Legislature(2017 - 2018)HOUSE FINANCE 519

03/28/2017 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Presentation by Commissioner Randall Hoffbeck,
Dept. of Revenue
Modeling by David Teal, Director, Legislative
Finance Div.
Heard & Held
Presentation: AK's Economy by Mike Navarre,
Kenai Borough Mayor
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 115                                                                                                            
     "An  Act  relating  to  the  permanent  fund  dividend;                                                                    
     relating  to the  appropriation of  certain amounts  of                                                                    
     the earnings reserve account;  relating to the taxation                                                                    
     of  income  of  individuals;   relating  to  a  payment                                                                    
     against the  individual income  tax from  the permanent                                                                    
     fund  dividend  disbursement;   repealing  tax  credits                                                                    
     applied  against  the  tax  on  individuals  under  the                                                                    
     Alaska  Net  Income  Tax  Act;  and  providing  for  an                                                                    
     effective date."                                                                                                           
10:23:24 AM                                                                                                                   
MIKE  NAVARRE, MAYOR,  KENAI PENINSULA  BOROUGH, provided  a                                                                    
PowerPoint  presentation titled  "Alaska's  Economy: Why  we                                                                    
need a comprehensive  fiscal plan for Alaska  and Why broad-                                                                    
based  taxes  are being  considered"  dated  March 28,  2017                                                                    
(copy on file).  He stated that he represented  the point of                                                                    
view of  local government and  was here to help  broaden the                                                                    
debate.  He relayed  his personal  experience that  included                                                                    
previous  membership  on  the House  Finance  Committee.  He                                                                    
turned to slide 2 titled "The Problem…":                                                                                        
     $2.8  billion*  annual  state   deficit,  and  no  easy                                                                    
          1.Budget cuts?                                                                                                        
          2.Taxes (sales, income, oil & gas, others)?                                                                           
          3.Permanent Fund earnings?                                                                                            
          4.Economic development?                                                                                               
Mr. Navarre reviewed slide 3 titled "The Options…"                                                                              
Mr.   Navarre  moved   to  slide   4  [titled   10  in   the                                                                    
presentation]  and  addressed a  bar  chart  related to  the                                                                    
state's  fiscal challenge  titled "  Fiscal Challenge  - Top                                                                    
Three Unrestricted  General Funds Spending  Categories Total                                                                    
$3.4 billion." He  wanted to depict why budget  cuts were so                                                                    
difficult to make  for things like education  and health and                                                                    
social services. He addressed "The Options" on slide 5:                                                                         
Mr. Navarre  highlighted slide 6  tilted "Alaskans  pay much                                                                    
less in state taxes than  residents of any other state" that                                                                    
graphically depicted where  Alaskans ranked regarding broad-                                                                    
based  taxes compared  to other  locations  in the  country,                                                                    
measured  by per-capita  broad-based state  tax revenues  in                                                                    
2014. He qualified that being  ranked lowest "was not a good                                                                    
reason" by itself to implement taxes.                                                                                           
10:27:24 AM                                                                                                                   
Mr.  Navarre  turned to  slide  7  titled "What's  Different                                                                    
Today?" The  chart portrayed the  oil production  curve that                                                                    
peaked  in   1988  and  trended  downward   ever  since.  He                                                                    
suggested  that  increased  production achieved  by  capital                                                                    
investment    necessitated   a    reasonably   stable    tax                                                                    
environment. He moved to slide  8 titled "The Unconventional                                                                    
Revolution  has Vastly  Improved  America's Energy  Outlook"                                                                    
and  noted that  he had  borrowed it  from a  ConocoPhillips                                                                    
presentation. The  graphs depicted the paradigm  shifts from                                                                    
dependence  on  foreign  oil imports  due  to  low  domestic                                                                    
production to dramatically  increased production. He quickly                                                                    
moved to slide 9  titled America's "Big Four" Unconventional                                                                    
Fields are  World-Class Discoveries" and showed  an image of                                                                    
the US related  to fracking and other  oil production areas.                                                                    
He  indicated that  Alaska  had to  compete  with the  other                                                                    
areas  to   ensure  adequate  capital  investment   and  oil                                                                    
production  into the  future. He  moved to  slide 10  titled                                                                    
"The Options…"                                                                                                                  
