Legislature(2003 - 2004)
03/18/2004 09:06 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 18, 2004
9:06 AM
TAPES
SFC-04 # 48, Side A
SFC 04 # 48, Side B
SFC 04 # 49, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:06 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Lyman Hoffman
Senator Fred Dyson
Senator Donny Olson
Senator Ben Stevens
Also Attending: SENATOR JOHN COWDERY, SENATOR BERT STEDMAN, SENATOR
GARY STEVENS, SENATOR TOM WAGONER, SENATOR RALPH SEEKINS, SENATOR
HOLLIS FRENCH; D.H (DAN) CUDDY, President, First National Bank
Alaska; NEIL FRIED, Economist, Department of Labor and Workforce
Development; CHRIS MILLER, Chief, Research & Analysis, Division of
Administrative Services, Department of Labor and Workforce
Development; LUCKY SCHULTZ, Staff to Senator Fred Dyson; CHERYL
FRASCA, Director, Office of Management and Budget, Office of the
Governor
Attending via Teleconference: There were no teleconference
attendees.
SUMMARY INFORMATION
Conference of Alaskans Resolutions
The Committee heard presentations from Dan Cuddy, President, First
National Bank Alaska and from the Department of Labor and Workforce
Development
SJR 3-CONST AM: APPROPRIATION/SPENDING LIMIT
The Committee heard from the sponsor and the Office of Management
and Budget. A committee substitute was adopted and the bill was
held in Committee.
Conference of Alaskans Resolutions
Co-Chair Wilken noted that the Committee would be hearing
presentations from Mr. Dan Cuddy, President, First National Bank
Alaska and from Mr. Neil Fried, an economist from the Department of
Labor and Workforce Development.
Senator Bunde referenced information in a March 17, 2004 letter
[copy on file] that Committee members received from Bill Corbus,
Commissioner of the Department of Revenue. It is interesting to
note that when equating previous State budgets to today's dollars,
there is a significant difference. One example is that Governor
Bill Sheffield's proposed $2,719,000 FY 87 budget would equate to
$7,200,000,000 today when adjusted for population growth and
inflation.
Co-Chair Wilken noted that the two amendments [copies on file] to
the State Constitution that were suggested by Mr. Roger Cremo
during his March 17, 2004 testimony have been provided to Members.
D.H. (DAN) CUDDY, President, First National Bank Alaska read his
presentation as follows.
Paying the Cost of Alaska State Government
Thank you for allowing me to come before you today.
The State of Alaska is not presently facing a fiscal crisis.
Resources are presently available to pay the cost of State
Government. Thanks to the higher price for oil, state royalty
income is much higher than expected; and, thanks to the wisdom
of the legislature in making judicious use of the
Constitutional Budget Reserve, there are ample reserves in
addi9ion to royalties to pay the current expense of State
Government. Add to that the income of the Permanent Fund and
the State of Alaska has more than ample resources to pay for
any proposed version of the next State Budget. However, that
doesn't solve the current problem, which is UNCERTAINTY.
UNCERTAINTY NOW is surely contributing to what will become far
more than a "Fiscal Gap" in the future; what will become a
true crisis of major proportions, if the legislature does not
do something to avoid it now. There is uncertainty now in
financial markets about Alaska's future. There is uncertainty
now among oil producers who contribute the bulk of State
Revenue in the form of royalties. The same can be said of
other resource extraction enterprises. And there's uncertainty
among your constituents about the economic future of Alaska,
in light of the potential for seemingly unlimited governmental
spending.
At present the bond rating of the State of Alaska remains
relatively stable. The financial markets look to the
Constitutional Budget Reserve and the Permanent Fund as
security for payment of the cost of State Government,
including bonded indebtedness. The decision of the markets
about Alaska's credit worthiness will change quickly, and for
the worse, if the Budget Reserve is further depleted, or you
show reluctance to resort to income from the Permanent Fund to
pay part of the anticipated cost of State Government - worse
yet if the State of Alaska does something permanently to make
Permanent Fund income unavailable to pay part of the cost of
State Government when its needed.
Deterioration of the State's bond rating will of course
increase the expense of bonded indebtedness - the cost of
funding State Government. What makes matters worse is that
that rating will be deteriorating at the same time that
interest rates generally are increasing. I can't tell you
specifically how much interest rates will increase in the next
few years, or precisely when they will start to go up. But
everyone with any knowledge about current national economic
circumstances will confirm to you that interest rates will be
on the rise (they can't go any lower) and soon. If not at the
conclusion of national elections, then certainly as the
national trade deficit increases and the value of the dollar
declines against all major currencies. The impact on the cost
of funding state government will be doubly bad unless you act
to bring certainty to Alaska's fiscal situation now. That
includes both the source of State income for appropriation,
and the cost of State Government.
