Legislature(2017 - 2018)HOUSE FINANCE 519
03/28/2017 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB26 | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 26 | TELECONFERENCED | |
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 28, 2017
9:04 a.m.
9:04:38 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 9:04 a.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 Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Steve Thompson
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue;
David Teal, Director, Legislative Finance Division; Mike
Navarre, Mayor, Kenai Peninsula Borough.
SUMMARY
HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME
HB 115 was HEARD and HELD in committee for
further consideration.
CSSB 26(FIN)
APPROP LIMIT & PER FUND:DIVIDEND;EARNINGS
CSSB 26(FIN) was HEARD and HELD in committee for
further consideration.
Co-Chair Foster addressed the meeting agenda.
CS FOR SENATE BILL NO. 26(FIN)
"An Act relating to an appropriation limit; relating
to the budget responsibilities of the governor;
relating to the Alaska permanent fund, the earnings of
the Alaska permanent fund, and the earnings reserve
account; relating to the mental health trust fund;
relating to deposits into the dividend fund; relating
to the calculation and payment of permanent fund
dividends; and providing for an effective date."
9:05:55 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
addressed a PowerPoint presentation titled "Permanent Fund
Protection Act CSSB 26 (FIN)" dated March 28, 2017 (copy on
file). He relayed that much of the information in the
presentation was previously presented therefore, he would
skip over slides. He read from slide 3 related to the
intended use of Permanent Fund earnings.
USE OF PERMANENT FUND EARNINGS
"This proposal, if approved, would amend the
Constitution of the State of Alaska by …
establish[ing] a constitutional permanent fund
into which at least 25 percent of all [mineral
royalties] received by the State would be paid.
The principal of the fund would be used only for
income-producing investments permitted by law and
the income from the fund would be deposited in
the general fund of the State and be available to
be appropriated for expenditure by the State
unless otherwise provided by law."
Ballot Proposition No. 2
Permanent Fund from Non-Renewable Resource
Revenue Constitutional Amendment
Co-Chair Foster noted that Representative Kawasaki had
joined the meeting. He asked committee members to hold
questions until the end of the presentation.
Commissioner Hoffbeck turned to slide 4 and spoke to the
question "Why use Permanent Fund earnings?"
FY18 Budget $4.2 billion
FY18 Budget Gap $2.8 billion
Potential Tools to Close the Gap
Motor Fuels Tax Increase $0.1
Broad Based Tax $0.6
Oil Tax Credit Reform $0.1
Max. Cuts Proposed (over 3 years) $0.75
SB26 (net dividend) $1.9
9:08:57 AM
Commissioner Hoffbeck addressed slide 5 titled "Structure
for using the Permanent Fund":
1. Rule-Based Framework (Saving, Spending, Dividend)
2. Stabilize the Budget
3. Protect the Dividend
4. Protect the Permanent Fund
5. Maximize the use of the Earnings Reserve
Commissioner Hoffbeck moved to slide 6 titled "CSSB 26
Structure Review" that addressed the bill structure via a
chart. He relayed that the status quo did not meet any of
the five key points listed on slide 5. He added that SB26
alone would eventually degrade the corpus of the Permanent
Fund (PF) and risk depleting the Earnings Reserve Account
(ERA) over time. He voiced that SB 26 with a full fiscal
plan met all the five elements of the defined structure for
use of the fund.
Co-Chair Foster noted that Representative Pruitt had joined
the meeting.
Commissioner Hoffbeck turned to the chart on slide 7 titled
"CSSB26 Revenue Review." He reported that SB 26 contained
an appropriation spending cap of $4.1 billion that excluded
the Capital budget and debt. In FY 18, existing
undesignated general fund (UGF) revenues were $1.6 billion
and the planned ERA draw would be $1.9 billion, leaving a
deficit of $0.6 billion. He turned to the graph on slide 8
titled "Median UGF Revenue and Budget" that depicted the
state's deficit over time.
9:11:50 AM
Commissioner Hoffbeck advanced to slide 20 titled "CSSB 26
Scenario Modeled":
Deposits: 25% of royalties deposited into the
permanent fund.
Draw Calculation
Maximum POMV:
For first 3 years, 5.25% of the average value of
the fund in the first 5 of the last 6 years.
Beginning in FY 2021, 5% of the average value of
the fund in the first 5 of the last 6 years.
