HOUSE FINANCE COMMITTEE February 5, 1999 1:35 P.M. TAPE HFC 99 - 16, Side 1. TAPE HFC 99 - 16, Side 2. TAPE HFC 99 - 17, Side 1. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:35 P.M. PRESENT Co-Chair Therriault Representative G. Davis Co-Chair Mulder Representative Grussendorf Vice-Chair Bunde Representative Kohring Representative Austerman Representative Moses Representative J. Davies Representatives Foster and Williams were not present for the meeting. ALSO PRESENT David Teal, Director, Division of Legislative Finance; Ginger Blaisdell, Fiscal Analyst, Division of Legislative Finance; Tom Maher, Legislative Aid, Representative Gail Phillips; Representative Fred Dyson; Dan Spencer, Chief Budget Analyst, Office of Management and Budget; Tamara Cook, Director, Legislative Legal & Research Services. SUMMARY PRESENTATION: DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION 25 YEAR GENERAL FUND HISTORY SB 28 An Act relating to the increase of an appropriation item based on additional federal or other program receipts. CSSB 28(FIN) was reported out of Committee with a "do pass" recommendation and with a zero fiscal note by the Legislative Finance Division dated 1/26/99. SENATE BILL NO. 28 "An Act relating to the increase of an appropriation item based on additional federal or other program receipts." TOM MAHER, LEGISLATIVE AID, REPRESENTATIVE GAIL PHILLIPS, explained that SB 28 would revise procedures that the Governor must follow when the Legislative Budget and Audit (LBA) Committee does not approve or does not take under consideration a revised program request (RPL). The need for revisions to what is commonly called the 45-day rule stems from recent actions by the Governor and LBA's desire to protect the appropriation power of the Legislature. Last December, LBA directed Legislative Finance and Legal Services to explore options to address these concerns. The proposed legislation is a result of that effort. Mr. Maher continued, the Legislature typically places front section language in appropriation bills granting an open appropriation to the Governor to proceed with the expenditure of federal or other program receipts not specifically appropriated by the Legislature. The Governor is required to submit revised program requests to the LBA Committee. If the request is approved, the Governor may proceed immediately. If the request is disapproved, under current law, the Governor must wait 45 days and then provide a statement of reason to the Committee prior to the commencement of any expenditure. Mr. Maher pointed out that revisions to the 45-day rule set forth in SB 28 do not stop the Governor from ultimately proceeding with an expenditure that has been disapproved or not considered by that Committee. Instead, SB 28 strengthens the Legislature's appropriation power by delaying the commencement of any expenditure until after the full Legislature has been in regular session for at least 30 days. The 30 day period is designed to provide for additional discussions between the Governor and the full legislative body, allowing the full Legislature to consider any action deemed appropriate regarding the Governor's determination to proceed with any expenditure. Mr. Maher concluded, SB 28 would not create any major obstacles for the Governor in terms of proceeding with expenditures. The legislation merely allows the full Legislature to consider the issue and provide for additional safeguards to the legislature's appropriation power. Co-Chair Therriault explained how this legislation would be accomplished. In the front section of the operating budget, the Legislature's authority is extended to make modifications to appropriations for underestimated and unanticipated revenue receipts. That power is then extended to the LBA Committee. The Governor files an RPL requesting the additional authorization and then LBA takes the appropriate action. As the statutes are currently written, if the Committee fails to take it up or takes it up and turns it down, the Governor can proceed with the expenditure after the 45 days have passed. The question being, does the Legislature wants to extend that authority and allow the Governor to have that power or should that office wait until the full Legislature meets in session to consider and negotiate the concern. Mr. Maher pointed out that the LBA Committee does have the authority to rescind action taken if the RPL had previously failed. Representative Bunde pointed out that the Governor has taken advantage of this authority over recent years. Representative J. Davies disagreed with Representative Bunde pointing out that during his tenure on LBA Committee, such action was used sparingly and only in times of addressing a serious issue. He requested documentation indicating that there had been increased frequency to merit the policy change. Mr. Maher noted that he could provide a document received from Legislative Finance illuminating the concern. Representative Grussendorf referenced the sponsor statement which indicates that "provisions of the 45 day rule set forth in