Legislature(2017 - 2018)HOUSE FINANCE 519
01/25/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB57 || HB59 | |
| Presentation: Modeling Alaska Fiscal Proposals: Implications of Different Fiscal Assumptions and Choices Over Time by Gunnar Knapp, Professor Emeritus of Economics, University of Alaska Anchorage Institute of Social and Economic Research (iser) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 57 | TELECONFERENCED | |
| *+ | HB 59 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 25, 2017
1:31 p.m.
1:31:20 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:31 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Pat
Pitney, Director, Office of Management and Budget, Office
of the Governor; Gunnar Knapp, Professor Emeritus of
Economics, University of Alaska Anchorage Institute of
Social and Economic Research (ISER).
PRESENT VIA TELECONFERENCE
None
SUMMARY
HB 57 APPROP: OPERATING BUDGET/LOANS/FUNDS
HB 59 APPROP: MENTAL HEALTH BUDGET
PRESENTATION: MODELING ALASKA FISCAL PROPOSALS:
IMPLICATIONS OF DIFFERENT FISCAL ASSUMPTIONS AND CHOICES
OVER TIME BY GUNNAR KNAPP, PROFESSOR EMERITUS OF ECONOMICS,
UNIVERSITY OF ALASKA ANCHORAGE INSTITUTE OF SOCIAL AND
ECONOMIC RESEARCH (ISER)
Co-Chair Seaton reviewed the agenda for the meeting.
HOUSE BILL NO. 57
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs; capitalizing funds; amending
appropriations; repealing appropriations; making
supplemental appropriations and reappropriations, and
making appropriations under art. IX, sec. 17(c),
Constitution of the State of Alaska, from the
constitutional budget reserve fund; and providing for
an effective date."
HOUSE BILL NO. 59
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program; and providing for
an effective date."
1:32:11 PM
Co-Chair Seaton conveyed that the committee substitute was
strictly a version with technical corrections.
Co-Chair Foster MOVED to ADOPT the proposed committee
substitute for HB 57, Work Draft (30-GH1855\J).
There being NO OBJECTION, it was so ordered.
Co-Chair Seaton invited Mr. Teal to the table to explain
the technical corrections in the bill.
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, pointed
to the document comparison (copy on file). He explained
that the document comparison was derived after working with
Legal Services and the chairman's office. He reported there
was nothing significantly different from the governor's
version of the bill. He would not be going through every
change, but confirmed there were no transaction changes. He
noted there were a few date corrections and editing
changes. Essentially, the governor's bill was in a Legal
Services format, providing a clean start. The committee
substitute would become the basis for amendments.
Co-Chair Seaton asked Mr. Teal to remain at the table and
invited Pat Pitney to verify that there were no substantial
changes other than wording, technical, and date changes
from the Office of Management and Budget's perspective.
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, confirmed that she agreed that the
bill represented the governor's intent of the original
version. There were no material changes, only clean-up
changes.
Co-Chair Foster MOVED to ADOPT the proposed committee
substitute for HB 59, Work Draft (30-GH1856\D).
There being NO OBJECTION, it was so ordered.
Co-Chair Seaton asked Mr. Teal to address the process
related to the changes in the committee substitute.
Mr. Teal reported that the process regarding the bill was
identical to the one used for the operating budget. House
Bill 59 was the mental health bill. There were only a few
changes to the bill most of which were noted in the margins
of the document and had to do with formatting. He would
have liked to have tracked the changes to make it easier to
see the ones that were more significant. He encouraged
members to review the changes that were made. He commented
that items may have been reordered.
Co-Chair Seaton asked Ms. Pitney if the committee
substitute was the bill submitted by the governor with
technical realignment. Ms. Pitney responded affirmatively.
Vice-Chair Gara understood the need for a separate mental
health budget and that it started based on a court order.
He wondered how certain items ended up in the mental health
budget rather than in the operating budget. He mentioned
that in the prior year there was a disabilities item that
was funded with undesignated general funds (UGF) in the
mental health budget. He recognized that things funded by
the Alaska Mental Health Trust ended up in the mental
health budget. He also was aware of how it related to
mental health issues. He asked about the dividing line
between what mental health items ended up in the mental
health budget versus the operating budget. He provided an
example from the previous year's budget. Ms. Pitney
responded that there had been a tradition built up. She
spoke of base plus increments and decrements. Over time a
distinction had been made. She thought discretion was used
but she deferred to Mr. Teal as to the boundaries. She
noted that the priorities of the Alaska Mental Health Trust
Authority Board were represented in the distinctions. She
did not believe there were any hard and fast rules.
Vice-Chair Gara would take her answer, as the
administration did not know. He commented that he knew
priorities were not the only part of the equation.
Mr. Teal remarked that the reason he did not know was
because it was all done by computer. [members could be
heard laughing in the background].
Vice-Chair Gara made a humorous remark.
Mr. Teal answered that the budget was divided by fund codes
related to mental health. He mentioned mental health trust
receipts. He confirmed that there were UGF in the mental
health bill that were coded with gf/mh. He surmised that if
the item in question was part of a mental health group it
would automatically switch over to the mental health bill
which explained why there were mental health allocations.
He suggested that the same allocations would appear in the
regular operating budget and the mental health bill. It
took the mental health fund group from the regular
operating budget placing it into the mental health bill. He
relayed that with capital the dividing line was less
certain because there might be different fund sources.
However, the projects were proposed by the Alaska Mental
Health Trust Board. The governor was required to forward
them to the Legislature or provide a letter to the AMHTA
explaining why he did not forward them. At the end of
session, the legislature had to write a letter for the
chairman's signature describing what was left out of the
AMHTA request and the reasoning behind that decision. It
was a requirement in statute that the bills had to be
separated, although they were taken up together, amended
simultaneously, and were heard together in a conference
committee. He was certain that if there was not a statue
requiring separate bills there would only be one bill.
Representative Wilson referred to page 2 and asked if the
collective bargaining of the state's unions was in the
mental health budget. Mr. Teal responded affirmatively. He
furthered that anytime members of the bargaining
association were funded with mental health dollars, the
same language that appeared in the regular operating bill
was repeated in the mental health bill. Since it was not
always clear where the bargaining units appeared, the
legislature has repeated all the bargaining units even if
it was irrelevant to the mental health fund group.
1:44:52 PM
Representative Wilson asked about whether the wording was
the same in each budget including reducing proportionately
the amount for the bargaining agreements if an agreement
had not been reached.
Mr. Teal answered, "That's correct."
Co-Chair Seaton thanked the presenters for coming forward.
1:45:38 PM
AT EASE
1:47:32 PM
RECONVENED
Co-Chair Seaton indicated that the meeting would end at
3:30 PM.
