MINUTES SENATE FINANCE COMMITTEE March 12, 1993 9:20 a.m. TAPES SFC-93, #36, Side 1 (300-end) SFC-93, #36, Side 2 (000-250) CALL TO ORDER Senator Drue Pearce, Co-chair, convened the meeting at approximately 9:20 a.m. PRESENT In addition to Co-chairs Frank and Pearce, Senators Jacko, Rieger, and Sharp were present. Senators Frank and Kelly arrived while the meeting was in progress. ALSO ATTENDING: Jack Fragnoli, Office of Management and Budget, Governor's Office; Shelby Stastny, Director, Office of Management and Budget, Governor's Office; Kent Swishet, Alaska Municipal League; Dave Tonkovich, Fiscal Analyst, and other analysts, Legislative Finance Division; and aides to committee members. SUMMARY INFORMATION CSSB 88(CRA) - An Act relating to grants to municipalities, named recipients, and unincorporated communities; establishing capital project matching grant programs for municipalities and unincorporated communities; establishing a local share requirement for capital project grants to municipalities, named recipients, and unincorporated communities; and providing for an effective date. CSSB 88(CRA) and SB 89 were heard concurrently. SB 89 - An Act making appropriations for capital project matching grant programs; and providing for an effective date. Testimony was heard in support of SB 89 by Jack Fragnoli, Office of Management and Budget, Governor's Office; and Shelby Stastny, Director, Office of Management and Budget, Governor's Office. Kent Swishet, Alaska Municipal League, testified in support of SB 89 but noted areas of concern. Discussion was held between Senators Kerttula, Kelly and Rieger. CSSB 88(CRA) and SB 89 were HELD in committee. CS FOR SENATE BILL NO. 88(CRA): An Act relating to grants to municipalities, named recipients, and unincorporated communities; establishing capital project matching grant programs for municipalities and unincorporated communities; establishing a local share requirement for capital project grants to municipalities, named recipients, and unincorporated communities; and providing for an effective date. SENATE BILL NO. 89: An Act making appropriations for capital project matching grant programs; and providing for an effective date. C0-CHAIR DRUE PEARCE invited Jack Fragnoli, Office of Management and Budget, Governor's Office, to speak to the committee regarding CSSB 88(CRA) and SB 89. JACK FRAGNOLI apologized for Shelby Stastny, Director, Office of Management and Budget, Governor's Office, who was unable to attend because of a conflicting meeting. He said that Mr. Stastny would possible join the meeting later. Co-Chair Pearce asked Mr. Fragnoli to give a brief overview of the bill, and speak to the changes made in the CSSB 88(CRA) version. Mr. Fragnoli said that CSSB 88(CRA) and SB 89 were a high priority for Governor Hickel, and like bills had been brought before the legislature in the two prior sessions. He stated that Governor Hickel had three purposes in presenting this legislation. The main reason was that the Governor would like to see local communities identify their own projects and bring them forward to the legislature. He said the Governor believes that local communities are best able to identify their own needs and resources, and best suited to set their own time tables. In earlier versions of the bill, money would have been appropriated to the communities and the communities would have selected projects. This year's legislation would establish a process where communities would identify and prioritize their projects, and propose those projects in the Governor's capital budget. This would leave the ultimate selection of projects with the legislature. The bill would provide that if the Governor departed from the priority sequence, he would have to explain to the legislature his reason for reprioritization. Secondly, Mr. Fragnoli explained that Governor Hickel feels that CSSB 88(CRA) and SB 89 would help establish a sense of local ownership with the selection of capital projects by communities. The communities are usually not opposed to contributing to their projects and, in fact, already do provide moneys from different sources for many projects. Thirdly, Mr. Fragnoli said that Governor Hickel felt this legislation helps leverage state dollars either by saving state dollars or by extending coverage to the number of projects that can be financed. Mr. Fragnoli reiterated that the Governor felt this was important legislation. Mr. Fragnoli went on to explain that the CSSB 88(CRA) and SB 89 could be looked at as two distinct but related issues. First, it would establish a new capital matching grant program, and secondly, apply the match principles and the same percentages used in that matching grant program to our existing funding for municipal and unincorporated grants through Title 37. The main emphasis is the matching grants programs that would be created under this bill. It would create two funds - one in the Department of Administration (DOA), and one in the Department of Community and Regional Affairs (DC&RA) paralleling existing Title 37 programs. The DOA fund would be for municipalities, and DC&RA would fund unincorporated communities. He said that a block grant title approach would be used. Block appropriations would be proposed into each fund per formulas in the bill. Those monys would be distributed to each municipality or unincorporated community in the state. The underlying intent is to remove local capital project grant financing from the political arena. Communities would receive moneys annually, be able to accumulate it up to five years, and be better able to plan in advance for projects. The two-fold process is that the Governor would use a block appropriation for the program, and the legislature would make its own recommendations according to specific projects. Mr. Fragnoli added that the moneys going into the two funds would be spread among all the municipalities in the state. Under the terms of the bill, a pro rata basis by population is proposed using the factors of: under 1,000 - 1.5, 1,000 but less than 5,000 - 1.4, 5,000 but not greater than 10,000 - 1.2, and over 10,000 - 1.0. Mr. Fragnoli explained that this factor in the allocation formula would compensate smaller municipalities and unincorporated communities by giving them a larger percentage share. The rationale is that municipalities of different sizes have different capabilities in regard to access to capital, and human resources. He also identified the project cost differences that exist between rural and urban areas. He proposed this as the administration's best strategy for capturing these differences. Mr. Fragnoli explained that moneys would go into the fund, remain in the account, and then would be appropriated out in a "revolving sense." Some communities would use their money each year and some would hold it in the fund. If the moneys were not used within five years it would return to the general fund. Interest earnings made on that money would stay with the individual accounts. When money is withdrawn from the fund, there would be a matching requirement by the community. One set of percentage requirements would be in place for the first