Draw Limit: The maximum POMV amount is reduced by $1
for every $1 that UGF royalties and production taxes
exceed $1.2 billion.
Dividend Calculation:
25% of the maximum POMV calculation (before
applying the draw limit).
Overwriting the above calculation, the dividends
for CY2017, CY2018 and CY2019 are $1,000 per
person (the fund starting value accounts for the
CY17 dividend).
Inflation Proofing: Any ERA balance over 4 times the
full POMV calculation (after the current year draw) is
transferred to the corpus.
Commissioner Hoffbeck addressed the difference between the
current version of the bill and the original bill. He noted
that the original version of the bill specified that the
POMV was 5.25 percent for the life of the plan. In the
original version, the Permanent Fund Dividend (PFD) was
calculated at 20 percent of the maximum POMV calculation
plus 20 percent of the royalty revenue. A $1,000 PFD was
guaranteed for two years. Additionally, the current version
extended the $1,000 dividend another year for a total of
three years. He turned to slide 21 titled "CSSB 26
Scenarios Modeled."
SB26 with Full Fiscal Plan (full deficit closure, no
additional draws)
The model assumes that the permanent fund framework is
immune to any UGF deficit
This means that there are no unplanned withdrawals
from the ERA
SB26 with no other Measures (structural deficit
remains, requires additional draws)
The model uses the $4.1 billion appropriation limit in
SB 26 plus OMB's capital and debt payment budgets as
the budget assumption
Any deficit remaining after the planned withdrawal
from the ERA is filled first from the CBR; after the
CBR is depleted, budget deficits are filled by
unplanned withdrawals from the ERA
SB26 with $750 million in cuts over 3 years
The model uses the $4.1 billion appropriation limit in
SB 26 plus OMB's capital and debt payment budgets as
the budget assumption
Deficits are reduced incrementally by $300, $250, and
$200 million. Any deficit remaining after the planned
withdrawal from the ERA is filled first from the CBR;
after the CBR is depleted, budget deficits are filled
by unplanned withdrawals from the ERA
Commissioner Hoffbeck moved to slide 22 and spoke to a
graph titled "Budget Assumptions." He relayed that the
graph depicted the difference in the budget assumptions of
the three scenarios. The gold bar represented SB 26 with
$750 million in cuts, the green dash represented the budget
under Office of Management and Budget's (OMB) 10 - year
plan, and the blue dash line represented SB 26 plus the
capital budget and debt service. The spending cap in the
bill mirrored the budget forecast provided by OMB.
9:15:39 AM
Commissioner Hoffbeck turned to slide 27 titled "UGF
Revenue with POMV and Draw Limit" and addressed a graph
titled "UGF Revenue & Oil Price."
A formula that includes a draw limit:
Gradually reduces the amount drawn from the ERA
as oil revenues increase
Stabilizes UGF revenue through a range of oil
prices
Grows the fund more, producing larger draws and
dividends in the future
Commissioner Hoffbeck moved to slide 28 titled " SCENARIO:
UGF Revenue without Draw Limit" and spoke to the graph
depicting the scenario. He pointed to the revenue
volatility created without a draw limit. He moved to slide
29 and spoke to the scenario showing UGF revenue with a
draw limit. He noted that the revenue volatility evened
out. He turned back to slide 28 and noted that the draw in
2041 was $5.6 billion under a volatile structure without a
draw limit compared to $7 billion reported on slide 29,
which "turned off the use of the fund" and preserved funds
when revenues where high. He added that over time, the draw
limit also had an impact on available revenues.