10:29:26 AM                                                                                                                   
Mr.  Navarre  addressed  slide  11  titled  "Permanent  Fund                                                                    
     dividends,  protecting the  fund against  inflation and                                                                    
     public   services   -   this   number   fluctuates   as                                                                    
     investments make or lose money                                                                                             
          proof the fund                                                                                                        
          oil dollars                                                                                                           
Mr.  Navarre  stated  that  the  public  had  a  significant                                                                    
misunderstanding about the Permanent  Fund and how the money                                                                    
got there.  He believed that  the overriding effort  was "to                                                                    
save a  non-renewable resource that  could be used  into the                                                                    
future to provide and change  it into a renewable resource."                                                                    
He moved to slide 12 titled "The Options…":                                                                                     
          But does it help solve our fiscal situation?                                                                          
Mr.  Navarre  did  not believe  there  was  any  responsible                                                                    
fiscal plan  that did  not use  earnings from  the Permanent                                                                    
Fund. He  believed there was  a rationale for  maintaining a                                                                    
dividend  but thought  other spending  decisions for  use of                                                                    
the  PF  was equally  appropriate.  He  turned to  slide  14                                                                    
titled "Funds  from the State  to Kenai Borough."  The total                                                                    
amount  on the  slide was  $103.9 million.  He offered  that                                                                    
reductions at the state level  looked like reductions to the                                                                    
state budget but  transferred costs or tax  increases to the                                                                    
local  level.  He  emphasized  that  the  Public  Employees'                                                                    
Retirement System (PERS)/  Teachers' Retirement System (TRS)                                                                    
was a  "huge" burden  and considering the  historical facts,                                                                    
it  was not  "fair" to  transfer  more of  the liability  to                                                                    
municipalities.  He addressed  slide 16  titled "Assumptions                                                                    
for   hypothetical   economic  development   scenario"   and                                                                    
emphasized the scenario was  purely imaginary. The following                                                                    
slides articulated the assumptions.                                                                                             
     Peninsula Borough must be approved by both the state                                                                       
     and the borough                                                                                                            
     proposed economic development makes good fiscal sense,                                                                     
     and decide yes or no                                                                                                       
10:34:05 AM                                                                                                                   
Mr.  Navarre provided  a hypothetical  proposal on  slide 17                                                                    
related to a new manufacturing plant:                                                                                           
Proposal: A new widget manufacturing  plant wants to move to                                                                    
the Kenai Peninsula Borough                                                                                                     
     10,000 new jobs                                                                                                            
     10,000 new families                                                                                                        
     5,000 new students for the school district                                                                                 
     10,000 new homes to house the families,                                                                                    
     at average assessed value of $200,000 per home                                                                             
     $1 billion capital investment by the                                                                                       
     Widget Manufacturing Co. of America LLC                                                                                    
Mr. Navarre  related that  the purpose of  the slide  was to                                                                    
demonstrate  the state  and  local  government's ability  to                                                                    
capture some  of the revenues  from economic  development to                                                                    
pay for the cost of services.  He moved to slides 18 through                                                                    
22 and continued to address the scenario. Slide 18:                                                                             
   · $5 million a year in additional borough sales taxes                                                                        
   · $20 million a year in borough and service area                                                                             
     property taxes on homes                                                                                                    
   · $10 million a year in borough and service area                                                                             
     property taxes on widget factory investment                                                                                
Slide 19:                                                                                                                       
   · 5,000 students would be more than a 50% gain over                                                                          
     current  school  district  enrollment. The  state  pays                                                                    
     almost  2/3  of  school  district  budget.  A  50%-plus                                                                    
     increase  in the  borough contribution  is about  $27.5                                                                    
