SENATE BILL NO. 62 "An Act relating to grants for school construction." 9:40:02 AM Senator Olson stated that time was of the essence regarding the bill because of the school construction that was going on, particularly related to the small municipalities, and scheduling problems related to the funding. Mr. Scott introduced SB 62 and stated that it allowed 5 school districts be become eligible to use the Regional Educational Attendance Area (REAA) School Construction Fund, which had been established in 2010 by the 26th Legislature in SB 237. He explained that the impetus behind the REAA Fund was the Kasayulie Case. Mr. Scott presented a brief sectional analysis. He stated that Section 1 added the words "to small municipal districts" to the name of the REAA Fund. Section 2 defined what a small municipal school district was, which was "a district in the state that has an average daily membership (ADM) of not more than 300 and the full value per ADM was not more than $500,000." Section 3 added "small municipal districts" to the name of the REAA Fund and Section 4 delineated that small municipal school districts had the definition that was pointed out in Section 2. 9:43:11 AM Vice-Chair Fairclough observed that the fiscal notes appeared to propose $35 million per year. She inquired why the appropriation was not standing alone and why the Kasayulie case was part of the discussion. Mr. Scott replied that there was a new revised fiscal note and that he would try to answer the question. He shared that the REAA Fund dealt with the Kasayulie case regarding how there was inconsistent funding for Rural Alaskan schools and pointed out that there was formula in law, which was in AS 14.11.025(b) and Section 1 of the bill, that determined the $35 million amount; the formula used the total amount of annual debt service divided by the percentage of the schools that were located in the district and multiplied by a .244 quotient. Vice-Chair Fairclough thought that the Kasayulie case was resolved with setting up the REAA funds. She understood the issue, but did not understand why the Kasayulie case was being discussed in reference to a bill that was adding additional aid. Co-Chair Meyer noted that Senator Hoffman knew the issue well. Senator Hoffman stated that the Kasayulie case was legislation that he had worked on for about 10 years, and believed that he had piggy packed on a bill of Co-Chair Meyer's in order to resolve the case. He stated that the Kasayulie case was brought forward for REAAs, but noted that there continued to be school districts in Alaska that were not REAA's and did not have the capacity to sell bonds; furthermore, Tanana and St. Mary's were first class cities that did not have this designation or authority, but still had a responsibility to build new schools. He explained that the 2 cities had led the way in accepting the responsibly in funding education, but did not have the foresight to realize that they would be responsible for new school construction. He furthered that the Kasayulie case had been primarily addressed to REAA Rural Alaskan schools and pointed out that the case had been decided against the State of Alaska; the judgment basically stated that the difference in funding between REAA and urban schools was arbitrary and inadequate. Senator Hoffman continued to speak to the Kasayulie case and related that the focus of SB 237 was to address the plaintiffs' issues of inadequate funding for REAA schools; however, there was still an issue of contention regarding how the governor had submitted his capital budget the previous year. He explained that as required, there was $32 million or $33 million that went into the REAA fund, but that that during the negotiations, there were 10 rural schools that needed to be addressed prior to the fund kicking in; between 2010 and the last year, 7 of those schools had been funded directly through the General Fund mechanism. He related that the prior year, the legislature had changed the way the governor had approached the funding for the Kasigluk and Emmonak schools to have those schools be funded through General Funds. He observed the governor trying to do the same thing with the last school, which was Nightmute and noted that he was planning on meeting with Mr. Begich and Co-Chair Meyer in order to rectify the issue the same way as the previous year. He pointed out that the REAA case was settled for REAA schools, but that it did not address the other 5 school districts in SB 62 that ultimately had the responsibility to fund those schools; furthermore, these 5 school districts were small rural districts that did not have the capacity to build the schools. Senator Hoffman pointed out that instead of addressing the issue in a different way, Senator Olson was proposing the change in the SB 62, which seemed reasonable. He stated that the problem he had was that the individual REAA schools that had brought the Kasayulie case forward could potentially experience a dilution in REAA funds as a result of the additional 5 smaller schools. He noted that rural schools had a cost between $30 million and $50 million and that the plaintiffs of the REAA case would in essence be sharing the settlement with the smaller schools districts; however, he did not have much "heartburn" with that approach if the state could at least fund the last school with general funds. He opined that the issue should be addressed without having to open up the Kasayulie lawsuit again. 