SJR 19-CONST. AM: APPROP LIMIT  1:33:39 PM CHAIR HOLLAND announced the consideration of SENATE JOINT RESOLUTION NO. 19, Proposing amendments to the Constitution of the State of Alaska relating to an appropriation limit. CHAIR HOLLAND reminded members that the committee worked extensively on Senate Joint Resolution 301 during the third special session. The committee substitute (CS) language for Senate Joint Resolution 301 was incorporated into SJR 19. [The committee held its first hearing on SJR 19 on 1/28/2022.] 1:34:22 PM SENATOR SHOWER commented that the committee discussed [Senate Joint Resolution 301] last year. He asked for a summary of how the trailing average works and what indicators drive the change in the spending cap. 1:35:18 PM SENATOR MYERS, speaking as sponsor, responded that SJR 19 uses a five-year rolling average for the personal income index for several reasons. First, he offered his view that this would provide more stability. Second, if the state experienced a recession, it would need to ramp up unemployment insurance and several other things to create a smoothing effect. This means the economy can drop slightly while the rolling average is still increasing. The state would not cut off state spending immediately when it is needed. The state would need to reduce its spending, but using personal income provides a little flexibility at the beginning. He offered that this provides some incentive for the state to pay attention to the private sector and help get the economy back up and running if the state experiences a recession. 1:36:51 PM SENATOR SHOWER related his understanding that the spending cap could drive spending down. He asked for the curve's starting point and if it would be based on the current budget and trend upward. SENATOR MYERS answered that the spending cap would put downward pressure on the budget if the state experienced a recession. The concept of a spending cap is not only to cap spending but to tie it to the performance of the state's economy as a whole. Second, one benefit of the spending cap is the structure in SJR 19. Previous spending caps were based on current spending and indexed by inflation, population, or both. This creates some significant problems because it is not necessarily tied to current events, including state spending and the economy. He acknowledged that inflation is always an issue, but it is a driver based on events happening outside of Alaska. He said that the population largely follows the economy. If the economy is doing great, more people will come to Alaska, but the population tends to diminish if the economy is tanking. He offered his view that using personal income as the statistic would provide a better tracking overall. 1:39:28 PM SENATOR KIEHL moved to adopt Amendment 1, work order 32- LS1353\A.1. 32-LS1353\A.1 Marx 1/27/22 AMENDMENT 1 OFFERED IN THE SENATE BY SENATOR KIEHL Page 2, line 4: Delete "fourteen" Insert "fourteen and one-half" Page 2, line 8: Delete "fourteen" Insert "fourteen and one-half" SENATOR HUGHES objected for discussion purposes. 1:39:46 PM SENATOR KIEHL explained Amendment 1. He said he discussed SJR 19 with Legislative Finance and Ed King, an economist and committee staff. It appears a slight upward adjustment to the cap is necessary to achieve the additional headroom the committee discussed last fall. He recalled the committee had discussed 14 percent of Gross Domestic Product (GDP), leaving $600 million of headroom. He referred to charts the committee reviewed at its last meeting on January 28, 2022. He recalled that the spending cap based on personal income would provide $100 million in the current fiscal year and approximately $400 million in the next fiscal year. He stated that raising the percentage to 14.5 percent would achieve the level of headroom the committee discussed when it moved Senate Joint Resolution 301 from the committee. 1:41:30 PM SENATOR HUGHES referred to slide 1, Current Constitutional Appropriation Limit (Article IX, Section 16) and Appropriations Subject to the Limit. She directed attention to the graph on the lower side of the slide. She said it appears as though the blue line shows the state had $100 to $200 million of headroom during the state's highest years of spending [in FY 2009, FY 2012, FY 2013, and FY 2014]. She asked if the light blue line would move slightly upward if the spending cap was based on 14.5 percent instead of 14 percent. 1:42:23 PM SENATOR KIEHL responded that he thought it was the current status quo spending limit as shown by the dark blue line. 1:42:32 PM SENATOR MYERS agreed. The graph reflects the current spending cap established in the early 1980s. He said that the large gap illustrates that the existing spending cap is ineffective. It did not curb spending beginning the year after it was adopted. It potentially could have applied in the last boom in FY 2007 or FY 2012, but the state is nowhere near that right now. 1:43:31 PM SENATOR HUGHES asked for confirmation that using either 14 percent or 14.5 percent of the five-year rolling average of the value of personal income of Alaska residents would mean the constitutional spending limit would be below the high peaks shown on the lower chart. SENATOR MYERS directed attention to slide 2, to the bar chart shown in orange, Proposed Constitutional Appropriations Limits Based on State Private Personal Income. The bars representing state spending in FY 2009 and FY 2013 would be significantly above the proposed spending cap in SJR 19. 1:44:08 PM SENATOR SHOWER asked for confirmation that the chart on slide 2, Proposed Constitutional Appropriations Limits Based on State Private Personal Income means that the state could have saved a significant portion of the funds. He acknowledged that some of the spending was for capital budgets. He recalled Mr. King briefed members that the permanent fund would be $115 to $130 billion if not spent. He asked if this would create a true downward pressure. He asked how the constitutional spending limit of 14.5 percent would affect the chart. He wondered if the spending limit would be about 20 percent. 1:45:38 PM SENATOR KIEHL answered that it is difficult to predict what prior legislatures would have done since legislators could have increased the balances in the permanent fund, constitutional budget reserve (CBR), or statutory budget reserve (SBR). The referenced chart with orange bars and the blue line indicates that it would have resulted in less spending. He said the spending limit based on the 1980s era percentage of personal income was about $10 billion. He estimated ballpark figures of 25 percent. 