     million a year.                                                                                                            
Slide 20 titled "Kenai Borough decision: The math":                                                                             
   · $5 million a year in additional borough sales taxes                                                                        
   · $27.5 million a year in increased school funding                                                                           
   · $20 million a year in borough and service area                                                                             
     property taxes on homes                                                                                                    
   · $10 million a year in borough and service area                                                                             
     property taxes on widget factory investment                                                                                
Slide 21 titled " Kenai Borough decision: It adds up":                                                                          
   · $7.5 million available for other expenses                                                                                  
Slide 21 titled " Kenai Borough decision: It's a winner":                                                                       
   · Decision: YES                                                                                                              
Mr. Navarre addressed slides 23 through 26 related to the                                                                       
state of Alaska decision on new revenues.                                                                                       
Slide 24 titled "State of Alaska decision: Higher                                                                               
   · $10 million a year in higher expenses for troopers,                                                                        
     highways, courts, prisons, Medicaid, child care                                                                            
     assistance, etc.                                                                                                           
  · $45 million a year in increased school funding costs                                                                        
Slide 25 titled "State of Alaska decision: It doesn't add                                                                       
   · $550 million a year in additional expenses, no new                                                                         
Slide 24 titled "State of Alaska decision: Loser for the                                                                        
   · Decision: NO                                                                                                               
Mr.  Navarre observed  that if  the scenario  were true  the                                                                    
economic  development  increased  the  state's  budget  gap,                                                                    
illustrated  on  slide   27  titled:  "Economic  Development                                                                    
Decision." He  mentioned on  slide 28  titled "Why  a broad-                                                                    
based tax…"                                                                                                                     
     make the state's fiscal situation even worse                                                                               
     sales tax  … the  state could generate  several hundred                                                                    
     million  in unrestricted  revenue  annually.  … In  our                                                                    
     view,  therefore, the  state  has sufficient  potential                                                                    
     fiscal resources                                                                                                           
     -    if it can assemble the political will."                                                                               
10:37:28 AM                                                                                                                   
Mr. Navarre moved to slide 29 and read the slide:                                                                               
     No wonder it's so difficult…                                                                                               
     "We  all   bring  our   own  biases,   experiences  and                                                                    
     philosophies  to the  debate.  When  multiplied by  the                                                                    
     governor  and  his  staff,  60  legislators  and  their                                                                    
     staffs,  then  adding  in  the  population  of  Alaska,                                                                    
     factoring  in talk  radio, political  parties, election                                                                    
     dynamics,  the  media,  right- and  left-wing  splinter                                                                    
     groups,  lobbyists, special  interests and  a multitude                                                                    
     of constituencies for every item  in the budget ... the                                                                    
     problem doesn't seem all that difficult."                                                                                  
     - Kenai Peninsula Borough Mayor Mike Navarre                                                                               
Mr. Navarre  turned to  slide 30  titled "The  Perfect Plan"                                                                    
that contained a  blank slide followed by a photo  of a baby                                                                    
and two  kittens. He concluded  that a perfect plan  did not                                                                    
exist.  He  expounded  that  the  debate  over  taxes  would                                                                    
continue and  result in political consequences.  He believed                                                                    
that to  attract the  investment the  state wanted  and gain                                                                    
economic   opportunities   for   the  current   and   future                                                                    
generations   the   state   needed  a   fiscal   plan   that                                                                    
accommodated  the  goal,  "otherwise,  we  set  up  a  false                                                                    
Representative Wilson remarked that  the state had been very                                                                    
generous   with  education   and   PERS/TRS  payments.   She                                                                    
mentioned municipal revenue sharing  and maintained that the                                                                    
state had  no revenue to  share. She wondered at  what point                                                                    
the state decided  it could not pick up the  extra share for                                                                    
