HOUSE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE February 3, 2000 8:13 a.m. MEMBERS PRESENT Representative John Harris, Co-Chairman Representative Andrew Halcro Representative Lisa Murkowski Representative Fred Dyson Representative Reggie Joule Representative Albert Kookesh MEMBERS ABSENT Representative Carl Morgan, Co-Chairman COMMITTEE CALENDAR HOUSE BILL NO. 137 "An Act relating to the municipal dividend program; and providing for an effective date." - MOVED CSHB 137(CRA) OUT OF COMMITTEE HOUSE BILL NO. 233 "An Act granting authority to each municipality to be a debtor under 11 U.S.C. (Federal Bankruptcy Act) and to take any appropriate action authorized by federal law relating to bankruptcy of a municipality." - MOVED CSHB 233(CRA) OUT OF COMMITTEE PREVIOUS ACTION BILL: HB 137 SHORT TITLE: MUNICIPAL DIVIDEND PROGRAM Jrn-Date Jrn-Page Action 3/15/99 454 (H) READ THE FIRST TIME - REFERRAL(S) 3/15/99 454 (H) CRA, STA, FIN 2/03/00 (H) CRA AT 8:00 AM CAPITOL 124 BILL: HB 233 SHORT TITLE: MUNICIPAL BANKRUPTCY Jrn-Date Jrn-Page Action 5/12/99 1340 (H) READ THE FIRST TIME - REFERRAL(S) 5/12/99 1340 (H) CRA, JUD 2/01/00 (H) CRA AT 8:00 AM CAPITOL 124 2/01/00 (H) Heard & Held 2/01/00 (H) MINUTES(CRA) 2/03/00 (H) CRA AT 8:00 AM CAPITOL 124 WITNESS REGISTER REPRESENTATIVE MOSES Alaska State Legislature Capitol Building, Room 500 Juneau, Alaska 99801 POSITION STATEMENT: Testified as sponsor of HB 137. TIM BENINTENDI, Staff to Representative Moses Alaska State Legislature Capitol Building, Room 500 Juneau, Alaska 99801 POSITION STATEMENT: Answered questions. KEVIN RITCHIE, Executive Director Alaska Municipal League 217 Second Street, Suite 220 Juneau, Alaska 99801 POSITION STATEMENT: Supported concept of HB 137. Supported HB 233. MAYOR FRANK KELTY, Mayor City of Unalaska P.O. Box 610 Unalaska, Alaska 99685 POSITION STATEMENT: Supported HB 137. MARK HENNIGH, City Manager King Cove P.O. Box 37 King Cove, Alaska 99612 POSITION STATEMENT: Encouraged the committee to forward HB 137. JIM KELLY, Research & Liaison Officer Alaska Permanent Fund Corporation PO Box 25500 Juneau, Alaska 99801-5500 POSITION STATEMENT: Discussed the fiscal note. JONATHON LACK, Legislative Assistant to Representative Halcro Alaska State Legislature Capitol Building, Room 418 Juneau, Alaska 99801 POSITION STATEMENT: Presented HB 233 and answered questions. ACTION NARRATIVE TAPE 00-6, SIDE A Number 0001 CO-CHAIRMAN HARRIS called the House Community and Regional Affairs Standing Committee meeting to order at 8:13 a.m. Members present at the call to order were Representatives Harris, Halcro, Dyson, Joule and Kookesh. Representative Murkowski arrived as the meeting was in progress. Representative Morgan was not in attendance. HB 137-MUNICIPAL DIVIDEND PROGRAM CO-CHAIRMAN HARRIS announced that the first order of business before the committee would be HOUSE BILL NO. 137, "An Act relating to the municipal dividend program; and providing for an effective date." Number 0094 REPRESENTATIVE MOSES, Alaska State Legislature, testified as sponsor of HB 137. He commented that HB 137 should be part of the long-range fiscal plan. In the last decade, the legislature has "boxed" itself in by promising to cut the budget and by promising no taxes. This has placed the municipalities in a precarious position, which has resulted in some municipalities raising property taxes and cutting services. Representative Moses emphasized that there is only so much cutting that can occur and then it is passed on to the local government. Providing the local governments with financial help is long overdue. He acknowledged that user fees could be implemented, but he viewed those as no different than taxes. REPRESENTATIVE MOSES said that he realized that HB 137 is not perfect and requires some fine-tuning. He further realized the difficulty in developing an equitable formula to distribute funds to the different classes of municipalities. In the long run, Representative Moses believes that HB 137 would encourage communities to upgrade their municipal status or to incorporate. He informed the committee that HB 137 would help alleviate the threat of the Internal Revenue Service (IRS) taxing the fund as there would be a method of using the fund for government. Representative Moses envisioned the formula being based on $500 per capita. Creating a formula on a flat per capita basis would not be equitable. Number 0500 REPRESENTATIVE MOSES noted that the way HB 137 is written could be interpreted to mean that all of the surplus funds would have to go to the Municipal Dividend Program. When this bill was introduced three years ago, the anticipated surplus earnings was much smaller. Therefore, the intent is not for all the surplus funds to go into this method of distribution. He reiterated that an approximately $500 per capita, depending upon the service the local government provides, would be a good benchmark. Representative Moses felt that revenue sharing should be doubled or tripled and return some of the services now provided by the state to the local governments. Alaska, unlike any other state, provides many services that are normally provided by counties or local governments in other states. He