Talk now of a change in the State tax laws affecting oil and
gas producers in the State is causing them to rethink their
strategy in Alaska. I assure you that changes in current tax
laws affecting oil producers will cause them to spend their
resources for oil and gas production elsewhere. All at a time
when Alaska can least afford any further decline in oil and
gas revenue. Drive a harder bargain in connection with future
oil and gas development, if you think it prudent. That will
allow the producers to plan development. Changing what is, in
effect, a bargain that already exists will cause them to
abandon development in Alaska. The same can be said for
miners. Whether it be oil and gas or other mineral extraction,
development and return on investment, involves a long-term
process. One that will not go forward unless variables are
reduced to a minimum. If producers cannot count on a stable
tax structure for the life of an oil field, or a mine, they
won't begin to develop it in the first place. By changing
Alaska's current bargain with the producers, you will
jeopardize prospects of further development and jeopardize
revenue that will be critical to the State of Alaska in the
future.
There is just as much uncertainty among your constituents. As
long as there is no stated strategy for funding State
government and no plan for limiting State government
expenditures, there will be no potential for economic
development in the State of Alaska. And as long as there is a
common perception that there is no potential for economic
development in the State of Alaska, the State will encounter
the same cycle of booms and busts, and the same transient
population that has been the constant in Alaska throughout the
history of the State. There will be no economic development or
growth of business in Alaska able to sustain the anticipated
increased cost of State Government as long as there is the
threat of broad based taxes in an unspecified amount. And
there will be an immediate demand by your constituents for
distribution of all of the income of the Permanent Fund as
long as there is no articulated strategy for funding State
Government, and even more so, as long as there is no potential
check on State Government spending.
I'm sure it occurs to you. There is no recorded success of any
government fostering economic development by instituting or
increasing an income tax or sales tax. And further economic
development is what this state needs to establish a stable
source of income to pay the cost of State Government.
Just putting an end to uncertainty now about the extent and
means of paying for State Government will be a valuable
contribution to the State of Alaska. I warrant to you that it
will reduce the cost of borrowing to pay for State government,
and foster economic development in the State - certainty in
connection with resource extraction. It will also create a
more favorable climate for small business. And that will
attract and keep industrious people in the State and encourage
our children and their children to live and work here as well.
But like everyone else, I think you can do better than just
bring about certainty. I have my own suggestions for a
strategy. A lot of it is based on history, and thankfully I
have a lot of history in this State. I know because I was
here. The Permanent Fund was created so that there would be a
source of revenue to pay a portion of the cost of State
government, when revenues from oil production declined. No not
the principal portion of the fund, the income from the fund.
Likewise, I know, because I was here, that the dividend
program was instituted when there was seemingly no effort
whatsoever to limit government spending. Since folks thought
that the only thing that could limit State government spending
was a limit on available revenue for appropriation, the ideal
to pay a portion of the income of the Permanent Fund directly
to Alaska residents was born. By that means at least, some
limit on government spending could be imposed.
You can still achieve all of those objectives. By judiciously
avoiding appropriation of Permanent Fund earnings and
inflation proofing the Fund, you have provided a stable source
of income to pay a portion of the cost of State government and
pay a dividend to citizens of Alaska as well.
The Trustees and staff of the Permanent Fund have done their
job as well. By judiciously investing the principal and a
portion of the annual income of the fund there is now a source
of State Revenue and dividends as well.
The Percent of Market Value approach to management of
Permanent Fund earnings should be adopted. It has been the
successful means of managing many other endowments, and there
is every reason to believe that it will be an equally
successful means of managing the Permanent Fund. What's even
more important is that it increases the certainty of revenue
available to pay a portion of the cost of State Government and
a Permanent Fund dividend. We have seen the potential dramatic
effect available revenue of the current approach to management
of the fund. Distributions based on realized earnings are
always a function of the vagaries of the market and the
notions of current investment managers. The POMV approach
evens out those variables over a rolling ten-year period that
lends predictability to available revenue and the degree of
certainty that financial markets demand, if there is to be
stability in the cost of funding state government.
How that income is divided between State Government and
residents should be left to the legislature to decide. The
State's legislature should have the opportunity to determine
the use of all available State income as well as state
spending .The legislature can maintain that control if it
adopts a plan for division of the earnings of the permanent
fund and limiting State spending. An articulated plan to limit
budget increases according to identifiable indexes will go a
long way to quell uncertainty among dividend recipients.
Assuming a POMV approach to management of the Permanent Fund,
and a plan for limiting budget increases according to an
index, permanent fund recipients will have some degree of
certainty not only that a dividend will be paid, but also the
amount of the dividend payment they can expect from time to
time.
One additional benefit of bringing about a greater degree of
certainty now in respect of fiscal matters is that it will
give the legislature time to deal with a far greater problem
that will appear in the future. That problem is the unfunded
liability for pension and welfare benefits that will be owed
to State and Municipal employees in the next ten years.
