SENATE COMMUNITY & REGIONAL AFFAIRS February 17, 1994 9:05 a.m. MEMBERS PRESENT Senator Randy Phillips, Chairman Senator Robin Taylor, Vice Chairman Senator Al Adams Senator Fred Zharoff MEMBERS ABSENT Senator Loren Leman COMMITTEE CALENDAR -- REVIEW OF ALASKA SCHOOL FOUNDATION FUNDING PROGRAM Duane Guiley, Director of School Finance Department of Education SENATE BILL NO. 261 "An Act relating to municipal sales and use taxes involving air carriers; and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION SB 261 - See Transportation minutes dated 2/1/94 and Community & Regional Affairs minutes dated 2/15/94. WITNESS REGISTER Duane Guiley, Director of School Finance Department of Education 801 W. 10th St., Suite 200 Juneau, AK 99801-1894 Robert Hallford 3900 W. International Airport Road Anchorage, AK 99502 POSITION STATEMENT: Supports SB 261 Tim Troll, City Manager City of Sand Point 1600 A St., Suite 103 Anchorage, AK 99501 POSITION STATEMENT: Opposes SB 261 Steve Van Sant, State Assessor Department of Community & Regional Affairs 333 W. 4th Ave., Suite 200 Anchorage, AK 99501-2241 POSITION STATEMENT: Offered information on fiscal note on SB 261 Tom Boedekev 144 N. Binkley St. Soldotna, AK 99669 POSITION STATEMENT: Opposes SB 261 John Hartle, Assistant City Attorney City & Borough of Juneau 155 S. Seward St. Juneau, AK 99801 POSITION STATEMENT: Opposes SB 261 Paul Bowers, Airport Manager City & Borough of Juneau 1873 Shell Simmons Drive Juneau, AK 99801 POSITION STATEMENT: Opposes SB 261 Robert Jacobson Wings of Alaska 1873 Shell Simmons Drive Juneau, AK 99801 POSITION STATEMENT: Supports SB 261 ACTION NARRATIVE TAPE 94-14, SIDE A Number 001 The Senate Community & Regional Affairs Committee was called to order by Chairman Randy Phillips at 9:05 a.m. He stated the first order of business would be an overview by Duane Guiley on the Alaska School Foundation Funding Program. Number 010 DUANE GUILEY, Director of School Finance, Department of Education, directed attention to a packet of information that had been distributed earlier to the committee. Mr. Guiley said one of the primary reasons that their current foundation formula comes under attack is that they find there are students that generate as much as $40,000 per individual student down to as little as $4,366 on average throughout the state. Mr. Guiley explained how the formula works. There is a calculation of basic need. Basic need is made up of two components: the state share and the local share. The local share is equalized throughout the state, regardless of a local district's ability to pay. If they are incorporated, they must make an equivalent contribution of 4 mills of real and personal property tax. It does not have to come from that source, but it must be equal to that source. The formula has been upheld in court in that it does not cause disparate taxation. The 4 mills is limited to 35 percent of the basic need calculation, which establishes a minimum state share of 65 percent of basic need. The allowable excess for this cap is what is their measure of disparity of the relative wealth available to support each and every student throughout the state. Currently, this cap is limited by statute to 23 percent of current year basic need. Everyone in the state is equal at basic need, but they are not equal in the allowable excess. In theory, no student is disadvantaged by more than 23 percent of basic need statewide. Mr. Guiley noted that the formula was studied for two years by a committee of school district superintendents, business managers, CPAs that audit schools and other parties that deal directly with public schools and the group came up with several concerns. In trying to solve those concerns it appeared that some existing districts were going to lose money, and it became apparent that if anyone was going to lose there wasn't going to be a resolution. So, after two years of trying to resolve the concerns, the committee was disbanded with no recommendation. Basically, the public school foundation funding formula is controlled by AS 14.17 and in regulations (Section 9). They calculate basic need by instructional units. The instructional units are increased by the area cost differential and then multiplied by the unit value. Currently, the area cost differential ranges from 1.0 to 1.46. This number was based upon a household cost-of-living study done by the McDowell Group in 1983. Mr. Guiley pointed out that as much controversy as the area cost differential has, it only drives $58 million of the formula, or less than 10 percent. The balance of the difference in the $40,000 per student down to $4,000 per student is driven by the formula itself. The statutory instructional unit value is currently set at $61,000. Number 170 SENATOR ADAMS asked when the area cost differential was last evaluated. DUANE GUILEY answered that it was evaluated in approximately 1985 with an update done by the McDowell Group. There was an attempt to put that into statute, but it has never been adopted. Mr. Guiley in the formula, there is also a calculation of state foundation aid, as it relates to