limits should serve as guidelines rather than determining public policy. He also stressed that available revenue should not determine the "upper limits" of the budget. Mr. Tangeman clarified that the information utilized for calculations would be "compiled by a federal agency during the second and third calendar years preceding the calendar year during which the immediately preceding fiscal year began." Therefore, he concluded that the appropriation limit for FY 05 would be determined using population and inflation data from FY 01 and FY 02. He stated that the data would be finalized rather than estimated. Co-Chair Green indicated she would share information compiled by staff demonstrating that this amendment would clarify the provision. Co-Chair Wilken understood this amendment would provide clarification. Mr. Tangeman concurred. Senator Hoffman noted the spending limit would be partially based on the capital appropriation of FY 05, pointing out that this appropriation would likely be significantly less than the average $100 million general funds appropriated in previous years. He predicted this would create a scenario in which would not allow expenditure of available funds. He asked if capital expenditures would qualify as extraordinary circumstances and if not, how such appropriations would be made. Senator Bunde responded this resolution would implement "sideboards" to provide guidance. He hoped that future legislators would view this as such, but remarked that past experience has demonstrated that the spending limit would be the base. He pointed out that the price of oil is currently high and that $200 million would not need to be transferred from the Constitutional Budget Reserve Fund to balance the budget. However, he noted that others consider the $200 million to be new revenue that could be appropriated to fund education. Co-Chair Wilken withdrew his objection and Amendment #10 was ADOPTED. Senator Dyson indicated that a new committee substitute would be drafted to reflect the changes in the amendments adopted at this hearing. Co-Chair Wilken recalled that Senator Bert Stedman had prepared a sensitivity analysis on the original resolution showing the impacts from population and inflation changes. He suggested requesting Senator Stedman conduct a similar analysis on this amended version. Co-Chair Wilken asked if comparison of this resolution and the proposal under consideration by the House of Representatives has been done. Ms. Frasca replied the Office of Management and Budget is preparing to do this. Mr. Gorman Senator Dyson informed that although the House of Representatives is considering a spending limit proposal, the Senate is further into the process and that Representatives are observing the Senate process. Co-Chair Wilken expressed an interest in how bond-rating agencies such as Standard and Poor would view the impact of a constitutional spending limit. Co-Chair Wilken ordered the bill HELD in Committee.