^PRESENTATION: MODELING ALASKA FISCAL PROPOSALS:
IMPLICATIONS OF DIFFERENT FISCAL ASSUMPTIONS AND CHOICES
OVER TIME BY GUNNAR KNAPP, PROFESSOR EMERITUS OF ECONOMICS,
UNIVERSITY OF ALASKA ANCHORAGE INSTITUTE OF SOCIAL AND
ECONOMIC RESEARCH (ISER)
1:47:32 PM
GUNNAR KNAPP, PROFESSOR EMERITUS OF ECONOMICS, UNIVERSITY
OF ALASKA ANCHORAGE INSTITUTE OF SOCIAL AND ECONOMIC
RESEARCH (ISER), introduced himself. He wanted to continue
to be useful. He spoke of his work currently being
voluntary in retirement as listed on slide 2: "About Me…":
· Former Director and Professor of Economics at ISER
· Studied Alaska fiscal issues
· Retired end of June 2016
· Now a "Professor Emeritus"
· All of my work on fiscal issues is voluntary
· Not being paid by anyone
· My attempt at public service
· All opinions are my own
Mr. Knapp reported being a Professor Emeritus because he
retired at the end of June. He was in Juneau due to his
interest in the fiscal issue and because he had done a
significant amount of work over the previous several years.
He wanted to remain involved in studying the issue and to
be helpful if possible. He stressed that his work was
completely voluntary, he was not receiving payment from
anyone, and all his opinions were his own.
Mr. Knapp turned to slide 3: "My main goal is to illustrate
a way of comparing fiscal proposals." His main objective
was to come up with a way he could compare different fiscal
proposals under discussion. He made a model to do so. He
had several legislators approach him to assist them in
modeling their proposals. As a result, he came up with a
complicated model and was invited to the legislature to
discuss it.
Mr. Knapp advanced to slide 4 highlighting that he was not
advocating for or against a fiscal proposal. There was a
wide range of things people were talking about. He was
interested in running numbers and looking at what would
happen.
Mr. Knapp discussed slide 5: "My focus is on: Unrestricted
General Fund (UGF) revenues and spending Permanent Fund
earnings and draws." His focus was primarily on
unrestricted general fund (UGF) spending and the potential
use of Permanent Fund (PF) earnings.
Mr. Knapp turned to slide 6: "I will not talk about oil
credits or oil taxes." He clarified that he would not be
addressing other parts of the budget or talk about oil
credits or oil taxes. He explained that his models handled
those items such that if oil credits were changed, the
model would reflect a change in spending. If oil taxes were
changed, the model would reflect a change in revenues.
1:51:30 PM
Mr. Knapp turned to the graph on slide 6: "A long-term look
at our UGF revenues and spending . . .". The graph showed
what the state's revenues and spending have been on a per
capita basis adjusted for inflation since oil began
flowing. He noted that the revenue part was reflected by
the blue and red lines at the bottom. The blue lines
represented non-oil revenues and the red line represented
oil revenues. It was clear there had been two huge oil
booms: one in the early 80s and one in 2008-2013. They were
similar in terms of the value per Alaskan. There had been
periods where the state had a significant amount of money
and then periods where it had much less money.
Mr. Knapp drew the committee's attention to two lines.
First, the yellow line showed the agency spending per
capita. Second, the purple line denoted the total spending
per capita. The difference between the two lines was the
capital budget and statewide operations. Alaska's fiscal
policy over the historical period noted on the chart was
that when the state had more money it spent more. The state
would typically grow both the operating and the capital
budgets, but particularly the capitol budget. He continued
that when the state had less money it cut back on both
budgets, but particularly the capital budget. Over a long
period of time the agency budgets were squeezed down, and
capital spending was reduced. At a certain point, the state
went from running surpluses to running deficits. Everyone
was panicking in the late 90s and early 2000s because the
state had been running progressive deficits and drawing
down savings. He added that the cycle repeated itself
bringing the state to its present circumstance. In terms of
the difference, the state's revenues had fallen to a much
lower level with less of a prospect of coming back. The
state was left with the question of what to do. He thought
it would be impossible to squeeze the spending down to the
expected level of revenues.
1:54:01 PM
Mr. Knapp reviewed slides 8 and 9. He reported that the
state had been paying the deficits by drawing down its
savings. Alaska's Permanent Fund had been growing
substantially and generating money. Historically, the
savings had been used to pay dividends, to inflation-proof
the fund, and to build up the earnings reserve account
(ERA). Clearly, the state was not using all its earnings
which accounted for why the PF had been growing so quickly.
Presently, the question was whether it was time for Alaska
to start using the PF earnings to address the deficit
issue.
Mr. Knapp spoke to slide 12: "Key issues in the current
fiscal situation." He continued that part of the state's
fiscal debate had to do with how much of the state's
spending should be cut or how many taxes should be raised.
Another question he presented was to what extent could or
should the state solve the fiscal problem by using the PF
earnings. He wondered what way the funds should be used if
the state decided to use them. Several proposals were being
developed to look at the issue.
Mr. Knapp advanced to slide 13: "My model is only a
starting point for thinking about fiscal proposals." He
reported developing a model that would allow him to compare
them. He emphasized that there was nothing magical about
his model, as it was a large Excel spreadsheet containing
several formulas that tracked specific things. He designed
the model, so he could quickly change a number or a
variable to look at the effects of tweaking it a certain
way or another.
Mr. Knapp detailed slide 14: "My model is only a starting
point for thinking about fiscal proposals." He thought his
model was simplistic. The way the budget worked was very
complicated. He suggested that his model was good for a
first start, big picture comparison of different proposals.
However, he emphasized that it was not a substitute for the
detailed models put together by organizations with that
responsibility and expertise. It was not a substitute for
what the Legislative Finance Division (LFD) was able to
model. He would always differ to LFD for specifics.
Mr. Knapp scrolled to slide 15: "All the model projections
are in millions of dollars" He clarified that his numbers
were reflected in millions of dollars.
Mr. Knapp turned to slide 16: "My model is work in
progress." His model was a work in progress and might
contain errors.
Mr. Knapp explained slide 17: "My model's projections, like
any fiscal projections, depend critically on assumptions."
He illuminated that anytime projections were made,
assumptions were critical. In the state's model, the
assumptions had to do with what would happen to oil
revenues and what would happen to PF rates of return. If
the state had a model that included what the state's
finances would look like, the assumptions the state took on
about oil revenues and its return on investment were
critical to the type of results the state would get.
Mr. Knapp continued to slide 18: "What should we assume for
comparing different fiscal proposals?" He argued that if
the state made optimistic assumptions, it would not have a
problem. Conversely, if the state made its assumptions
pessimistic enough, it would have a huge problem. He
wondered how a state planned when it did not know what its
revenues would be.