In my view there is a deficit now in available resources to
pay those obligations. My prediction is the liability will
grow worse if the matter is left untreated. I expect there
will soon be more retired government employees entitled to
benefits than working government employees.
Once again I thank you for the opportunity to express my views
at this time.
Senator Dyson voiced appreciation for Mr. Cuddy's wisdom as well as
his family's contributions to the State. He asked for further
details regarding how a spending limit would encourage investment
in the State.
Mr. Cuddy responded that the current budget shortfall, increased
spending, discussions regarding implementing an income tax and/or a
sales tax, and the possible "raiding of the Permanent Fund" have
caused people and businesses to be concerned about the financial
condition of the State. Allowing the Legislature to allocate the
earnings from the Permanent Fund to support State government would
address this uncertainty.
Senator Dyson countered, however, that individuals and businesses
could assume that the Legislature would increase State spending and
then be required to implement such things as business taxes to
supplement the Permanent Fund money. This would be a deterrent to
future business investments in the State.
Mr. Cuddy responded that he is correct. This is the uncertainty of
which he speaks.
Senator Dyson understood the testimony to be that the Permanent
Fund was established as a mechanism with which to restrain
government spending.
Mr. Cuddy responded that the Permanent Fund program was established
as a result of this concern, for, were some of the money re-
directed in that manner, the Legislative could not spend it.
Co-Chair Wilken thanked Mr. Cuddy for his presentation.
Alaska's Economy-
The 1980s And Now
NIEL FRIED, Economist, Department of Labor and Workforce
Development, presented a slideshow, titled "Alaska's Economy - The
1980s And Now" [copy on file].
Mr. Fried referred the Committee to the slide titled, "Alaska is in
its 16th year of Uninterrupted Growth-the Longest Run in Our
History," which indicates that other than the approximate three-
year "economic bust" that began in 1986, the State's economy has
steadily climbed. The State has just completed its sixteenth year
of uninterrupted economic, or employment, growth. The next slide,
"Since 1985 Alaska's Rate of Growth has Slowed," reflects the fact
that the past sixteen years have experienced more steady growth
than had occurred in previous decades. The average growth for the
periods 1960-1970, 1970-1980, and 1980-1985 was a "pretty
impressive" six percent. A two-percent per year growth rate has
occurred since 1990. "We are in a different environment now."
Mr. Fried stated that in the 1980's real estate was a major issue,
as it had a tremendous run-up, and then in 1986, a dramatic decline
as the economy fell. This is depicted in the graph titled
"Residential Housing Activity in Anchorage." In 1983, more than
9,000 residential building permits were issued in Anchorage. This
is more than the last five years of building permits combined. The
next graph, titled "Fairbanks Does Not Look Much Different"
reflects the fact that a similar trend occurred in Fairbanks. Other
communities in the Railbelt area depict similar scenarios.
Mr. Fried stated that the graph titled "AHFC Foreclosures
Statewide" reflects what happened in the housing market as the
number of foreclosures climbed in 1986 and peaked in 1988. The
average price of condominiums peaked at $100,000 in 1995 then fell
to approximately $34,000 in 1987 and 1988.
Mr. Fried stated that in addition to the decline in the housing
market, the overall economy of the State declined after 1985. As
reflected in the graph titled, "The Boom and Bust Years," the State
lost 20,000 jobs between 1985 and 1987. The biggest loss the State
has experienced since records began at Statehood. In the mid-1990s,
the economy re-obtained the employment levels of 1985. The chart
titled "Job Gains and Losses" reflects the employment losses. Fifty
percent of the jobs lost were in the construction industry, as
reflected in the chart titled, "Where the Jobs Were Lost in the
1980s Crash". There are fewer people employed today in construction
than there were in the 1980s. In addition, the retail,
finance/insurance/real estate industries lost a substantial number
of jobs.
Mr. Fried stated that the graph titled, "Construction Growth has
been Very Difference During the Past Decade", reflects the fact
that the construction industry is playing a different role today
than it did in the 1980s as it "is more accommodating" to the
State's growth, and as a result, it does not have as severe an
impact on the State's economy as it did in the 1980s. In 1983
construction employment grew by 30-percent, now a growth level of
four or five percent is "pretty impressive."
Mr. Fried stated that the graph titled, "Lots of Migration in the
1980s, Much Less Over the Past Decade" mirrors the Construction
Growth chart. This chart depicts the net migration of people
leaving and entering the State. The early 1980s reflects the
strongest influx of population. A population outflow occurred from
1986 through 1989. The past few years reflect a small net increase
in population, with an overall growth in the last ten to 15 years
of about one-percent.
Mr. Fried stated that the chart titled, "Population Growth During
the Past Decade Slowed Considerably" reflects the State's
population growth according to the ten-year census. He noted that
it was not until the 1990-2000 decade that Alaska's growth aligned
with national statistics.
