HOUSE FINANCE COMMITTEE April 29, 1998 1:50 P.M. TAPE HFC 98 - 134, Side 1. TAPE HFC 98 - 134, Side 2. TAPE HFC 98 - 135, Side 1. TAPE HFC 98 - 135, Side 2. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:50 P.M. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Kohring Representative J. Davies Representative Martin Representative G. Davis Representative Moses Representative Foster Representative Mulder Representative Grussendorf ALSO PRESENT Avrum Gross, Attorney, North Slope Borough, Juneau; Deborah Vogt, Deputy Commissioner, Department of Revenue; Eddy Jeans, Manager, School Finance Section, Education Support Services, Department of Education; Rick Cross, Deputy Commissioner, Department of Education; Kristie Tibbles, Staff, Senator Drue Pearce. TESTIFIED VIA TELECONFERENCE: Steve Van Sant, State Assessor, Anchorage; John Eng, Associated General Contractors, Anchorage; Tom Brooks, Chief Engineer, Alaska Railroad Corporation, Anchorage; Bill Hupprich, Associate General Counsel, Alaska Railroad Corporation, Anchorage; Bill Sheffield, President, Alaska Railroad Corporation, Anchorage. SUMMARY SB 36 An Act relating to transportation of public school students; relating to school construction grants; relating to the public school foundation program and to local aid for education; and providing for an effective date. SB 36 was HELD in Committee for further consideration. SB 285 An Act relating to state procurement practices. SB 285 was HELD in Committee for further consideration. SENATE BILL NO. 285 "An Act relating to state procurement practices." KRISTIE TIBBLES, STAFF, SENATOR DRUE PEARCE, explained that when highway improvements are needed, a project is designed, a request for bids is advertised, and a construction contract is then competitively awarded by the Department of Transportation and Public Facilities (DOT&PF). When the highway that needs the work involves the Alaska Railroad, the work involving the Railroad property is not included in that bid. When such a situation occurs, the Department negotiates a force-account contract with the Alaska Railroad. That arrangement reduces the amount of work which the private industry can participate in and keeps the Department public fund expenditure from going through a competitive bid arrangement. Ms. Tibbles reported that SB 285 would reintroduce competition for construction of DOT&PF highway projects which involve the Alaska Railroad. SB 285 will establish a fair and effective manner by which to award construction contracts for those projects and will require the Alaska Railroad Corporation to utilize a competitive bidding process, openly advertised when managing projects. JOHN ENG, (TESTIFIED VIA TELECONFERENCE), ASSOCIATED GENERAL CONTRACTORS, ANCHORAGE, testified in support of the bill before the Committee. He stated that taxpayer dollars should be used for improvements to other properties included in the bidding process. He urged passage of the legislation. Representative G. Davis inquired if the bill had been created to address a specific problem. Mr. Eng replied that in recent years, the Department of Transportation has negotiated account contracts with the Alaska Railroad, project paid for with tax dollars. Consequently, general contractors have not had the opportunity to bid on that work. The Alaska Railroad could participate by working for contractors that bid on those projects. The Railroad would not be able to bid or sign a contract on a force-account contract. Representative G. Davis questioned the legal authority of those people working within the Alaska Railroad right-of- way. Mr. Eng replied that the right-of-way is property which belongs to the Alaska Railroad, and that DOT&PF works together with them to address highway improvements which occur within that area. Representative J. Davies asked if there would be a problem separating the roadwork from the signaling and control work. Mr. Eng replied that would not create a problem. TOM BROOKS, (TESTIFIED VIA TELECONFERENCE), CHIEF ENGINEER, ALASKA RAILROAD CORPORATION, ANCHORAGE, commented that in the existing system, DOT&PF treats the Alaska Railroad as a utility. If one of their projects impacts the Alaska Railroad, they come to the Railroad to provide funding needed to accommodate the changes required. He continued, that work is generally done with a railroad work force, however, from time to time, there has been a request from the Department to pursue a construction contract. When that work is done, the Railroad employees 100% Alaskans. He continued, if the work were bid, there are a limited number of qualified contractors in the State. Mr. Brooks emphasized that if the work were competitively bid, there is no guarantee that it would stay in Alaska. Mr. Brooks stressed that there is valid concern when addressing the safety of the trains. He added, if the bill is separated, it is important that signaling and flag protection continues to be part of the Alaska Railroad effort. He reiterated that the signaling work is a specialty contract situation and that railroad