SB 28, do not stop the Governor from ultimately proceeding with an expense which has been disapproved or not considered by the Committee". He asked if that was correct. He understood that the Governor could proceed with the expenditure with or without legislative approval. Mr. Maher agreed, noting that there could be other legislative action within that negotiation. Co-Chair Therriault reiterated his main concern is that the full Legislature deal with each item as a new appropriation or as an expansion to an existing appropriation. Representative J. Davies suggested that it would be appropriate to hear the historical perspective which lead to the existing 45-day statute. He cautioned changing the terms of that settlement. Co-Chair Therriault clarified that the proposed legislation would only be an extension to the delay period. Representative J. Davies explained that the Administration claims that for some funds, there should be no requirement for legislative appropriation because they are federal pass- through funds. The Administration argues that authority does not have to be extended. The compromise was to have a "notice" feature of the 45 days. Co-Chair Mulder suggested that the concern is "the power of appropriation". He commented that the Legislature does appropriate "other funds". He believed that the Legislature has the right and authority to make the appropriation. Representative J. Davies agreed to that, however, asked if the Legislature has the power to stop an appropriation made by Congress. Co-Chair Mulder noted his concern that with the current system, the Legislature indirectly encourages the Administration to not "lay all their cards on the table" during the appropriation process. Representative Austerman questioned why the 45 rule exists, if the Legislature is the appropriating body. He asked when the 45-day rule was implemented. TAMARA COOK, DIRECTOR, LEGISLATIVE LEGAL & RESEARCH SERVICES noted that the statute which has issue with the proposed legislation, provides an entertaining history. It was enacted in 1977, which provided for the Governor and the LBA Committee to jointly approve expenditures of three different categories of which one was program receipt. When the bill was passed, it was immediately challenged in a class action called Kelly vs. Hammond. The plaintiff was Ramona Kelly and the case went before Judge Steward who ruled that all three types of appropriations were invalid. With respect to the program receipt portion, the Judge found an improper delegation of the legislative power to appropriate to a committee and he found a violation of the separation of powers doctrine. Judge Steward also addressed the question of federal program receipts. At the trial court level, Judge Steward concluded that even federal program receipts are subject to appropriation. As advised at that point, is currently how Alaska operates. Ms. Cook continued, the case was under appeal and both the Legislature and the Executive Branch won some things and lost some things. The appeal was dropped by agreement. Instead, the Legislature submitted a proposed constitutional amendment to the voters, which would put in place, what is before the Committee in the proposed legislation as Subsection H. The voters turned it down. The following year in 1979, the Legislature amended Subsection H so that it would apply only to program receipts and in the form currently before the House Finance Committee. In response to Judge Stewart, the Legislature realized that it would have to come up with an appropriation. The Legislature hit upon the mechanism of appropriating in the front section of the budget an unknown amount of additional program receipts, subject to legislative audit. That was a physical appropriation in an appropriation act of both federal and non-federal program receipts. It is broad language which has never been challenged. Ms. Cook continued, the second part, dealing with the Legislature not interfering with the Executive Branch's power of expenditure created the 45-day rule. LBA does have authority, but it does not have the power to keep that money from being spent. That would be an improper delegation of the Legislature's expenditure power to a Committee. It would violate the Governor's power to spend in the face of a legitimate appropriation. The 45-day rule allows LBA to refuse and recommend but, ultimately, the Governor has the power to spend. Ms. Cook pointed out that the "statutory fix" coupled with LBA's advisory review, creates a system which has never been challenged. She added that it has worked for both the Executive Branch and the Legislature, creating a system which is flexible. Co-Chair Therriault asked if it was correct to call the referenced case a "settlement". Ms. Cook explained that the case was dropped because the Governor and Legislature decided to seek a political solution by proposing an amendment to the Constitution. When that effort failed, this statutory scheme was put in place. Representative J. Davies remarked that the "settlement" had been an agreement made out