SJR 2-CONST AM: APPROPRIATION LIMIT  4:01:58 PM CHAIR DUNLEAVY called the committee back to order and announced the consideration of Senate Joint Resolution 2, (SJR 2). He explained that SJR 2 is a constitutional amendment appropriation limit sponsored by the Senate State Affairs Committee. He provided an overview of SJR 2 based upon his sponsor's statement as follows: In 1982, Alaska's voters enacted a constitutional appropriation limit which can be found in Article IX, Section 16. It has applied to every budget since FY84. However, in practice the spending cap has grown too high to matter during the budget process. For example, the constitutionally calculated spending limit for this year is $10.1 billion, while applicable state spending is roughly $5.2 billion. Simply put, we could double the budget today before bumping into the cap. Unless we act to "reset" the spending limit, it will remain powerless to curb future government spending growth. SJR 2 lowers the constitutional appropriation limit amount, to bring it in line with the state's current fiscal realty, and to respect the intent of voters who chose to restrict the size of their government. It ties the cap going forward to a percentage of the annual change in population and inflation, to allow for changing conditions in the state. SJR 2 draws on the wisdom from experience since 1982, and aims to close loopholes which allow for spending to bypass the limit. It attempts to simplify the limit so that it can be easily understood by budget and policy makers, as well as ordinary citizens. Alaskans are prepared to help get us through this short-term fiscal situation, but do not want to give government an open checkbook. One of the simplest and most impactful ways we can structurally reduce and cap government growth is through repairing the constitutional appropriation limit to ensure it functions, as the voters of Alaska intended when they enshrined it in the Constitution not once, but twice. The state's fiscal situation calls upon Alaskans to make sacrifices and the people want assurances that the size, spend, and growth of government will be kept in check. SJR 2 may be the most crucial piece of legislation that helps in accomplishing this goal. 4:06:24 PM DANIEL GEORGE, Staff, Senator Mike Dunleavy, Alaska State Legislature, Juneau, Alaska, provided an overview of SJR 2 as follows: SJR 2 is a timely conversation, it addresses a clause in our constitution that for some time has not been relevant to the discussion; but, given our current predicament, it is an option to help us deal with our fiscal situation as well as guide the state going forward, and it's an opportunity to respect the intent of the voters who enshrined this in the constitution not once, but twice. The way SJR 2 functions is it takes all state spending and places it within a dollar-cap limit and that is the way the existing Article IX, Section 16 reads, and then it names and lists out the items that are outside that limit. MR. GEORGE disclosed that former legislators and staff from former governors were contacted for input as well. He divulged that former governor Hammond's staff members were contacted and noted that the appropriation cap was originally Governor Hammond's bill. MR. GEORGE reiterated that SJR 2 takes all state spending and places it within a limit and then lists each item that is exempt from the limit. He noted that as Senator Dunleavy pointed out, the legislation would be on the ballot in November of 2018. 4:09:01 PM He presented to the committee an overview, "SJR 2, Constitutional Appropriation Limit-Revision," and detailed as follows: · Article IX, Section 16 of Alaska's Constitution. · In Alaska: An annual cap on appropriations which can be enacted, which grows yearly by the increase in population and inflation, and held binding by the constitution. Some categories of appropriations are exempted. · According to Alaska's OMB, "appropriation" is defined as, "Statutory authorization to spend a specific amount of money for a state purpose. Appropriations are often subdivided into allocation in the appropriations bill. Funds may not be spent without an appropriation made by law." He addressed page 3, "How Many States Have Limits?" as follows: · Appropriation limits are part of a broader category of Tax and Expenditure Limits (TEL). · According to the National Conference of State Legislatures (NCSL), as of 2010: ƒ30 states operate under a tax or expenditure limit. ƒ23 states have spending limits. ƒ3 states have tax limits. ƒ4 states have both spending and tax limits. · Roughly half of these limits are constitutional, the other half are statutory. He noted that Alaska's appropriation limit is a state appropriation limit that does not apply to municipalities or local governments. CHAIR DUNLEAVY pointed out that many municipalities have opted for certain caps; for example, Anchorage has a tax cap and other municipalities have to get a vote of the people to raise a tax. He noted that the term "appropriation" is used in the same breathe as "revenue limit;" the two terms are slightly