Mr. Knapp reviewed slide 19: "Most analyses of fiscal
proposals rely on a single set of assumptions." He pointed
out that the most convenient assumptions for the state to
use (the most recent DOR projections and the current PF
assumptions from advisor recommendations) were magic
numbers to use for planning. The state would plan
everything based on those numbers. However, historically,
neither of the assumptions were likely to come true or
remotely true.
1:58:33 PM
Mr. Knapp pointed to slide 20: "Historically, we have done
very poorly at projecting future oil prices, particularly
over the longer term." He reported that most analyses of
fiscal proposals relied on a single set of assumptions. The
state had done a poor job of projecting future oil prices.
He noted the bars on the chart showed what came true and
the different lines showed what had been projected in
different years about the state's future revenues. His
objective was not to criticize the people that made the
projects, but rather to show how difficult it was to
predict future oil prices. He posed the question about why
the state would do better currently. Two or Three years out
the price assumptions would probably be way off from the
official ones.
Mr. Knapp explained slide 21: "We have also not done very
well at projecting North Slope oil production over the
longer term." He opined that it was also difficult to
project future oil production for more than a few years
out. Historically, there had been periods where the state
had been overly optimistic and times where it had been the
opposite.
Mr. Knapp advanced to slide 22: "Because we have not done
well at projecting oil prices or production, we have not
done well at projecting state revenues, particularly over
the longer term." He suggested that if the state's
inability to guess future prices was combined with its
inability to predict future production, the state would
have a difficult time accurately projecting its future
revenues.
Mr. Knapp advanced to slide 23: "Historically, after a few
years, our actual revenues have usually been much higher or
lower than the revenues which we projected a few years
earlier." He indicated that in looking at projected
unrestricted general fund (UGF) revenues, typically, the
projections were off by about 30-40 percent one way or the
other.
Mr. Knapp scrolled to slide 24:
"In modeling fiscal proposals, we should look at a
range of assumptions about future oil revenues and
make sure that we're comfortable with the implications
of those assumptions given the likelihood that they
might come true."
Mr. Knapp encouraged members to look at a range of
assumptions rather than relying on one.
Mr. Knapp discussed slide 25: "What range of oil revenue
assumptions should we be looking at?" He wondered what the
range of assumptions should be. He did not know the correct
range. He suggested going beyond the point estimate. He
could tweak his model in several different ways to show the
effect of different oil prices. However, it was already
known that if oil prices were higher, the state received
more money.
2:01:02 PM
Mr. Knapp pointed to slide 26: "For today's presentation, I
only show projections based on the most recent DOR Fall
2017 revenue projections, because…" He relayed that it was
unlikely for oil prices to go high enough to generate a
significantly larger amount of money to get the state out
of its fiscal problems.
Mr. Knapp turned to slide 27: "Historically, Permanent Fund
rates of return have fluctuated widely. Projections
assuming a constant rate of return may be very wrong." He
noted that it was also true that, historically, the state
had seen real changes over time in 10-year averages.
Mr. Knapp advanced to slide 28: "Historically, Permanent
Fund average earnings over longer periods of time have also
fluctuated widely. Assumptions about future rates of return
won't necessarily come true." He argued that the state
could not assume that the projection of the PF earnings was
going to come true on a year-to-year basis or in earnings.
In terms of what the state could do, he suggested that as
legislators thought about different fiscal proposals, they
should consider how they would play out if the PF returns
were lower or if they varied significantly.
Mr. Knapp turned to slide 29: "I use three sets of modeling
assumptions for future Permanent Fund rates of return." He
used 3 sets of assumptions. First, he used what the
Permanent Fund Corporation was projecting for returns.
Second, he showed the effect if the return was 1 percent
less than the projection. Third, he used an arbitrary 10-
year period in history from FY 06 to FY 16 using the rates
of return for those years.
Co-Chair Seaton interjected with a question regarding slide
28. He was confused about the colors on the chart. He
commented that the colors did show up. He mentioned fund
total revenues, real return, and inflation.
Mr. Knapp detailed slide 30: "If we don't inflation proof
or draw any PF earnings…" He mentioned a few basics about
the PF. He indicated the information was important in terms
of thinking about any proposal that involved the use of PF
earnings. He asked what would happen if nothing were taken
from the PF. Assuming the projections were correct, the
fund would grow to $113 billion by FY 27. That would be the
maximum size of the PF if the state did not draw from it at
all. On the other hand, the more the state drew from it for
dividends and for government, the less the fund would grow.
He pointed to the graph on the right of the slide. The
realized earnings were shown in blue. He had not included
inflation proofing in the example. He ran the model with
the assumptions that all earnings were accumulated in the
realized earnings where the grow would appear.
Mr. Knapp highlighted slide 31: "Effect of 1% lower
earnings…" He continued that if the rate of return was
lowered by 1 percent, the state would end up with $13
billion less in the fund in FY 27. Every percent of the
rate of return on average made a significant difference.
2:05:00 PM
Mr. Knapp continued to slide 32: "Effect of the same rates
of return as for FY 06-FY 17…" He spoke to the effect of a
varying rate of return like in FY 06 - FY 16. The amount
still grew but was significantly more varied.
Mr. Knapp turned to slide 33: "If we fully inflation-proof
but don't draw any PF earnings." He explained that in the
graph he showed what happened if the state inflation-
proofed. He continued that inflation proofing was taking
money from one part of the PF and placing into another part
of the PF. Money was taken from the earnings reserve
account (ERA) from which the legislature could spend, and
placed into the principal account from which the
legislature was not allowed to spend. It did not change how
much the PF earned or the fund value, but it kept it safer.
He posed the question as to how much money the state wanted
to take off the table to ensure that the principle was safe
from being spent. By inflation proofing the fund it did not
make the PF any larger, it just moved money to a part of
the fund the legislature could not get at as easily. In the
remainder of his presentation assumed that the state would
not inflation proof the fund.
Mr. Knapp advanced to slide 34: "If we don't inflation-
proof and draw only dividends based on the current
formula." He reported that if the fund was not inflation
proofed, there were no government draws, and the dividend
formula was kept the same the PF would only grow to $82
billion by FY 27. His point was that dividends were not
using the entire PF earnings. There was extra money the
state could potentially use and still have a very large PF.
The more the state dipped into that extra money, the less
the PF would generate in earnings in the future.
Mr. Knapp detailed slide 35: "I'll show the model
projections for 5 "fiscal proposals" (2 hypothetical, 3
approximations of actual proposals)". He would walk the
committee through 5 fiscal proposals reflecting
combinations of things that could be applied to spending,
revenues, drawing money from the ERA, and dividends. The
first 2 proposals were completely hypothetical for purposes
of illustration. The last 3 were his attempts to model Sen.