9:18:18 AM
Commissioner Hoffbeck advanced to slide 32 titled "CSSB 26,
Full Fiscal Plan." He noted that the graph depicted the
unrestricted general fund (UGF) available from the ERA. He
reported that with a full fiscal plan the draw grew from
$1.867 billion in FY 18 to $3.296 nominal or $1.954 billion
real dollars in 2041. He turned to slide 33 titled "CSSB
26, No Fiscal Plan" and pointed out that the graph showed
the 2041 value at $2.489 billion nominal or $1.475 billion
and represented a loss. Slide 34 included a line graph
showing UGF revenue titled "CSSB 26 Modeling Comparison:
UGF Revenue - Funds Available for Services." He summarized
that the status quo line over time without a fiscal plan
depicted the money available for government services was
degraded. He skipped to slide 37 that illustrated dividend
durability under CSSB 26 with a full fiscal plan. He
explained that in FY 18, the median value of the dividend
was $1000 and by 2041 was $1,606 nominal or $941 in real
dollars, which grew at a rate close to inflation but did
represent 6 percent less purchasing power over time. He
scrolled to slide 39 titled "CSSB 26, No Fiscal Plan" that
included a line graph showing the status quo effect on the
dividend declining to $1,277 nominal or $749 real dollars
in 2041. He moved to slide 39 titled "CSSB 26 Modeling
Comparison: Dividend" that graphed the dividend over time
under the different plans. He observed that the Senate's
plan for SB 26 with $750 million in cuts equated to a full
fiscal plan, but whether that number of cuts could be
achieved was questionable. He pointed to the dotted line
that represented the status quo precipitously declining
beginning in 2024; at that point the Constitutional Budget
Reserve (CBR) and excess revenues in the ERA were depleted,
which threatened a dividend payment. The graph also showed
the degradation of the dividend over time
9:22:40 AM
Commissioner Hoffbeck addressed CSSB 26 inflation proofing
and fund durability in the following slides. He turned to
slide 43 titled "CSSB 26, Full Fiscal Plan - Fund Size." He
indicated that the corpus of the PF was approximately $54
billion which grew to $111 billion nominal or $65 billion
in real dollars by 2041 under the full fiscal plan. The ERA
failure rate over 24 years was less than one percent. He
characterized the full plan as "close to a slam dunk." He
reviewed Slide 44 titled "CSSB 26, No Fiscal Plan" that
showed the scenario losing real value at $78 billion
nominal or $46 billion in real dollars by 2041 and that the
ERA failure rate slid to 46 percent. Slide 45 titled "CSSB
26 Modeling Comparison: Fund Size - Nominal Fund Value"
included a line graph showing representations of various
plans including the status quo and the different versions
of SB 26. He concluded on slide 49 that contained a summary
of the bill.
CSSB 26
1. Provides a rule-based framework for use of permanent
fund earnings
2. Stabilizes UGF revenues from petroleum and permanent
fund earnings; also limits spending from all revenue
sources
3. Protects the dividend
4. Protects the inflation-adjusted value of the
permanent fund
5. Robust use of the earnings reserve
9:25:24 AM
Co-Chair Seaton spoke to the revenue limit and referenced
charts in previous testimony. He asked the department to
provide the data he referenced. Commissioner Hoffbeck
replied that he did not have the data, but would follow up
later. Co-Chair Seaton asked whether the model contained
data that associated the real economy with what would occur
with implementation of $750 million in cuts in terms of job
loss, slowing the economy, and other effects versus a
revenue scenario. Commissioner Hoffbeck answered in the
negative. The model was largely a numbers formula and did
not include feedback loops on the various plans.
Representative Pruitt spoke to a royalty reduction change
from 50 percent to 25 percent on new oil. He asked whether
the governor endorsed the change. He wondered about the
thought process if oil production increased in the future
and maintaining reduced royalty money deposited into the
PF. Commissioner Hoffbeck answered that the plan was
intended to be permanent. The choice had been made during
revenue surpluses to deposit more royalty into the corpus
of the Permanent Fund, but that was no longer the case and
the plan reverted to the constitutionally mandated amount.
9:29:28 AM
Representative Pruitt suggested maximizing the use of the
Permanent Fund earnings. He felt that limiting the PF
deposit did not account for the fact that the state would
never gain more into its savings even if oil production
increased. He envisioned a time when throughput increased.
In 20 years he did not want to try to account for why more
savings were not deposited into the PF in times of
increased throughput. Commissioner Hoffbeck answered that
because the bill cut off the PF draw it automatically
"flipped the revenue into the corpus of the fund." He
related that if the ERA grew to four times the size of the
draw the appropriation would go back into the corpus of the
fund. He cautioned against harvesting the revenue in high
revenue years and not following the plan, which would
reduce future savings. He warned that higher revenue may
lead to some situations where the long-term goals for
durability were not met. He felt that a few years spike in
revenue did not warrant changing the plan. Representative
Pruitt asked about the four times draw. He wondered when
the commissioner expected that the draw would take place
and what estimated amount would be moved into the corpus.
9:34:09 AM
Commissioner Hoffbeck replied that the answer was elusive
and depended on volatile factors. He noted that the plan
would be starting with a much higher than anticipated ERA
due to market returns, but the answer was unknown.