basic need. They start with the calculation of basic need, subtract the required local effort, and subtract their eligible impact aid. Mr. Guiley directed the members to page 4 of the packet, which relates to projected FY 95 foundation program entitlements for the school districts in the state. He pointed out that in the formula, as property values increase and decrease throughout the state, there is a recognition and impact on the basic need and state aid calculation. As property values dip, two years later there is an increase requirement on state aid, because the recognition of property valuation is delayed two years in the formula. For the local municipality as property values start to decline and the tax receipts are less, they have two years in which to adjust their support to the local schools if they so desire. On the other side, as property values start to increase, the local municipality has two years to collect the receipts and to phase in gradually to a increased state aid requirement. Mr. Guiley continued to go through and explain the numerical data he had supplied to the committee. Number 312 SENATOR PHILLIPS asked how many funding communities there were with less than 10 students. DUANE GUILEY answered that right now there are about 16 funding with less than 10 students, and the smallest funding community is five students. He added that the funding communities with less than eight students will disappear next year as far as separate funding units. Those students still generate money within the system by being added to the largest funding community within that district. Number 350 SENATOR TAYLOR discussed the high cost of building a school at Tenakee Springs, which has a current enrollment of nine students. DUANE GUILEY explained that under the existing board plan there will not be any schools with less than 10 students by the year 2000. The state owns title to the Tenekee Springs school and the school district uses the building under a use permit which requires the district to maintain the building for one year after it is no longer used for educational purposes. The state has that one year to decide how to dispose of the building, but the Department of Education has already received notice from Tenekee Springs that the community doesn't want the building because they can't afford the maintenance bill on it. Number 375 SENATOR ADAMS noted that Adak has an average daily membership of approximately 495 students and that the military site is being demobilized by the military, and he asked what happens to the funding for that district. DUANE GUILEY answered that under existing state law, a district that has a substantial decrease in average daily membership is afforded the opportunity to phase out their program on a progressive basis. Last year they had almost 800 students, this year they have 495 students, and next year they are projected to have 150 students. That is more than a 10 percent loss in K-12 units in one year so the district must absorb 25 percent of the loss in the first year, 50 percent in the second year, and 75 percent in the third year, and 100 percent in the fourth year. So the state will be phasing out state funding to this school district over a four-year time period. Mr. Guiley pointed out that the State of Alaska has been under a foundation program since 1970. The foundation program has revised approximately five times throughout that time period. When the formula was last revised in 1987, there were two important policy decisions that were made in that revision. One is a shifting of the burden to the local through the 4 mill required deduct of every district, regardless of wealth. The second was the recognition of impact aid in every single district, or the supplanting of state dollars with federal dollars. Those two decisions have saved the state $155 million. TAPE 94-14, SIDE B Number 010 SENATOR RANDY PHILLIPS asked what was done prior to 1970. DUANE GUILEY responded that prior to 1970, for most of the years since statehood, money was distributed based on teacher units, and in some years there were only five differences in valuation across the state. In some years the money was distributed assuming a certain class load for teacher and in some years the money was distributed based upon what's the equivalent of standardized teacher salary schedule. 1970 was the first time a foundation formula was adopted where it went to these more complex calculations. Number 022 SENATOR TAYLOR commented that we did make that shift, but we failed to mandate that 4 mills. Had that full 4 mills been mandated, it would have saved for the state and rolled out of the local districts an additional sixty plus million dollars. He suggested it was time to give serious thought to a policy call about whether or not districts and communities that have the wealth to able to contribute more to continue to decide not to contribute more. Number 120 SENATOR TAYLOR asked if the department was making a recommendation that the Legislature should adjust the area cost differential. DUANE GUILEY answered that at this point there is not a