Mr. Fried stated that in addition to the economic changes the State
has experienced, the chart titled, "Alaskans are Getting Older,"
reflects how the State's population would look in the future. In
1980, the median age was 26, meaning that half of the population
were younger than 26 and half were older. The State's citizens are
aging and Alaska's median age now is getting closer to the national
average.
Mr. Fried also noted that the chart titled, "Alaska's Population
has Become Much Less Footloose" reflects the fact that while still
being a transient population in comparison to the rest of the
country, the number of those residents who have lived in the State
longer than five years is increasing. There are far more multi-
generational families. This would affect how the State's population
might react to a large economic event.
Mr. Fried concluded his presentation.
Senator Bunde recalled a previous Department of Labor and Workforce
Development demographic analysis that had predicted that, in the
year 2015, the vast majority of Alaskans would be over age 65 and
under age five. "The producers," those between the ages of 30 and
50, would comprise the smallest portion of the population. He
worried that this might result in "an inverted pyramid of income
producers."
Mr. Fried responded that the largest growing segment of the
population is those over the age of 65. The "dependency ratio,"
which consists of those over 65 and children, is "definitely
increasing." He noted that a new population overview was recently
completed.
Senator Bunde asked that that new forecast be provided, as its
information is an important factor in Legislative actions;
particularly in regards to revenues and taxes, specifically
considerations regarding an income tax.
Mr. Fried clarified that while these segments are rapidly growing,
they would continue to be a small percent of the overall
population.
Senator Bunde understood, from Department data, that approximately
90-percent of the wages earned in the State are earned by resident
Alaskans. There are those citizens who belief that non-resident
workers should be contributing more to the State and therefore
favor the implementation of an income tax. However, he noted that
non-resident workers earn less than is perceived, with an average
of approximately $13,000 annually.
Mr. Fried agreed that the non-resident annual wage is considerably
less than that earned by resident workers.
Senator Bunde reiterated that the new data would be valuable.
Co-Chair Wilken requested that this information, to include the
percentage of out-of-state worker and their earnings, be provided.
Senator Dyson asked whether the average wage of the non-resident
worker has significantly declined.
Mr. Fried suspected that, with inflation adjustments, they have
fallen. Wages overall have declined.
Senator Dyson asked whether the demographic trends projected in the
Department of Labor and Workforce Development presentation would
continue.
Mr. Fried commented that the demographic trends would continue
unless something every dramatic, such as a huge economic boom or
influx of young people, occurred. However were an economic boom to
occur, its impact would not have as significant an impact on the
economy as the State's economy has gotten larger. Economic growth
is less predictable than predicting demographic trends. However, it
could be assumed that the State would continue its 16 years of
moderate growth.
Senator Dyson asked whether the Department tracks State gross
productivity.
Mr. Fried stated that this is one of the economic indicators
utilized by the Department. The price and production of oil has a
tremendous impact, however, he warned that this should not be
viewed as the lone indicator, as it would appear to indicate that
the State's economy has not grown at all.
Senator Dyson asked the Department to develop a graph depicting
gross State productivity, to include an oil price/productivity
component.
CHRIS MILLER, Chief, Research & Analysis, Division of
Administrative Services, Department of Labor and Workforce
Development, reaffirmed that the State's current demographic trends
mirror the rest of county in that the Baby Boomers are aging. The
next demographic group, referred to as "Generation X", is a much
smaller group. This group is followed by "the Boomlets." These
smaller groups of people would be a workforce issue, as there would
be fewer workers in the transition from the Baby Boomers to the
Boomlet workforce.
Co-Chair Green asked whether the demographic data could be used as
a school enrollment predictor, in that the number of students would
reduce over time as the population ages. This would assist in new
school planning and district forecasting.
Mr. Miller affirmed that close watch of these "age cohorts" would
be required. While the number of children is growing, it is a
smaller number than experienced in the previous generation.
Senator Olson asked for further information regarding non-resident
workers, as he understood that the majority of these people are
part-time/seasonal employees.
Mr. Miller commented that the average wage for a year-round,
"entire economy" worker is in the mid $30,000 salary range, while,
seasonal/part-time workers average in the mid $20,000 range.
Senator Olson asked what the year-round non-resident salary would
be were part-time and seasonal workers removed from the equation.
Mr. Fried responded that that information would be provided.
Mr. Miller noted that the factors in this would be that different
industries compensate their employees at different rates: the oil
and construction industry compensate their seasonal employees at a
higher rate than, for instance, the fishing industry's seasonal
employees.
Mr. Fried interjected that the service industry, such as tourism,
also has a low-end wage.
Senator Olson stated that this is the reason that part-
time/seasonal employment should be excluded from the calculation.
Senator Hoffman asked regarding the trend in family size in the
most recent decades.
Mr. Fried responded that family size has lowered slightly and that
as the population has aged, there are more families without
children. Fertility has also lowered and leveled off with the aging
population.
Senator Hoffman inquired as to how this compares to the national
average.
Mr. Fried responded that Alaska continues to be more fertile than
the national average, and that Alaskan family size continues to be
larger than the national average household size.