different, but the effects are they are trying to have the same effect and that is to limit the growth and size of government. MR. GEORGE continued on page 3 and addressed the 23 states that have spending limits as follows: Of the states that have tax expenditure limits, roughly half are constitutional in nature and the other half are statutory; Alaska has both as you may know. The constitutional limit in 1982 and then the statutory limit was enacted by the Legislature in 1986, the same year that the constitutional limit was up for a revisit. When the bill passed the Legislature and went to the voters, it was known that they would revisit the limit in four year; so they know it would be on the ballot again in four years and have a chance to look at it and see how it was doing and see if they liked it or not. The Legislature passed the statutory limit knowing full well that the constitutional limit may or may not exist later on, but the statutory limit would exist regardless. 4:12:02 PM CHAIR DUNLEAVY emphasized that SJR 2 is not something new to the people of Alaska, and they had a say on an appropriation limit decades ago. He acknowledged that Alaskans did want to constrain the Legislature and the size of government. MR. GEORGE addressed page 4, "How Did We Get Our Appropriation Limit?" and detailed as follows: Historical Context: · Trans-Alaska Pipeline System (TAPS) completed, first oil flowed June 20, 1976. · Alaska Permanent Fund established by voters November 2, 1976. · From FY79 to FY82, Alaska's total budget tripled, going from $1.08 billion to $3.21 billion. For reference, the FY06 budget was $3.29 billion. · Alaska was facing a challenge of plenty at the time and there was a robust dialog about the need for an appropriation limit that took place in the early 80s. MR. GEORGE pointed out that Alaska's budgets have grown in quick bursts over the years. SENATOR COGHILL noted that in the constitution there is reference to the inflation rate. He asked if dollar amounts addressed by Mr. George are in real dollars or in inflated dollars. MR. GEORGE replied as follows: The "Unrestricted General Revenue/Budget History" graph referenced on page 4 is in nominal dollars that are not adjusted. If you were to turn this into real dollars, you see that blip around the early 80s, it would look nearly as high as the top of the chart on the right hand side of the 2000s. So what they were facing was, and if you were to look at it in real terms per capita, it's very significant. There's a whole presentation that Legislative Finance has put together on this. SENATOR COGHILL commented on nominal dollars versus adjusted dollars and specified as follows: This is just a context we need to kind of keep in front of us because we are going to be asking them to think about how it would look in the adjusted dollars along the way and yet it just shows that stark reality of the huge volume of dollars that have come and gone. 4:15:11 PM MR. GEORGE addressed page 5, "How Did We Get Our Limit?" as follows: Timeline: · July 15, 1981: Legislature passed Governor Hammond's SJR 4 in a special session. · November 2, 1982: Voters enshrined the amendment limiting appropriation increases in the Alaska constitution, passing Ballot Measure 4 with a 61 percent to 39 percent tally. · November 4, 1986: Voters reaffirmed the amendment in a planned revisit, passing 71 percent to 29 percent. Later Fiscal Measures: · 1986: Statutory Appropriation Limit. · 1991: Statutory Budget Reserve Fund. · 1991: Constitutional Budget Reserve Fund. MR. GEORGE noted that Governor Hammond in 1981 addressed the larger budget and called a special session for a fiscal guarantee regarding the state's future for by asking for an appropriation limit, via SJR 4, to go before the Legislature. CHAIR DUNLEAVY pointed out that the chart that Mr. George referenced shows that each time the people of Alaska had an opportunity to vote on an appropriation limit they reaffirmed it and did so by larger numbers. He opined that a baseline "spend" that was actually more constrained with less of an incline would have resulted in billions of more dollars in savings accounts and the budget issue that the Legislature has been grappling with for the last two or three years would not be as large as it is today. He set forth that SJR 2 draws on the past and present to chart the course for the future that is much more fiscally sustainable for Alaskans. 4:17:12 PM MR. GEORGE addressed page 6, "Why SJR 2 Was Brought Forward," as follows: · The appropriation limit in Article IX, Section 16 is in need of repair; it has soared out of reach and failed to impact any spending since its enactment: ƒFY17 budget was $5.2 billion, while the limit was $10 billion. · The limit may never come into play again unless it is reset. · The intent of the voters should be respected and there should be a meaningful appropriation limit. 