certain  municipalities'  services.  Mr.  Navarre  spoke  to                                                                    
education   and  relayed   that  the   state's  constitution                                                                    
specified  that  the  state  would  pay  for  education.  He                                                                    
elucidated that the borough and  municipalities paid a local                                                                    
share. He  believed that  educational costs  were continuing                                                                    
to rise and  were "insatiable." He commented  that the state                                                                    
would have to  make a significant change  to the educational                                                                    
foundation  formula to  allow additional  contributions from                                                                    
local government.                                                                                                               
10:40:59 AM                                                                                                                   
Mr. Navarre addressed the PERS/TRS  portion of the question.                                                                    
He  noted that  he experienced  the issue  from both  sides;                                                                    
state and local  perspectives. He related that  from a local                                                                    
perspective the  retirement program  was established  by the                                                                    
state and  relied on the  state's actuaries to  define local                                                                    
government's  contribution.  Communities were  issued  their                                                                    
contribution  rates by  the state's  actuaries, but  a large                                                                    
error  had been  made  in the  calculations.  A lawsuit  had                                                                    
occurred,  and  the state  settled  the  $5 billion  lawsuit                                                                    
without discussions or input with  local government. He felt                                                                    
that the  appearance was that local  governments created the                                                                    
problem. He  expounded that  when positions  were eliminated                                                                    
on  the local  level they  had  to pay  into the  retirement                                                                    
system for  the next 25 years,  which did not happen  at the                                                                    
state level. He  remarked that there was a lot  of nuance to                                                                    
how  PRS/TERS was  being administered.  He  guessed that  if                                                                    
litigation ensued  between the state and  local governments,                                                                    
"the local governments would probably  come out on the short                                                                    
end" even if they won, because  the state had "so many other                                                                    
tools they can  use to penalize" local  government. He noted                                                                    
that assigning proportions and blame  was difficult and that                                                                    
the issue was extremely complex.                                                                                                
10:44:17 AM                                                                                                                   
Mr.  Navarre  spoke  to the  revenue  sharing  component  of                                                                    
Representative Wilson's  question. He  noted that in  2006 a                                                                    
new  program was  added,  where unincorporated  communities;                                                                    
there were  27 communities  in the Kenai  Peninsula Borough,                                                                    
all received the allocations. He  related that the money was                                                                    
put to beneficial  community use, "but if it  was jerked out                                                                    
from   under   the   communities"  the   impact   would   be                                                                    
"significant." He  acknowledged that was part  of the reason                                                                    
budget cuts  were difficult. He  related from  past personal                                                                    
experience that the public had  different perceptions of how                                                                    
the   government  worked   and  advocated   for  cuts   from                                                                    
misunderstandings.  Legislators   had  a  higher   level  of                                                                    
understanding due  to more access to  information and direct                                                                    
experience in the process.                                                                                                      
Representative  Wilson clarified  she  did  not believe  the                                                                    
situation  was the  borough's fault.  She asked  whether the                                                                    
state  was  at  a  point to  seriously  consider  the  issue                                                                    
regarding communities  that pay  local taxes and  those that                                                                    
do  not. Mr.  Navarre  answered that  all local  governments                                                                    
were  situated  differently  with  various  combinations  of                                                                    
taxes. He  cautioned that when talking  about shifting costs                                                                    
to  local governments,  one size  did  not fit  all and  the                                                                    
consequences could be negative.                                                                                                 
10:48:18 AM                                                                                                                   
Representative  Wilson   clarified  she  was   asking  about                                                                    
communities that were not forced  into a borough and did not                                                                    
pay local  taxes. She  asked whether there  would be  a time                                                                    
the legislature  needed to engage  in discussions  about the                                                                    
unincorporated areas  of the state that  did not contribute.                                                                    