recommended replacement However, he added that there is still a bill before the committee that includes the Alaska School Price Index and within the statute it provides an opportunity for the department to develop that Alaska School Price Index through regulation. Should the bill make it through the legislative process, the department stands ready to develop an Alaska School Price Index to replace the current area cost differential. SENATOR TAYLOR said we're talking about a three to six differential that has been impacting the districts he represents since this formula was last changed in 1987. Number 170 SENATOR RANDY PHILLIPS thanked Mr. Guiley for his presentation on the school foundation formula. He then brought SB 261 (NO MUNICIPAL SALES TAXES ON AIR CARRIERS) before the committee as the next order of business and stated testimony would be taken over the teleconference network. Number 195 ROBERT HALLFORD, representing Northern Air Cargo in Anchorage, noted that over the last several years there have been several communities that have attempted to impose a local tax on air transportation, and it has been costly for the air carriers involved to mount a response to defeat them. He also noted that the City and Borough of Juneau is opposed to SB 261 because it would like to enact a tax on flight seeing and the bill would impede the ability to do so. Mr. Hallford read a portion of a letter he received from Edmund W. Burke, recently retired Justice of the Alaska Supreme Court, in which Justice Burke concludes that the federal preemption statute renders the city sales ordinance invalid and unenforceable with regard to transportation services sold and provided by Northern Air Cargo and other air carriers similarly situated. Mr. Hallford said SB 261 is not intended by the air carriers nor the sponsor to deprive any community of its right and ability to derive revenue from the sources normally available to it, but, rather, it is to put an end to the extremely costly process of defending themselves against these revenue raising methods that are preempted by federal law. Number 320 SENATOR ADAMS asked Mr. Hallford if he knows when the decision on the St. Marys versus Northern Air Cargo and Alaska Airlines lawsuit will be made. ROBERT HALLFORD responded that no case has been formally filed in the courts, and the reason they don't want to wait is because every day that passes costs more money to fight a battle that they believe has already been decided a number of times. Number 330 TIM TROLL, City Manager, City of Sand Point, stated he was the former city attorney in St. Marys, and he confirmed that no lawsuit has been filed by St. Marys against anybody, but they are posturing at this point with the air carriers in trying to resolve the issue without having to go to court. He added that the air carriers are trying to resolve the issue at the legislative level rather than at the negotiating level. Mr. Troll read sections of the federal law and a section which stated that nothing in the section shall prohibit a state or political subdivision to levy or collect taxes other than those enumerated in a previous subsection. That particular section of federal law was looked at by the U.S. Supreme Court and the court stated that section showed "that to the degree that Congress considered the power of state to tax air travel, it expressly and unequivocally permitted the states to exercise that authority." Mr. Troll voiced his concern that passage of SB 261 may lead to more litigation because it goes beyond what is involved in federal law. Number 429 STEVE VAN SANT, State Assessor, Department of Community & Regional Affairs, speaking to the department's fiscal note, said the minimal impact that he came up with in preparing the fiscal note was based on currently levied sales taxes in municipalities of the state. Number 456 TOM BOEDEKEV, a Kenai Peninsula Borough attorney, stated that SB 261 is not a clarification; it is clearly an expansion on the federal exemptions. The exemption under federal law, or the preemption question is the carriage of passengers; it has nothing to do with freight. He suggested that if air carriers are to have the hauling of freight exempt, then any other form of transportation that hauls freight should also be addressed. Number 606 JOHN HARTLE, Assistant City Attorney, City & Borough of Juneau, stated opposition to SB 261 because it goes beyond the federal law in that it includes prohibition on taxes on carriage of freight and on head taxes. Mr. Hartle pointed out that municipalities have to provide municipal services to air carriers, but if the Legislature were to pass SB 261, the state would be precluding the municipalities from locally deciding whether or not to tax them. The City & Borough of Juneau's biggest concern is the broadness of language "use tax on an activity that directly involves the carriage of individuals or goods." Mr. Hartle said that could include landing fees, and the City & Borough Juneau collects $850,000 in landing fees. They are also concerned that "federally certificated" is too broad. TAPE 94-15, SIDE A Number 