1:46:40 PM SENATOR MYERS said he believed Senator Kiehl was correct. He said the current spending cap was 23 percent of GDP. 1:47:27 PM At ease 1:48:06 PM CHAIR HOLLAND reconvened the meeting. 1:48:13 PM SENATOR HUGHES stated that using the appropriation for this budget, there would be about $500 million headroom at 14 percent. SENATOR MYERS answered that using the governor's budget for FY 2023, SJR 19 at 14 percent, would provide $467 million headroom. 1:49:01 PM SENATOR SHOWER responded that he did not mind providing some wiggle room. He acknowledged that it was pertinent for the next committee of referral. He said he agreed, but he was concerned about raising the percentage. 1:49:58 PM SENATOR HUGHES said she realized that this would provide $500 million in headroom, so she is comfortable using a spending cap based on 14 percent. 1:50:40 PM SENATOR KIEHL explained the underlying constitutional language provides the absolute hard ceiling. He spoke in favor of giving a little more flexibility to the spending limit. 1:51:22 PM SENATOR HUGHES maintained her objection. 1:51:27 PM A roll call vote was taken. Senator Kiehl, Myers, and Holland voted in favor of Amendment 1 and Senators Shower and Hughes voted against it. Therefore, Amendment 1 was adopted by 3:2 vote. 1:52:01 PM CHAIR HOLLAND opened public testimony on SJR 19. 1:52:37 PM EDWARD MARTIN, JR. representing self, Kenai, Alaska, stated that SJR 19 was an interesting resolution. He said he thought that as an American, he was secure in his person, paper and effects. He expressed concern that using personal income would not be available since Alaska does not have a personal income tax. He asked whether the state would use the federal tax rolls to spy on Alaskans. He suggested it might be intrusive. MR. MARTIN said he appreciated the sponsor's concern about government spending. He shared his viewpoint on another bill, not before the committee and the need to cut government spending. CHAIR HOLLAND asked testifiers to speak to the bill before the committee. He asked his staff to provide insight to address Mr. Martin's concerns. 1:56:39 PM ED KING, Staff, Senator Roger Holland, Alaska State Legislature, Juneau, Alaska, stated that the US Bureau of Economic Analysis publishes federal metrics and those metrics were used to generate the charts. The IRS provides federal data that is available for states, even those without a personal income tax. 1:57:23 PM MIKE COONS, representing self, Palmer, Alaska, (via teleconference) said the sponsor mentioned the five-year rolling average in terms of a recession. He said that going back to the governor's proposal of 2.5 with a 10 percent cap would provide more money to address a recession. He highlighted that the real function of government is not to provide social welfare. He offered his view that the SJR 19 language would confuse voters. He surmised they would vote no. He favored the governor's amendment with a 2.5 percent cap. He said he does not support SJR 19. 1:59:47 PM SENATOR HUGHES asked Mr. Coons to repeat his last sentence. MR. COONS stated that he would like a clearcut 2.5 percent spending cap and that the legislature should let the voters decide. He does not support SJR 19, but he supports the governor's proposed constitutional spending cap. 2:00:23 PM SENATOR MYERS stated he was unsure whether he understood his point. The committee previously reviewed the governor's proposed constitutional amendment, and it did not use a percentage, so he was uncertain about the reference to the 2.5 percent cap. MR. COONS responded that was his understanding of the governor's spending cap. 2:01:08 PM SENATOR HUGHES clarified for the public that comparing the two constitutional amendments was not comparing 2.5 percent to 14 or 14.5 percent of growth. 2:01:56 PM SENATOR MYERS summarized the governor's constitutional amendment [SJR 5] for a spending cap to SJR 19. The governor took the current spending and indexed it to inflation and population growth. As inflation and population grows, the legislature's amount to spend would increase. SENATOR MYERS explained that SJR 19 proposes a different mechanism. Rather than taking current spending, the spending should reflect the economy. The 14 percent spending limit is not a measure of growth but how much of the economy comes from the government. Thus, if the economy shrinks, the budget will shrink; if the economy grows, the government will grow. As he mentioned when he presented SJR 19, one would expect the government to grow as the economy grows. He emphasized that while the goal is to limit spending and excess, the mechanism used in the two proposals is very different. 2:03:23 PM CHAIR HOLLAND summarized that under SJR 19, as the economy shrinks, there would be downward pressure to shrink state spending. As the economy grows, there would be more opportunities for state spending to increase. However, it would do so by increasing the cap. SENATOR MYERS answered that he was correct. 2:03:40 PM SENATOR HUGHES related a scenario where the economy could shrink, the population could grow, and inflation could rise. The legislature would like to avoid the predicament where it cannot afford government spending. She said she believed that tying it to the economy would be better than using population and inflation factors. 2:04:10 PM CHAIR HOLLAND closed public testimony on SJR 19. 2:04:23 PM SENATOR MYERS made closing remarks. The point of a spending cap is not to put downward pressure on the legislature during a spending crisis but to limit growth and excess spending. The legislature has discovered it is effortless to increase expenditures but challenging to reduce them. It's better to keep spending from going up in the first place. Last year, he did the math when he introduced the resolution for a spending cap using GDP. Even without addressing inflation or investment, the state would have an extra $15 billion in the bank. He surmised that economic modeling using personal income, as SJR 19 does, would likely be similar. A significant part of the fiscal solution is ensuring that the state does not go on a spending spree again when revenue increases. 2:05:43 PM SENATOR SHOWER moved to report SJR 19, work order 32-LS1353\A as amended, from committee with individual recommendations and attached fiscal note(s). CHAIR HOLLAND heard no objection, so SJR 19 was reported from the Senate Judiciary Standing Committee. 2:06:06 PM At ease