Dunleavey's proposals, the proposal in HB 365 [Legislation
introduced in 2016 - Short Title: INCOME TAX; PERMANENT
FUND TAX CREDIT], and the Governor's proposal. He
emphasized that his attempt to model the last 3 proposals
represented his understanding, which might not be correct,
of how these proposals worked. His objective was to
illustrate in contrast the approaches that the different
proposals took.
2:09:14 PM
Representative Wilson asked for clarification about HB 365.
Mr. Knapp indicated it was Co-Chair Seaton's proposal. Co-
Chair Seaton clarified that HB 365 was a proposal from the
previous year presented in House Finance. Representative
Wilson wanted clarification for the public.
Mr. Knapp reviewed his first hypothetical proposal on slide
36: "Cut and Tax Only Projections." The parameters of the
proposal included eliminating the deficit immediately and
leaving the Permanent Fund earnings intact. The proposal
involved cutting spending and raising taxes in a 50/50
proportion. In other words, he would take the current
deficit compared with current revenue sources and split the
difference. He would get rid of half of the deficit by
cutting spending and half of it by raising taxes. He
explained that the model was depicted in the upper left-
hand graph. It showed what the state was spending and how
it was funded. The top [dark] green line in the graph
represented what the state was spending. The yellow
[horizontal] line in the middle represented the current
incoming revenues. Current oil revenues were depicted in
black at the bottom of the graph. He highlighted the blue
portion which represented the current non-oil revenues.
These two sources at the bottom represented the Department
of Revenue's (DOR) projections of the state's current
revenue sources. In the model he would slash the green
spending line by half the amount of the deficit and he
would add a large amount of new taxes. His point was that
without dipping into the PF earnings the legislature would
either have to implement very large spending reductions or
substantial taxes or a combination of both. The fiscal
issue was a large problem and was difficult to solve with
just by implementing a combination of cutting, spending, or
new revenues. On the other hand, with this approach the PF
would be growing rapidly because it would not be touched.
Hence, the fund would be earning more, and the dividend
payouts would increase. In summation, spending would be
reduced, taxes would be increased, the PF would go
untouched, and the dividends would increase. Presumably it
was why there was a significant amount of discussion about
"Cut and Tax Only" being too harsh and about the
possibility of using the earnings.
2:13:37 PM
Mr. Knapp stated that slide 37 showed the "Do Nothing"
projections. He reemphasized that it was a totally
hypothetical scenario. He suggested that if the state were
to leave spending as it was and avoid implementing any new
revenues, the state would first draw down the use the
Constitutional Budget Reserve (CBR) fund. He noted the
graph on the bottom left showed the state's 3 savings
accounts including the CBR, the Permanent Fund Earnings
Reserve account (ERA), and other funds (the miscellaneous
funds with a balance). The constitutional budget reserve
would quickly be depleted to fund the deficit. Once the CBR
was gone the state would have to turn to the only other
source of money to pay for it, which was the ERA. The state
would be doing so without a plan.
Mr. Knapp continued that there was no plan in place such as
Senator Dunleavy's, Co-Chair Seaton's, or the governor's
plans. He called the circumstance a "forced draw" denoted
in a dashed red [vertical] line. A forced draw meant
drawing from the PF ERA and was shown at the middle graph
at the top of the slide. It showed how much the PF would
earn in realized earnings and what kinds of money would the
state be taking out of the account. He pointed to the
middle graph at the top. The money taken from the account
would be spent to pay for dividends (shown in blue
generated from the same formula that had been used
previously) and for the deficit. By taking more money out
every year than what the account was earning, the ERA would
begin to be depleted. He pointed to the next graph over
[top right] that showed the total amount of dividends being
paid shown in blue. The yellow line showed the dividend
amount. The dividend would continue to rise because the
total value of the PF would still be growing slowly. Two
things would be added including royalty deposits and
unrealized earnings. The interesting thing about doing
nothing was not a total disaster scenario from a fiscal
viewpoint. Projecting out 10 years, the PF ERA would be
going down, but Alaska would not immediately run out of
money. However, the state would be spending more than it
was taking. The "do nothing' plan could result in going to
the ERA. However, he emphasized that the PF was earning so
much money that it was a way of having a large draw from
the fund. He thought this approach was a dangerous way
because unlike an of the other plans people were proposing,
it was an uncontrolled way in which to do so. He thought
the scenario was a default way of having access to another
source of cash.
Representative Ortiz asked what would happen to the PFD
amount and the distribution to Alaskans in the "do nothing"
plan. Mr. Knapp responded that he had left the dividend
formula intact. The state's current formula was based on
what the PF earned. He suggested the because the PF grew a
little, the dividend also grew a little over time.
2:19:41 PM
Mr. Knapp turned to slide 38: "Do Nothing Projections". He
relayed that the slide showed the same thing except he
assumed that the PF earned 1 percent less. Therefore, the
funds would be earning less and drawing down the fund more
rapidly. The dividends would no longer increase, and the PF
would become flat - not growing at all.
Mr. Knapp reviewed slide 39: "Do Nothing Projections". He
indicated that the slide showed the same "do nothing"
scenario but with varying rates of returns (he referred to
the scenario as the FY 06-16 scenario). He suggested that
if the hypothetical rates of return came true, there would
be widely varying rates of return. He continued that the
state would be drawing the same amount from the Permanent
Fund that was earning widely different amounts every year.
Therefore, the ERA balance would go up and down. Under
certain scenarios the state would never fully deplete the
account. There was a chance the account would be fully
depleted if the state encountered enough bad years. He also
noted that the dividends would fluctuate widely just like
they had in the past under the historic formula.
Representative Wilson asked if he was assuming a rate of
return based on historical data. She wondered if he was
assuming that the state would make a minimum of 3, 4, or 5
percent. Mr. Knapp responded that he had no clue of the
rate of return. There would be some variation. His point
with his model was to illustrate what would happen if the
returns varied. If the returns varied, the dividend would
vary, and the ERA would bounce around. He claimed there was
nothing magical about his numbers, as he was only using
them as an illustration.
2:22:44 PM
Co-Chair Seaton asked about the rate of return from 2006 to
2017. He wondered if Mr. Knapp was using a 10-year average.
Mr. Knapp responded in the negative. He wanted to use
something that he could use to illustrate the point about
what would happen if the state got variable returns. He
randomly chose a past historical period. The scenario was
completely hypothetical.
Co-Chair Seaton asked if Representative Wilson had her
question answered. Representative Wilson responded that she
was still confused. She asked for clarification about the
PF rate or return assumptions. Mr. Knapp would show her 3
slides [slide 37, 38, and 39] and suggested that she look
in the upper right-hand corner. He explained that he
illustrated the proposals with 3 different sets of
assumptions for each scenario. He indicated that when he
used APFC (Alaska Permanent Fund Corporation) [slide 37] it
meant he used the assumptions provided by the advisors of
APFC. He turned to slide 38 which used the numbers from the
previous slide less 1 percent. He used the third slide,
slide 39, for the purposes of illustration applying
historical numbers to the model.