Representative Pruitt referred to the modeling provided to
the committee and the three options for moving forward with
a fiscal plan. He commented that the fiscal plan did not
address the priority of the options that he stated as;
preserving the PF, amount of PFD, or ensuring enough for
government spending. He asked what stood out as the most
important of the three concepts when considering the fiscal
plan. Commissioner Hoffbeck did not believe there was a
hierarchy but shared that all options were considered when
developing the plan. He thought that funding government
services was a "very important component" and the sole
reason for a fiscal plan. He offered that after traveling
around the state and listening to public testimony, it had
become clear that the dividend had to be preserved at some
level. The amount that could be drawn from the fund on an
annual basis for services and the PFD while still
maintaining the real value of the ERA over time had to be a
significant consideration.
Representative Wilson referred to slide 4 of the
presentation. She spoke to the FY 18 $2.8 billion budget
gap and the $1.9 billion ERA draw under the bill. She
commented that the budget gap was either filled by
generating revenue via a broad-based tax or cutting
government services by $750 million. Commissioner Hoffbeck
replied that the gap could be filled by a combination of
cuts and taxes.
9:39:59 AM
Representative Wilson voiced that the administration had
already talked about shared services creating savings. She
spoke to the possibility of taxes and smarter government.
She surmised that the different options would have
different impacts on the economy and asked whether there
was a hierarchy related to the impacts on the economy.
Commissioner Hoffbeck agreed that the options all had
impacts on the economy that could not be avoided. He
communicated that the "true measure was what was the
relative difference between the impacts." The only option
that did not have an impact in the short-term was spending
savings but eventually depleting savings resulted in
consequences. Representative Wilson did not think anyone
thought only using money from savings or the status quo was
an option. She spoke to the impact on the rest of the
state. She believed the relevant question was how each of
the options impacted the state's economy and how to keep
the economy operating optimally. Commissioner Hoffbeck
answered that her statement was the reason a fiscal plan
was necessary. The government had less money to infuse into
the economy therefore, it was important to rely more
heavily on private sector investment. A fiscal plan would
act as an inducement to private sector investment by
creating certainty.
9:43:01 AM
Co-Chair Foster noted Vice-Chair Gara had joined the
committee meeting.
Representative Ortiz asked whether the anticipated $1.2
billion in oil revenue was included in the model.
Commissioner Hoffbeck replied in the affirmative.
Representative Ortiz asked whether he modeled where $750
million in cuts would come from. He thought it was
important to know the answer to determine the effects on
the state's economy. Commissioner Hoffbeck replied that the
model did not include the specific information. He spoke to
the intent voiced by the Senate about cuts to education,
the university, health and social services, and
transportation. He mentioned modeling broad based cuts in
prior testimony and showing that the impact was passed on
to local communities. He stated that any cut had some
specific "collateral damage." Representative Ortiz asked
whether there was any consensus from Institute of Social
and Economic Research (ISER) or other groups showing which
model would least impact the economy. Commissioner Hoffbeck
replied that ISER and other economist had "pontificated" on
how the various options would impact the economy.
Vice-Chair Gara spoke to SB 26 without a full fiscal plan.
He asked about the administration's position on the success
of the SB 26 only option. Commissioner Hoffbeck answered
that the administration believed the state needed a full
fiscal plan. The administration felt that the bill was a
good structure for using the Permanent Fund but was an
incomplete solution.
Co-Chair Seaton corrected that the FY 18 draw in HB 115
Income Tax; PFD Payment/Credit was the same as in SB 26. He
spoke to a gross tax versus a net profits tax. He asked
whether budget cuts were coming out of the economy upfront
and where an income tax, based on profits after money had
been generated, made a difference in the reaction from
industry. He noted that the oil industry strongly favored a
net profits tax. He stated that he was not hearing the same
argument regarding up front cuts versus an income tax.
9:48:41 AM
Commissioner Hoffbeck answered that the answer depended on
what a business believed about its profits; what amount
could be reinvested in the business and how much was
"harvested" back into the economy. He suggested that money
that could be reinvested to grow the business could impact
economic growth over time. Much of it depended on what the
assumptions were regarding the ultimate use of the profits.