expressed the need for the state to turn road maintenance to the local governments. However, he re-emphasized that the local government must be given funds to operate, which is a method of cutting the budget. Therefore, the local government can decide if and what it wants to cut. Representative Moses informed the committee that he knew of an area in the state where the state still maintains the driveways. Although that started in order to get the milk to market, it continues today. REPRESENTATIVE HALCRO asked if Representative Moses envisioned the services being transferred from the state to the local governments, after the program is established. REPRESENTATIVE MOSES commented that he was not in the position to say whether the state should transfer the court system to the local government, but he was sure that the state should get out of maintaining roads. He also envisioned passing on a higher percentage of education [funding] to the local governments, which could eliminate many frills that the local government would put into the state budget. Again, he emphasized that if cuts are desired at the local level those cuts could be made. Number 0895 CO-CHAIRMAN HARRIS inquired as to the effect this program would have on the dividend program. REPRESENTATIVE MOSES answered that undoubtedly, implementation of this program would slow an increase in the [permanent fund] dividend. He commented that the dividend should probably be capped. In further response to Co-Chairman Harris, Representative Moses hoped that slowing the increase in the dividend would not be an obstacle to HB 137. He posed a situation in which the dividend increased to $10,000, which he believed would result in an influx of people and the population would not care whether it worked or not. All that would be a retardant to the economy of the state. Representative Moses emphasized the need to have nonresident workers pay for their share of the service. He said that these nonresident workers come to the state make money, but do not spend any while in the state. Furthermore, he estimated that there are probably tens of thousands of people in the state, who are here to make a nest egg and then leave the state. These people are not true residents. No other state in the nation is faced with such a situation. CO-CHAIRMAN HARRIS understood that the dividend is to be based on population figures. He noted that many complain that during the census, the smaller villages do not get counted accurately. How would one ensure that those areas receive their fair share [of the Municipal Dividend Program]? REPRESENTATIVE MOSES responded that there is no easy answer, but some formula has to be used in order to have such a program. Number 1157 REPRESENTATIVE KOOKESH commented that HB 137 is something that should be kept around for discussion. With regard to the possibility that this program would be inequitable based on population, Representative Kookesh did not believe that to be the case. He informed the committee that he is from a small community of 800 people and if that municipality received even $50 per capita, that would be more money than it presently has coming in. This would be a good use of the permanent fund's earnings reserve, even if based on population. Representative Kookesh mentioned that this plan probably had its genesis as far back as former Governor Hickel. Perhaps, this plan does come with a price tag and a transfer of some of the state's responsibilities to those communities. REPRESENTATIVE JOULE asked if any thought had been given with regards to a top end amount. Have any numbers been run? REPRESENTATIVE MOSES said that he had not run any numbers. Although it will be difficult to develop an equitable formula, he could envision a minimum for small villages. In order to be fair and equitable, one must consider economies of scale and the size of the community. Representative Moses announced that he would like to see HB 137 passed on to House Finance. REPRESENTATIVE HALCRO agreed with Representative Kookesh that some communities are under great pressure due to the 10 mill cap, which will devastate some communities. He then turned to the September vote. He attributed a high percentage of the "No" vote to be because people did not want to feed this mythical bloated state government. If the Municipal Dividend Program is created, people feel they have more control. He agreed with Representative Moses that this program may be the only way to achieve public support for using of the earnings. Therefore, he hoped that HB 137 does not die in the next committee of referral. Number 1529 REPRESENTATIVE DYSON moved that the committee adopt CSHB 137, Version LS0591\D, Cook, 1/25/00. There being no objection, it was so ordered. REPRESENTATIVE DYSON noted that the only difference seems to be the statute referenced on page 2, line 7 and the year of the effective date. He understood that HB 137 merely sets up the fund and is subject to the appropriations made by the legislature. He inquired as to which department calculates the dividend. To which department does AS 29.66.670 refer? TIM BENINTENDI, Staff to Representative Moses, Alaska State Legislature, answered that the Department of