Legislature(2017 - 2018)BELTZ 105 (TSBldg)
01/18/2017 01:30 PM Senate LABOR & COMMERCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Institute of Social and Economic Research Presentation: What Do We Know About the Alaska Economy and Where is It Heading? | |
| Northern Economics Presentation: Forecasting Alaska's Economy 2016-2017 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE LABOR AND COMMERCE STANDING COMMITTEE
January 18, 2017
1:34 p.m.
MEMBERS PRESENT
Senator Mia Costello, Chair
Senator Shelley Hughes, Vice Chair
Senator Kevin Meyer
Senator Gary Stevens
Senator Berta Gardner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH PRESENTATION: WHAT DO
WE KNOW ABOUT THE ALASKA ECONOMY AND WHERE IS IT HEADING?
- HEARD
NORTHERN ECONOMICS PRESENTATION: FORECASTING ALASKA'S ECONOMY
2016-2017
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DR. RALPH TOWNSEND, Director
University of Alaska Anchorage
Institute of Social and Economic Research (ISER)
POSITION STATEMENT: Provided introductory remarks and introduced
Dr. Guettabi.
DR. MOUHCINE GUETTABI, Assistant Professor of Economics
University of Alaska Anchorage
Institute of Social & Economic Research
Anchorage, Alaska
POSITION STATEMENT: Delivered a PowerPoint titled "What do we
know about the Alaska economy and where is it heading?"
JONATHON KING, Vice President and Senior Economist
Northern Economics
Anchorage, Alaska
POSITION STATEMENT: Delivered a PowerPoint titled "Forecasting
Alaska's Economy 2016-2017."
ACTION NARRATIVE
1:34:30 PM
CHAIR MIA COSTELLO called the Senate Labor and Commerce Standing
Committee meeting to order at 1:34 p.m. Present at the call to
order were Senators Stevens, Hughes, and Chair Costello.
Senators Meyer and Gardner arrived soon thereafter.
^Institute of Social and Economic Research Presentation: What Do
We Know About the Alaska Economy and Where is it Heading?
Institute of Social and Economic Research Presentation: What Do
We Know About the Alaska Economy and Where is it Heading?
1:35:06 PM
CHAIR COSTELLO announced the committee would hear presentations
from the Institute of Social and Economic Research (ISER) and
Northern Economics. She said the state faces serious economic
challenges and these hearings are an opportunity for legislators
and the public to understand the economy. The presenters'
insight will help legislators sort the data, the trends and
policy options that are available. The goal is to analyze the
changes we're seeing and then move Alaska's economy forward. She
reminded listeners about the committee's new Facebook page. She
welcomed Dr. Townsend and Dr. Guettabi.
1:36:53 PM
DR. RALPH TOWNSEND, Director, University of Alaska Anchorage
Institute of Social and Economic Research (ISER), explained that
a role of public universities in the U.S. is to provide research
and public outreach to serve communities in the state to support
the economy, the industries, the institutions and the people.
ISER has served in that role for years and both the university
and the state have been very supportive. He advised that ISER
has about 15 lead researchers and an equal number of staff that
support the work. About one-third of the staff have PhDs in
economics and about half are doing work in economics. He also
pointed out that about half the staff do work related to
education, health care policy and social service delivery, which
is an important part of their mission.
He introduced Dr. Guettabi, an assistant professor of economics
whose specialty is urban and regional economics. He noted that
Dr. Guettabi also does work in health care economics.
1:39:18 PM
SENATOR MEYER joined the committee.
1:39:23 PM
DR. MOUHCINE GUETTABI, Assistant Professor of Economics,
University of Alaska Anchorage Institute of Social & Economic
Research, reviewed the outline of his presentation. First, he
would give an overview of Alaska's economy over the last two
years and then discuss how the decline in oil prices
reverberated through the economy. Next, he would describe the
mechanisms through which a decline in oil prices works its way
through the many sectors of the economy, followed by a forecast
of where the economy is heading. Finally, he would discuss the
extent to which it's possible to reconcile the weakness of the
economy with the need to close the budget gap.
1:39:59 PM
SENATOR GARDNER joined the committee.
