CS FOR HOUSE BILL NO. 104(RLS) "An Act renaming the Alaska performance scholarship and relating to the scholarship and tax credits applicable to contributions to the scholarship; relating to Alaska Advantage education grant funding and to Alaska performance scholarship funding; establishing an account and fund for those purposes; making conforming amendments; and providing for an effective date." 9:04:54 AM Co-Chair Stedman discussed the agenda and the rules of decorum. DIANE BARRANS, EXECUTIVE DIRECTOR, POSTSECONDARY EDUCATION COMMISSION, DEPARTMENT OF EDUCATION, testified in support of the legislation and expressed appreciation on behalf of the administration for the bill being heard so early in the process. She stated that the governor's original request modified the name of the program to deal with copyright infringement and provided a stable funding source for statewide scholarships. She added that the governor was seeking to establish a recurring fund source. The current bill had been modified to include funding for Alaska Performance Scholarships (APS) and Alaska Advantage Education Grants. She observed that Alaska Advantage Education Grants provided the state's only needs-based financial aid program for postsecondary education. 9:11:54 AM Ms. Barrans discussed Sections 1 through 4, 7, 9, 13, and 16; these sections were the program's "housekeeping components" as they renamed the scholarship program. She informed the committee that Section 5 clarified a new process in the event of a funding shortfall and furthered that if a shortfall was experienced, no new students would be accepted into the scholarship program. Section 6 added requirements that are applicable to postsecondary institutions seeking to participate in APS; this section required that participating institutions must provide mandatory counseling and insured that the courses needed for a student to complete their program on time were available. She related that Sections 8, 10, and 14 established the accounts, as well as a fund into which appropriations would be made; these sections specified that income earned on investments and donations to the fund were permitted and also provided a funding scheme. She looked at Sections 11, 12, and 19; these Sections created tax credits for corporate citizens to make contributions to the APS and Education Grant funds and also ensured that contributions remain eligible for the credit in the years subsequent to the sunset date. Ms. Barrans indicated that Section 15 contained transition language, while Sections 17 through 20 dealt with effective dates. She noted that ideally, new requirements for institutions would have an effective date of one year later in order to allow institutions to meet the requirement changes. She stated that funds were set aside by passing SB 76 the prior session and that conforming changes to the bill were appropriate. She stressed that "We stand ready to work with the committee to bring back a bill that is acceptable to all parties." 9:15:40 AM Co-Chair Stedman indicated that not everyone was familiar with the legislation and requested an explanation of the HB 104. Ms. Barrans explained that the bill modified a program that was put into statute in 2009; it created a program that incentivized Alaskans to succeed in school and score well on national exams. The high school graduating class of 2011 was the first class of students eligible to receive the scholarship. She said that the original bill required that the Commission on Postsecondary Education, the Department of Education (DEED), the Department of Labor (DLWD), and the University of Alaska report on the outcomes of the scholarship program; the report was due within ten days of the start of the current session. Ms. Barrans highlighted the upcoming report and pointed out that approximately 2400 Alaskans were eligible in 2011 for the scholarship, but that only a little over 900 made use of the program. She furthered that due to the tentative nature of funding the prior year, many students chose to attend institutions in other states. She expounded that the scholarships could not be used at institutions outside of the state and noted that out of those eligible, almost as many students attended institutions outside the state as those who attended in-state institutions. She concluded that over time, more trend data would be available regarding the scholarship's eligibility and utilization. Co-Chair Hoffman wondered how the fund would be split between the Alaska Advantage Education Grants and APS. Ms. Barrans replied that there was no prescribed formula for a split. She continued that there was discussion during the prior session regarding a formula, but that the offered bill version did not address that aspect. Co-Chair Hoffman stated that there was a lot of interest in the Alaska Advantage Education Grant Fund and that legislators wanted assurances about what portion would be allocated to that fund. He queried if the administration had a recommended spilt. Ms. Barrans responded that there was a discussion about a one- third/two-thirds split. 9:19:35 AM Co-Chair Hoffman wondered if the administration felt that the $400 million set aside would be adequate under a one-third/two- thirds split. Ms. Barrans replied that the funding was adequate. She stated that the utilization rates for the scholarship had been determined based on a proxy, but indicated that the rates had been adjusted based on actual experiences that year. The adjusted rates were slightly lower and were reflected in the updated fiscal notes. She deferred to the Department of Revenue (DOR) for a discussion regarding what income could be generated off of the $400 million allocation. Senator Thomas queried what kind of marketing was in place to promote the scholarship program. Ms. Barrans replied that the Commission on Postsecondary Education had been working closely with DEED and the governor's office to coordinate the marketing. There was a staff person at DEED who was charged with disseminating information about the program to the schools, counselors, principals, and superintendents. The commission used direct marketing approaches. Information from DEED and the Permanent Fund Division was used to identify and target students in order to send information about the program directly to them. The commission's outreach staff, based in Anchorage, gave public service announcements that were targeted at students who were planning for college. She added that the program had no operating funds and did not have a specific marketing budget. 