Community and Economic Development would manage the program. REPRESENTATIVE MURKOWSKI asked if Representative Moses had reviewed Representative Davis' legislation, which she recalled set up the Community Dividend Endowment. Representative Davis came before the committee last year with his bill that seemed to be similar to this legislation. She asked Representative Moses if he was familiar with Representative Davis' legislation and if so, how do the two compare? REPRESENTATIVE MOSES replied that he was not familiar with Representative Davis' bill. MR. BENINTENDI stated that Representative Davis' legislation does set up an endowment, but he did not recall the specifics. Number 1759 KEVIN RITCHIE, Executive Director, Alaska Municipal League (AML), turned to Representative Davis' legislation. He recalled that Representative Davis' legislation set up an endowment of $750 million and 2 percent of the earnings of the permanent fund. That endowment would be distributed to municipalities on a per capita basis. MR. RITCHIE then addressed HB 137. He pointed out that the constitution calls for maximum local government. Since 1986 the primary source of state funding for local government municipal revenue sharing programs has been cut from approximately $140 million to a little over $31 million last year. That is a cut of 77 percent. Mr. Ritchie said that all of Representative Moses' comments regarding the communication and negotiation with regard to how services are delivered to the public are valid. Municipalities can do more and the constitution says that they should do more. He believes the municipalities are ready to do more. The question, in the urban areas, is what should the tax be. In areas with little or no tax base, how will such an area perform services? MR. RITCHIE informed the committee that last month the Conference of Mayors performed a survey regarding the impacts [resulting from the cuts to municipal revenue sharing]. The survey found that 50-75 percent of the municipal officials surveyed felt that the level of service from police, Emergency Medical Services (EMS), fire protection and roads were now inadequate. In discussions with the state EMS, they reported that about 17 EMS departments are not functional due to lack of training and equipment. Without the training and support, it is difficult to keep volunteers prepared to provide service. He pointed out that most of these declines occurred in the last five years, with many occurring last year. From the survey, it was discovered that some municipalities that once had full-time police service now do not. Some communities with Village Public Safety Officers (VPSOs) had to lay them off. Therefore, people have an increased chance of dying because of the lack of fire and EMS protection. He did not believe that had been the intention with cutting the state's budget. Number 1983 MR. RITCHIE informed the committee that AML performed a survey of the states that are similar to Alaska in terms of large areas with small populations. Those states were Montana, Wyoming, North Dakota and South Dakota. In those states, the state acts as the county for many services such as public assistance. However, Alaska differed with these states in the provision of county sheriffs and jails. Mr. Ritchie informed the committee that AML's policy statement says that Representative Moses' and Representative Davis' proposals are valid, especially when developing a long range financial plan. He further informed the committee that AML and the Alaska Conference of Mayors passed a resolution, in November, strongly wanting to work with the state. In conclusion, Mr. Ritchie said that AML does support the concept of HB 137 as one of the tools which should be presented to the public as a possibility for continuing services. Number 2121 REPRESENTATIVE HALCRO emphasized that he wholly supported and endorsed Representative Moses' efforts. He then turned to the January 31, 2000, letter from AML which included the following sentence: "We believe that rising property taxes due to state cuts have strengthened support for the proposed property tax cap initiative." Representative Halcro expressed frustration that two years ago in Anchorage, the voters overwhelmingly voted to amend the city's charter to require a super majority for any new taxes. Before that in 1993, a sales tax on the ballot was defeated by 70 percent to 30 percent. Anchorage residents have expressed an overwhelming distaste for taxes. REPRESENTATIVE HALCRO turned to the 10 mill tax cap initiative, which would devastate the community. Anchorage alone would experience a loss of $80 million. Representative Halcro emphasized that people do not want to pay, they do not want to pay for local services or state services. Therefore, how can the state continue to provide a level of commitment to local communities when the local community does not want to provide services. He specified that his comments refer to his community. Representative Halcro said, "If my neighbors don't want to pay for government, why should we provide government?" MR. RITCHIE mentioned that he has been involved in local government for some time. He felt that the tax cap is not absolutely