Co-Chair Seaton asked about the projected levelized rate of
return for the APFC proposals. Mr. Knapp thought the rate
was a 6.9 percent total.
Co-Chair Seaton asked if, in that situation, an average
rate of return was being applied every year. The same
average rate of return minus 1 percent was applied to the
other slide. The third slide applied the actual rate of
return over a 10-year period which Mr. Knapp happened to
choose FY 06 - FY 17. Mr. Knapp added that the average for
the FY 06 - FY 17 was about half a percent lower than the
average for APFC. The average was in between the others.
2:26:18 PM
Mr. Knapp advanced to slide 40: "Dunleavy Proposal
Projections." He reviewed Senator Dunleavy's proposal. He
proposed a very significant spending cut. He modeled an
$800 million cut over three years. He pointed to the green
line on the upper left-hand chart which went down. He
suggested that cuts of $300 million per year for two years
and $200 million for one year would be applied to the
budget, cutting it by $800 million. The reductions were a
significant part of his proposal. The senator's plan
reflected no new revenues but left the oil revenues and the
non-oil revenues intact. There was also a draw from the PF.
Basically, the same amount would be drawn for dividends
calculated in the same way. Historically, the state used a
formula to determine what to draw from the ERA. The formula
took the average of the earnings over the previous 5 years
and spend half the amount. In the Dunleavy proposal it took
all the earnings, keeping half for dividends and used the
other half for state government. That was his understanding
of the general concept of the proposal. There was also a
planned draw down of the CBR and a draw down from some
other state funds. He pointed to the upper left-hand corner
drawing attention to the red portion of the chart
indicating the revenues from the draw from the PF equal to
the dividend amount. The money was added to the general
fund to be used to fund government. Those revenues combined
with the suggested spending cuts would provide enough money
to eliminate the deficit and begin to run a surplus because
of rising oil revenues. The surplus would then be used to
build up the CBR shown in the bottom left-hand graph.
Representative Pruitt noticed that the planned draw was
more than the spending based on the formula being applied.
Mr. Knapp checked the senator's projections and they showed
a surplus close to Mr. Knapp's projections.
Representative Pruitt wanted to confirm that Mr. Knapp's
plan placed the surplus in the CBR. Mr. Knapp thought that
was the senator's intention. The CBR grew to about the
amount listed on the slide.
Mr. Knapp explained that the surplus was a result of an
$800 million spending cut and a draw amount equal to the
dividends from the ERA. He suggested that because, so much
was drawn from the ERA, the ERA would not grow as rapidly.
He directed the committee's attention to the graph on the
bottom right which showed the components of the PF. He
pointed to shaded parts which represented unrealized gains.
The state was only allowed to spend the realized gains. He
explained that if a person bought stocks which grew to
twice the value, the earnings would not be realized until
the stock was sold. In all his models, growth occurred
partly because every year the state was getting unrealized
gains.
2:32:13 PM
Representative Pruitt understood that it was a matter of
shifting some of the state's money from the ERA to the CBR.
Simply put, it was a fund transfer. He asked if it was an
advisable move. He estimated that if the funds were left
within the PF the power of being a part of the PF would be
better.
Mr. Knapp relayed that the state was not taking it out and
placing it into the CBR. The money was being taken out and
used to pay for government and some of the funding would be
left over and placed in the CBR. He agreed that it did not
make much sense to take more money out than needed and
putting into a fund that did not earn as much money. He
thought it was important to consider. He added that an
interesting feature of the plan was that it was simple. The
state would only use money that was acquired as realized
earnings.
Vice-Chair Gara spoke to realized earnings of the Permanent
Fund that were arbitrary. He reasoned that if government
was being run on volatile earnings, revenue would go up and
down as well. Mr. Knapp concurred with Vice-Chair Gara.
2:35:35 PM
Vice-Chair Gara suggested that realized earnings of the PF
were not 6.9 percent per year. He provided an example of
unrealized earnings. He relayed that the realized earnings
were somewhat arbitrary in terms of when they were cashed
out. He wondered, if the government and the PF dividends
were based on the realized earnings that were radically
going up and down, whether the government and dividends
would also go radically up and down under the plan.
Mr. Knapp offered to skip ahead 2 slides [slide 42]. The
slide showed the same plan but also showed the FY 06 - FY
16 rate of return assumptions. He indicated that both the
dividend formula and the general fund draw were based on
earnings that were changing. They both went up and down
frequently. There was a significant variation in the money
available. He thought Vice-Chair Gara was correct.
Vice-Chair Gara spoke to another issue. The Alaska
Permanent Fund Corporation would be forced to sell its
stock to create realized earnings if the state wanted to
ensure a $3000 dividend every year. He thought the PF would
be unable to maximize its return. If the dividend was set
high, the APFC would have to cash out investments that it
would otherwise keep. Over the long term it would start
earning less. He wondered if it was a possibility.
Mr. Knapp would modify slightly what Vice-Chair Gara
stated. He relayed that in the past there had been a
certain dividend formula with a significant amount of
variation over the years, which Alaskans had grown to
accept. He thought Alaskans would be much less willing to
have a variable budget than a flexible dividend. The state
was currently faced with a complicated issue for people
managing Alaska's incredibly valuable asset. If the state
needed access to more cash, it would change the way
investments were made. He questioned what it would do to
investment strategy and whether earnings would be reduced
over time. He thought the legislature would have to grapple
with the complex issue. He conveyed that for reasons he did
not quite understand there was supposed to be less of a
concern if a Percent of Market Value (POMV) type of payout
was used.
2:38:54 PM
Representative Ortiz thought that none of the models
assessed the impact on the overall economy. Mr. Knapp
responded that his models only looked at the financial
feasibility of each of the scenarios. They said nothing
about how any of the different proposals would affect the
economy or the demographics of the state. He encouraged
members to use his models as a starting point to check to
see if a plan really worked financially. He also suggested
that as legislators debated they would need to get into
larger philosophical questions such as what role the
dividend would play. In other words, what kind of dividends
did Alaskans want versus government spending or keeping
taxes low. Anyone looking at the plans could determine
which would help the economy or certain demographics more.
He remarked that his presentation just contained boring
numbers.
Co-Chair Seaton commented that the first part was modeling
$800 million cut over 3 years resulting in a surplus in the
out years. He suggested that if the state were to cut $2
billion over 3 years then the state would have a bigger
surplus. He concluded that the committee could review the
financial effect on a system, but it did not show whether
it was feasible within a vibrant Alaskan economy.