of court between the Legislature and the Administrative Branch to resolve a long-standing disagreement. Ms. Cook agreed that it had been mutually beneficial to both the parties. Representative Grussendorf believed that the Exxon Valdez Oil Settlement (EVOS) money was the issue which created tension. That money had to be spent in certain designated areas. He suggested that this was a different category than program receipts. Ms. Cook agreed that the Exxon Valdez money was unusual. In the case of that settlement, it went before the Court in a formal sense. At one point, the Administration assumed the position that expenditure of those funds, which were "weird" in that they were co-mingled with the federal government, could have been received as damages. The State damages were placed into a single fund with trustees representing both the federal government and State government in charge, which created a curious dynamic to address those co-mingled funds. Ms. Cook recalled that the federal government indicated that none of the money in that fund would be subject to appropriation. They emphasized that it was not part of the Alaska State Treasury and was not subject to appropriation. One of the difficulties of not appropriating that money was that it would be going to State entities. If the money was not subject to appropriation, there was a question as to how the departments would accept it and delegate it with absence of that appropriation. The Legislature responded by passing a statute, which applied, to Exxon Valdez money. The statute was specific to that money indicating that there were two ways in which the expenditures could be made: ? The Legislature could appropriate money for a particular project that is submitted and then fund it; or ? Through program receipt expenditure authority which provides oversight for the LBA Committee. Ms. Cook reiterated that this is how the State has gotten to the present point with the EVOS money treated like program receipts. Representative Bunde asked if it was only federal program receipts which LBA had perview over. Ms. Cook responded that the definition of program receipts was broad and included a few different income streams of which federal program receipts are one. Representative J. Davies pointed out that the legislation before the Committee resulted from seven cases in which three were related to EVOS circumstances. That leaves only four program receipt issues of concern, two of which occurred during the Administration of Governor Hickel and two during that of Governor Knowles. He suggested that there is no evidence of acceleration. Co-Chair Therriault responded that all have occurred since 1990, from a statutory scheme put in place in 1979. Co-Chair Mulder asked the value to the Legislature of having the 45-day rule. Ms. Cook replied that value would be the same that the 45-rule has for the Governor. It sets up a system of appropriating an unanticipated amount of revenue. It is beneficial to the Legislature in that it gets the Legislature out from under constitutional objection that a Committee is participating in an expenditure decision in an unconstitutional manner. It helps the Governor, because without that, LBA Audit review, the Legislature would be disinclined to appropriate that amount of money. Co-Chair Mulder believed that the old system does encourage providing excess authority in anticipation of funding. Ms. Cook replied that the 45-day rule allows the Office of the Governor to make the expenditure more quickly. Co-Chair Therriault stated that it provides the ability to deal with unforeseen circumstances during interim. He agreed that the current mechanism has provided some sort of flexibility. Representative G. Davis suggested that the 45-day rule basically provides notice. Co-Chair Therriault agreed, although asked if it was correct that when a legislator makes a vote on the front section of an appropriation, would notice be good enough or would you expect more control. Representative G. Davis asked what is an "emergency" and could that differ between the Governor and the LBA Committee. DAN SPENCER, CHIEF BUDGET ANALYST, OFFICE OF THE GOVERNOR, OFFICE OF MANAGEMENT AND BUDGET, offered to provide Committee members an overview. He noted that the front section appropriations reference those not specific to statute. Three years ago, those appropriations were more broadly worded with EVOS, program receipts, test fishery receipts and statutory designated program receipts. Years prior to that, it also included general fund program receipts. Of the seven RPL's proposed as problems, three of these were general fund program receipts at the time they were used. Mr. Spencer explained what has occurred is that a subcommittee faced with a cap might take program receipts out of the budget and then offers intent language to LBA in order to receive those program receipts. He explained the way the process currently works is that the Legislature passes a budget plan based on what is known at that time. As unexpected federal grants are made available, it