CS FOR HOUSE JOINT RESOLUTION NO. 9(FIN) am Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit. This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken explained that CS HJR 9 (FIN) am, Version 23- LS0435\O.A would allow Alaskan voters to decide whether or not to adopt a Constitutional spending limit amendment in the 2004 General Election. He noted that following testimony by Representative Bill Stoltze, the sponsor of this bill, Senator Dyson and his staff would explain the differences between this bill and the related bill, SJR 3-CONST AM: APPROPRIATION/SPENDING LIMIT, that they are sponsoring. REPRESENTATIVE BILL STOLTZE, the bill's sponsor, stated that this legislation was introduced "as an independent stand-alone Constitutional amendment" that is not linked to other legislation. He noted that in order to address the State's fiscal crisis, a multitude of ideas including such things as using Permanent Fund earnings, instituting new taxes, and developing other non- traditional revenue sources are being discussed. However, he continued, the intent of this legislation is to assure that the State proceed in these manners in "a controlled fashion." In conclusion, he stated that the best action to take in regards to this bill and the Senate bill, SJR 3, that similarly proposes a Constitutional amendment pertaining to an appropriation spending limit would be to understand the differences between the two bills. LUCKY SCHULTZ, Staff to Senator Fred Dyson, the sponsor of SJR 3, referred the Committee to a comparison analysis of the two bills titled "Comparison of HJR 9 and SJR 3" [copy on file]. He pointed out that one of the four major differences between the two bills is a "no ratchet down provision" is included in SJR 3 but not in HJR 9. This provision in SJR 3, he explained, specifies that in a year in which the formula reflects an appropriation decrease, the spending limit would be retained at the previous year's level. He disclosed that other states that increase and decrease appropriations depending on a formula have been negatively impacted when their appropriation decreases. As a result, he continued, Colorado and other states have implemented a "no ratchet down provision." Mr. Schultz stated that the comparison chart also reflects provisions that are included in HJR 9 but not included in SJR 3 as follow: Item #11, which pertains to language in Section 1, Subsection 16(c) located on page two, lines five through seven of HJR 9, specifies that in order to exceed the appropriation limit by up to two-percent, a 2/3 vote of the legislature would be required; Item # 12 which pertains to language in Section 1, Subsection 16(c), page two, lines seven through ten of HJR 9 that specifies that in order to exceed the limit above two-percent but less than four-percent, a 3/4 vote of the legislature would be required; and Item #13 which pertains to language in Section 1, subsection 16(c), page two, lines ten through twelve of HJR 9 that would not allow exceeding the limit by more that four-percent. He explained that while SJR 3 does not include this limiting language, it does include provisions through which the limit could be exceeded in order to address "extraordinary circumstances." Mr. Schultz noted that both bills include provisions with which to address disasters or emergencies as declared by the Governor. Mr. Schultz stated that another difference between the two bills is addressed in Item #3 on the aforementioned handout regarding how the appropriations are determined in each bill. [NOTE: HJR 9 appropriation language being referenced is located in Section 1, subsection 16 (a) on page one, beginning on line six of the bill that reads as follows.] Section 16. Appropriation Limit. (a) 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, increased or decreased by the less of (1) seventy-five percent of the sum of the following: (A) the percentage rate of change in the cost of living for the three calendar years preceding the calendar year during which the immediately preceding fiscal year began; plus (B) the percentage rate of change in the State population for the three calendar years preceding the calendar year during which the immediately preceding fiscal year began; or (2) the percentage rate of change in the personal incomes of State residents for the three calendar years preceding the calendar year during which the immediately preceding fiscal year began. [NOTE: The SJR 3 appropriation language being referenced is located in Section 1, subsection 16 (a) on page one, beginning on line six of the bill that reads 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: (1) the percentage rate of change in the Consumer Price index for all urban consumers for the Anchorage metropolitan area