9:50:54 AM Vice-Chair Fairclough supported making sure that rural schools were treated with fairness and agreed that the Kasayulie case should be closed. She added that her issue was that the Kasayulie case should be closed period and that the state should look at equitable funding across the state "with that lens." She shared Senator Hoffman's concern that adding other schools could dilute the compromise of Kasayulie case and observed that the money contribution would be annual, which represented a win in the end. Co-Chair Meyer noted that Senator Hoffman had taken his good bill and made it better and requested that Senator Hoffman refresh the committee on how he had dealt with the Kasayulie case in the legislation. Senator Hoffman offered that he had taken a good bill and made it much better. He related that the bill had been in the Senate Finance Committee at the time and recalled asking the administration for assistance in developing a formula, which never developed. He relayed that the committee knew the state was on the hook for 70 percent of the funds to pay for urban schools and that the committee had written a formula on a percentage basis of how much the State of Alaska was paying for urban schools; a percentage of that was taken to pay for rural schools. He shared that a problem had been that the first 10 schools had substantial construction costs and that there was an understanding that those schools would be funded so that the smaller schools could be addressed. He thought that if the Nightmute school was addressed through the current year's capital budget and this legislation was changed, the state would be able to get to the St. Mary's school this next year. He offered that St. Mary's was the only school on the list, but others could submit evaluations and be evaluated; all of these schools were funded on an evaluation basis on which ones were in the most need of repair or replacement. He commented that there were no provisions to address the major maintenance issue. 9:54:15 AM Vice-Chair Fairclough stated that she was 100 percent behind appropriate funding for Rural Alaskan schools, but did not understand why there was not a road between Toksook Bay and Nightmute. She pointed out that the road was needed for public safety issues, but also because the state was building 2 schools that were in very close proximity to each other. She understood that Toksook Bay and Nightmute were 2 distinct communities that wanted to remain distinct, but observed that as money started to constrict those were decisions that the state would have to make. She acknowledged that a road would be expensive and might create too many public safety issues, but that it could connect that community to a school that was already improved. Senator Hoffman stated that he agreed with Vice-Chair Fairclough and related that he had recently been discussing additional ways to save to money for rural schools with Senator Dunleavy. He stated that there were several issues in both rural and urban schools that continued to need attention such as increased education opportunities, increased scores, and possible ways to save. Senator Olson observed that many school districts in his district were single-school districts that did not qualify as REAAs; however, some of the districts were dealing with the same situation that had been addressed in the Kasayulie Case, particularly Galena. He discussed inconsistent funding of certain school needs in Alaska. He concluded that the intent of the bill was to ensure that school districts across the state were not overlooked and rectify the problem in districts where this may have been occurring. Co-Chair Meyer recalled Vice-Chair Fairclough's comments regarding the possibility of building a road from Toksook Bay to Nightmute instead of building another school and inquired what the distance was between the 2 communities. Vice-Chair Fairclough thought that the distance was less than 5 miles. Senator Olson thought that the distance was about 7 miles, but that the route would have to cross the river. He pointed out that the rising tide was a factor on the river delta and that building a bridge would be complicated. He opined that the state would have to consider a way to get the 2 communities connected, not only for schools, but also for needs like electricity. Senator Hoffman noted that the villages on the river delta were now represented Senator Gary Stevens. 