is then determined if they would fit into an existing budget. If not, it is then submitted as a RPL to the LBA Committee. Mr. Spencer acknowledged that the existing 45-day rule provides any Administration plenty of opportunity for mischief although, emphasized that no governor has chosen to do that but instead has worked closely with the LBA Committee. Mr. Spencer continued, if an RPL is turned down during the LBA Committee, the Governor's choice is to resubmit, ask the LBA Committee to reconsider its action, not undertake it, or continue and authorize the expenditure. He assured Committee members that in the decision involving the seven issues of concern, none of them were arrived at from a "cavalier attitude". He emphasized that nothing is taken lightly about this rule. (Tape Change HFC 99 - 16, Side 2). Mr. Spencer advised that a timing issue had been involved in each of the seven decisions and that the Governor did consult with the members of the LBA Committee. Mr. Spencer addressed his concerns with the legislation in regards to giving the LBA Committee veto power. The law as currently written has been rarely invoked. Had it not been for EVOS, there have been few times it has occurred. When it has occurred and when there is a timing constraint, this legislation could give the Committee veto authority, and that would not be in the best interest of the State. Presently, the Governor must provide LBA a written report explaining why the expenditure was essential; that action has always occurred. Under the proposed statutory change, the Governor would not be able to make that decision. Mr. Spencer summed up the position of the Governor's Office, pointing out that the Legislature and that Office have a workable agreement and a process with a built-in reasonable time delay before the Governor can invoke the ability to spend unappropriated money. No Administration has acted unreasonably. He concluded that the current process works. Representative Bunde mentioned his concern that there are projects which can not maintain the scrutiny of the full body so consequently decide to wait to introduce their proposition so that it would come before the LBA Committee. Mr. Spencer acknowledged that the concerns are a double- edged sword and that motives do vary. Co-Chair Mulder asked about the Department of Community and Regional Affairs (DCRA) payment in lieu of taxes. Mr. Spencer noted that federal money had been available for the communities and he recalled that in prior years, it was off budget. The question was never if the communities would receive the funding, but rather would they receive it in a timely fashion. Mr. Maher addressing that concern, referenced an e-mail from Fred Fisher, Legislative Analyst, pointing out that the issue got to LBA because it was difficult to find the original appropriation. Mr. Spencer agreed that there has been debate regarding the underline appropriation of that RPL. Representative Grussendorf advised that the situation was more complicated with that Payment In Lieu of Taxes (PILT) which has always passed directly through to the communities. LBA was trying to direct communities how they were to spend that money. The communities did not appreciate that attitude especially in Southeast Alaska. Representative Austerman noted that he was not convinced that the proposed legislation would be the correct way to address the problem. Co-Chair Therriault replied that the legislation would grant the flexibility on many different possible fronts. Within 30-days when the Legislature was back in session, action could then be decided upon by the full legislative body. Representative J. Davies countered that if the Legislature were to not place it in the front section, then communities might go directly to the federal government to get the money appropriated. He suggested that the Legislature would then have less foresight and control then now. Additionally, every issue before the LBA Committee has had a timing concern for funding. He reiterated, the current settlement is the best compromise and has worked over the years. Representative Grussendorf suggested that the legislation was submitted because some people disagreed with the land purchases. He pointed out that each issue had been quite time sensitive. Representative J. Davies agreed with Co-Chair Therriault that members on the LBA Committee should not take their votes lightly. He suggested that the recommendations made by Co-Chair Therriault could actually "shut-off" an appropriation to veto funding made either by the Legislature or by Congress. Representative J. Davies emphasized that both those actions would be unconstitutional. Representative G. Davis thought that the legislation could initiate additional costs. He believed that if a situation were a true emergency, it would need to be quickly addressed and with the proposed legislation, the Governor would have to call a Special Session to handle it. He recommended that the current system stay in place. Representative Bunde commented that the decision regarding the legislation