compiled by a federal agency during the two 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 two 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 two calendar years preceding the calendar year during which the immediately preceding fiscal year began compiled by a State department. Mr. Schultz pointed out that the appropriation formula utilized by HJR 9 would designate 75-percent of the sum of cost of living and population whereas SJR 3 would use 100 percent of the sum of inflation and population. Mr. Schultz also noted that, as identified in Item #7 of the comparison chart, the HJR 9 appropriation calculation is based upon the rate of change being the sum of three years whereas SJR 3 specifies the rate of change as being the sum of two years. Furthermore, he pointed out that these differences would equate to "a one percent per year increase in HJR 9 on the limit over SJR 3." He further explained that this would equate to an $85 million difference between the two bills through FY 09, which is the termination date identified for both bills. Senator Dyson asked for confirmation that HJR 9, with its determining factor of 75 percent of the sum of population and inflation, "has a steeper" uphill curve because its rate of change is over a three-year period as compared to SJR 3's two-year period. Mr. Schultz affirmed. He stated that, according to information provided by Legislative Finance, the State is projected to annually experience a three-percent inflation factor and a one-percent population growth factor for a total factor of four-percent per year. Continuing, he stated, that utilizing HJR 9's three-year timeline with this four-percent factor would equate to 12 percent. Therefore, he calculated that the HJR 9 appropriation calculation formula would be nine percent based on its 75-percent of 12-percent formula. In contrast, he continued, the four-percent per year factor would equate to an eight percent appropriation calculation utilizing SJR 3's two-year 100-percent formula. Therefore, he summarized, HJR 9's formula would reflect a one-percent increase per year over that of SJR 3. Co-Chair Wilken asked that the graph titled "CS SJR3 & CS HJR9 Compare" [copy on file], dated May 2, 2004, be reviewed as the HRJ 9 numbers it reflects surprised many Senators, including himself, as they had understood that the provisions of HJR 9 were "more restrictive." Specifically, he asked for details about how the University of Alaska receipts factor into the equation, as depicted on Line #17 of the graph, which states that, " The most significant difference between the two bills is that HJR9 exempts university tuition only. SJR3 exempts all non-GF [general fund] university receipts". Mr. Schultz affirmed that how University receipts are recognized in the formulas is one of the four major areas of difference in the two bills. Continuing, he explained that while SJR 3 would exempt numerous University receipts including tuition and other receipts that are not federally or state funded, HJR 9 would only exempt University tuition receipts. He shared that the differing approaches to University receipts would amount to a difference between the two proposals of approximately $150 million, as reflected in the graph with SJR 3's FY 05 appropriation limit being approximately $150 million less than that proposed for HJR 9. Co-Chair Wilken asked for confirmation that the appropriation limit difference reflected in the graph could be contributed specifically to University receipts. Mr. Schultz confirmed. Co-Chair Wilken understood therefore, that while the comparison slope of each bill's appropriations as depicted on the graph is "about the same", the lesser appropriation level shown for SJR 3 is the result of how University receipts are factored. Mr. Schultz clarified that the HJR 9 slope is similar to that of SJR 3 except that it's slope reflects the one percent higher formula calculation. Co-Chair Wilken asked for confirmation, therefore, that HJR 9's slope increase in the out-years is the result of the one percent factor difference. Mr. Schultz concurred. Senator Dyson explained that the difference "in the vertical axis is the University receipts," and that the out-year slope difference is the result of the one-percent formula calculation difference. Co-Chair Wilken acknowledged that explanation. Co-Chair Green stated that she had expected to view corresponding numbers somewhere in the comparison charts, perhaps in FY 2000 or FY 2001, as she expected that there should be a base from which to begin both bills' calculations. Continuing, she inquired as to the reason that, FY 02 and FY 03, which reflect actual numbers, are different. Mr. Schultz responded that the graph was adjusted to reflect, "going backwards", exemptions