SENATE JUDICIARY COMMITTEE May 24, 1999 3:11 p.m. WORK SESSION MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Dave Donley MEMBERS ABSENT Senator Rick Halford, Vice-Chairman Senator John Torgerson Senator Johnny Ellis OTHERS PRESENT Senator Jerry Ward COMMITTEE CALENDAR SENATE JOINT RESOLUTION NO. 28 Proposing an amendment to the Constitution of the State of Alaska relating to the appropriation limit. -HEARD AND HELD PREVIOUS SENATE COMMITTEE ACTION SJR 28 - See Judiciary minutes dated 5/23/99. ACTION NARRATIVE TAPE 99-39, SIDE A Number 001 SJR 28-CONST AM: APPROPRIATION LIMIT CHAIRMAN ROBIN TAYLOR called the Judiciary Committee work session to order at 3:11 p.m. and announced that the subject of a constitutional spending limit is appropriate for the committee to discuss during the special session even though it is not technically within the Governor's call. He stated that the Governor's Proclamation does not include, as a general subject, the consideration of a long term, or any, fiscal plan. SENATOR DONLEY commented the Governor's Proclamation does include the consideration of an advisory vote on a long term fiscal plan but it does not include the legislative elements of a long term plan to make an advisory vote work. He added the only exception is a specific plan the Governor likes, which is included in one of the House proposals. That plan limits the amount of the permanent fund dividend. CHAIRMAN TAYLOR asked Senator Donley to discuss his proposal on a state government spending limitation (SJR 28 - Version K). SENATOR DONLEY said Version K restructures the existing constitutional appropriation limit. That appropriation limit has never functioned correctly. Version K lowers the current constitutional limit from $2.5 billion to $2.025 and it reduces the amount it can escalate from 100 percent to 12.5 percent by using a calculation that contains both the consumer price index and the population increase. By reducing the escalator to 12.5 percent and reducing the dollar amount by almost $250 million, the ten percent provision in the bill will equal more than the current general fund operating amount. He noted that demonstrates how "out of whack" the current constitutional appropriation limit is. Number 100 CHAIRMAN TAYLOR asked if increases in federal revenue have been exempted from that calculation. SENATOR DONLEY said they have. SENATOR WARD joined the committee. SENATOR DONLEY stated the language on lines 6-8 contains two existing exemptions that are appropriate to continue: the exemption for appropriations to the Alaska Permanent Fund and monies expended to meet a declaration of disaster. CHAIRMAN TAYLOR asked what effect the current constitutional spending limit has had on expenditures. SENATOR DONLEY said, "Absolutely none because the dollar amount is so astronomical that we've never even gotten close to reaching it." He added that since the constitutional appropriation limit was enacted, the one-third amount for capital projects has never been met. An attorney general's opinion interpreted that provision to mean that if the full amount of the limit is spent, then at least one-third must be used for capital appropriations. Number 149 CHAIRMAN TAYLOR noted the spending limit was passed by the voters during the peak oil years when the State had a lot of revenue and very high budgets. The people were concerned that the government would keep spending without restraint unless a constitutional amendment was enacted to prevent that from occurring. He agreed the existing constitutional amendment has had no effect because the amount was set extremely high and then the state's income started to taper off. SENATOR DONLEY added that when this amendment was approved by the voters the price of oil was projected to be $40 per barrel by the end of the century. He stated the escalation provision allows escalation for both population increases and inflation. He explained if one estimated both population increase and inflation at one percent, with a 12.5 percent escalation factor, the dollar increase of total operating expenditures would be $16 million for the first year and $26 million for the second year. Using the current one hundred percent escalation calculation, that $16 million would increase to $128 million. During the past eight years, however, the Legislature has pretty much held the line on spending. For that reason, the constitutional limit has become less effective. With the escalation factor decrease to 12.5 percent under Version K, an increase of $16 million will still occur in the first fiscal year. Number 220 CHAIRMAN TAYLOR asked how it would actually work. He noted the Legislature is currently required to balance the budget, but not balance it against state income. Instead, the amount appropriated is determined by the projected price of oil. SENATOR