was a "judgement call". He added that some departments circumvent legislative action by coming to LBA with their requests rather than to the full Legislature. He noted that he supported the legislation with the hope that negotiations could be made to eliminate the need for it. Co-Chair Mulder MOVED to report CSSB 28(FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representative J. Davies OBJECTED. Representative J. Davies explained that that issues have not been resolved and there have been serious concerns raised in discussion. He requested an opportunity to better understand the cases which stimulated the proposed legislation. Additionally, he recommended separating the EVOS circumstances from the rest of the proposal. The EVOS process was added as an appendix to the current process. Representative J. Davies asked to separate the issues, place the bill in subcommittee, and leave in-place the statutory laws made over twenty years ago. He requested members to reconsider their consideration their position on the legislation. Representative Grussendorf noted the historical efficiency of the LBA Committee given the tremendous amount of funds they are responsible for. The current system has worked efficiently. He requested that Committee members not use the proposed legislation as an item for a power struggle between the Legislature and the Office of the Governor. A roll call vote was taken on the motion. IN FAVOR: Austerman, Bunde, G. Davis, Kohring, Mulder, Therriault OPPOSED: J. Davies, Grussendorf, Moses Representatives Foster and Williams were not present for the vote. The MOTION PASSED (6-3). CSSB 28 (FIN) was reported out of Committee with a "do pass" recommendation by the Legislative Finance Committee dated 1/26/99. PRESENTATION BY DAVID TEAL - 25 YEAR GENERAL FUND HISTORY DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, spoke to how oil revenue affects the overall revenue for the State. He emphasized that oil revenue is not stable and that there is a downward trend in oil revenue. Currently, there is a $1.1 billion dollar fiscal gap or 50% of the budget. Mr. Teal commented that concern with stability is no surprise. The General Obligation (GO) debt was structured so as to assume continued production and selling power of the oil. The present situation creates a much larger than anticipated fiscal gap. Mr. Teal stressed that the gap can not be reasonably addressed with budget cuts alone. He noted that the focus of the Senate Finance Committee meeting earlier in the day had been on generating revenue rather than the downsizing expenditures. Mr. Teal commented that following the request to address State expenditures, the Legislative Finance Division prepared Attachment #1, "The 25 Year General Fund History". [Copy on file]. He noted that Ginger Blaisdell coordinated that effort for the Division. GINGER BLAISDELL, FISCAL ANALYST, DIVISION OF LEGISLATIVE FINANCE, spoke to Attachment #1. She stated that Page 2 of the graph indicates the volatility of oil and gas property taxes, severance tax, corporate income tax and rents and royalties on Alaska's total revenue. She pointed out that the small spikes in the "other revenues" line are attributed to: ? 1980 Investment earnings ? 1983 Investment earnings ? 1986 Settlement payments Ms. Blaisdell continued, the greatest peak in 1981-1982 was due to extraordinary high world oil prices that occurred at the same time Alaska's production came onto the market. Alaska was producing 2 million barrels per day at that time. Alaska's production level is currently about half, and the price per barrel is less than half of the 1982 level. In general, Alaska's oil forecasts have been close to actual earnings over the past 15 years. Overall, the Department of Revenue has under-projected oil revenues by $.82/bbl. Representative J. Davies asked if "other revenue" included Permanent Fund revenues. Ms. Blaisdell replied that category was only general fund revenue and would not include the Permanent Fund. Representative J. Davies questioned if the tax settlement had been considered revenue. Ms. Blaisdell stated that would not show as general fund revenue nor would the Capital Budget Reserve (CBR) interest. Ms. Blaisdell spoke to Page #3, which illustrates projected general fund revenues at various oil prices, indicating the impact on the general fund as the oil price fluctuates between $10/bbl and $20/bbl. The narrowing distance between lines shows that with lower production, the price per barrel has a lesser effect on oil revenues. Other oil revenues, such as corporate income tax, property tax and severance taxes provide additional "oil-related" revenues to Alaska. She noted that the oil projections are based on a sensitivity model provided by the Department of Revenue and are based on the current oil fields life and production expectancy. Ms. Blaisdell pointed out that to make $1.257 billion dollars in year 2020, oil prices would have to be $91/bbl as adjusted for 3% inflation. ($45/bbl in today's dollars). Representative Grussendorf asked about the oil companies production reaction at this time. Ms. Blaisdell stated that she understood that ARCO was looking at future development. Page #4 of the handout illustrates general fund revenues versus the expenditures. In general, Alaska's spending has followed the pattern of its revenue. As revenue increases, so does spending. As revenue decreases, so does spending, but at a slightly lower rate. She pointed out that general fund program receipts are counted as general fund expenditures but are not included in the State's revenue total. Ms. Blaisdell noted that the revenue peaks and valleys shown on Figure #4 are attributed to oil fluctuation. ? 