She asked  whether it  was time  to begin  the conversation.                                                                    
Mr. Navarre answered  the issue was something  that had been                                                                    
discussed and  debated since the beginning  of statehood. He                                                                    
identified the  problem in rural  areas that did not  have a                                                                    
tax base or a local  economy. He surmised that the situation                                                                    
was inherent  to the nature  of Alaska. He pointed  out that                                                                    
when  a tax  base was  created; e.g.,  Red Dog  Mine or  the                                                                    
fishing  industry in  Unalaska,  governments  formed at  the                                                                    
local  level.  Representative  Wilson countered  there  were                                                                    
places in  the state that  did have local revenue  and chose                                                                    
not  to  participate.  She  believed   it  was  a  necessary                                                                    
discussion   to   have   because   the   disparity   between                                                                    
communities  would become  more  accentuated  as the  budget                                                                    
debate evolved.                                                                                                                 
10:51:00 AM                                                                                                                   
Vice-Chair Gara  voiced that he  did not want to  settle for                                                                    
politically expedient measures to  ensure his reelection and                                                                    
"leave  a  mess." He  appreciated  Mayor  Navarre's call  to                                                                    
action. He mentioned  that some wanted to  pass school costs                                                                    
onto  municipalities.   He  asked  whether   in  communities                                                                    
without  a tax  cap, the  increased costs  were passed  onto                                                                    
local citizens.  Mr. Navarre  responded in  the affirmative.                                                                    
He  elaborated  that  the  Kenai Borough  had  oil  and  gas                                                                    
properties that the community assessed  on a 10-mill average                                                                    
level.  State   reductions  that  shifted  costs   to  local                                                                    
governments would  likely increase the  municipalities' mill                                                                    
levy. He deduced that the mill  levy increase on oil and gas                                                                    
properties  would  reduce  the  properties  revenue  to  the                                                                    
state. Whether  increased costs  were paid  at the  state or                                                                    
local level,  economic impacts would  occur. He  believed it                                                                    
was  better done  at the  state level  rather than  shifting                                                                    
costs to  the local  level. He felt  that the  cost shifting                                                                    
would  exacerbate the  rural urban  divide. Vice-Chair  Gara                                                                    
believed that lack of a  fiscal plan created uncertainty for                                                                    
businesses. He asked  for the mayor's opinion  on the issue.                                                                    
Mr. Navarre  relayed personal  experiences. He  replied that                                                                    
he  had nine  Radio Shack  stores  in various  areas of  the                                                                    
state and related  that he had closed them  because they had                                                                    
been  struggling  to make  a  profit  even  in a  period  of                                                                    
relative economic stability. He  discussed that the decision                                                                    
had  been difficult.  He  owned a  restaurant  chain in  the                                                                    
state and  recently decided not  to invest in  more outlets.                                                                    
As  a  business owner,  he  performed  a five-year  economic                                                                    
outlook  and he  determined not  to reinvest  due to  a poor                                                                    
forecast. He emphasized focusing  on the state's economy for                                                                    
the short and long-term and  reminded the committee that any                                                                    
decisions  or   plans  the  legislature  enacted   could  be                                                                    
adjusted as the economic situation changed.                                                                                     
10:56:17 AM                                                                                                                   
Vice-Chair Gara was  not in favor of the $65  to $70 million                                                                    
in cuts  others were  proposing to education  on top  of the                                                                    
prior $30 million. He asked  how the prior and proposed cuts                                                                    
to  education impacted  the borough's  schools. Mr.  Navarre                                                                    
answered  that   the  borough   was  increasing   its  local                                                                    
contribution  to education  and did  not want  to exacerbate                                                                    
the impacts that already had  occurred because they were not                                                                    
keeping up  with inflation. He  believed that  the long-term                                                                    
outlook was good, but he  was concerned about the short-term                                                                    
impacts to a  generation of children. He  announced that the                                                                    
borough could  not make-up the difference  with the proposed                                                                    
cuts. He  recounted that the local  contribution was reduced                                                                    
and  coupled  with additional  cuts,  the  borough would  be                                                                    
