HOUSE FINANCE COMMITTEE February 9, 2000 1:45 P.M. TAPE HFC 00 - 30, Side 1 CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:45 p.m. PRESENT Co-Chair Therriault Vice Chair Bunde Representative Grussendorf Representative Austerman Representative Moses Representative J. Davies Representative Phillips Representative G. Davis Representative Williams Co-Chair Mulder and Representative Foster were absent from the meeting. ALSO PRESENT Representative Lisa Murkowski; Mike Tibbles, Staff, Representative Gene Therriault. TESTIFIED VIA TELECONFERENCE Jim Lynch, Interim Vice President of Finance, University of Alaska, Fairbanks; Bob Manley, State Planning and Tax Attorney, Anchorage. SUMMARY HB 191 An Act relating to charter schools; and providing for an effective date. CS HB 191 (FIN) was reported out of Committee on 2/07/00, with a "do not pass" recommendation and with a fiscal note by the Department of Education and Early Development. HB 268 An Act relating to the Alaska Higher Education Savings Trust; and providing for an effective date. CS HB 268 (HES) was REPORTED out of Committee with a "do pass" recommendation and with fiscal impact note by the University of Alaska. HOUSE BILL NO. 191 "An Act relating to charter schools; and providing for an effective date." Co-Chair Therriault provided the Committee with information regarding previous action taken by the Committee on HB 191. He noted that the Committee on 2/7/00 adopted conceptional Amendment 5. Members were provided with suggested by the legislative auditor and legislative legal counsel to implement Amendment 5: AS 14.03.260 is amended by adding new subsection to read: (e) If a school district intends to charge a charter school for services provided, then the school district shall itemize the services provided to charter schools in the district. The cost of the itemized services shall be identified separately. The portion of costs related to the charter school shall conform to the cost principles as defined in United States Office of Management and Budget Circular A-87 or be determined using a cost allocation method mutually agreed to by the school district and the charter school. In addition to administration, services provided by a local school district may include audio-visual services, curriculum, staff development and training, special needs and intensive services, transportation, procurement, facility rental and other services that are agreed to between the local school district and charter school. Except for administration services, those services required by law and other services with benefits that are inseparable between the charter school and the school district, a charter school may elect not to receive services provided by a local school district. MIKE TIBBLES, STAFF, REPRESENTATIVE THERRIAULT explained that the conceptual language in Amendment 5 attempted to tie the list of exceptions to federal guidelines. The intent was that the list of exceptions not be so specific that they run counter to the federal guidelines. The amendment was expanded to incorporate this intent. He summarized the Amendment 5 as drafted by legal counsel. The amendment would: · Require itemization only if the district intends to charge the charter school for the service. If the school district has an extra room they could agree to let the charter school use the room without accounting. · Require the cost of the itemized services to be identified separately. · Require a cost allocation method that conforms to the cost principles as defined in US 0MB Circular A-87 or based upon a mutually agreed method between the charter school and the school district. There may be a methodology that is not included in the OMB Circular A-87 that the charter school and the school district can agree on. The OMB Circular A-87 requires that services be accounted for by the hour. School districts may use a different system · Clarify that administration is a service that a charter school must receive. · Replace language "district wide programs" with "services with benefits that are inseparable between the charter school and the school district" in list of services that a charter school must receive. This language more appropriately addresses the intent. If a charter school is in a school facility the electric bill will be inseparable. CS HB 191 (FIN) was reported out of Committee on 2/07/00, with a "do not pass" recommendation and with a fiscal note by the Department of Education and Early Development. HOUSE BILL NO. 268 An Act relating to the Alaska Higher Education Savings Trust; and providing for an effective date. BOB MANLEY, STATE PLANNING AND TAX ATTORNEY, ANCHORAGE testified via teleconference in support of HB 268. He observed that clients have sent money out of Alaska to other state college savings plans. He noted that section 529 plans are authorized under IRS Code 26 USC 529. Forbes Magazine calls section 529 plans the sleeper tax break of the 1997 Tax Act. While each state can setup its own plan there is no requirement that the beneficiary use the funds in the state in which the fund was setup. It allows savings for education and works like an IRA, except that there is not an income tax deduction at the time of contribution. Taxable income from the plan is deferred at accumulation. It would be subject to income tax at the time of withdraw. Students generally have a lower income tax than the contributor does. Additionally, there are proposals in Congress that would make section 529 funds totally tax free, providing the funds are used for qualified higher education. Mr. Manley further noted that section 529 plans allow a contributor to make a completed gift and still maintain some parental control. Completed gifts are important because that is how "you get your $10 thousand dollar per recipient per year exclusion from gift taxes." Five years worth of exclusion can be placed in one lump sum. Husbands and wives can each contribute. Money put away for a child's college tuition would be out of the contributor's estate for tax purposes. The total amount of contribution is uncertain. Federal law provides that the maximum amount of contribution should be the total cost of higher education within the state that sponsors the