1979-1982 Oil production increased from the previous years and the extremely high prices. ? 1986 Oil prices "crashed" from a projected $24.64/bbl to $22.03/bbl. With high production, the slight price drop caused a significant drop in Alaska's revenues. ? 1991 The Gulf War brought projected oil prices from $19.15/bbl to $21.57/bbl. ? 1992 Tax settlement payments from oil producers increased revenues. ? 1994 Oil prices "crashed" from a projected $18.25/bbl to $14.05/bbl. ? 1997 Unexpected high oil prices from projected $16.72/bbl to $20.90/bbl. ? 1998 Iraq exports are allowed that drive prices down from projected $18.44/bbl to $16.03/bbl. ? 1999 Price "crash" brings oil to a new low average of $11.58/bbl. Ms. Blaisdell spoke to the expenditure peaks and valleys on Page #4. ? 1980 Alaska's first $1 billion dollars operating budget plus $100 million dollars supplemental. Capital budget increased from $23 million dollars to $86 million dollars in 1980. ? 1981 Alaska's operating budget increased to $1.5 billion dollars, capital expenditures jump from $86 million dollars to $900 million dollars in general fund spending. ? 1982 Alaska's operating budget grows by another $400 million and the capital budget declines slightly. Special appropriations are approximately $3 billion dollars. ? 1983 & 1984 Drop significantly due to decline in special appropriations spending, however, the operating and capital budgets stay at around $1.9 billion dollars and $400 million dollars respectively. ? 1985 Operating budget increased to $2.3 billion dollars and capital jumps to $1.8 billion dollars. ? 1986 Oil revenues drop due to a price crash. Overall spending stays relatively stable but drops in FY88 and rebounds in FY89. During this time, 1,300 positions were eliminated from the state work force. By 1991, state positions were back to the "pre-layoff" level and stabilized with minimal growth. ? 1987 The operating budget stayed relatively the same, the capital budget increased $200 million dollars and special appropriations increased $150 million dollars from 1986. ? 1988 to 1994 Expenditure peaks and valleys have leveled off. ? 1990 Constitutional Budget Reserve created. ? 1994 Alaska draws from the Constitutional Budget Reserve to offset the decline in revenues. ? 1997 An unexpected increase in revenues created a $70 million dollar general fund surplus. ? 1998-2000 The Constitutional Budget Reserve is depended upon to "balance" the State's expenditures with it declining revenue source. Representative J. Davies responded to comments made by Representative Kohring and pointed out that the graphs do not indicate federal funds. If the total expenditures per capita were plotted and adjusted to real dollars, it would indicate that the State spends less per capita now than it did in the 1970's. Ms. Blaisdell provided those figures: 1973 Population was 336 thousand residents. 1998 Population was 621 thousand residents. 1973 $3.7 million dollars per person was spent. 1998 $3.7 million dollars per person was spent. Mr. Teal pointed out that in 1973, there were only two funds, general fund and federal funds. Over the years, the "other" funds have grown substantially. Co-Chair Therriault commented that when the State started offering a dividend, the State started attracting a populace that required much more service from government. Representative Bunde asked if the expenditures indicated money paid out for the Permanent Fund Dividend (PFD). Ms. Blaisdell stated it did not. PFD checks are paid out of the Permanent Fund corporate receipts and are not included in the general fund category. Co-Chair Mulder acknowledged that oil revenue is not stable and asked how to reduce that uncertainty. Mr. Teal advised that "uncertainty" could not be reduced, because oil is a commodity and commodities fluctuate. He emphasized that oil prices can not be controlled. Everyone understands that the oil bonanza is over. He cautioned that it is important to remember to spend less than every dime that is available. Representative J. Davies suggested that earnings from the PFD could be a source of major income. Mr. Teal acknowledged that the Legislature has been responsible but that there is competition for that money. The Permanent Fund Dividend takes away the earning flow from the general fund. Thus concluded the presentation on the general fund history. ADJOURNMENT The meeting adjourned at 3:45 P.M. H.F.C. 10 2/05/99