flag protection is a matter of safety. BILL HUPPRICH, (TESTIFIED VIA TELECONFERENCE), ASSOCIATE GENERAL COUNSEL, ALASKA RAILROAD CORPORATION, ANCHORAGE, remarked that if the proposed legislation is enacted, it could cause problems in Union agreements by restricting the Railroads authority to contract or subcontract out the work. He warned that the legislation could place the Alaska Railroad in the middle of a Department project. If the work were not done with railroad people, it would be best to have the Department contract directly with the bidder, which would solve the Union contract problem. Mr. Hupprich advised that the Alaska Railroad is opposed to passage of the bill. He spoke to Amendment #1. [Copy on File]. He recommended that if the legislation is to pass that "construction work" must exclude signal work and rail flagging. Mr. Hupprich pointed out that Amendment #1 proposes to amend Section 1.36.30.015(a), on the fifth line, placing a period after "Public Facilities" and deleting the remainder of the underlined portion of the amendment. Co-Chair Therriault clarified that if the money were coming from the Department, they would then be the ones handling the entire project. BILL SHEFFIELD, (TESTIFIED VIA TELECONFERENCE), PRESIDENT, ALASKA RAILROAD CORPORATION, ANCHORAGE, reiterated that the concern with the legislation is a matter of safety, particularly, signaling and flagging. Governor Sheffield explained that the Alaska Railroad Corporation is a specialist in railroad construction and that most DOT&PF jobs are done from standard plans, generally not charging for the engineering and/or site inspection. He reiterated that the Alaska Railroad is in opposition to the legislation. In response to a concern by Representative Foster, Mr. Brooks explained that the Alaska Railroad occasionally receives grant money from the federal government that passes through DOT&PF. The intent is that funding not be a part of the proposed legislation. Representative G. Davis asked if DOT&PF would have the legal authority to dictate control of the project. Governor Sheffield replied that the Alaska Railroad does have control of its own right-of-way where it crosses a highway belonging to the Department. If the Department is to improve the road or reconstruction is done, there must be coordination of the project so that it is done safely. Representative Martin suggested that DOT&PF could be a better facilitator of cooperation. Governor Sheffield reiterated the need that the Alaska Railroad is in charge of the signalization. Co-Chair Hanley advised that his preference is to allow the competitive bidding process, then whom ever meets the qualifications and the lowest bid should be able to do the work. He asked if that language was included would there continue to be a Union contract problem for the Alaska Railroad. Mr. Hupprich replied it could work if the language of the amendment was deleted. Co-Chair Hanley asked if the Department bids out the job through an open competitive process, the Railroad then bids as one of the contractors, would there continue to be a problem. Mr. Hupprich replied there wouldn't and that the Alaska Railroad could support that language. SB 285 was HELD in Committee for further consideration. SENATE BILL NO. 36 "An Act relating to transportation of public school students; relating to school construction grants; relating to the public school foundation program and to local aid for education; and providing for an effective date." DEBORAH VOGT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE, advised that the answers to Co-Chair Therriault's questions were addressed in a letter from the Department dated 4/29/98. [Copy on File]. She added that in the members packet was a spreadsheet illustrating the ASSESSED VALUES and TAX RATES (taken from the Alaska Taxable). [Copy on File]. Ms. Vogt commented that the Department of Revenue's primary responsibility is carried out in the Oil and Gas Audit Division located in Anchorage. The responsibility of that agency is to access the property that is taxed under AS 43.66. The State carries out those assessments and announces the values to the various municipalities; the municipalities or the taxpayers can appeal those assessments to the review board. Ms. Vogt explained that the Department began a regulation process on AS 43.56 last summer. Both taxpayers and municipalities are in the process of identifying what general subject areas will be addressed. The methodologies used by the municipalities under AS 43.56 have been the subject of a great deal of interest over the years. In the end, everyone who has looked at the methodology, has returned to that methodology established twenty years ago. By now there is twenty years of continuous and consistent construction of those statutes. She emphasized that the Department at this time, has found no reason to again review those determinations. Co-Chair Therriault noted that Ms. Vogt's letter had made reference to the 1989 Senate Select Advisory Committee on Municipal Taxation of Oil and Gas