DONLEY clarified that the Constitution does not contain a balanced budget provision; it contains a limit on incurring debt but Alaska's reserve accounts have prevented that provision from holding down spending. If Version K is enacted, the constitutional language will be clarified to include state agencies but not monies received from the federal government. SENATOR WARD asked if that would include federal monies that do not require a state match. CHAIRMAN TAYLOR said it would not. He stated that many departments are living off of program receipts. He asked Senator Donley to recount the explanation given by David Teal of the Division of Legislative Finance the day before of how other revenues are accounted for. SENATOR DONLEY stated the Alaska Constitution states that all expenditures must be appropriated by the Legislature, therefore, program receipts are appropriated. A serious question of the legality of the Alaska Housing Finance Corporation's (AHFC's), Alaska Industrial Development and Export Authority's (AIDEA's), and the Alaska Railroad Corporation's (ARRC's) expenditures continues to be raised. Although federal law requires that federal railroad funds be expended for railroad activities only, Alaska's Constitution requires that those federal monies be appropriated by the Legislature, which is not being done. CHAIRMAN TAYLOR stated Senator Donley's constitutional amendment (SJR 28) would capture those monies within its ambit. SENATOR DONLEY said that is true for everything except ARRC for which an exception needs to be made. SENATOR WARD noted ARRC could be placed under the Executive Budget Act. SENATOR DONLEY said that could not be written into the Constitution, but ARRC could be added to the list of exceptions. CHAIRMAN TAYLOR asked if all other activities will be added to the total amount of state expenditure allowed under the new constitutional spending limit. SENATOR DONLEY said that is correct. SENATOR WARD asked if the Denali Commission is separate. SENATOR DONLEY answered it is separate to the extent that no state match is required for its federal funding. State match portions for programs receiving federal funds will have to be dealt with under the appropriation limit. SENATOR WARD said he thought the Denali Commission had to have state regulatory cooperation in order to exist. CHAIRMAN TAYLOR said it may, but that he thought some state match was going to be required. If so, SJR 28 would give the Legislature the opportunity to review those expenditures. SENATOR DONLEY indicated it may resemble the village water and sewer program in which direct grants are given to local governments while not all of those grants are matched with local money. Likewise, with the Denali Commission, the State may be the conduit for the federal dollars although no match is required. CHAIRMAN TAYLOR noted the federal funds going to the Denali Commission would not show up as part of the state's budget because federal funds will be exempted under SJR 28. SENATOR DONLEY said between the limit reduction of $250 million and the decreased escalator, a meaningful dollar amount will result. Referring to a spreadsheet, he said the state would kick in $2.797 billion in the first year. The constitutional proposal contains a provision that could be accelerated or increased by up to ten percent with a two-thirds vote of the Legislature - that would equal $280 million. The total amount would then be $3.038 billion. That amount is almost exactly the same as the FY 2000 appropriations. CHAIRMAN TAYLOR asked if this spending limitation would hold state spending at the current level and then, over time, with population growth and modest growth in the consumer price index, the amount of per capita spending would decrease. SENATOR DONLEY said that is correct. He explained that a dramatically reduced increase would occur over the years. Number 381 SENATOR WARD asked if this proposal would decrease the budget by ten percent without a majority vote of the Legislature. SENATOR DONLEY said that is true. SENATOR WARD thanked Senator Donley for bringing this proposal forward. He said he has often wondered why the existing spending limit did not work but now understands why. CHAIRMAN TAYLOR noted the wrinkle put in by the Attorney General was to prevent one-third of the budget from being spent on capital expenditures. The Attorney General determined the Legislature did not have to spend the one-third on capital expenditures until the maximum amount was spent, and that never took place because the maximum was too high to reach. He added if the amount of the permanent fund dividend is to be capped, state spending should also be capped. SENATOR WARD said as a member of Local 302, he never understood that a legal opinion prevented more money from being spent on capital projects. SENATOR DONLEY