9:59:44 AM DAVID HERBERT, SUPERINTENDENT, ST. MARY'S SCHOOL DISTRICT, ST. MARY'S (via teleconference), voiced the district's strong support of SB 62. He related that St. Mary's School District had originally been part of the Kasayulie case, which had recognized that the method of funding new school construction in Alaska's schools needed to be fair and equitable. He reported that during the final negotiations of the settlement, the St. Mary's School District had been excluded from the list of schools that were eligible to receive funds through the Kasayulie funding mechanism; the exclusion was due to the fact the St. Mary's was considered a first class city school district instead of an REAA district. He explained that a first class city school district such as St. Mary's required the city to make a mandatory local contribution to the school district each fiscal year to help offset the costs of running the school district; whereas, REAAs did not have a mandatory contribution requirement. He stated that St. Mary's was surrounded by REAA school districts that were benefitting from the Kasayulie new school construction funds. He expressed that St. Mary's was disappointed to have been excluded from the settlement during the final hours of the negotiations because it was the only first class city school district in the lawsuit. Mr. Herbert related that the St. Mary's School District had then taken the necessary steps to improves its position on the new school construction list through the Department of Education and Early Development and had written a quality application; additionally, the district had been frugal and fiscally responsible in order to make the additional investments needed to improve the quality of its application and had followed all the steps to ensure that it met all requirements to move up to the top of the new school construction list. He pointed out that currently, St. Mary's was the only small municipal school district on the school construction list that SB 62 would apply to; therefore, the impact of the legislation would be minimal to the state, but would be greatly important to the St. Mary's School District because without the bill, the district's chances of being funded for new school construction would be greatly diminished. Mr. Herbert related that currently, most municipalities in the state had bonding capacity, which meant they were eligible to pass bonds and receive up to 70 percent reimbursement from the state for new school construction projects. He stated that the Kasayulie case funding mechanism in SB 237 provided a funding source for Rural Alaskan schools that did not have the capacity to bond and were REAA schools; however, there was 1 small group of school districts that were not included with the urban or REAA groups, which was the group that were the small municipal school districts as outlined in SB 62. He opined that the St. Mary's School District had demonstrated its ability to provide quality education in Rural Alaska, had outperformed surrounding schools academically, had demonstrated sound fiscal management, and was ensuring that its students became contributing and productive citizens. He urged the committee to pass the legislation. Co-Chair Meyer CLOSED public testimony. 10:06:15 AM Co-Chair Meyer inquired if the administration supported SB 62. ELIZABETH NUDELMAN, DIRECTOR, SCHOOL FINANCE AND FACILITIES, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, responded that the administration did not have a formal position on the legislation. She furthered that the administration had reviewed the bill and did not see any outstanding unanswered questions. Co-Chair Meyer inquired if Ms. Nudelman had prepared the fiscal note. Ms. Nudelman responded in the affirmative. Co- Chair Meyer noted that the bill's estimated cast was $618,000 and requested an explanation of the amount. Ms. Nudelman responded that the Department of Education and Early Development (DEED) had spoken to the Legislative Finance Division and had made a revised fiscal not for the presentation. She shared that the calculation for the funding for the REAA Fund was the annual school debt that the state spent, divided the percentage of municipality schools in Alaska, multiplied by a constant of .244; this created the proportion of funding that supported the REAA funding stream. She explained that the $618,000 was generated when 5 of the municipal school were moved into the REAA group, which changed the percentage slightly; the existing funding was about $35 million annually, which the bill would change by about $600,000. Co-Chair Meyer inquired if the funds would be in the capital budget. Ms. Nudelman responded in affirmative and pointed out the funds being capital was one of items that the Division of Legislative Finance had pointed out in the original draft of the fiscal note. Co-Chair Meyer inquired if the $618,000 was on top of the $35 million that was already in the capital budget. Ms. Nudelman responded in the affirmative and added that the $35 million in the capital budget would become about $35.6 million. Co-Chair Meyer noted that the fiscal was unclear, but that Ms. Nudelman had had clarified things. 