Properties. Ms. Vogt replied that this was a "blue ribbon commission", members which had been chosen to review these issues and make recommendations to the Legislature. Co-Chair Therriault made reference to the two methodologies which in the past has allowed the municipalities to move from one method to the other, converting the tax to a mill rate. He noted that this had not been proposed in statute anywhere. Statute states that an area is to access one of the two methods. Ms. Vogt replied that the statutory base from which that issue had been established in AS 29.45.100, clarifies that all limitations do not apply for bonded indebtedness. Co-Chair Therriault replied that was for bonded indebtedness and that the way it is being applied is impacting justification to remove all limitations. Ms. Vogt explained that the limitations on the operating budgets are implemented by the boroughs, whereas, the limitations on bonded indebtedness to the operating budget applies to the 225%, which then determines a mill rate cap established by statute, multiplied by 30 mills, times the 225% limit which gives a dollar amount (30 mills applied against that tax base). The bonded indebtedness establishes the bonded indebtedness for all properties in the municipality. In response to a handout distributed, Representative J. Davies questioned if Co-Chair Therriault was insinuating that an illegal formula was being used. [Copy on File]. Co-Chair Therriault stated that he had received the handout from the Ketchikan City and Borough group without properly checking it before releasing it. [Copy on File]. Representative Martin asked if a ceiling had been set. Ms. Vogt replied that the Court established that ceiling in the North Slope Borough versus the Sohio case in 1978. There was language in statute stipulating that the Statute of Limitation did not apply to bonded indebtedness. The State argued that the limitations were waived only when the bonds were in jeopardy of default. The Supreme Court responded that the limitations are removed in all cases of bonded indebtedness. Representative Martin asked to what degree the State was morally obligated to school bonding indebtedness. Ms. Vogt could not answer that question nor speak to the motivation. Co-Chair Therriault inquired, when using method C and arriving at a dollar amount, and then returning back to method B and assessing against the tax base, would that artificially keep a millage rate on the local property, unusually low. Ms. Vogt noted that the conversion of the mill rate from the smaller property base to the larger rate is a cosmetic difference, and that it would arrive at the same result. The issue raised by Representative Therriault is how the 225% property tax base gets built. All the property is prorated and reduced to form the cap. Ms. Vogt disagreed with Representative Therriault's characterization that they convert to method B; she understood that they use method C for the operating budget and that there is no limitation on bonding indebtedness. Co-Chair Therriault questioned that portion. The Department must appropriate that part of the oil and gas properties which are subject to taxation, while apportioning the local owned property. He advised that there is not a statutory directive to do that. Ms. Vogt remarked that this is the issue which has been questioned over the years. She suggested that perhaps the Department of Revenue should physically designate pieces of property within the 225% limit. The proportioned pro rata reduction is the only way that mandates could be applied. Co-Chair Hanley inquired the combined North Slope Borough mill rate. Ms. Vogt stated that the total mill rate was 18.51%. The handout chart indicates how the mill rate is established. (Tape Change HFC 98- 134, Side 2). Co-Chair Hanley questioned if the 225% cap was the total dollar amount. Ms. Vogt replied that 27 mills would be applied to the 225% portion for the operating budget. Co- Chair Hanley inquired the mill rate calculated on the total budget in order to arrive at the bond debt service rate. Ms. Vogt replied that the debt service rate would be the 13.39. The chart indicates how the mill rate for the smaller tax base on the 225% limit is converted for the mill rate for the purpose of the property tax bills. Co-Chair Hanley asked if the North Slope Borough had passed an ordinance on the mill rate assessment. Ms. Vogt stated that they do pass an ordinance, although, she had not seen it. The figure indicated in the handout refers to the ordinance passed in that area and sets out the manner in which the entire mill rate is built. Co-Chair Therriault asked if the Department had adopted regulations incorporating the methodology as recommended in the 1978 memo from the Department of Revenue. Ms. Vogt stated it had not been done to date, although, there is a regulation project in the makings at this time and that a task force group was currently looking at those issues. Co-Chair Therriault commented that this concern is so "big" and complicated, the Legislature, to date