Mr. Knapp suggested that one person might like the $800
million in cuts. Another person might disagree with certain
cuts. It was not just an exercise in changing the numbers
drawing the green line lower. The argument was about
another subject.
2:42:28 PM
Representative Wilson repeated the plan. She indicated that
half of the earnings would be used to pay dividends, the
other half would be used for government. She noted the lack
of a set dividend and the five-year average used to
calculate the dividend amount. She asked about having more
funding coming out of the ERA than what was needed for
government and whether it would be better to invest any
surplus into something like the CBR. The earnings would be
lower, but the funds would be more accessible. Alternately,
leaving the unused surplus in the ERA would generate more
profit.
Mr. Knapp thought that 5 or 6 years down the road when the
deficit was fixed, and the legislature realized that money
was being taken out of a high income earning account and
being placed into a low income earning account, it would
want to take less out of the account. He did not believe
the plan would work exactly in the manner suggested.
Mr. Knapp detailed slide 43: "HB 365 Projections". He Noted
that HB 365 was a bill Representative Seaton introduced in
2016. He highlighted that in the model there was an
increase in spending equal to $4.65 billion. The increase
was due to an assumption about the need to increase
payments to pay off oil tax credits that were due.
Mr. Knapp posed the question about how to pay for spending.
The model was built on having a budget increase. He
reported that without a budget increase the state would
have less of a deficit. He pondered how the state would pay
for spending. The plan had a feature that none of the other
plans had - it introduced a new source of revenue - an
income tax providing $650 million in revenue every year. In
addition, there would be a 2.3 Percent of Market Value
(POMV) draw from the Permanent Fund. The model kept a
dividend program but cut it in half. The same formula would
be used to calculate the dividend, but a smaller percentage
of the earnings would be paid out.
Mr. Knapp continued to explain that the Percent of Market
Value approach, the average market value of the PF over the
proceeding 5 years, would be used to calculate the
government draw (shown in red on the charts). He pointed to
the upper left chart on slide 43. In combination, the $650
million from new revenues from an income tax and the POMV
draw would fill a significant portion of the budget
deficit. However, it would be necessary to draw some extra
money from the PF. He suggested that because the amount
being drawn would be less relative to what it was earning,
the ERA would increase in the model.
2:47:47 PM
Mr. Knapp pointed to slide 44: "HB 365 Projections." The
slide showed different assumptions about the PF earnings -
they dropped by 1 percent. The dividends would be less over
time. However, the draw for government would not go down as
much because it was based on the market value. He suggested
that if earnings went down by 1 percent, the market value
would not go down by 1 percent and there would be less of
an immediate effect on the size of the draw. The state
would be able to draw a similar amount for government.
Mr. Knapp continued to slide 45: "HB 365 Projections." The
third version of his model had a variable rate of return.
The dividend would be variable and half the size. He
thought that because the PF draw for government was
determined by a POMV model, there would be a more stable
draw for government. However, the value of the ERA would
fluctuate significantly. He was aware the Legislative
Finance Division had conducted some detailed analysis of
the proposal. He recommended that members defer to the
division's numbers.
Co-Chair Seaton added that the assumption was out of
character for where the proposal was because the budget had
not been increased to $4.6 billion. He asserted that when
the budget did not increase, the draws would not take place
and the CBR would be maintained over time. It would be
discussed at a different time.
Mr. Knapp did not mean to characterize that Representative
Seaton was advocating a large budget increase. He had seen
a model version run by LFD. A larger problem would arise if
the state spent more money.
Co-Chair Seaton suggested that he had been one of the
strongest proponents of reducing the oil tax credits
instead of extending them indefinitely and paying them off
annually.
Mr. Knapp did not treat the proposal fairly. He used a
higher level of spending. He suggested that it was a hybrid
way of calculating dividends and the Permanent Fund draw
for government in different ways. The dividend went up and
down like it always had, though it was a smaller amount.
However, the draw for government was more stabilized
because of the POMV concept.
Mr. Knapp highlighted slide 46: "Governor's Proposal
Projections." He indicated that the governor's proposal was
the most complex of all of them because it changed more
things. He modeled it as if spending was held at $4.3
billion. He clarified that he was not making any statement
about what the governor was proposing for spending.
2:51:42 PM
Vice-Chair Gara wondered if Mr. Knapp was talking about the
governor's proposal in the current year or in the previous
year. Mr. Knapp responded that he was talking about the
proposal the governor put forward in December at the time
he announced the budget for the current year. His general
understanding was that the governor's proposal had some
similarities to things that were talked about at the end of
session in the previous year. He read the language
introduced in the present year.
Representative Wilson asked if the increase on the motor
fuel tax was included. Mr. Knapp understood that the
governor proposed an increase in the motor fuel tax which
would add millions of dollars. However, he did not include
it in the model. He suggested that if the increase in the
motor fuel tax was added it would be reflected in the green
bar showing new revenues. He reemphasized that in his model
was not an exact characterization of what the governor
proposed. He thought the governor had suggested that the
motor fuel tax would be a start, but additional revenues
would be necessary. He clarified that if new revenues were
added, the deficit would be smaller.
Representative Wilson responded that it was already in the
budget for the current year. Items had been moved from
undesignated funds to designated funds as if legislation
had already passed increasing the motor fuel tax. The
monies were reflected in the budget. She suggested that an
additional $80 million would have to be added to $4.3
billion. It was already in the budget.
Mr. Knapp reported that the projections he used did not
include the tax. He could add the numbers to his model and
show what would change if there was more time. His goal was
to demonstrate a general concept. He wanted to emphasize
how the governor's proposal would use the PFD. It reflected
more of a change of how the earnings would be used.
Mr. Knapp turned to slide 47: "Governor's Proposal
Projections." He explained that there were several parts to
using the Permanent Fund earnings in the governor's
proposal. First, there would be a large single draw from
the PF based on a POMV concept of 5.25 percent. He
continued that 20 percent of the draw would be used to pay
dividends. The other 80 percent would be used to help fund
government. In addition, the share of oil royalties that
got deposited into the PF would be reduced from about 31
percent to the constitutionally mandated 25 percent. Thus,
more oil royalties would go to government and oil revenues
would be higher. Also, 25 percent of the unrestricted oil
royalties the state received would be used to add to
dividends. He pointed to the upper right-hand graph which
showed that the dividend payout for Alaskans would be a
combination of 20 percent of the 5.25 percent POMV draw
plus 20 percent of the unrestricted oil royalties. If
either the draw or the oil royalties changed, the dividend
would change. The model resulted in a smaller dividend,
roughly about $1000. There were some other features that he
did not think he modeled right which proposed a minimum
dividend at start up. He relayed that the draw from the PF
was based on a POMV. The Percent of Markey Value was
driving part of the dividend. The other portion of the
dividend was coming from royalties. Under the plan the PF
earnings were not all being spent because the PF was
earning approximately 6.9 percent. The Permanent Fund would
still be growing in value.