10:08:53 AM AT EASE 10:11:50 AM RECONVENED Vice-Chair Fairclough wondered what items were currently on the major maintenance list. She recalled that before the Kasayulie case had been settled, there had been schools across the state that were trying to compete on the state's list and that there had been a bottleneck at the top of list of the schools, which were predominantly in the Kasayulie case, that needed to be funded; as a result, no other schools across the state could match the criteria that was already established with those schools waiting to be funded. She wondered what was left on the major maintenance list and understood that St. Mary's School District was number 2 on the remaining priority list. She noted that someone was copying a draft of the list so that the committee could examine the issue. Co-Chair Meyer voiced agreement with Vice-Chair Fairclough's request and stated that his office would make sure that all the members received a copy of the list. Vice-Chair Fairclough requested that the administration provide the list of major maintenance. Co-Chair Meyer agreed that it would be better if the list came from the administration. Ms. Nudelman replied that DEED would provide the requested information and added that the department prioritized a list for major maintenance and a list for construction each year, both of which were on the department's website. Vice-Chair Fairclough hoped that the committee would receive both lists because both were important to all of Alaska. Co-Chair Meyer noted Mr. Begich was heavily involved in the Kasayulie case and requested his thoughts on the record. 10:14:18 AM TOM BEGICH, POLICY DIRECTOR, CITIZENS FOR THE EDUCATIONAL ADVANCEMENT OF ALASKA'S CHILDREN, noted that Citizens for the Educational Advancement of Alaska's Children was the plaintiff group that had brought the Kasayulie suit forward and that it represented 21 of the 53 school districts in the state; furthermore, it represented 12 of 19 REAAs. He reassured Vice-Chair Fairclough that the bill did not attempt reopen litigation, but that it attempted to fix the gap. He pointed out that there were schools that could utilize the Municipal Debt Reimbursement Fund and those that were covered under the REAA funding mechanism, but that there were a number of small schools that had fallen through the cracks that did not have the capacity to bond or were not REAAs. He explained that the legislation ensured that that any districts that fell under the criteria of not having the capacity to bond or were not REAAs would have access to the REAA funds. He addressed Senator Hoffman's comments regarding possible concerns from REAAs about a dilution of funding REAA funding, but asserted that as the plaintiff group in the Kasayulie case, the Citizens for the Educational Advancement of Alaska's Children had made SB 62 its highest legislative priority with the recognition that some of the other plaintiff member districts had not been addressed. He reassured the committee not to worry about a feeling that the bill would diminish the REAA Fund. Mr. Begich discussed the administration's priority list for major maintenance and construction and related that although St. Mary's could currently qualify for funding through the General Fund, the REAA Fund was designed for schools exactly like St. Mary's. He added that the bill's particular formula was adopted to minimize the impact that the legislation would have on the REAA Fund, which was why it used a combination of value, divided by ADM and had an ADM number of 300; this method ensured that only the districts that could not bond would have access to the REAA Fund. He explained that if a city's tax base expanded, it could cause a district to be no longer eligible for funding because eligibility was based on a formula and not on the named communities; the formula was aimed at continually focusing on equity regarding how schools were funded. 10:17:47 AM Senator Hoffman recalled a previously mentioned list of schools and stated that Nightmute was the last school that was to be funded with General Funds. He recalled fixing the funding for "the 2 schools" the prior year and switching the funding mechanism to General Funds. He pointed out that the governor was again trying to build schools with the REAA Fund and offered that the legislature felt that those top 10 schools should be funded with General Funds; he requested Mr. Begich to address these comments. Mr. Begich responded that there were 5 schools named in the consent decree, 2 of which were put in the prior year's budget by the governor to be funded by the REAA Fund; furthermore, the Citizens for the Educational Advancement of Alaska's Children and