two years, and then those percentages would be elevated. The local share percentage requirement for the first two years would be: 30% for a municipality with a population of 5,000 or more; 15% for a population of 1,000 - 4,999; and 5% for a population under 1,000. After two years, the percentages would increase to 50, 25 and eight percent, respectively. Mr. Fragnoli stated that the Governor would like to see a 50-50 match, but proposed the lower percentages to effect more acceptance for the legislation. The same percentage rates would apply to Title 37 and unincorporated community grant programs already in place. He explained that under Title 37, there is another population of grantees that is not in the Governor's matching grant program - the main recipient grants. These would be governed by the same percentages as the community in which they are located. End SFC-93 #36, Side 1 Begin SFC-93 #36, Side 2 SENATOR JAY KERTTULA proposed that the Department of Administration should be bookkeepers and not handle or advocate certain programs. He also suggested that CSSB 88(CRA) and SB 89 would not solve any problems or accomplish any major projects in the bush since the costs there are so high. He said geography, population, and the ability to pay should be taken into consideration when figuring the percentage factor. He felt that a separate budget, which included the addition of four positions in DOA and two position in DC&RA, was unnecessary. In answer to Senator Kerttula's remarks, Mr. Fragnoli said that in the last two years, elaborate formulas had been proposed. Since those formulas were considered too complex, the percentage weights in the present bill were chosen to correspond to the fiscal capacity in the municipalities. In answer to Senator Kerttula, Mr. Fragnoli said this legislation would provide for allocation of money by the Governor, but the appropriation process would still occur. Senator Kerttula remained unconvinced that this bill would solve the problem of taking allocations out of the political arena. Co-chair Pearce invited Shelby Stastny, Director, Office of Management and Budget, Governor's Office, to join the committee at the table to address any questions. SHELBY STASTNY said that the Governor's main concern in regard to CSSB 88(CRA) and SB 89 was the equitable allocation of "some" dollars, not the total allocation of dollars in the capital budget. He pointed out that last year's proposed legislation did not provide for legislative approval of community projects. Mr. Stastny reiterated that CSSB 88(CRA) and SB 89 provided equity for "some" of the capital dollars spent around the state. He agreed to work with the legislature to make the bill more equitable. SENATOR STEVE RIEGER asked what happened to a direct appropriation outside of this program. Mr. Stastny said that all other capital appropriations would stay in place. This legislation would ensure that the allocated funds would be spent equitably across the state, and would require a matched contribution from that district. Mr. Fragnoli explained that if a grant was made under Section 37, a local match was required, but a grant outside of Section 37 would not require one. Senator Rieger spoke to the number of programs, such as organizational grants, that are designed to encourage the formation of municipalities. He felt that this legislation might undo some advantages gained by incorporating, such as having to pay more for capital grants. He asked someone to speak to that. Mr. Stastny said that the communities within the borough still receive their allocation based on the size of their community. Senator Rieger asked if cities could exist outside of boroughs. Mr. Stastny explained that the cities and the borough would each get an allocation. The borough would subtract the cities' populations and the net would be the borough allocation. Co-chair Pearce invited Kent Swishet, Alaska Municipal League (AML), to speak to CSSB 88(CRA) and SB 89. MR. SWISHET directed attention to a handout titled "AML Position on Matching Capital Grants" (copy on file). He said that the AML does support the concept of matching grants, and the criteria for that support is: 1) providing project determination at the local level; 2) providing a minimum entitlement that is a meaningful amount, 3) providing equitable distribution of funds according to population, services, and/or need, 4) provide for differentials in construction costs in various communities around the state, 5) providing for accountability, and 6) requiring a local match that is weighted based on local ability to pay. He agreed that these bills do meet some of the above mentioned items. However, the AML is concerned about the extension of match requirements and the administrative regulations surrounding these grants. At this time, a match is not required for Section 315 grants, and AML would be opposed to additional requirements imposed on those grants. AML is also concerned that administrative and management effort, and Section 315 grants would not be able to be included as part of the match of the proposed grants. He felt that reasons for requiring local match made better sense when a project is purpose specific, for example, the construction of a large number of local sewage treatment plants. He stated that when communities receive a fixed amount on a formula basis, the value of a local match cannot be as easily defined as when it achieves some public purpose. This makes it harder for the communities to use the money. Perhaps, the local match is a good idea, but not at the level as suggested in CSSB 88(CRA). He pointed out that in some cases, population is not really a good indicator of the wealth of a jurisdiction. He felt the ability to pay is an important criteria, if, in fact, the formula is going to be fair. He could not offer any solutions to that problem but did not want it to go unrecognized. SENATOR TIM KELLY asked how Mr. Swishet would structure the ability to pay. Mr. Swishet answered that with existing information, AML would probably take existing budgets as a reflection of a community's ability to pay. Senator Kelly asked if a community refused to tax themselves should they get a larger ratio. Mr. Swishet said that was a problem, but he felt urban communities in that situation could be identified without too much difficulty. Mr. Swishet said his concern was more with the communities that lacked the ability to pay and asked for a solution to that problem. Senator Sharp said that the community's ability to pay was based on an assessed evaluation which does not take into consideration any debt owed on that assessed evaluation. Since the net asset on the community or on private ownership then is not clear, assessed evaluation is not necessarily a good way to determine the ability to pay. Co-chair Pearce requested a brief recess. Recess 10:00am Reconvene 10:03am Co-chair Pearce directed that CSSB 88(CRA) and SB 89 be HELD in committee. She said that the committee was working with the administration on the capital budget and these two bills would come before the committee again. ADJOURNMENT The meeting was adjourned at approximately 10:05 a.m.