Co-Chair Green noted that future projections are a consideration in
the State budgeting process.
SFC 04 # 48, Side B 09:53 AM
Co-Chair Green asked whether the Department, in making its
projections, reviews or incorporates other indicators that might
influence the price of oil, as the State has a fairly poor track
record in regards to forecasts verses the actual. "While it is the
nature of the beast," is there any mechanism through which oil
projections could be more accurate as this is the primary
projection utilized in determining the State budget.
Mr. Fried replied that employment and population data would be a
better indicator of what is happening in the State's economy.
However, he was unsure how these could be utilized to support
budget decisions.
Co-Chair Green asked whether a formula could be developed that
could factor in this data, as it historically has remained reliable
and steady.
Mr. Miller responded that population and labor force trends "react
more slowly than other international economic events which are out
of our control and unfortunately" could have a very significant
economic impact on the value of State resources. While the
Department could provide fairly accurate population and workforce
trends, the value of products such as oil are oftentimes
unpredictable.
SENATOR TOM WAGONER asked whether an overlay could be applied to
the "Growth in Jobs" chart that could depict the trend, average
number of jobs, and income that is experienced due to the influx of
box stores that have lower paying jobs without benefits. These
types of jobs place another form of pressure on the government to
provide services.
Mr. Fried responded that this information is included in a graph
[copy not provided] that compares the State's average annual wage
to the national average. In 1995, the State's wages were 28-percent
above the national average. Today, the State's wages are comparable
to the national average. He noted that the cost of living has also
decreased. This is a significant trend and has a definite affect on
the State's economy.
Senator Wagoner stated that while job growth is important, the
types of those jobs is also important, as it could indicate
increased costs to the government. He asked that a copy of that
chart be provided.
Mr. Fried stated that the chart would be provided.
SENATOR BERT STEDMAN asked for an explanation regarding how fishing
industry wages are factored into the economic trends, as
oftentimes, the industry's wages are not included in wage analysis
due to the complexity of the associated calculations. He stated
that this industry has a huge impact on the State.
Mr. Miller affirmed that, while the fish harvesting industry has a
significant part in the State's economy, by definition, it is
considered a non-agricultural industry, and as such, is not
included in the routine data collection the Department conducts
with the US Bureau of Labor & Statistics. However, the Department
is working with the Department of Fish and Game to develop a
process whereby estimates could be made in regards to the
harvesting sector. This is an ongoing process. The Department of
Fish and Game does have revenue reports.
Senator Stedman asked whether a rough calculation reflecting the
industry's percent of the economy could be developed.
Mr. Miller stated that this could be possible.
Senator Stedman asked how the recent downturn in fish prices might
affect recent year's income data.
Mr. Miller responded that declining fish prices is a trend that has
resulted in some people leaving the industry.
Mr. Fried stated that the Department recently developed a
population trend overview that indicates that population out-
migrations are occurring in areas that historically have supported
the fishing industry.
Senator Bunde asked whether information regarding the net return of
the fishing industry to the State is available.
Mr. Miller expressed that the Department of Revenue could best
provide that answer.
Senator Hoffman asked whether a job growth chart could be developed
that would reflect the growth of State government employees.
Mr. Fried replied in the affirmative.
Senator Dyson asked that such a chart also depict federal and
municipal employee growth. He asked that the federal workforce
chart include military employees.
Senator Bunde additionally requested that these charts reflect the
trend from 1980 to the present.
Co-Chair Wilken voiced appreciation for the manner in which Mr.
Fried conducts his presentations.
Senator Dyson asked whether there is validity to the "Laughfer
Curve" theory.
Mr. Fried responded that this theory is difficult to apply to
Alaska as it consists of large economic theories.
Senator Dyson asked whether it might be applicable in the future
were the State to implement a variety of taxation methodologies to
increase revenue.
Mr. Fried was uncertain.
Co-Chair Wilken stated that this concludes the presentation.
CS FOR SENATE JOINT RESOLUTION NO. 3(JUD)
Proposing an amendment to the Constitution of the State of
Alaska relating to an appropriation limit and a spending
limit.
This was the third hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken informed that Version 23-LS0296\B and its
accompanying Sectional Analysis is before the Committee.
AT EASE 10:07 AM / 10:07 AM
Co-Chair Green moved to adopt Version "B" as the working document.
There being no objection, Version "B" was adopted as the working
document.
Senator Dyson, the bill's sponsor, highlighted the changes in the
committee substitute to include: in Section 16, page one, lines
nine and ten, the elimination of the fractions in the calculations
pertaining to population and inflation factors; the addition of
language in Subsection 1(c), on page two, lines nine through 22
that would exempt all Permanent Fund appropriations including
inflation proofing, as well as other dedicated funds and Trust
Funds; the addition of language to Subsection 1(a)(1), on page one,
lines ten through 16 that would limit the inflation factor to not
exceed the per capita income for Alaskans; and the expansion of the
"extraordinary circumstance" definition in Subsection 1(d), on page
two, lines 23 through 29. In addition, a section of the bill was
deleted "that gave the Governor the responsibility of cutting back
the budget if the Legislature had, in my view, acted irresponsibly"
and had submitted a high budget. Removal of this language would
revert the language to what currently exists in State law.