9:22:37 AM Senator Ellis expressed concern that rural students could not realistically access the courses needed to qualify for merit scholarships. He queried if any changes could be made to HB 104 to address the realistic access of rural students to the courses needed to compete for scholarships. Ms. Barrans responded that Commissioner Hanley from DEED was in the room and that he might want to respond to the question personally. She interjected that she did not believe the statutory language had been altered to affect that change. She furthered that data showed that students from small, remote areas were making it into the program, but acknowledged that it was more of a challenge for rural students to qualify. She spoke about the need to make the required courses "readily available" to all students. Co-Chair Hoffman asked if an analysis had been done comparing qualifying students from rural versus urban districts. Ms. Barrans responded that the analysis was included in the report. Ms. Barrans stressed that federal privacy laws prevented them from reporting small graduating classes where the number was below an established threshold. Reporting on very small numbers, such as two or three, could lead to the students being identified as individuals. In order to satisfy federal requirements, the commission was required to "roll up numbers" to a district or region level in schools where the graduating class was too small. 9:26:30 AM Senator Thomas queried if the increases in the tuition had prompted any discussion in the administration about increasing scholarship funding levels. Ms. Barrans replied that the administration had not had a discussion regarding funding levels. She indicated that the scholarship levels were fixed to the 2010-2011 tuition and would have less "buying power," but added that the dollar levels were set in statute and could be changed. Senator Egan wondered how many needs-based requests they had been receiving. Ms. Barrans replied that they had received about 4400 applicants that year and were able to fund just over 2000 with education grants. Based on the current application volume, just under $7 million would be needed to fund all student applicants. Senator Egan asked if the number of funded students represented just less than half of the applicants. Ms. Barrans replied that Senator Egan was correct. Senator Olsen expressed the importance of a good education. He noted that HB 104 seemed to put rural school districts at a disadvantage. He indicated that he would have a hard time supporting this type of legislation until rural and urban students were on more equal footing and emphasized to Co-Chair Stedman that he had "some pretty strong feelings" on the issue. 9:29:34 AM Co-Chair Stedman stressed the importance of using the sign-up sheet if you would like to testify on a bill. He listed the five updated fiscal notes as follows: two zero fiscal notes from DOR, Treasury and Tax Division, one zero fiscal note from DEED, and two fiscal impact notes from the Alaska Commission on Postsecondary Education. One note from the Alaska Commission on Postsecondary Education contained a $2 million dollar increment for APS while the other reflected a $3.996 million request in administration and operating costs. Both fiscal notes included increasing out-year cost estimates. He mentioned that one of the fiscal notes had been received that morning and was new to him. ROBYNN WILSON, AUDIT SUPERVISOR, TAX DIVISION, DEPARTMENT OF REVENUE (via teleconference), introduced herself and stated that she was available for questions. Co-Chair Stedman inquired what the tax credit's net effect was on the state's credit mechanism. Ms. Wilson replied that HB 104 did not change the amount of credit available, but it added a category under which an education credit could be claimed. 9:32:03 AM Senator Olson wondered if there had been indication that the private sector wanted to participate in the tax credit program. Ms. Wilson responded that they had not yet received the tax returns that would report private sector participation. Senator Olson furthered that he assumed there was a study regarding possible private sector participation. He wondered whether the state would fully fund the program. Ms. Wilson indicated that DOR did not have a study regarding private sector participation and furthered that as HB 104 was written, the state would be fully funding the program. 9:33:36 AM AT EASE 9:34:19 AM RECONVENED Co-Chair Stedman expressed his surprise that no one had signed up to testify on HB 104. Co-Chair Hoffman had a question in reference to a fiscal note prepared by Diane Barrans. He noted that from FY 13 to FY 18, the number of students entering the program was anticipated to grow by 35 percent and that the expected payout of the fund will increase from $6.9 million to $9.6 million. He queried how the fund would be managed to address the increase in payouts and whether the fund would be adequate if no additional dollars were added. Ms. Barrans asked for clarification on which fiscal note Co- Chair Hoffman was referring to. Co-Chair Hoffman replied that he was referring to the fiscal note that the Office of Management and Budget (OMB) noted as number 2738. Co-Chair Hoffman reiterated his question. Ms. Barrans replied that her discussions with DOR led her to believe that investments from the fund would be based on expected pay outs and that investment decisions would be aimed at insuring that the fund was able to cover the costs. She deferred to Jerry Burnett for a more detailed answer. Co-Chair Hoffman noted that a high rate of return would be needed to offset increases in student payouts. 9:37:42 AM Co-Chair Stedman asked for an explanation of the $400 million set aside for the fund and wondered what revenue might be earned off that allocation, including projected shortfalls or surpluses. JERRY BURNETT, DIRECTOR, ADMINISTRATIVE SERVICES DIVISION, DEPARTMENT OF REVENUE, replied that when the bill was originally introduced, the $400 million was to be invested in a fund with an annual real rate of return of 5 percent. He stated that the fund was to be inflation proofed and would earn 7.75 to 8 percent in the current market place. The fund was projected to earn $20 million the first year and would grow each year. He noted that "we're looking at less than $20 million in those first years". DOR would consider the program's costs and would customize an asset allocation designed to build the fund, based on the $400 million allocation and the expected future payments. He observed that the $400 million had earned interest throughout the year in the general investment fund and that as a result, the Alaska Housing Capital Corporation had more than the initial allocation available. 