Mr. Knapp detailed slide 48: "Governor's Proposal
Projection". He discussed a variable earnings scenario. The
Permanent Fund earnings would vary, but the use of them
would be driven by the 5.25 percent draw. There were other
complicated features that were important. The draw from the
PF would be reduced if the oil revenues rose by a certain
amount. The state would not take as much out if there was
another oil boom. Another feature would be if a certain
amount was accumulated in the ERA, then some of it would
automatically be placed into the principle. He reiterated
the inaccurate characterization and referred committee
members to consult with LFD or the Office Management and
Budget. He was only presenting a general concept.
Mr. Knapp moved to slide 49: "What is a 'Sustainable' level
of state spending?". He wanted to address the question of a
sustainable level of state spending. He thought the issue
was subtler and did not have a specific answer. His answer
to the questions about a sustainable level of spending was
that it depended on several assumptions.
2:59:53 PM
Mr. Knapp addressed slide 50: "What is a 'Sustainable'
level of state spending?":
· The time period we are planning for
· What we assume about future oil revenues and
investment returns
· How much we want to preserve or grow our assets
· How much we want to pay in dividends
· How much we're willing to raise in new revenues
· Whether we want to keep the same buying power of our
spending and savings by adjusting for inflation
· Whether we want to keep the same per-capita buying
power of our spending and savings by adjusting for
population growth
Mr. Knapp posed the question about the length of
sustainability. Assumptions around future oil revenues and
investment returns were critical. He provided a
hypothetical scenario. He did not believe the question
about what was sustainable could be answered without
addressing how much money the state would have. The state
did not have the answers about how much oil revenue it
would have or what the returns would be. All that could be
provided were estimates. The fact was that no one knew the
truth. He used the example of getting ready to retire and
looking at a sustainable level of spending based on
investments. It depended on how certain the state wanted to
be.
Representative Guttenberg thought Mr. Knapp could answer a
few of the questions listed on the slide regarding
planning. He asked about an appropriate timeframe and a
relevant equation.
Mr. Knapp would go through his bullet list quickly. He
thought the state should consider a 10-year time horizon. A
longer time horizon would be difficult. He had no clue as
to what the state should assume about its future oil
revenues and investment returns. He would trust the experts
at DOR and APFC to provide reasonable estimates of
averages. He suggested coming up with something that worked
in a low case scenario. He believed a critical question had
to do with preserving and growing the state's assets and
deciding what the state wanted to leave for future
generations. An individual that was retiring would consider
what they wanted to leave for their kids. He thought the
minimum standard should be to leave future generations with
the same real buying power as the state's current assets.
Mr. Knapp addressed the question about whether to keep the
money the same or keeping it the same per capita. He
suggested that if Alaska's population grew 50 percent over
the following 10 years and the state needed to be as rich
per capita, it would have to save more. He offered that the
state should be striving for a level of spending that would
leave the inflation adjusted value of the state's assets
the same after 10 years. It meant that the state needed to
spend no more than what it was taking in in terms of real
value. He thought the issue could be debated for a long
time.
3:06:58 PM
Vice-Chair Gara asked about budget cuts and job losses. He
wondered if Mr. Knapp had updated his studies on the
impacts of spending cuts on jobs and the impact of other
revenue measures on jobs. He wondered if someone had
further refined his reports by someone who was currently
working at the Institute of Social and Economic Research
(ISER).
Mr. Knapp reported that he had worked on a study in the
prior year that tried to look at the different ways of
reducing the deficit and their economic implications. He
reported that after having finished his report he had not
done any more work on the subject. He noted that he had not
been following what others at ISER were doing. He was not
aware of any changes to it and did not have anything new to
say about it.
Vice-Chair Gara understood there was someone else at ISER
who had a projection concerning how many jobs were lost for
every $100 million in budget cuts.
Mr. Knapp relayed that his former colleague, Dr. Mouhcine
Guettabi, was one of the co-authors of the study he had
worked on. He believed that when Mr. Guettabi said
something about economic effects associated with doing
various things he would have been referring to the same
study rather than a new work. He had not talked with Mr.
Guettabi about it.
Mr. Knapp reviewed slides 51 and 52. He suggested that if
the state reached sustainability, it faced the question
coming up about sustaining the value of its assets. The
question as to which assets needed to be sustained would
need to be answered. He posed the question whether the
state should sustain its value of spendable assets such as
the CBR and the ERA, or if it should sustain the value of
all its financial assets such as the PF principle amount.
The state was adding 25 percent of the royalties to the
principle of the PF to save for future Alaskans. It could
be argued that the state should sustain even more. His
questions spoke to the point of sustainability.
Mr. Knapp scrolled to slide 53: "What the nominal value of
our assets would need to be at the end of FY 27
to sustain their nominal value of as of the beginning of FY
18." He explained that the chart showed the nominal value
of the state's assets measured in different ways. He
suggested that if the committee followed his standard, not
depleting the assets, he would look at the third column. He
emphasized that the chart showed the nominal value without
adjusting for inflation. He thought the numbers were too
low. He recommended projecting inflation and expanding the
numbers. The money the state could spend depended on oil
revenues.
3:11:55 PM
Mr. Knapp proceeded to slide 54: "Sustainable on paper
isn't necessarily the same as sustainable in practice." He
pointed out that sustainable on paper was not necessarily
the same as sustainable in practice. He argued that a plan
was not sustainable unless discipline was used to stick to
the plan. He suggested there were two things for a plan to
be sustainable not just on paper but in practice. First,
discipline to not over project future average revenues was
necessary. Second, the temptation to spend a little bit
more had to be avoided. The state's plan had to be built on
average revenues coming in. He referred to slide 7
reflecting Alaska's history. He commented that the state
had never had the discipline to watch spending in the good
years. He reported that on two occasions Alaska had spent a
significant amount of money and built many things. As a
result, Alaska had to go through a long and agonizing
period of reducing spending because the level was not
sustainable in practice. He suggested the state consider
building in ways that would allow the state to stick to the
plan.
Mr. Knapp highlighted slide 55: "It's useful to compare
fiscal proposals." He assumed that the goal was to get to a
solution. There were wildly varying opinions in the
legislature about the right solution and about what should
be done to solve Alaska's fiscal problem. The state had to
get past an impasse. He suggested looking at all the
proposals running the same graphs and using the same
terminology to determine how each played out. It would make
it easier to have a discussion.
3:15:25 PM
Mr. Knapp discussed slide 56: "You can't debate the merits
of a fiscal proposal by only talking about that proposal."