explained that Section 2 of Version K pertains to an implementation mechanism to enforce the limit. Some portions of the budget, such as the front section portions, do not specify the precise amount of expenditures for entities such as AIDEA. The legislature does not know until the end of the year how much was expended. To provide an enforcement mechanism, Section 2 says that when spending exceeds the appropriation limit, the Governor shall reduce expenditures by the Executive Branch for its operation to the extent necessary to avoid spending more than the amount that may be appropriated under the Constitution. The operating expenditures by each department established by law would be reduced by a percentage. This mechanism guides the Governor on how to make cuts. CHAIRMAN TAYLOR maintained it is crucial that an enforcement mechanism be included. The proposal would allow a person to file suit to force the Administration to comply with the Constitution. The second interesting part is that the method to reduce appropriations has been designated in the legislation. He noted that last year no effort was made by the Governor to decrease spending as the price of oil went way down, and this year the proposed capital budget contains another $400 million to pay for this year's expenditures because no one slowed down the spending. When Governor Sheffield was faced with the same problem in 1986, he reduced the number of state employees by 1500. That decline was only a fraction of the decline that occurred this past year. He stated he appreciates that the bill contains guidance and enforcement provisions. Number 485 SENATOR WARD asked if the Court System is considered a principal department. SENATOR DONLEY said it is not. SENATOR WARD asked how the Court System would share in the cuts. SENATOR DONLEY replied that this legislation should be considered a starting point for what the Governor should do if spending exceeds the appropriation limit. Section 2 is a spending limit enforcement of the appropriation limit which never existed before. SENATOR DONLEY said he is very open to suggestion on how to craft the section on how to give guidance to the executive branch, i.e. the bill could exempt certain departments, such as the Department of Public Safety, from budget decreases. SENATOR WARD said he would not want to exempt any department. CHAIRMAN TAYLOR noted that many Governors have used the "Washington Monument Syndrome" whereby snow plowing services are terminated in the districts of legislators who call for reduced government spending. SENATOR DONLEY added the Court System is not addressed by this bill because of the separation of powers issue. Requiring the Executive Branch to impose budget cuts on the Court System would create problems. SENATOR DONLEY stated tremendous progress has been made on this issue in the last 48 hours and he thanked staff and the legal drafters who worked on the measure. He thought SJR 28 is now a much better product that will allow for quality public comment. CHAIRMAN TAYLOR indicated that at this point of time, a spending limit is not within the Governor's call, therefore action on that subject is limited to committee work. He noted the committee wrote a letter to the Governor the previous day asking him to expand the call so that the Legislature can take action on a spending limit. He agreed the committee has done good work on this measure. SENATOR DONLEY stated the idea that a long range plan can be devised for a 20 year period is far fetched because things can change dramatically in five years. He suggested placing a sunset provision in the legislation, or some mechanism to force the Legislature to revisit the issue periodically. CHAIRMAN TAYLOR agreed that without such an escape valve, the Legislature could find itself in a very difficult position because the Constitution can only be amended during a general election year and a drastic change could occur in the meantime. SENATOR DONLEY suggested placing triggers in the legislation that would force revisitation of the issue, such as a certain inflation percentage. CHAIRMAN TAYLOR suggested also placing a time limit as well as several triggers in the legislation. CHAIRMAN TAYLOR announced that he would like to bring this subject up again if the Governor expands the call of the special session and to take public testimony on this legislation when a quorum is available. SENATOR DONLEY believed the committee needs to officially adopt a good proposal that could be put before the public for comment. SENATOR WARD maintained the public wants a chance to vote on this proposal. He noted his constituents in Kenai did not understand that the subject of a spending limit could not be addressed by the Legislature during the special session. CHAIRMAN TAYLOR recessed the meeting at 3:58 p.m. to a call of the Chair.