4:18:10 PM At ease. 4:18:52 PM CHAIR DUNLEAVY called the committee back to order. MR. GEORGE addressed page 7, "Why SJR 2 Was Brought Forward, Continued," as follows: · During the 2016 interim, Senator Dunleavy asked Legislative Finance Division (LFD) to review the existing Statutory and Constitutional Appropriation Limits. · LFD responded with analysis and also provided a look at problems associated with the state's spending limits, and recommendations for ways to assist in developing a workable loophole-proof as much as possible with a spending limit that would: ƒSuppress the growth of government ring revenue surpluses, ƒAddress rapid burning of reserves during revenue shortfalls. · Staff worked with LFD, Legal Services Division, and individuals involved in the creation of the existing appropriation limit, to craft a revised appropriation limit for Alaska. He addressed page 8, "Key Elements of SJR's Revision to the Constitutional Appropriation Limit," as follows: · Simplicity in presentation: ƒVoters must be able to clearly understand the limit; it must not be so complex or wonky that it cannot be easily explained. ƒSJR 2 was designed to simplify the existing limit. · Sophisticated in function: ƒBorrows from lessons learned following implementation of the 1982 limit. ƒOMB's Division of Strategic Planning wrote a paper in 1986 which characterized the 1982 limits as, "Complex, because it has be. Like all legislation, it was designed to strike a balance between accomplishing something in a particular way, yet simultaneously preserving the flexibility to respond to unforeseen events and changing circumstances." He addressed page 9, "Basics of SJR 2" as follows: · Would need to pass during the 30th Legislature, prior to the November 2018 General Election: ƒConstitutional Amendments and Conventions: AS 15.50.030, placing proposition on ballot. The lieutenant governor shall direct the director to place the ballot title and proposition on the ballot for the next statewide general election held after the amendment proposed by the Legislature or held 120 days after the amendment proposed by a constitutional convention. If there is insufficient time to permit the proposition to be placed on the regular ballot by the director, the lieutenant governor shall direct the director to prepare a separate ballot for the proposition. · Effective Date: Under AS 15.50.060, would become effective 30 days after certification; this means SJR 2 would be effective for the FY2020 budget, contemplated in early 2019. 4:21:27 PM CHAIR DUNLEAVY commented as follows: Once again, we are going through a time where we may be asking the people of Alaska for the first time in decades to contemplate a tax, contemplate some reconfiguration of the permanent fund, and the feedback I've been getting from constituents is they want to pull together and get Alaska to get through this period of time; but, the very concern about once we get through this period of time is it's going to be an "open checkbook" and is it going to be their checkbook that's open for any future increases in taxes, any future reconfigurations of the permanent fund. The feedback that I'm getting from constituents is they want to keep government constrained and as small as possible so that they can keep as much money in their pockets. I had a discussion with many constituents that believe we should be sure that we have adequate public safety, good roads, good schools, their concerns are some of the other things that may have spent our money on in the past, they would like us not to go back to that spending where when we get money, we spend it for the most part, we save a little bit, but we spend it for the most part; they want to be assured as we move forward they are going to be able to retain as money in their pockets and the state will have adequate funds to deliver basic services. 4:23:22 PM MR. GEORGE addressed page 10, "Basics of SJR 2, Continued," regarding spending exempt "outside" the limit appropriations made as follows: · The Alaska Permanent Fund; · Payment of Permanent Fund Dividends; · Meet a state of disaster declared by the governor as prescribed by law, AS 26.23.020; · State general obligation or revenue bond proceeds; · Obligations under State general obligation bonds and revenue bonds; · Money received from the federal government; · Reappropriation of a previous unobligated appropriation; · Expenditure by a state agency to provide internal services, or to provide services to another agency, and another state agency has also received an appropriation of the same money. · Money held in trust by the state for a particular purpose; · Money receive by the state from a source other than the state or federal government that is restricted to a specific use by the terms of a gift, grant, bequest, or contract; · Revenue of a public enterprise or public corporation that issues revenue bonds; · Money deposited into the Constitutional Budget Reserve (CBR), back to the funds and accounts from which the money came, "reverse sweep;" · State savings account or fund as prescribed by law; · Dedicated funds. CHAIR DUNLEAVY addressed general obligation bonds and revenue bonds. He noted that revenue bonds have revenue attached to service those bonds. 