9:39:29 AM Co-Chair Hoffman queried what interest rate the fund had earned during the first 6 months. Mr. Burnett replied that he was unsure, but that he could get that information. He added that over the past several years, the fund had earned 3 to 4 percent. He reiterated that the allocation would be customized based on the future needs of the fund and remarked that fiscal the note in the packet indicated that based on the house bill's language, the money would have to be left in the general investment fund. Co-Chair Hoffman queried if the $400 million would grow by the anticipated 35 percent between FY 13 to FY 18 in order to meet the expected payout. Mr. Burnett responded that he believed the $400 million allocation could potentially earn enough to meet the payout in FY 18 and expounded that in order to meet the payouts, DOR could customize an asset allocation that had a lower probability of loss. Co-Chair Stedman requested that DOR come back to the committee with a forecast projecting the initial $400 million input, including expected withdrawals and payouts. He specified that the forecast should go through FY 18 or whatever fiscal year DOR was comfortable projecting to. He observed the similarity to the Power Cost Equalization program, where the payouts had reached 7 percent and erosion of the principal was a concern. He continued that the fund could become part of a larger discussion when oversight was done on various pools of funds. 9:42:27 AM Co-Chair Hoffman queried if the interest earned from the $400 million was going to pay for the first year of operating expenses or if additional money would be requested. Mr. Burnett replied that he made no assertions about how the program would be funded during the first year and elaborated that because the $400 million had been earning interest in a segregated fund that kept its earnings, there was more than $400 million available. He added that the appropriation to fund was only $400 million. Senator Ellis queried if students who get GED's qualify for the merit based scholarship programs and wondered how the program dealt with students from tumultuous backgrounds, like those attending military academies and alternative high schools. Ms. Barrans replied that students would be required to obtain a high school diploma in order to qualify. Senator McGuire inquired if the current meeting was the last hearing on HB 104. Co-Chair Stedman stressed that this was the first hearing on HB 104 and that more hearings would be held. 9:45:27 AM Senator McGuire requested that Ms. Barrans give further explanation of what led to HB 104 and what it accomplished. She stated that the bill would not be the scholarship for every Alaskan, but that it was an opportunity for exceptional students. She continued that special options could be explored to help rural students and indicated an interest in hearing how Louisiana had dealt with their rural townships. She stated that Galena's student program was a model that could be used to create a program for Alaska's rural students and stressed the need to enable rural districts to bring students into compliance, rather than having rigid standards to qualify for scholarships. She expressed her approval of the intent of HB 104 and a desire to work with DOR through the process. She added that declining production of the Trans-Alaska Pipeline System (TAPS) would tighten the state's budget and force the state to make choices. She indicated that funding might not always be there for certain programs and that it was DEED's job to "sell" the program to the legislature. Ms. Barrans pointed out that HB 104 was not the bill that created the program. There were many hearings on the original bill and the legislature had put the program into statute the prior year. She emphasized that the program had been operating less than a year and stressed the benefit of several years of progress before making substantive changes to the program. The legislation was intended to change the program's name and to fund the program. She urged that it was important to give the program time to operate before attempting to fix it and related that the program was intended to help students make the right decisions early. She acknowledged that the program was not the end solution, but that it was a good starting place. Senator Olson noted that DOR expected to be able to achieve the 7.75 to 8 [percent] interest rate. He wondered what mechanisms were in place to insure that qualified children were not overlooked if the expected interest did not accrue. He furthered that his real question was if DOR was setup to use the funds that were already in place. Mr. Burnett replied that he was unable to answer because DOR needed to examine models for future funding in order to establish an asset allocation for that purpose. He added that the program could be set up as an endowment or as fixed income investments that were based on timing. 9:51:56 AM Co-Chair Stedman noted that the committee would await the analysis that Mr. Burnett had referred to and observed that in the future the committee would look at a multi-year period, rather than using a six month period and extrapolating it further out. He announced that the Permanent Fund and the retirement system would be reviewed in the committee at a later date. He pointed out that there would be a presentation on the growth in the Gross Domestic Product (GDP) relative to debt levels; the presentation would give them a "better feel for what we can expect out of the performance of our pile of assets that we've set aside, our cash." Senator Thomas asked for a written explanation of Ms. Barrans' response to Senator Egan's question. Ms. Barrans agreed to provide the information. 9:53:38 AM House Bill 104 was HEARD and HELD in committee for further consideration. 9:53:59 AM AT EASE 9:54:20 AM RECONVENED