DR. GUETTABI offered a snapshot of Alaska's economy over the
last two years. In August 2014 Alaska North Slope oil prices
stood at over $100 and the number of employees in the state was
355,638. A year later, oil prices had dropped to just over $48
but just 100 jobs were lost. He said this lack of job response
in that first year is not surprising. That is because many
projects that were already under way had to be completed, and
much of the generous capital budget allocations in 2012, 2013
and 2014 were still making their way into the economy. The
economy has weakened considerably since then and in 2016 the
three sectors that have borne the brunt of the decline have been
state government, oil and gas, and professional and business
services. Specifically, losses in the professional and business
sector is an indication that the decline is making its way to
non-primary sectors. "That multiplier that we like to speak
about is in full effect." He displayed a bar graph of month-to-
month Alaska employment numbers that shows that the economy lost
2,261 jobs between March 2014 and March 2016.
1:44:03 PM
DR. GUETTABI discussed the ripple effects of the decline in oil
prices on private employment. He said he finds it helpful to try
to isolate where the losses are coming from and to look at the
actual sequence of events. "I refer to this as the decomposition
of the effect or of the effect of the decline in economic
activity." In the first phase, the most obvious effect is direct
jobs losses in the oil and gas sector. In the second phase, oil
and gas companies reduce purchases from Alaska companies in
multiple sectors. The third phase is the decline in local
spending by oil and gas employees as their wages or jobs are
cut. This decline in local spending affects the rest of the
economy.
1:48:06 PM
DR. GUETTABI discussed the obvious and hidden effects on
government when oil prices decline. He said the most obvious
effect reflects the dependence of the state budget on oil
revenues. From 2005 to 2014, 90 percent of the unrestricted
general fund was coming from oil revenues that significantly
declined due to the decline in prices. He said a more hidden
factor is the extent to which local governments and the private
sector depend on spending by state government. Local government
dependence stems from the fact that about 1 in 3 dollars of
local government revenues come from the state government. For
the private sector, the dependence on state government stems
from government contracting and purchases made from private
Alaska companies, and spending by state government employees on
goods and services provided by the private economy.
He relayed that ISER is investigating the effects to local
government in its next Alaska snapshot. "What we're trying to do
right now is basically build a panel of revenues by borough and
census area to decompose where each borough gets its revenues
and what's its share of those revenues that come directly from
state government, what's the share that comes from different
basic sectors, how many of them have a sales tax and how much
money do they get."
1:48:50 PM
DR. GUETTABI displayed a chart showing the job losses by sector
from March 2014 to March 2016. It illustrates that state
government and private industry were hardest hit through March
2016, with the state government losing nearly 1,700 jobs. He
noted that the most recent numbers from the quarterly census of
employment and wages. Private industry lost 1,518 jobs while
local governments, including school districts, added 783 jobs.
Federal civilian jobs saw an increase of 165. In total, 2,261
jobs were lost. He noted that the latest numbers from the
quarterly census of employment and wages shows considerable
additional weakness between March and June.
He said compare March 2014 to March 2016 and you can see that
state government and the private sector experienced most of the
decline. He opined that improvement in local government will not
be sustainable. Local government include school districts and
given the reliance of local government revenues on the state's
health, it's to be expected that local governments will struggle
going forward.
A more refined sectoral breakdown in that same period shows job
losses in construction, natural resource and mining, other
services and professional and business services. Health care and
social assistance showed the greatest increase in jobs.
1:51:09 PM
DR. GUETTABI displayed a state map to show the geographic
breakdown of job gains and losses (by number and percentage)
from March 2014 to March 2016. He noted that there is
considerable heterogeneity across the state and that variation
is something to keep in mind because no two places are alike and
decisions going forward will impact places differently depending
on their basic sectors and relative vulnerability. The depiction
clearly shows that most places had already lost jobs by March
2016. The Mat-Su Borough was an exception and the gains in that
area were distributed across sectors with gains in health care,
construction and retail. One caveat is that most of the gains
were in sectors that depend on household spending. He
anticipates that as household spending weakens going forward,
most of those gains will slow down. He said it's difficult to
tease out what is going on in the Aleutians East (-16%) and the
Aleutians West (+36%). It is a food manufacturing/processing
employment area that demonstrates the importance of the
heterogeneity.
He displayed a chart that looks at the share of employment in
the hardest hit sectors in each borough and census area, and
adds the totals. For example, in Anchorage it shows the share
employment in mining, in construction, in professional &
business services, in state government and in local government.
The last two columns show the total without local government and
the total with local government. He said he's spending time on
this data to illustrate that most places have 50 percent or 60
percent of these their employment in these six sectors that have
already been vulnerable to this recent decline. The other reason
is to emphasize the impending local government weakness and what
that will do to these different places that have very different
economies.