going to pass. Although there has not yet been a statewide effort to educate the public, an early professional poll found that 50 percent of Anchorage did not support the tax cap. Therefore, he felt that the tax cap is beatable if the public knows the consequences. Mr. Ritchie pointed out that, in general, the public will not vote for an issue when they feel the issue is complex and they do not know what is happening with the money. Both of those are probably true in regard to the September 14 vote. Therefore, he interpreted the public as saying that they did not understand. He informed the committee that in areas where taxes have been voted in such as Sitka, the formula has been to inform the public what the money will be used for and sunset the tax. Such actions help build public confidence. The Alaska Conference of Mayors felt that when the state and local officials are not viewed as working together, it makes it less likely that the public supports it. However, Mr. Ritchie was optimistic that there are formulas that the public can be approached on and the public will pay for those areas that it can see direct connections. Number 2427 REPRESENTATIVE MURKOWSKI asked if there had been any polling outside the Anchorage area with regards to the tax cap initiative. MR. RITCHIE replied no. He mentioned that he had given a presentation before the Sitka Chamber of Commerce, who did not understand the other side of the 10 mill cap. He explained that there is also an assessment cap. For example, Sitka has a 6 mill property tax cap in its charter. The 10 mill cap statewide would cap Sitka's assessment increases, and therefore Sitka would no longer be taxing on the fair market value. Therefore, he believes that as more people understand the tax cap, there will be more opposition to it. In further response to Representative Murkowski, Mr. Ritchie said that AML will be doing an education campaign. REPRESENTATIVE DYSON expressed his interest in moving the bill from committee. CO-CHAIRMAN HARRIS said that, out of courtesy he would like to allow those on the teleconference to testify. Number 2605 MAYOR FRANK KELTY, Mayor, City of Unalaska, testified via teleconference. He informed the committee that the Unalaska City Council supports the legislation and would urge the committee to move it forward. This program would be an excellent way for communities to offset the loss of municipal revenue sharing. Furthermore, this legislation would allow each community to address its own needs. He informed the committee that Unalaska subsidizes the state contracted jail by about $200,000 per year. A program such as this would help offset that subsidy. Furthermore, Unalaska recently lost its food safety office and its inspector. If Unalaska had to take that over, this program would be helpful as well. He also envisioned the possibility of a community holding back its revenue in order to invest it for use later. Mayor Kelty informed the committee that Unalaska has an 11.75 mill rate, a 3 percent sales tax, a 2 percent landing tax on fish delivered to the city, and the city funds the school to the maximum amount allowed. In conclusion, he urged the committee move HB 137 forward. Number 2727 MARK HENNIGH, City Manager, King Cove, testified via teleconference from King Cove. He acknowledged the ongoing voracity of Representative Moses on HB 137. He noted that Southwest Alaska tries to pay its own way as much as possible. Sales taxes and user fees have been raised on every city service provided since 1996. He indicated that HB 137 would provide a bit of a revenue stream, which would provide some much needed capital improvements. In conclusion, Mr. Hennigh encouraged the committee to forward HB 137. CO-CHAIRMAN HARRIS closed public testimony and the committee took a brief at-ease. Number 2804 REPRESENTATIVE DYSON moved to report CSHB 137 out of committee with individual recommendations and the accompanying zero fiscal note(s). JIM KELLY, Research & Liaison Officer, Alaska Permanent Fund Corporation, said that a fiscal note was prepared and passed on to [the Department of] Revenue. It is a zero fiscal note with a letter attached. CO-CHAIRMAN HARRIS asked if there were any objections. There being no objection, CSHB 137(CRA) was reported out of committee. The committee stood at-ease from 8:58 a.m. to 9:02 a.m. HB 233-MUNICIPAL BANKRUPTCY CO-CHAIRMAN HARRIS announced the next order of business before the committee would be HOUSE BILL NO. 233, "An Act granting authority to each municipality to be a debtor under 11 U.S.C. (Federal Bankruptcy Act) and to take any appropriate action authorized by federal law relating to bankruptcy of a municipality." JONATHON LACK, Legislative Assistant to Representative Halcro, Alaska State Legislature, informed the committee that the federal law changed in 1994 to require a state's specific authority to local governments to file Chapter 9 bankruptcy reorganization. The State of Alaska has been slow to respond to that change, and therefore HB 233 would fix that. REPRESENTATIVE MURKOWSKI asked if any communities have suffered due to the change in the federal law [and the state not being in compliance]. TAPE 00-6, SIDE B MR. LACK said