005 Mr. Hartle noted that the federal law has recently been changed to allow passenger facilities charges, and SB 261 would clearly prohibit that. Number 032 PAUL BOWERS, Airport Manager, City & Borough of Juneau, testifying in opposition to SB 261, said the passenger facilities charges are not imposed today anywhere in the state, but the likelihood is that they will be in Juneau, Anchorage and Fairbanks within the next several years. There is concern that SB 261 not preclude that. Number 056 ROBERT JACOBSEN, representing Wings of Alaska, said when he first learned of the introduction of SB 261, he felt it wasn't necessary because there is a federal preemption on states and local jurisdictions implementing sales and use taxes on air carriers. However, he then recalled how many times in the last ten years he has had to deal with city administrators (new ones) in the jurisdictions that Wings flies to, and then decided that it probably was a good idea that the state clarify the policy. Mr. Jacobsen said in considering the Airport Development Acceleration Act of 1973, the Senate Commerce Committee was concerned with primarily two issues: (1) the impact of state and local taxes; and (2) the urgent need for federal involvement to encourage local governments to construct new and improved airport facilities. In the purposes section of the Senate report, the committee states: "The legislation to provide increased federal participation in airport development grants is required because of the serious financial difficulties being experienced by many of local government agencies who bear the responsibility to build, operate and maintain the nation's system of publicly owned airports. The funds required to increase the federal share of airport development grants will come from the airport and airway trust fund established by the Airport and Airway Revenue Act of 1970. The fund is funded from revenues from user taxes and aviation system users and contains and will contain adequate revenues to cover the cost of the increased federal assistance. No new taxation and no expenditure of general U.S. funds will be required as a result of the legislation. The bill prohibits any government agency, other than the United States, from establishing or levying a passenger head tax or use tax. This prohibition will ensure that passengers and air carriers will be taxed at a uniform rate by the United States and that local taxes will not be permitted to inhibit the flow of interstate commerce and the growth and development of airport transportation." The report also reads: "The bill provides that the cost of this increased federal participation will be born by the users of the system, not the general taxpayer. The airlines, the airline passengers and shippers and aircraft owners and operators all contribute to the development of the system by paying user taxes established in 1970." The report further reads: "In accepting a greater federal role and responsibility in airport development, the committee has also acted to prohibit local taxation. We believe local taxation to be inimical to the development of a national system funded in large part by uniform federal taxes. The committee views S. 38 as a aviation development package, the components of which cannot be separated. Therefore, by prohibiting state taxation on passengers or on air transportation, the committee has accepted greater responsibility for U.S. assistance believing that the two actions must be viewed together and that neither should stand alone. " Mr. Jacobsen pointed out that a Florida circuit court has most recently held that Section 1113 of the Federal Aviation Act prohibits states from taxing air cargo, and struck down a Florida provision assessing a 5 percent tax on intrastate air freight and a 2.5 percent tax on intrastate shipments. Mr. Jacobsen asserted that the aviation community is paying a lot of taxes to the federal government. He said he would much rather pay 4 percent to the City & Borough of Juneau and have that money stay within the local community. Presently, Wings is paying the federal government 10 percent on passengers and a 6.25 percent cargo tax on all cargo shipments. That money comes back to the communities throughout the state in a big way. Over the last five years, Juneau has received over $8 million from the airport and airway trust fund. Concluding, Mr. Jacobsen said it might be timely and good public policy for the Legislature to intervene and help define this issue. Number 166 SENATOR RANDY PHILLIPS asked for the pleasure of the committee on SB 261. SENATOR ADAMS and SENATOR ZHAROFF agreed that the bill needs more work and SENATOR TAYLOR said he was willing to abide by the decision of the Chair on the bill. SENATOR PHILLIPS stated he wanted to move the bill out of committee, but the votes weren't there to do so. He then stated the bill would be back before the committee the following week, and he suggested the members prepare any amendments they may wish to offer at that time. There being no further business to come before the committee, the meeting was adjourned at 10:55 a.m.