1:54:18 PM
DR. GUETTABI turned to the old 2016 forecast. He explained that
at in January 2016 the Alaska Business Monthly asked Gunnar
Knapp and him to write a description of the state of the economy
and give a forecast of economic activity. They forecast two
percent negative growth in both 2016 and 2017, absent any
further budget cuts or imposition of taxes. At that time, they
said that any action that takes money out of the economy will
make future employment declines either deeper or longer lasting.
He displayed a line graph showing employment growth projections
without a pipeline and with a pipeline. He highlighted that
there has been slower year over year growth since 2011. The
significant declines appear in 2016 and 2017. He emphasized that
the upturn in 2016 is not a recovery. Rather, it shows that 2018
losses will be lower than 2017. He noted that information shows
more clearly on the updated forecast.
1:56:33 PM
DR. GUETTABI displayed the updated forecast graph that shows
historical and projected annual percentage changes in total
Alaska employment. He explained that he is treating 2016 as a
forecast because not all the 2016 numbers are available. It
anticipates 2.3 percent losses in both 2016 and 2017 and [0.6
percent] losses in 2018. He said, "My anticipation is that most
of the cuts in the capital budget, most of the decline in oil
and gas activity will have worked its way out of the economy
essentially by 2018." However, there will be no significant
recovery or a return to previous activity levels. Rather,
employment will be back to 2010 levels by the end of 2017. "That
will be the new normal of economic activity, because it's
difficult to foresee a sector engine that basically pulls us out
of this much slower growth." He reminded members that this does
not consider any further cuts or imposition of taxes. Anything
that takes money out of the economy has the potential of
deepening or lengthening the slowdown. A fiscal solution is
obviously important, he said.
1:59:41 PM
DR. GUETTABI discussed the multiplier effect of declines in the
most affected sectors under two scenarios. [The sectors listed
were construction; oil and gas extraction; professional,
scientific and technical services; and management companies and
enterprises]. Under both Model 1 and Model 2, the multiplier is
close to two. He clarified that this information is not used for
the forecast, but it does point to where the losses in 2017 are
coming from.
2:00:59 PM
He explained that in 2016, most job losses were concentrated. In
2017, job losses are expected to spread because of the
multiplier effect. In 2017, support industries, retail,
accommodation and food services are expected to suffer job
losses at a much more rapid pace. He said this is important from
a forecasting standpoint because the types of jobs that were
lost in oil and gas are very different from the types of jobs
that will be lost going forward, both in terms of the people who
were holding the jobs and in terms of the likelihood of
migration due to losing their jobs.
Empirical literature shows that younger people with higher
incomes are much more likely to migrate out than older, lower
income individuals. "If we're trying to think about the
unemployment rate; if we're trying to think about the response
to these negative shocks, from a migration standpoint I think
that this difference is going to matter because the profile of
the people affected is going to start changing." The decline in
activity will also become more visible because the types of
places that will be losing jobs are the sectors that we
potentially interact with quite a bit more than the ones we were
describing up until 2016.
2:03:17 PM
DR. GUETTABI summarized his thoughts on the future state of the
economy. The current forecast anticipates 2.3 percent losses in
2016, 2.2 percent losses in 2017, or 7,500 jobs lost each year.
The losses will be distributed across more sectors as the
multiplier spreads through the economy. While downside risk
remains, 2018 will be a little stronger and potentially better
able to absorb a shock stemming from the imposition of taxes or
further budget cuts. The long-term health of the economy
requires fiscal stability. Most of the available measure will
potentially mean exacerbating and extending the current
slowdown.
2:05:25 PM
DR. GUETTABI displayed a bar graph showing the estimated (full
time equivalent) job impacts per $100 million of deficit
reduction. He said this is work that ISER did last year, but it
goes hand-in-hand to explain the weakness that exists in the
economy. For example, an income tax that raises $100 million
would potentially result in between 500 and 800 jobs lost. He
said this is important because these losses would be in addition
to the job losses previously described. An income tax that
raises $300 million would potentially result in 1,500 and 2,400
additional job losses in the year the tax is imposed. The
overriding question is the extent to which the economy can
handle more losses and will something too drastic push it over
the precipice.