such as the University receipts. Co-Chair Green asked the reason it was deemed necessary to make these adjustments when looking at previous years. Mr. Schultz responded that these adjustments were conducted in order "to compare apples to apples." Co-Chair Green argued that only the dollars looking forward from FY 04 should be adjusted to reflect these exemptions. She opined that previous years' dollars are unaffected and should reflect actuals. Mr. Schultz responded that in order to calculate the proposed formulas, it was deemed necessary to exempt the University receipts in the preceding years. Co-Chair Green argued that any prior year adjustments would affect the slopes reflected on the graph. Co-Chair Wilken understood that, in FY 06, the annual growth projection for HJR 9 would be $164 million and the growth projection for SJR 3 would be $112 million. He recalled recent and separate testimony that specified that the State would be required to provide $107.6 million for the Public Employee Retirement System [PERS] and Teachers Retirement Systems [TRS] in FY 06. Therefore, he asked whether these PERS and TRS obligations must be provided for from these projected amounts. Mr. Schultz affirmed that this would be required. Continuing, he clarified that some funding for the PERS and TRS obligation was included "in the fixed base for FY 04 and FY 05, both to smooth the chart but also for transition" purposes. Co-Chair Wilken concluded therefore that PERS and TRS obligations for FY 07, FY 08, and FY 09 must be subtracted from the projections. In summary, he surmised that the annual growth for the forthcoming four years would be "more than consumed" by the projected PERS and TRS obligation. Mr. Schultz agreed. Co-Chair Wilken informed the Committee that he had requested the Division of Retirement and Benefits to provide "official" FY 06 PERS and TRS projections. Co-Chair Green asked whether "the transition language" in HJR 9 is similar to that of SJR 3. Mr. Schultz responded that the transition language is "very similar" with the exception of the differing base numbers due to the University receipt exemptions. Senator B. Stevens observed that in Section 30, which is the transition language section of each bill, reference is made, on page three, line 21 of HJR 9, to Section 16 (D) of Article IX of the Constitution, whereas in SJR 3's Section 30, on page three, line 19, the reference is to Section 16 (C) of Article IX in the Constitution. He stated that this appears to be a technical error as, otherwise, the language in each section is identical. Mr. Schultz understood that the language should be identical. Senator B. Stevens stated that this discrepancy should be examined. Mr. Schultz agreed. Senator Dyson asked regarding the base year adjustment that was required in order to apply the proposed formulas. BRUCE TANGEMAN, Fiscal Analyst, Legislative Finance Division, responded that, while it is too early to determine the budget outcomes of FY 04 and FY 05, the numbers utilized would provide the $120 to $150 million "headroom" necessary for projected budgetary requirements for such as PERS and TRS in FY 06. Senator Dyson specified that, in light of the State's "recent budget reductions … a cushion" of approximately $150 million was built into the projections "in order to make the formulas work." This, he continued, would provide a floor from which to expand to provide for projected PERS, TRS, and Medicare and Medicaid increases. Senator Bunde expressed the understanding that the State's deficit would exceed $10 billion in ten years as the result of inflation, PERS, TRS, Medicare and Medicaid expenses. CHERYL FRASCA, Director, Office of Management and Budget, Office of the Governor, affirmed that, based on the FY 05 budget projections and going forward, the Department of Revenue projects that there could be a one billion dollar budgetary shortfall in approximately six or seven years based on a $22 per barrel of North Slope crude oil price. Senator Bunde understood therefore that the deficit amount he had shared was "in the ballpark." Ms. Frasca replied that, "they could be." In response to Senator B. Stevens earlier question regarding the differing articles identified in Section 30, Mr. Schultz clarified that the language is correct, as the adoption of either bill would change the Constitution in that were HJR 9 adopted, the language in the Constitution being referenced would be Section 16(d) of Article IX, and were SJR 3 adopted, the language in the Constitution being referenced would be Section 16(c) of Article IX. Representative Stoltze affirmed that this is a complicated process. Co-Chair Wilken complimented the efforts being undertaken in this endeavor and ordered the bill HELD in Committee.