He added that if programs were cut that served a need they
would need to be fulfilled somewhere else. He voiced that
the equation was complex. Co-Chair Seaton referred to
slides 28 and 29 related to the draw limit. He asked for
further detail on the slides. Commissioner Hoffbeck replied
that the dark green area on slide 28 represented other
existing UGF revenues and was stable. The light green area
represented other new UGF revenues implemented to close the
fiscal gap. The gold area was the POMV draw from the PF.
The light blue area represented royalties and the dark blue
areas represented production taxes. The graph contained all
the revenue sources available for funding government
sources and the PFD. He remarked that investment earnings
could be volatile but using the five-year average on
earnings removed the volatility. He delineated that
instituting a draw limit "absorbed" the volatility in the
price of oil at high oil prices by reducing the draw from
the ERA. He surmised that the draw limit essentially
putting the volatility in the PF draw on the downside: the
draw was decreased at higher oil prices but not increased
at low oil prices. The volatility would consequently reside
in the gold section [slide 29] of the POMV draw, which
"dramatically smoothed out the revenue available for
government services."
9:52:34 AM
Co-Chair Seaton remained curious about the "other" UGF
revenues. He asked whether the plan was equating cuts to
the other revenues and if cuts would have to be recurring
to reach a full fiscal plan with reductions only.
Commissioner Hoffbeck answered that the graph assumed that
a revenue package was adopted. A plan based solely on
decreased expenditures would shift everything down and use
reduced numbers. Co-Chair Seaton looked at the inclined new
revenues line in FY 18 and FY 19. He asked if it was due to
the ramp up time required prior to generating the full
amount of new revenue. Commissioner Hoffbeck answered in
the affirmative. He stated the chart on slide 29 had been
based on HB 115's inclusion of an income tax.
9:55:05 AM
AT EASE
10:00:09 AM
RECONVENED
Co-Chair Foster invited Mr. Teal to walk through the fiscal
modeling.
10:00:29 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
provided a dynamic Excel fiscal model [Note: two pages of
the fiscal model titled "LFD Fiscal Model" dated March 27,
2017 (copy on file) were static representations.]. He
indicated there had been a few questions about the
difference between SB 26 and HB 115.
Representative Wilson referred to the top left corner of
the model graph titled "UGF Revenue\Budget". She asked him
to model the $750 million in budget cuts including
increases for inflation proofing over the next three years.
Mr. Teal relayed that the model was "fairly simplistic." He
noted that the cut reduced the budget by $750 million each
year resulting in growing the state's reserves.
Representative Wilson asked that as the line was increasing
what percentage was the increase versus a flat budget. She
voiced uncertainty over using the 10-year plan provided by
OMB. Mr. Teal responded that the 10-year plan showed OMB's
expectations and was a new version. He reported that OMB
expected a flat budget for FY 18 and FY 19 and subsequent
budgets that grew 2.2 percent with inflation.
Representative Wilson asked how the model looked without
the cuts but with implementation of an income tax. Mr. Teal
modeled a $750 million income tax versus $750 million in
spending reductions resulted in graphs that looked very
similar. Representative Wilson asked when the income tax
grew to $750 million. She thought that the proposal was to
collect $668 million in income tax. Mr. Teal answered that
roughly the tax was rounded up to $700 million. He noted
that the $50 million did not affect the model. Reductions
or revenue had the same impact on the model.
Representative Guttenberg asked whether the top left chart
included inflation proofing and the budget. He asked
whether the $750 million in cuts were built into the graph.
Mr. Teal answered in the negative. He explained that
reductions were not part of the model, but was an option
that could be selected.
10:06:51 AM
Representative Guttenberg wondered what relation cutting 13
thousand jobs out of the economy had on the size of the
budget or the payout of the Permanent Fund. He asked
whether the data was included in the model or if the model
was "just numbers." Mr. Teal answered that it was just
numbers. He indicated that determining the effects of
unspecified budget cuts was a very difficult endeavor. The
easiest cuts for state government to make were reductions
that transferred costs to municipalities. The scenario
looked like a cut, but residents would pay increased local
taxes. He stated that "there was no easy answer."