has chosen not to address these concerns. He acknowledged this was not the fault of the North Slope, suggesting that perhaps the tax paid by private citizens was low due to the methodology being used. Co-Chair Therriault believed that the residents of the North Slope Borough would be more mindful of their total debt if they were paying the proper mill rate, pointing out the impact to the State Treasury. Ms. Vogt responded that the 1978 North Slope Borough versus Sohio lawsuit had a tremendous impact. Unless that Court decision was reversed, it would be difficult to change what is currently happening. Co-Chair Therriault argued that any Court decision was subject to interpretation. He did not agree that the interpretation of the Court decision was to remove the limitations on everything. The oil and gas taxation mechanism was created separately and was to be treated separately so that a percentage of the wealth of those properties could flow to the general fund in order to be distributed across the State. He recommended those funds could be distributed to help pay for K-12 education. Co-Chair Hanley asked if Ms. Vogt had read the Ketchikan analysis. Ms. Vogt commented that she had seen a part of it and that there were a couple of differences between the way Ketchikan reads the status quo and the way the Department understands it to be. The first difference is a question of whether the North Slope Borough (NSB) versus Sohio case did restrict bonded indebtedness taxation to the 225% limit. That language makes it clear that the limitations do not apply, but it does not appeal the power to tax. Co-Chair Therriault noted that the tax case implied that for the bonded indebtedness portion of their budget, a municipality could go above the limit, but would not be able to do so for the operating budget. Ms. Vogt agreed. She understood that the Ketchikan representative was saying that the Court allowed bonded indebtedness to go beyond a rate and amount but not on the tax base. An additional concern resulting from that testimony was the idea that Ketchikan was interpreting the current practice as evidence that the municipality had chosen method B. Ms. Vogt disagreed, noting that they had chosen and continue to use the 225%. Co-Chair Hanley asked if the House Finance Committee passed a resolution or sent a letter to the Department requesting that the Department address this concern in a different manner, would the Legislature be guaranteed that would happen. Ms. Vogt replied that 20 years of a statute of continuous and consistent action carries a fair amount of weight, although, if the Legislature passed a statute, then the Department would adhere to that change. In response to Representative Mulder's accusation of the lie being lived by North Slope Borough for the past 20 years, Ms. Vogt cautioned that this was a statutory area which has not been clear to everyone, neither the Department of Law, the Department of Revenue nor the North Slope Borough. Representative J. Davies pointed out that the Legislature took a close look at the concern when it formed the 1989 Select Committee; that group provided a blessing of the status quo. Co-Chair Therriault referenced a memo from Tamara Cook regarding the municipally taxation of oil and gas production and pipeline property. [Copy on File]. In that memo, she made reference to the portion of the statute which stated that the Department might designate a portion of the tax base against which the local tax may be applied. Co-Chair Therriault emphasized that proration of personal property is not correct. Ms. Vogt acknowledged that this is the issue which has been in conflict and that methodology has been publicly scrutinized and brought to the attention of the Legislature. Representative Foster requested that the Department of Law come before the Committee to respond to legal concerns regarding the North Slope Borough accusations. He strongly protested materials distributed in members packets. Co- Chair Therriault cited that what was requested was clarification of how the statute should be applied. AVRUM GROSS, ATTORNEY, REPRESENTING THE NORTH SLOPE BOROUGH, JUNEAU, spoke to the taxation of oil and gas property as pertaining to the context within SB 36. He insinuated that this is an issue of "life and death" for the North Slope Borough. Mr. Gross stressed that there has been no illegality and no impropriety. The North Slope Borough and the State of Alaska have followed rigorously the statutes which have been passed by the Legislature. Mr. Gross pointed out that the presentation given by the representatives from Ketchikan was confusing and misleading. He advised that he had been involved with this issue since its inception in 1973, during a Special Legislative Session which settled the litigation between the oil companies and the State over the pipeline. Part of that Special Session addressed the taxation of the pipeline and related property. Taxation focused on a number of things, one of which was the taxation of oil and gas property used in the development