"impacted in two ways."                                                                                                         
Representative  Pruitt stated  the decisions  of some  local                                                                    
communities had driven some costs  increases. He stated that                                                                    
the number  of students  had remained  the same  since 2007,                                                                    
but  inflation  over  time  had  been  about  17.5  percent.                                                                    
However, the state foundation  formula funding had increased                                                                    
35  percent.  He  suggested  that  local  communities  spent                                                                    
beyond  its means  and spent  above  inflation. He  remarked                                                                    
that somehow  the legislature was expected  to fix decisions                                                                    
that had  been made at  the local level. He  understood that                                                                    
the state  had a  constitutional mandate to  fund education.                                                                    
He asked at  what point the state had to  step in because of                                                                    
decisions that  had been made  on the local level  that were                                                                    
driving the costs. He wondered how to balance the issue.                                                                        
11:00:30 AM                                                                                                                   
Mr. Navarre replied that part  of the increase in costs were                                                                    
due to the  changes in the formula  regarding special needs.                                                                    
He shared  that in the  Kenai Peninsula Borough  the student                                                                    
population  decreased  but  due  to the  special  needs  the                                                                    
multiplier had  increased. He attributed the  factor as part                                                                    
of  the reason  for the  increases. He  relayed that  if the                                                                    
district in Kenai  lost 100 students it  appeared they could                                                                    
cut  staff; however,  there  were 42  schools  so the  fewer                                                                    
students  spread out  over  the number  of  schools did  not                                                                    
translate  into a  reduction of  teachers. He  supported the                                                                    
labor  organizations, but  discerned  that successful  labor                                                                    
negotiations  spread   to  other  community   contracts  and                                                                    
resulted in  the overall  creep in  costs. He  believed that                                                                    
often "priorities  were messed  up." He  spoke to  costs for                                                                    
healthcare  versus  costs  for teachers.  He  discussed  Mr.                                                                    
Navarre's unique perspective as  a former lawmaker, business                                                                    
person, and  mayor. He addressed utilization  of schools. He                                                                    
knew that  some of the  schools in his community  were being                                                                    
underutilized.  He   remarked  that  if  the   numbers  were                                                                    
trending  throughout the  city maybe  a consolidation  could                                                                    
take place. He  relayed that he had  been told consolidation                                                                    
was not going  to happen. He stressed that  it was necessary                                                                    
to  do  things differently  to  create  change. He  believed                                                                    
going forward it  was important for all entities  "to have a                                                                    
conversation  about  efficient  and  "smart"  spending."  He                                                                    
recommended  additional conversations  with and  among local                                                                    
11:06:02 AM                                                                                                                   
Mr.  Navarre  replied  that   the  local  governments  would                                                                    
appreciate being  part of the  conversation. He  agreed that                                                                    
things needed to change over  time and efficiencies could be                                                                    
found  on the  local  level.  He shared  that  in the  Kenai                                                                    
Peninsula  Borough,  the state  paid  100  percent of  pupil                                                                    
transportation. He  shared that in  Kenai there was  one bus                                                                    
company with  staggered routes that  saved money.  In Homer,                                                                    
there were two  sets of buses than ran at  the same time. He                                                                    
started a dialogue  about changing the schedule  to help the                                                                    
state achieve savings. Eventually,  the routes and schedules                                                                    
were changed, and  the action saved the state  a little over                                                                    
$500,000 per year.                                                                                                              
HB  115  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair  Foster asked  members to  have amendments  for the                                                                    
bill to his office by Friday at 4:00 p.m.                                                                                       

Document Name Date/Time Subjects
SB 26, OMB Budget.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
SB 26, Flat Budget.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
SB26 Sectional Analysis - S(FIN)CS - 3.28.17.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
HB 115 Kenai Borough Mayor Mike Mayor presentation for House Finance 3-28-17.pdf HFIN 3/28/2017 9:00:00 AM
HB 115
SB26 Supporting Document - DOR Presentation on CSSB26 - 3.28.17.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
SB 26 Sponsor Statement - Governor's Transmittal Letter 01.17.2017.pdf HFIN 3/28/2017 9:00:00 AM
SB 26