4:27:19 PM MR. GEORGE addressed page 11, "What Is Inside and Outside the Limit?" as follows: · Permanent Fund Dividends: ƒExisting limit: outside; ƒNew limit: outside. · General Obligation Bond Proceeds (State): ƒExisting limit: inside, unless in Capital Budget and approved by voters; ƒNew limit: outside, universally. · General Obligation Bond Principal Repayment (State): ƒExisting limit: outside; ƒNew limit: outside. · General Obligation Bond Interest Repayment (State): ƒExisting limit: outside; ƒNew limit: outside. · Municipal Debt Service: ƒExisting limit: outside; ƒNew limit: inside. · Revenue Bond Proceeds: ƒExisting limit: outside; ƒNew limit: outside. · Revenue Bond Debt Service: ƒExisting limit: inside; ƒNew limit: outside. · Money held in trust by the State for a particular purpose: ƒExisting limit: outside; ƒNew limit: outside. · Revenues of public enterprise or public corporation of the State that issues revenue bonds: ƒExisting limit: outside ƒNew limit: outside. · Federal receipts: ƒExisting limit: outside; ƒNew limit: outside. · Reappropriatons: ƒExisting limit: outside, per attorney general opinion; ƒNew limit: outside, explicitly. · I/A Services and Duplicate Appropriations: ƒExisting limit: implied outside; ƒNew limit: outside, specified. · Gift, grant, bequest, or contract, restrict money from neither Feds or State for a specific use: ƒExisting limit: implied outside; ƒNew limit: outside, specified. · CBR reverse-sweep: ƒExisting limit: not contemplated; ƒNew limit: outside. · To a state savings account, as prescribed by law (designated in the statutory bill), which require further appropriation in order to spend. (Statutory Budget Reserve (SBR), CBR): ƒExisting limit: implied outside; ƒNew limit: outside, specified. · Dedicated funds (per Constitutional definition): ƒExisting limit: outside, with exceptions; ƒNew limit: outside. · Appropriations from other than the Treasury: ƒExisting limit: outside; ƒNew limit: inside. · Appropriations into the Permanent Fund: ƒExisting limit: outside; ƒNew limit: outside. · State Capital Budget: ƒExisting limit: inside, unless valid and approved by voters as prescribed by law; ƒNew limit: inside, generally. · Disaster (when declared by governor, as provided by law): ƒExisting limit: outside; ƒNew limit: outside. MR. GEORGE noted that one significant item which was not spelled out in the original limit was municipal debt service that includes: transportation, infrastructure, bonds that are on the local level, and school debt reimbursement; those are approved on a municipal-wide basis. He explained that the state, under a statute that dates back to 1971, has made an annual appropriation in most years to offset or pay the municipalities for those costs. He said as a policy call, the way SJR 2 works is it takes all state spending, except for the items in the exclusions, and puts them on equal footing with one another so that they compete for scarce resources under equal footing. He detailed that SJR 2 would take municipal-debt reimbursement and place it within a limit; that doesn't mean it wouldn't be paid, it's just that it would have to compete with other items. 4:28:33 PM He addressed page 12, "The Built-In Growth Formula" as follows: · The mechanism which adjust the appropriation cap annually is a critically important element. · The existing limit's formula adjusts the spending cap by 100 percent of the cumulative change in population and inflation; this led to a trajectory for the limit which quickly became unattainable. · If the formula in 1982 had been set at 50 percent of the cumulative change in population and inflation, the limit would have cutoff the mountain of spending for FY06 to FY15. CHAIR DUNLEAVY concurred with Mr. George that if SJR 2 was in place, the appropriation spikes from FY06 and beyond would not have occurred. He asserted that billions of dollars would have been put into savings that the state would have today; that's one of the major points of trying to revise the appropriation limit. He set forth that the state will come into more revenue over time and noted recent oil discoveries occurring on the North Slope as well as an oil-price rebound. He said being prepared for the future will allow the state to save more of the added revenue. 4:30:56 PM MR. GEORGE addressed page 13, "Further Policy Considerations" as follows: · Flagged spending items for further examination: ƒRevenue bond debt service; specifically, whether this exemption should be limited to bonds that generate sufficient revenue, or anticipated reductions, to cover debt service. ƒUnrestricted federal funds, approximately $7.4 million in FY18. ƒReappropriations and scope changes. ƒUniversity receipts, Designated General Funds (DGF) or other. ƒAppropriations to a state savings account, as designated by law; statutory clarification needed, CBR or SBR. ƒDedicated fund; example, Fish and Game Fund currently inside the limit, the introduced bill would place all dedicated funds outside the limit. Note: dedicated fund are not the same as designated funds. ƒCapital budget; this is an obvious loophole if placed outside the limit. · Pressure-relief valve: ƒA method to exceed the appropriation limit, whether it be through referral to voters, legislative super- majority, or otherwise. He addressed the pressure-relief valve and noted its use in emergency situations. He disclosed that states have abused the pressure-relief valve by annually declaring an emergency as a way to get around their appropriation limit, or to declare a particular appropriation is outside the limit. 