Senator Dyson noted that other issues have been raised to which
further language adjustments might apply.
Senator Hoffman commented that, in previous testimony, it was
mentioned that appropriations made in the prior two years would be
a factor. He asked the location of this language.
Senator Dyson clarified that either he had misspoken or the issue
was confused in translation. In actuality, the timeframe is three
years.
Senator Hoffman agreed that, while a three-year average was
discussed, reference to a prior two-year timeframe was discussed.
Senator Dyson noted that confusion arises in respect to the fact
that the prior year is not included in the calculation. The two-
years, three-years, and four-years previous to that are used to
obtain the average. The reason for this is that the data for the
immediate prior year is incomplete. This language is located in
Section 1, Subsection 16 on page one, line 12 of Version "B".
Senator Hoffman asked that consideration be given to including in
the calculation the most recent ten-year's consumer price index
(CPI) and its comparison to the budget for the last ten years. This
would provide an analysis of how the current system is following
the CPI; specifically whether it would be larger or smaller were
the proposed calculations imposed.
LUCKY SCHULTZ, Staff to Senator Fred Dyson, informed that this
information is available for the years since 1997. Information
prior to that is difficult to incorporate due to different
categories of expenses and appropriations. This information is
depicted on a handout, prepared by the Division of Legislative
Finance, titled "Draft - Spending Limit Proposals" [copy on file]
that depicts three charts.
Senator Hoffman, noting the multitude of changes that the proposal
has undergone, asked whether the information depicted on the charts
would continue to apply.
Senator Dyson stated that this would be clarified.
Senator Bunde referenced an earlier discussion in which it was
stated that, were a spending limit previously implemented, the
excess funds could have been allocated to the Permanent Fund. This
would have served to make it substantially larger. He asked that a
graph be provided to reflect that scenario.
Senator Dyson responded that a graph could be developed.
CHERYL FRASCA, Director, Office of Management and Budget, Office of
the Governor, commented that the bill's progress has been
substantial and has evolved into a workable framework. As mentioned
by Senator Dyson, some changes, including those suggested by Co-
Chair Green, would continue to be discussed.
Senator Hoffman asked whether further discussion has occurred in
regard to establishing a termination date or a review at some
future time.
Senator Dyson stated that, as specified in Section 3(b) on page
three, line 14, this proposal would be placed on the Statewide
ballot four-years after its initial adoption. This would force the
Legislature to review the outcome of the proposal, as to whether it
had become "an unbearable restraint" or assisted the effort to
which it was intended.
Ms. Frasca pointed out that Section 1, subsection (c) on page two,
beginning on line nine, specifies the variety of items that might
be exempt from the spending limit. Language in subsection (3) of
that section would allow the exemption of such things as money from
donations, gifts, or grants to the State for purposes specified by
the terms of those donations, gifts, or grants. This language would
provide the various departments the ability to receive and expend
those monies without affecting their regular budgetary process by
"displacing other spending." She noted that this language would
address one of Co-Chair Green's concerns.
Ms. Frasca also noted that, as specified in Section 3, on page
three, line 13, the original proposition language would be placed
on the Statewide ballot every four-years. This would allow the
Legislators to propose changes as deemed necessary.
Senator Hoffman voiced concern that utilization of the average
annual percentage rate of change in the Anchorage metropolitan area
consumer price index (CPI), as specified in Section 1(1) on page
one, line ten and eleven would not be "a true index of the
inflation rate" for the balance of the State, as Anchorage's
numbers "are always lower" than those of Rural areas. He also
voiced concern regarding language on lines 13 through 15 of that
section that indicates that the rate must not "exceed the average
percentage of the change in the average personal income…" This
would, in effect, "tie the rate of increase to how successful the
bargaining units are in the State of Alaska," as average incomes
are affected by those negotiations. Tying the spending limit to
this factor is of concern.
Senator Dyson deferred to Ms. Frasca to address the Anchorage CPI
concern. However, he noted that due to the fact that Anchorage has
half of the State's population, and because "it is so difficult to
conduct CPI data in other areas," "it still ends up being quite
accurate." In addition to being influenced by bargaining contracts,
State spending is also driven by such things, as Medicaid,
Medicare, and other health care cost changes. "All of these are
volatile components of State spending."
Ms. Frasca stated that the United States Bureau of Labor &
Statistics develops the data used for the Anchorage CPI. The
Anchorage CPI information is the lone element that is available and
as such is the one commonly utilized.