10:09:23 AM
Vice-Chair Gara appreciated the charts but qualified that
the state had many expenses that rose higher than
inflation; e.g. healthcare costs. He asked whether a budget
built on the general inflation index would need cuts to
make up for the expenses that rose higher than the rate of
inflation. Mr. Teal replied in the affirmative. Currently,
the biggest driver for inflation in state government was
the cost of living increases. He noted that current state
employee contracts contained no increases. He did not
expect costs to go up at the rate of inflation. He reported
that the contracts were three-year items and when the
contracts were renegotiated inflation may rise and might
affect the 10-year plan. If the state did not keep pace
with inflation, it was the equivalent to a real reduction
in expenditures.
Co-Chair Seaton looked at the chart and asked Mr. Teal to
factor in the $750 million [in cuts] in the model. He asked
about the size of the Permanent Fund under the SB 26
scenario in 2026. Mr. Teal replied the Permanent Fund was
roughly $70 billion. Co-Chair Seaton observed that it was
$67.5 billion. He asked about the meaning of the
information on the chart. Mr. Teal explained that the data
meant that the Permanent Fund was one percent above the FY
18 value inflated by 2.25 percent in FY 26. The PF was
doing slightly better than keeping pace with inflation. Co-
Chair Seaton requested that the model inputs switch to HB
115 with the income tax and remove the $750 million in
cuts. Mr. Teal replied there would be higher dividends up
to $1,400 instead of $1,000 and the PF was roughly the same
level at $69 billion ($2 billion higher) and was doing
better than the rate of inflation (103 percent). He
cautioned that the results were "very similar" with a
margin of error factored in.
10:14:18 AM
Representative Wilson clarified she was not advocating for
either bill. She stated that under the HB 115 scenario she
would receive a higher PFD but would pay some or all the
dividend back in taxes. Mr. Teal replied in the
affirmative. Representative Wilson thought that the
comparisons were not apples-to-apples and depended on tax
brackets; a dividend could be completely wiped out
depending on what kind of income tax an individual had to
pay.
Representative Guttenberg discussed that if the $750
million in cuts were added, the costs would be transferred
to the local communities. He thought that teachers and
healthcare would be affected. Costs did not go away they
were just moved around. To get to an apples-to-apples
comparison the issues needed to be factored in.
Representative Pruitt spoke to a difference between SB 26
and HB 115. He asked when the draws from the ERA began from
the Permanent Fund in SB 26. He asked if there was a
difference in the effect either bill had on the Permanent
Fund.
10:17:07 AM
Mr. Teal answered that the Permanent Fund balance would be
roughly the same in both bills because the payout was the
same and earnings were assumed at 6.95 percent for both
bills. The payout was 5.25 percent in the first three years
in SB 26 and for two years in HB 115; subsequently, the
payout became 5 percent. The almost identical draws
resulted in a similar balance. Representative Pruitt asked
whether SB 26 began the process in FY 18. He believed the
intent of HB 115 from the perspective of the budget had
assumed that the bill had been passed the prior year, FY
17. He did not believe SB 26 had the same effect. He
remarked that the difference created a $1.6 billion
difference in earning potential of the PF. Mr. Teal
answered that the difference was approximately $2 billion
in the ending fund balance. He explained that HB 115 took
$1.7 billion from the Permanent Fund in FY 17. Under SB 26
there was no scheduled FY 17 payout. The money remained in
the Permanent Fund and resulted in the higher end balance.
The FY 17 draw transferred money from the ERA into the
corpus and left a balance under the four times limit. He
furthered that the market value of the PF or ERA did not
change, therefore, the payout did not change. It was a
question of whether the legislature wanted the money in the
ERA or the corpus. Representative Pruitt thought that the
size of the CBR played a role in the PF balance. Mr. Teal
replied in the affirmative. He detailed that the amount of
deficit that remained and how the gap was addressed
affected the outcome. The legislature had a choice of
either removing money from the CBR, ERA or hold funds out
the corpus; i.e., "transferring money to the corpus or
not."
CSSB 26(FIN) was HEARD and HELD in committee for further
consideration.
10:22:39 AM
AT EASE
10:23:24 AM
RECONVENED
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
answers
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…"
impacts
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:
impacts
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
information…":
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
expenses":
· $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
up"
· $550 million a year in additional expenses, no new
revenues
Slide 24 titled "State of Alaska decision: Loser for the
state"
· 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
economy."
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
communities.
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
consideration.
Co-Chair Foster asked members to have amendments for the
bill to his office by Friday at 4:00 p.m.
ADJOURNMENT
11:08:49 AM
The meeting was adjourned at 11:08 a.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 |