the governor had a disagreement regarding what the consent decree stated. He explained that the Citizens for the Educational Advancement of Alaska's Children thought that intent of the consent decree was to fund these schools that were extraordinary in costs with the General Fund because it would otherwise wipe out the REAA Fund; furthermore, this was also the position taken by the Senate the prior year. He explained that the prior year, both of "those schools" had been shifted from the REAA Fund as the funding sources to the General Fund and that both schools had been funded and supported by the governor in consistency with the consent decree. Mr. Begich continued to address Senator Hoffman's comments and related that the in the current year, the governor had introduced the Nightmute and Quinhagak schools both drawing from the REAA Fund. He shared that the Citizens for the Educational Advancement of Alaska's Children believed that the Nightmute school should be funded through General Funds and not through the REAA Fund, but that this represented a decision the legislature would have to make. He pointed out that if the Nightmute were funded through General Funds and the legislation passed, it would ensure that St. Mary's would draw from the REAA Fund this year and would help free up the clogging of the list that had occurred over time. He pointed out that there was 1 large school left on the list that was not involved in the Kasayulie case and that once it was funded, the list could be cleared rapidly. 10:20:32 AM Co-Chair Meyer inquired how much money was in the REAA fund. Mr. Begich replied that the prior year, about $35 million had been appropriated to the fund and that in the current year, there would be about an additional $35 million. He noted that the fund was capped at $70 million and that even if the legislation added $600,000 it had no effect once the cap was reached. He clarified that if nothing was spent out of the REAA fund in the current year, the next year's deposit would be virtually nothing; even though an appropriation was required, the fund would be maxed out. Senator Olson inquired why St. Mary's did not qualify as an REAA school district and expressed concerns regarding potentially making the same mistake with some of the school districts that he represented. Mr. Begich replied that the St. Mary's had chosen to organize and tax, which took care of a lot of local education and other needs; however, what the district had not addressed when it became incorporated as a city was having to build schools. He explained that St. Mary's did not have the property tax base needed to bond and pointed out that bonding agencies looked at raw numbers and values; in this instance, St. Mary's did not have property tax base that any bonding agency would allow it to issue bonds with. Senator Olson queried why St. Mary's had not been included and wondered if what was part of the negotiators' reasoning. Mr. Begich replied that the mechanism for getting the plaintiff and the state to come to the table and negotiate was proposed in 2010. He explained that the mechanism was a complex bill that was attached to another complex bill and referenced earlier comments by Co-Chair Meyer and Senator Hoffman; additionally, the bill had been at risk of not passing. He shared that he could not speak to what occurred during negotiations, but that it had been simpler to look at the REAA number versus the bonded numbers by those who were actually working in the legislature on that bill; a result, a compromise had been reached. He shared that at the time in 2010, "we all" had brought up the question about the bonded schools and that people had hoped to correct the issue before the legislation came into play; however, this simply did not happen. He stated that the Citizens for the Educational Advancement of Alaska's Children had pursued SB 62 on St. Mary's behalf, as well as other the schools, and were hopeful that the legislation would pass. 10:24:42 AM Senator Bishop inquired if the legislation would close the donut hole on any other schools. Mr. Begich responded in the affirmative. BRUCE JOHNSON, EXECUTIVE DIRECTOR, ALASKA COUNCIL OF SCHOOL ADMINISTRATORS, stated that the membership was supportive of the legislation. Senator Olson inquired what the consequences of the bill not passing in a timely manner would be. Mr. Johnson replied that if the bill did not pass, the 5 school districts that were being considered would be unable to have some of their needs addressed regarding capital projects because they did not have the money or the capacity to raise it through a bond because of their limited taxing authority. 10:27:45 AM AT EASE 10:30:14 AM RECONVENED Co-Chair Meyer noted that the bill represented a lot of money and that the committee would have further discussion on the legislation. SB 62 was HEARD and HELD in committee for further consideration. 10:31:04 AM RECESSED 3:17:16 PM RECONVENED