Senator Hoffman acknowledged that; however, continued to question
whether this is fair representation of the rest of the State. He
contended that it is not a true indicator, and therefore, the
growth rate should not be tied to it.
Ms. Frasca expressed that it would be difficult to find a
replacement, as this is "the only reported indicator." The
challenge is to have an appropriation limit that would establish a
ceiling on State spending from one year to the next. "It is not a
precise science." The Department of Labor and Workforce Development
presentation indicated that there are approximately 300,000
employed people in the State, of which approximately 19,000 are
State employees.
Senator Hoffman argued that this language would calculate on the
low end rather than the mean average. This could potentially create
a problem as it relates to growth.
Senator Dyson stated that this concern is one reason that he
removed the point-nine percentage factor associated with the
inflation calculation. He stated that it could be successfully
argued that the requirement for delivery of State services does not
always align with the change in the CPI. The point-nine percentage
factor would have been at the low end of it and changing that to
"unity" would better provide a more generous limit that would take
into account the fact that delivery of service in Rural areas does
inflate faster than urban areas. He also noted that, were it
thought to be more accurate, discussion in regard to increasing the
percentage factor to one-point-one times the inflation rate would
be welcome.
Senator B. Stevens asked, in reference to Senator Hoffman's
question about the influence of bargaining units, the number of
workers in the State who are members of a collective bargaining
unit. Also, that the number be divided into State and non-State
employees. He anticipated that, of the total number employed, the
percentage of collective bargaining unit employees would not be a
large number.
Senator Hoffman questioned why, were that the case, this language
should be included.
Mr. Schultz stated that some of the parameters that the Division of
Legislative Finance was asked to include in its research was
population and CPI as well as "population and keeping the CPI below
personal income." Data in this regard is only available from 1997
forward. As depicted on the aforementioned chart, there is no
significance difference between these two variables to this point.
The reason the language was included is because of the high rate
inflation in the 1980s. This would be a concern in regards to the
appropriations limit.
Mr. Schultz stated that the aforementioned chart reflects three
different scenarios in determining the base year. The first chart
uses the fixed base year of FY 96 and a three-year floating average
for variables. While the chart appears favorable, "there is a
ratcheting down effect" realized in the first few years. This has
been determined to have a negative impact on the state economy in
other states. The second chart reflects a base year of two years
prior and a three-year floating average for variables. This has
proven to have the negative affect of making it difficult to
determine what the limit would be for the following year.
Therefore, the third chart was developed utilizing a base year of
the average of the three prior years and a three-year floating
average for variables. Since this would provide a more predictable
limit, it should be "more attractive" to businesses and residents.
Senator Hoffman stated that his suggestion for a ten-year timeframe
was based on the fact that "these years include the quarter of a
billion dollar reduction" that the State experienced. As a result
of this monetary reduction, the legislature implemented a plan to
hold the level of government spending, and, for five of these
years, the mandate was to reduce government spending quarter of a
billion dollars. The time periods utilized in this formula
incorporate "the lowest standards of growth in Alaska's history"
and do not accurately portray a true growth in State government.
Senator Dyson asked whether Senator Hoffman would desire charts
developed that would reflect how these proposals would appear were
they based on those years' budgets as proposed by the Governor.
Senator Hoffman preferred that the charts be developed based on
actuals for a ten-year span as opposed to ones based on
hypothetical information that was not acted upon. Charts based on
actuals would provide "a true indicator of growth."
Senator Dyson determined that three different charts could be
developed: one reflecting State growth were there no $250,000,000
reduction; one based on actuals; and one to depict the billion
dollar increase as proposed by the Governor.
Senator Bunde recalled that while there was a quarter of a billion
dollar reduction over a five-year period, that money was reinstated
during the sixth year. In addition, use of the Anchorage CPI as a
base could be valid due to the fact that the Port of Anchorage
serves 80-percent of the State, and therefore, it could be stated
that 80-percent of the State's economy is dependent on what's going
on in Anchorage.
Senator Dyson stated that that might be; however, Senator Hoffman
raises a valid point. Perhaps utilizing the federal CPI would
negate the accusation that the State government's calculation was
slanted in order to allow or disallow more spending.
Co-Chair Green stated that when the Version 23-LS0296\Y committee
substitute was being discussed, her staff had developed a ten-year
look-back population/inflation/per capita income statistic analysis
that compared the growth per year. She assumed that that
information could be updated to reflect the language included in
Version "B" and thereby, might provide the information requested by
Senator Hoffman. She noted that it would be interesting to view
that chart as, while numbers might appear to be steady, they could
become volatile depending on what factors are incorporated. She
stated that this chart would be updated and provided to Members.
Senator Dyson understood that Senator Stedman has produced a chart
[copy not provided] that also might be helpful to the discussion.
Co-Chair Wilken asked that, prior to any further material being
provided to the Committee, information should be updated to reflect
Version "B" language.