of oil. Mr. Gross continued, at that time, the State imposed a 20- mill tax on all pipeline property. The issue arose regarding what that would do to municipal taxation. Municipalities were granted the right to tax oil and gas property that was located within their boundaries. Their power to tax was limited by statute. Mr. Gross pointed out that this was the only limitation that is found on taxation of real property or property of this nature in the State. In the case of oil and gas, the State imposed some limitations. The limitations that were imposed are found in the municipal code. Those limitations are two-fold. ? The first is the total amount of tax, which the borough can impose, which could make for a low mill rate. ? The second limitation is what has created confusion in the House Finance Committee. It does not limit the amount of tax imposed, but instead, limits the value of property upon which the tax is imposed. That is determined by taking the total assessed valuation of all real property in the State, divide it by the number of residents in the State, which provides an averaged accessed value per resident. That figure is multiplied by 225%, and then multiply that amount by # of people in the municipality. Then we would have the assessed value in the municipality upon which a property tax maybe assessed. If that value were higher than the assessed value of all the property in the municipality, there would be a problem. Mr. Gross continued, the problem comes when the property value in the municipality is greater than the amount produced in the formula. He questioned what is done in order to reduce the assessed value to limit on which you impose a tax. There are two options: ? Reduce the oil and gas property down proportionately, or ? Reduce all the property down proportionately. Mr. Gross continued, the Statute which Mr. Bullock, Ketchikan Borough, is concerned about specifies that a municipality may level and collect a tax on the full and true value of that portion of taxable property as assessed by the Department of Revenue and does not exceed the accessed valuation produced by the 225% figure. The only property, which gets reduced, is the oil and gas property. Everyone else pays taxes at the full and true value. Mr. Gross noted that the Department of Revenue analyzed this, noting that it was only one statute, which is part of a total code which authorizes municipalities to tax oil and gas property. Mr. Gross pointed out that there are two other statutes. That statute does not indicate what should be done if the value of all the property exceeds the maximum. There is another statute, AS 43.56.10 010(c), which indicates what exercise should be undertaken. That statute states that if the total value of the accessed property exceeds the 225% limit, the Department of Revenue shall designate the portion of that tax base against which the local tax may be applied. When referring to a portion of the tax base, they were referring to the entire tax base. They were speaking about a proportionate reduction of the entire tax base. At that time, the Attorney General also looked at the general statute AS 43.56, which required municipalities to tax oil and gas property at the same rate as all other property. If only the oil and gas property is reduced, and the value of other things was not proportionately reduced, the effective tax rate would not be the same. The purpose of the Legislature was to insist upon a proportioned reduction of all taxes under the 225% tax limit. Mr. Gross advised that the legislation is not clear. Someone had to make an opinion and that opinion was issued in 1978. In 1985, the issue was surfaced again by Mr. Bullock when he worked for the Department of Revenue. At that time, the Attorney General looked at the statutes and concluded that the method used by the North Slope Borough was acceptable and reasonable. It had been authorized and directed by the State. In 1989, the Select Committee comprised of members from the former Commissioner of the Department of Revenue and the former Commissioner of the Department of Community and Regional Affairs was created and the Legislature was once again made aware of the situation. Mr. Gross spoke to the second issue pertaining to bonds. For all municipalities in the State of Alaska, there are no limits on the ability to tax for bonds. There is a general 30-mill limitation on municipal taxation. That limitation falls by the wayside when talking about bonds. The Legislature, when it adopted these two limits, put in a separate statute which stated that these limits do not apply to the payment of bonds. The issue arose in the Sohio case and the Supreme Court stated it was all bonds. There is no limitation on the ability of the Borough to tax to pay bonds. Mr. Gross advised that if were changed, it would be fatal to the North Slope Borough. In reliance upon what the State has told it to do, the North Slope Borough has issued bonds and has created an operating budget. If that were changed now, it would shift an inordinate chunk