4:32:39 PM CHAIR DUNLEAVY commented as follows: This is a bill that we are going to really take our time and do it right because once again, changing something in the bill or adding something really needs to be scrutinized and evaluated to see if it stays within our parameters of being simple and effective. What we don't want to do is end up where the folks in 1982 ended up and that was they wanted a spending limit, it went through the process, we know how the process can be with bills with amendments and changes, and what came out the other end was a spending limit, and if the trajectory of "spend" was kept at that trajectory, that baseline, it probably would have constrained us, but the reality was we would have to spend about $10 billion. He noted that even if SJR 2 passed during the current year, a vote would not occur for another year. He asked Mr. George to verify the ballot date. MR. GEORGE replied November 2018. CHAIR DUNLEAVY welcomed invited testimony on SJR 2. 4:35:08 PM JEREMY PRICE, State Director, Americans for Prosperity, Anchorage, Alaska, testified in support of SJR 2. He said the existing cap, established at $2.5 billion in 1982, would be over $10 billion after inflation and population growth adjustments. He noted Alaska has come close to exceeding the appropriation limit in FY09 and FY13. He pointed out that spending increased dramatically from $3 billion in FY04 to $8.7 billion in FY13. He asserted that spending increases dramatically when government revenue is high. He said the challenge to keeping spending under control is when times are good. MR. PRICE opined that the majority of Alaskans have not changed their opinion since the early 1980s on limiting state spending. He asserted that now is the perfect time to enact the limit on appropriations because state spending has been declining for the last few years. He referenced the Municipality of Anchorage and the state of Colorado as examples of governing bodies with taxing and spending caps. He noted that Anchorage recently spent excess taxes, but Colorado issued refunds to taxpayers. He disclosed that Colorado has refunded $2 billion to taxpayers since 1992. He set forth that the lessons learned in Anchorage and Colorado can be applied to Alaska by: 1. Not allowing an appropriations cap to be suspended. 2. Making language of the spending cap "water tight" so future legislators will not be able to "poke holes" in it. He opined that the majority of Alaskans are largely supportive on limits to keep government from growing excessively. 4:43:34 PM BOB WILLIAMS, State Budget Solutions Representative, American Legislative Exchange Council, Gig Harbor, Washington, disclosed his background and noted that he served five terms in the Washington State Legislature where he worked on tax and spending limits. He set forth that the purpose of spending limits is to provide the fiscal discipline necessary during strong periods of revenue growth. He concurred that a budget is overextended when a strong limit is not set during revenue growth. He said the main benefits from SJR 2 are as follows: · Makes government more accountable; · Forces discipline over budget and tax practices; · Makes government more efficient; · Makes government think of creative ways to generate revenues; · Controls the growth of government; · Forces government to evaluate programs and prioritize services; · Raises questions about the advisability of some functions provided by government. · Helps citizens feel empowered and results in more taxpayer satisfaction. · Helps diffuse the power of special interests. MR. WILLIAMS concurred with Mr. Price that a tax and spending cap must stay "watertight." He noted that some states without watertight caps have put in exceptions to get around caps. He suggested that consideration also be given to budget reform where the process is changed to an outcome-performance-based budgeting. 4:46:25 PM CHAIR DUNLEAVY. He said he believed SJR 2 is one of the most important pieces of legislation and tool that all Alaskans are going to be looking at moving forward. He asserted that legislators work for the people of Alaska and have to remember that. He opined that Alaskans were fortunate enough for decades to have a large amount of oil revenue and the paradigm has changed. He set forth that the people legislators represent are owed their say prior to the Legislature making decisions on taxation or changes in the permanent fund or other revenue enhancements and tell legislators what they are looking at in terms of size of government. CHAIR DUNLEAVY announced he would hold SJR 2 in committee for future consideration