program. States have estimated this amount at $100 to $172 thousand dollars. He reiterated that section 529 plans allow participant control. Beneficiaries within a family can be changed or withdrawn. There is a penalty for money that is not used for higher education. The penalty can be as low as 10 percent of the earnings. The penalty goes back to the program. Mr. Manley observed other advantages of the section 529 plan. Funds are protected from creditors. The university will be able to receive fees for the administration and management of the program. The university would also receive penalties from funds that were not used for higher education. The program is also good for non-Alaskans because it is in competition with other states to offer the best program. The more funds in the program the more efficient the program will be and the more benefit to the university. Mr. Manley emphasized that because of Alaska's unique trust laws; Alaska would offer better credit protection to non- Alaskans. This would aid in marketing the program outside of Alaska. section 529 plans can be rolled over from one program to another like an IRA. Representative J. Davies asked how the university would benefit. Mr. Manley explained that the university would receive requests for proposals from major brokerage houses. A brokerage house would handle the marketing and administration expenses and give the university a percentage. The university would also receive penalties from funds that were not used for higher education. Mr. Manley clarified that taxes would have already been paid on the original funds. Income tax would have to be paid on the earning increases when the funds are withdrawn. In response to a question by Vice Chair Bunde, Mr. Manley noted that the penalty could be as low as 10 percent and as high as the university wanted to set it. He suggested that the university would have to consider the penalty with a mind to make the program marketable. JIM LYNCH, INTERIM VICE PRESIDENT FOR FINANCE, UNIVERSITY OF ALASKA, FAIRBANKS explained that the Prepaid Tuition Program had substantial penalties for withdrawal. The savings programs that are currently operating are mostly set at the 10 percent level. He emphasized that the market would establish the rate. Co-Chair Therriault questioned what the contractor fee would be. Mr. Lynch explained that the fee would be set through a competitive public procurement process. He stressed the importance of a low fee structure. He estimated that there will be 30 - 40 programs competing in the market place a year from now. Fees could range from one-half of one percent to one and a half percent of the main program. New Hampshire charges one-eight of one percent for its section 529 plan. This is the total fee charge, which includes the cost of administration and marketing. Vice Chair Bunde expressed concern that the university is entering into the investment business. He maintained that if the intent of the legislation is for citizens to save money and not a fundraiser for the university that it should be revenue neutral. REPRESENTATIVE LISA MURKOWSKI replied that she would be happy to work with Vice Chair Bunde to make the legislation more revenue neutral. She emphasized that the intent is to encourage savings. Vice Chair Bunde asked what the program would do to the permanent fund check off program. Mr. Lynch stated that the university intends to continue the permanent fund check off program, Advance College Tuition Program (ACT). The intent is to build the two programs together. He emphasized that they serve different purposes. The ACT program was built with graduation incentives. If earnings were greater than the cost of the program they would be returned to the participant in the form of graduation incentives. There are over 11,000 participants in the ACT program. This represents a high level of per capita participation. He anticipated that the Higher Education Savings Trust would rapidly dwarf the ACT program. Mr. Lynch concluded that the legislation would make a good match to the ACT program and would not compete with the private sector. Representative Austerman assumed that the ACT participants could roll their funds into the Higher Education Savings Trust. Mr. Lynch noted that the intent is to allow funds to be rolled over, but that it would have to be approved by the IRS. Representative Austerman expressed concern that the ACT program is being subsidized by general funds dollars running through the University of Alaska. He considered attaching a sunset clause, but indicated that he would not attach a sunset clause if the program were revenue neutral. Mr. Lynch noted that the intention is to be revenue neutral and that excess earnings would be used as incentives for participants. He stressed that the excess could be used to encourage graduation or to give an instate premium. Co-Chair Therriault questioned why there is an issue of revenues in excess of costs. Mr. Lynch observed the difficulty of matching revenues to expenses. Co-Chair Therriault questioned why the revenue from interest, once fees are subtracted, does not accrue to the accounts. Mr. Lynch responded that the tax advantage nature of the program means that higher fees can be paid and the account could still be better off. He did not think there would be large excess. He pointed out that it would take at least $100 million dollars for the program to break even. Vice Chair Bunde pointed out that the program could be in place for 20 - 50 years. Mr. Lynch stressed the responsibility to the participants. In response to a question by Vice Chair Bunde, Mr. Lynch noted that if a student graduates within 6 years the student would receive back an additional percentage of the earnings, based on revenues, to provide an incentive to graduate within a specified term. Representative J. Davies MOVED to report CSHB 268 (HES) out of Committee with the accompanying fiscal note. Representative Grussendorf pointed out that participation is voluntary. There being NO OBJECTION, CSHB 268 (HES) was Moved from Committee. CS HB 268 (HES) was REPORTED out of Committee with a "do pass" recommendation and with fiscal impact note by the University of Alaska. ADJOURNMENT The meeting adjourned at 1:25 p.m.