of the obligation to support the local government on the people who own other than oil and gas property in that area. In some cases, that burden would be very high and as a result the budget of that area would have to be radically cut. Lots of people would be unemployed. The bond situation would be worse and would affect more than the people that live in that area. The North Slope Borough bonds would go into default. There would be no way the residents could pay for basic public service bonds and they would have to assume new obligations for bonds. Mr. Gross asked members to consider what would happen to the financial structure of the North Slope Borough and what would occur to the bond rating of the State, if bonds, issued under one tax structure, and all of a sudden, the Legislature changed the tax structure before the bonds were paid. There would be no tax structure for the bonds. He stressed that this issue is for real. In 1989, the State Assessor claimed that this could happen if the bonds went into default. Mr. Gross reiterated that the North Slope Borough has done exactly what the State of Alaska has told it to do during all of the last Administrations. There has been a consistent interpretation for the past twenty years, and that these people have made a "good faith" interpretation of what they consider to be the law. In conclusion, Mr. Gross commented that the North Slope Borough only uses the 225% for its operating budget. It taxes on full and true value for bonds. There are two ways of taxing, one for operating and one for bonds. The Borough shows the tax bill to the residents as if it took the 225% figure and blew it up to true value with a corresponding mill rate reduction. (Tape Change HFC 98- 135, Side 1). In response to a concern of Representative Therriault, Mr. Gross replied that if the State's statutes require that oil and gas property in a borough be assessed at the same millage rate as all other property, and that property is reduced by 50%, the millage rate would effectively be reduced in half. Mr. Gross emphasized that this would not be fair. Co-Chair Therriault advised that language in Title 43, states that the municipality may levy and collect a tax under a rate of taxation that applies to other property taxes of the municipality. Mr. Gross remarked that was a statute which was somewhat confusing to interpret. The Attorney General at that time looked to other provisions in the code to try to find guidance in how to do this. Co- Chair Therriault advised that the Legislative Majority attorney suggested that could not be done. Mr. Gross acknowledged that twenty years ago, no one knew how this would turn out. And now twenty years later, Mr. Gross suggested that a court of law probably would not change the situation. He emphasized that the Legislature should not change the status quo because such action will devastate the North Slope Borough. Co-Chair Hanley and Mr. Gross discussed SB 36 and how the tax and millage rate would affect full and true value. Mr. Gross noted that he was only present to address the oil and gas property tax issues. He understood that SB 36 spoke to taxable value. He pointed out that the assessor had assumed that it would be applied on the 225% assessed rate because the Borough uses the 225% figure for operating expenses, which includes schools. The assumption was that the bonded indebtedness would use full and true value. Co-Chair Hanley noted that in order to make a policy call, the Legislature needs to know what it will cost to fund the bill. The impact to North Slope Borough will differ depending on the interpretation. In response to Representative Martin's comment, Mr. Gross explained that there are written opinions which explain what the interpretation of the statute is. He pointed out that what keeps arising is the same issue brought forward by Mr. Bullock and that in each case that concern has been struck down. Representative J. Davies pointed out that the Department of Education has never assumed a position. They accepted the value which was provided by the assessor and deferred the decision of which value choice was to be used. Co-Chair Hanley inquired how the 4 mills would be applied and how that would impact SB 36. STEVE VAN SANT, (TESTIFIED VIA TELECONFERENCE), STATE ASSESSOR, ANCHORAGE, stated that the official full value given to the NSB would be the $12 billion. Co-Chair Hanley reiterated that the 4 mills would be on the full value. He voiced concern that the current Administration seems to be arguing two different opinions concurrently. Mr. Gross pointed out that there are two different statutes being addressed. One allows the NSB to tax and the other is the contribution that local municipalities have made for school funding. He understood that the assessor would use taxable value. He thought that the taxable value for the operating budget was limited by the 225% which is the $2 billion. The taxable value for bonded repayment was not so limited, so it would be taxed at full and true value. Mr. Gross believed that both of