that he did not know of any cities or local governments that had experienced problems. He noted that the City of Whittier had some problems that may or may not of necessitated this type of use [bankruptcy]. Furthermore, one of the Rural Education Attendance Areas (REAA) may have had some difficulties in the past few years and need some reorganization. Number 2865 CO-CHAIRMAN HARRIS asked if any city in Alaska had ever went bankrupt. MR. LACK indicated that the committee packet should include a case note on the Copper River School District. The Copper River School District did go through Chapter 9 reorganization. He explained that in 1986 the legislature did an across the board 10 percent cut in assistance to REAAs. Therefore, the REAAs could not restructure their contracts with the teachers' union and thus went into collective bargaining. The arbitrator decided against the Copper River School District, which was told it had to pay on the contracts. The legislature then made a one-time appropriation of about $.5 million, which solved the problem for the 1986-1987 school year but not for the 1988 school year. He explained that the Copper River School District sought protection from the Bankruptcy Court under Chapter 9 in order to reorganize the debt. The Bankruptcy Court stepped in and renegotiated the contracts for the REAA because the school district could not. CO-CHAIRMAN HARRIS posed a situation in which someone had a contract with a community for a very large sum. Would the project be bonded under normal circumstances? MR. LACK explained that for something like construction of a new school, if an entity is bonded then the entity would be first in line to recover in Bankruptcy Court because the entity has a secured interest. When dealing with a nongovernmental entity, a secured creditor will receive its security interest. However, that is not necessarily the case with a governmental entity because "you don't want a creditor coming in and grabbing a school, grabbing an ambulance, grabbing a fire truck." Mr. Lack further explained that Chapter 9 does not allow a local government to discharge debts but rather Chapter 9 allows a local government to reorganize in order to prevent a creditor from seizing assets. Therefore, if there is a bond for insurance, the insurance agent will probably have to pay. CO-CHAIRMAN HARRIS returned to the issue of schools and posed a situation in which the community is giving at its cap and enrollment is decreasing, but the teachers' contracts continue. Would this legislation allow the school to go bankrupt in order to reorganize? MR. LACK replied yes. With regard to REAAs, the first responsibility is that of the legislature to fund them. In the case when the legislature does fund the REAA, the Bankruptcy Court would have the authority to reorganize that school district and renegotiate those contracts. All the parties would be at the table at Bankruptcy Court. MR. LACK, in response to Representative Joule, informed the committee that with no effective date the legislation would become effective 90 days after passage [after the governor signs the legislation] or July 1. Number 2624 REPRESENTATIVE DYSON commented that it appears that the state is moving towards state recognition of tribes. From his limited understanding, he believes that tribal organizations cannot be sued. If the state does recognize tribes, then will this legislation apply to them. MR. LACK answered that tribes cannot be sued as a state or local government cannot generally be sued unless that entity has given authorization. For instance, the City of Anchorage has given authorization to sue in tort, which most cities and states do. Mr. Lack explained that as a general concept, when tribes contract or have agreements, the tribe generally waives its rights to be sued under that contract or agreement. Otherwise, the states or the federal governments would not contract with them. Mr. Lack was not sure how HB 233 would apply to tribes, but he offered to research that and report back. REPRESENTATIVE DYSON said that he sensed that this legislation does not apply to tribes. KEVIN RITCHIE, Executive Director, Alaska Municipal League, testified in support of HB 233 as it provides an additional option to municipalities. CO-CHAIRMAN HARRIS pointed out that the sponsor statement says that the Congress changed the Bankruptcy Code to require states to give local governments specific authority to protection. If the Congress passes a bill requiring such, do the states have to do so or can they decide not to do it. MR. RITCHIE said that he believes that it is an option of state governments. REPRESENTATIVE MURKOWSKI interjected that such would be necessary if they want to avail themselves of protection under Chapter 9. CO-CHAIRMAN HARRIS closed public testimony. Number 2427 REPRESENTATIVE HALCRO moved to report CSHB 233, Version LS0948\G, Cook, 1/26/00, out of committee with individual recommendations. There being no objection, it was so ordered and CSHB 233(CRA) was reported out of committee. ADJOURNMENT There being no further business before the committee, the House Community and Regional Affairs Standing Committee meeting was adjourned at 9:14 p.m.