Senator B. Stevens noted that, historically, State spending,
including such things as payroll and government cost of living
allowance allocations for regions has been benchmarked on the
Anchorage CPI indicator. Therefore, he understood that any
adjustments in the Anchorage rates would, by utilizing a geo-
differential, affect Rural areas.
Co-Chair Wilken voiced being uncertain as to how to develop the
baseline requested by Senator Hoffman.
Senator B. Stevens responded that were the Anchorage benchmark
adjusted to reflect inflation and then a geo-differential applied
to that rate, it would affect Government spending in other areas of
the State.
Senator Hoffman stated that he would be more comfortable with tying
the rate to the "breadbasket measure" which is currently available
for cost comparisons for grocery items in Anchorage, Fairbanks,
Juneau, Bethel, and Nome. This would provide more accuracy in
regards to the true cost of living in various regions of the State.
For example, it is documented that a grocery item might cost one
dollar in Anchorage, $1.80 in Bethel and $1.90 in Nome. He noted
that the wages of correctional officers in Bethel are 1.3 times
those paid in Anchorage.
SFC 04 # 49, Side A 10:42 AM
Senator Dyson expressed that while the cost of fuel and food might
affect a family's budget, these costs do not significantly affect
the cost of delivering State services.
Senator Dyson stated that adjusting costs up ten percent, as
proposed in the Version "B" committee substitute, would adequately
address the cost differentials of Rural Alaska, particularly as it
is unlikely that the cost of State government services would
increase ten percent in those areas.
Co-Chair Green understood that this language is applicable to the
total expenditure rather than being region specific.
Co-Chair Green referred the Committee to language in Section 2, on
page two, beginning on line 30 that addresses appropriations to the
Constitutional Budget Reserve (CBR). She asked regarding the reason
that the Legislature should support the deposit of any money in the
General Fund that is available for appropriation at the end of each
fiscal year into the CBR, particularly in a year in which the State
experienced "another windfall" and had received a substantial
amount of money.
Senator Dyson replied that presently, the Constitution mandates
that any excess funds be deposited into an account that bears
interest. This is true of the CBR. As presented in recent testimony
by nationally renowned economist, Dr. Poulson, it was stated that
the most successful State programs having spending limits, are
those that implement a "shock absorber" or rainy day account that
could provide funds or replenish funds as incomes rise and fall.
The CBR could provide this "very valuable" function. It would also
provide substance to favorable bond ratings. He cautioned against
depositing money into the CBR as a mechanism to prevent "political
difficulties." In addition, were the CBR to reach a point that
would support bond ratings and sufficiently address State funding
needs, then consideration could be given to determining whether
excess funds could be deposited into an alternate account. In
summary, he stated that the CBR is a good place to place those
excess funds. It would also replenish the money that was borrowed
from the CBR, that have not, of yet, been reimbursed. This process
would also provide funds with which the State could address
"extraordinary circumstances" such as earthquakes or support
infrastructure and major projects such as a gas pipeline or a road
to the Arctic National Wildlife Refuge [ANWR].
Co-Chair Wilken shared Co-Chair Green's concern that money that
could be accessed by a majority vote would be deposited into a
savings account that could "create turmoil in the budgeting
process."
Senator Bunde opined that, "the maximum allowable growth rate would
become the minimal growth rate." In the future, Legislators might
decide that a two-percent growth rate is too much. Therefore, he
argued that perhaps it is a good thing that the funds in the CBR
could not be leveraged. This could serve to prevent additional
spending that might not be overwhelmingly supported. The sword does
"cut both ways."
Co-Chair Wilken asked how this legislation would allow for
unexpected and uncontrollable expenses such as a $80 million
Medicaid bill or, more recently, the $94 million Public Employee
Retirement System (PERS) and Teachers Retirement System (TRS) debt.
Ms. Frasca stated that the appropriation limit does not solely
apply to General Fund spending. She cautioned that while expenses
might increase, revenues do not always follow. In those cases,
choices must be made. This year for example, in order to provide
funds for the PERS/TRS expenses, reductions were required in other
areas. This is the reality of having limited resources. This
legislation would assure voters that government "would not go on a
spending spree and grow" were significantly more revenue to
transpire. This would force the government to make choices.
Co-Chair Wilken voiced concern "that an avenue" would be available
through which the Legislature could address unexpected and
extraordinary expenses without negatively affecting other
priorities.
Mr. Frasca understood that the section of the bill regarding
extraordinary circumstances would address this concern.
Co-Chair Wilken stated that further discussion ensue in this
regard.
Co-Chair Wilken noted that another concern is that the bill
provides no distinction between the capital and operating budgets.
"The operating budget builds bureaucracy and the capital budget
builds Alaska." Therefore, he argued that further distinction
should be included in this regard.
Senator Dyson stated that this Constitutional amendment would
eliminate the Constitutional mandate that requires one-third of the
budget to be allocated to the capital budget. He doubted, however,
that this mandate has been upheld.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:54 AM
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