those made sense. Mr. Gross addressed the interpretation of the taxation method. He believed that it should be clarified in SB 36 without meddling around with AS 43.56, by simply specifying how the local contribution is to be computed. Co-Chair Therriault asked if there had ever been a legal opinion from the Department of Law on the interpretation of the statute. Mr. Gross replied that in 1985, Attorney General Gorsuch issued an opinion stating that the method used by the North Slope Borough was reasonable. Co-Chair Therriault asked how could the Department of Education implement language defining a school. RICK CROSS, DEPUTY COMMISSIONER, DEPARTMENT OF EDUCATION, noted that the Department would define schools as consistently as possible with the direction given. He noted that there is a problem rebuilding all schools in the State trying to use a similar code. Currently, schools are distributed randomly and the definition in one community would be quite different from the definition in another. He acknowledged that this has been a problem for the Department. He reiterated that there has been a struggle in trying to create a definition which makes sense for all the Alaskan communities and schools. Co-Chair Therriault voiced concern in places where there is a wall dividing a building and then calling it two schools. He asked if the Department would allow that under the current definition. Mr. Cross responded that could be a problem and that the Department's ability to control and regulate should be addressed. He advised that was not the prevailing problem in providing a definition of school. The current table used has problems with basic integrity. Co-Chair Therriault theorized that a community that has multiple, small operations which are close, could affect the validity of the McDowell tables. Mr. Cross stated that he had asked the McDowell Group that specific question regarding the integrity of the table. They replied that there was flexibility in the chart, although, it would eventually need to be redone. Mr. Cross pointed out that when artificial schools are created, then the number of schools in the State is decreased. The McDowell study assumed that there are 480 schools in the State. As the schools decrease, there is a new redistribution. That would not provide a consistent or even result. Representative Martin asked what would be a fair distribution of the resources. Mr. Cross replied that the Governor's bill provides a fair compromise. The Department understands that there are varying views on what is a reasonable approach and the Department has opted not to use the funding communities. Mr. Cross stated that it is important to recognize that the current foundation formula has inequities within the districts that are at the cap, and that revenue generation potential must also be addressed. Co-Chair Therriault requested a description of the disparity concern. (Tape Change HFC 98- 135, Side 2). EDDY JEANS, MANAGER, SCHOOL FINANCE SECTION, EDUCATION SUPPORT SERVICES, DEPARTMENT OF EDUCATION, explained that it is important that SB 36 meet the federal disparity test. The Department has provided a preliminary disparity test. Disparity is based on budgeted data and is run on actual audited local contributions and revenues. The disparity test takes all the revenue that a school district generates through a school operating fund, divides that by the adjusted instructional unit as is done in the current formula or the adjusted Average Daily Membership (ADM). That data provides a revenue per adjusted student and that data is then sorted high to low, eliminating the top 5% students and then eliminating the bottom 5% students and measuring the different between the high and the low. The difference is divided by the low, which provides the disparity. Co-Chair Therriault asked if the House HESS version met the disparity standard. Mr. Jeans replied it would. Under the current foundation program, single site appropriation has been made outside of the foundation formula for the past ten years. Those single site school districts appear in the top 10% of districts and get discarded each year. These are small allocations to those districts in terms of dollars, which inflates dollars on a per student basis. The disparity comes in at 23% in those cases. Mr. Jeans continued, if the Department took the single site table, placed that in the foundation formula as an adjustment, there would be additional instructional units for those districts, which would therefore reduce the revenue per instructional unit and bring them back down. Mr. Jeans continued, that would bring them within the 23%, which is the limit. Because the Department receives appropriations outside the formula, it will drive it up. Under the current foundation statutes, municipal districts are allowed to contribute 23% above basic needs. That is what maintains the 25% federal disparity standard. Thus, concluded Mr. Jeans testimony on SB 36. SB 36 was HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 4:10 P.M. H.F.C. 15 4/29/98 p.m. .