He thought the state needed to be comparing different ways
of doing things. All the proposals involved a change. They
all involved doing something painful such as cutting
spending, adding taxes, or cutting dividends. He argued
that although none of the options were appealing, something
had to be done to fix the state's deficit. The question was
which alternative or mix of things should the state choose.
He thought the conversation had to be about comparing
alternatives. He thought people needed to move away from
complaining about a proposal to offering suggestions.
Mr. Knapp pointed to slide 57: "There are many potential
ways to address Alaska's fiscal challenge and end
unsustainable draws on our savings." He explained that
there were several ways to approach the issue, but they all
involved a combination of the unpleasant options of
reducing spending, increasing revenues, cutting dividends,
or saving less of the PF earnings. He thought it was
important to understand that if one option was off the
table then more of the other options would have to be
imposed. He thought a combination needed to be considered
rather than talking about an option by itself. He thought
finding the best combination should be the focus. If
someone did not want to do option A, of options A, B, C,
and D, then more of options B, C, and D would have to be
exercised.
Mr. Knapp moved to slide 58: "Fiscal projections can't tell
us which proposals are 'best'":
· They can tell us whether proposals are feasible and/or
sustainable
· They can't tell us about other things that matter:
· Short-run economic effects
· Long-run economic effects
· Effects on government services
· Relative effects on different income groups
· Relative effects on different regions
Mr. Knapp reported that none of the projections determined
which proposal was best. They indicated whether the
proposals penciled out. He thought the issues listed at the
bottom of the slide were what really mattered. Alaskans had
widely varying opinions about the items. He believed that
showing the numbers was a starting point for beginning the
rest of the conversation about how to associate the
proposals with the things that mattered. He thanked members
for the opportunity to appear before the committee.
3:19:31 PM
Representative Wilson agreed with Mr. Knapp about the math.
She wondered where to get the data for each plan showing
how Alaskans would be affected. She listed the financially
challenged and large corporations. She noted hearing about
people having to go on public assistance or having to seek
other means to make up the difference when the dividend was
cut. She was uncertain where to get the data showing which
solution was best.
Mr. Knapp thought that all the hearings, discussions, and
testimony gathered from different groups provided feedback
to lawmakers. He thought much of the information was being
gathered in the legislative process. He suggested there
were certain studies that could be conducted. He reported
ISER having done a study regarding short-run economic
impacts. The study determined that if dividends were
reduced or if taxes were raised it had certain effects on
jobs and income. In terms of data regarding the effects on
government services of cutting the budget, it was the sum
of a million different options of how the budget could be
cut and how reductions would play out on schools, troopers,
and other services. Collecting the data could take years.
He suggested that legislators pay attention to constituent
feedback to decide on the right balance of services and how
much Alaskans were willing to give up in taxes or dividends
to pay for them. He thought it would be useful to study
certain kinds of things such as the affects on rural and
urban Alaska. He provided a hypothetical scenario. He
thought that listening to constituents was a way to get
more accurate input.
3:23:40 PM
Representative Wilson asked if he would suggest trying
several different things to balance the budget or trying
only a couple of things to see how it affected the economy
before doing more things. She indicated that in the
previous year there had been several suggestions. She
thought that it would have been difficult to know what did
not work with implementing several things at once.
Mr. Knapp thought the state was running out of time and
stated that the legislature had been adjusting to the
"financial problem" for 4 or 5 years. He acknowledged that
the legislature had done many things to reduce spending.
However, the savings had been depleting at a rate of about
$10 million per day. He voiced that some legislators might
not want to "go into the water too fast" but cautioned that
some action had to be taken quickly. He emphasized that the
longer the legislature failed to act, the less money would
be available, the lower the future earnings, the more the
state would be at risk, and the more Alaskans would be left
uncertain about the future. He continued that ideally it
would be good to move slowly and carefully. However, time
was running out.
3:25:21 PM
Representative Kawasaki referred to when Mr. Knapp
mentioned spending differently, preventing the state from
spending in high years and saving in lower year. He
remembered when he started in 2007 the state owed the CBR
billions of dollars because it had been spent down. After
2009 there were changes to oil taxes and in the price of
oil. The state had huge surpluses which were used to pay
back the CBR. Some money was spent on things that might not
have been necessary. He mentioned the legislature having
replaced Ryan Middle School in his neighborhood because it
was going to fall in an earthquake. He thought some items
were necessary to fund after years of lean budgets. He
mentioned that there had been talk about adding a spending
limit. He wondered if it was a viable option.
Mr. Knapp was not an expert on spending limits. He thought
it was well worth having the discussion. However, he did
not know that it was the only way. There were real
operational problems with spending limits. He provided a
hypothetical scenario. He thought a spending limit was a
blunt tool. He would not assume it was the best option.
3:29:05 PM
Vice-Chair Gara asked Mr. Knapp his opinion. There had been
several job losses. He asked if he would now do as much as
possible to fix the deficit rather than waiting.
Mr. Knapp responded that the state was currently in a fix.
He agreed that the state was in a troubling recession and
that legislators needed to be concerned with not
aggravating the circumstances based on the current fiscal
situation. He noted that the money was running out and the
legislature needed to think about the future and to come up
with a stable way of dealing with the state's finances. He
stressed that the legislature had to live with the state's
fiscal reality. Alaska was not the federal government. In a
recession the federal government could print money to keep
the economy going, but Alaska did not have that option. He
indicated that he could not advise the legislature on the
correct approach but maintained that cutting government,
cutting dividends, or adding taxes would all cost jobs.
Some people argued that certain things would cost fewer
jobs. He stated that reducing government cut real jobs in
an obvious way. He claimed that a lack of investment in the
state would also cost jobs. He suggested that if people did
not see a future in Alaska they might leave. People might
leave if they felt schools were not up to par, which might
result in more lost jobs in ways that were not as obvious.
The state was in a fix and he did not know the answer.
Co-Chair Seaton hoped the legislature would find a fix to
the problem. He reviewed the agenda for the day.
ADJOURNMENT
3:32:40 PM
The meeting was adjourned at 3:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 57 OP LFD Summary of Changes - Doc Comp between Gov Tech and Move.pdf |
HFIN 1/25/2017 1:30:00 PM |
HB 57 |
| HB 57 CS WorkDraft J version 1-23-17.pdf |
HFIN 1/25/2017 1:30:00 PM |
HB 57 |
| HB 59 MH CS WorkDraft vD Legal and LFD tech changes 1-19-17.pdf |
HFIN 1/25/2017 1:30:00 PM |
HB 59 |
| 170125-HFIN talk - Gunnar Knapp.pdf |
HFIN 1/25/2017 1:30:00 PM |
ISER Fiscal Plan Presentation HFIN |