2:07:39 PM
DR. GUETTABI reviewed. He said he likes to look at the
differences between 1985 and 2015 to emphasize that the economy
has cushions that it did not have in 1985. The economy has aged
so there is less potential for out migration. Sources of
retirement income are insensitive to the Alaska economy. Native
corporations are diversified and sheltered from state-specific
economic shocks. Some sectors have matured and benefit from a
healthy national economy.
He concluded saying there are very few easy decisions to get out
of the economic decline. Revenue-generating mechanisms or budget
cuts take money out of the economy and potentially worsen the
economic decline, but they may be necessary. The question is
when to implement some of these solutions.
2:09:43 PM
CHAIR COSTELLO asked if the endowment approach to managing the
permanent fund or cuts to government or taxes would have the
most positive impact on the budget challenges and the least
impact on the economy.
DR. GUETTABI said an approach that uses savings does the least
damage. All the tax measures are somewhat similar because they
all take money out of the pockets of Alaskans and therefore will
have a negative shock. An income tax affects people with higher
incomes more than individuals with lower incomes and a sales tax
is more regressive. Government cuts look outsize because you
lose the jobs that are cut plus you lose jobs due to reduced
spending. The endowment approach has almost no short-term
damage, but isn't sustainable.
2:14:15 PM
SENATOR GARDNER referred to the slide titled Employment Impacts.
She asked if it would be a wash or if there would be more job
losses over time if there were no spending cuts and all the jobs
were saved. The gap would be bigger, and it would be necessary
to raise more revenue with the other options.
DR. GUETTABI said there is no quantitative answer because each
of the options were purposely modeled individually. He offered
his opinion that it is myopic to only think of shocks in the
short term and ignore long term fiscal stability. "However,
based on my estimations, it looks like potentially 2018 is a
year where we're better able to absorb shocks," he added.
SENATOR GARDNER asked if there is a multiplier when state
workers lose jobs.
DR. GUETTABI answered yes and it's between 1.7 and 1.9 on the
class of worker that is laid off.
2:18:35 PM
SENATOR MEYER referred to the slide titled Employment Impacts
and asked if it's safe to say the dividend cut has very little
impact.
DR. GUETTABI said the dividend cut has a slightly larger impact
than the other tax options. Net net the dividend has a larger
negative effect on the health of the economy than an income tax
because more Alaskans are affected, and lower income individuals
spend a majority of their income. "For every dollar you take
out, the economy is losing that whole dollar in addition to
whatever the multiplier is."
SENATOR MEYER observed that it is significantly less that the
spending cut.
DR. GUETTABI said the spending cut is the largest option because
it starts with job losses that result if further job losses.
SENATOR MEYER asked if he suggested waiting until 2018 to make
any changes because the economy would be a little stronger.
DR. GUETTABI clarified that he would characterize it as less
weak. He anticipates that the bottom of the losses stemming from
declining oil prices will have made their way out of the economy
by the end of 2018. He said it's important to remember that he's
talking about a reversion to the 2010 level.
SENATOR MEYER asked the basis of the notion that the economy
will be less weak in 2018.
DR. GUETTABI said the takeaway should be that there is no
recovery engine; the slight improvement in conditions means the
shock will have resulted in the loss of up to 17,000 jobs and
there will be very slight growth going forward.
2:23:24 PM
SENATOR MEYER asked if he said that losses in the oil and gas
extraction sector had the largest multiplier effect.
DR. GUETTABI replied oil and gas jobs have the largest
multiplier because of the interdependence of multiple support
sectors.
SENATOR MEYER asked if the North Slope small producer tax
credits should be continued or stopped.
DR. GUETTABI said ISER has not modeled the tax credits, not
because they aren't important but because they didn't think they
could model them in a way that would produce defensible results.
SENATOR MEYER asked if it's more efficient to have a stronger
private sector versus a large capital budget that comes from
state government.
DR. GUETTABI replied there is significant interdependence. A
healthy private sector requires a well-functioning state
government and vice versa.
2:27:22 PM
SENATOR HUGHES asked if the multipliers in Model 1 and Model 2
reflect the high and the low.
DR. GUETTABI replied they are completely different models but it
shows that the variations are not enough to throw off the
estimation.
SENATOR HUGHES recalled that he said the state job multiplier is
between 1.7 and 1.9. She asked him to expand on his statement
that the permanent fund endowment model would be neutral.
DR. GUETTABI clarified that he was referring to the use of
savings to pay for the current size of government, separating
the endowment that affects dividends from a dividend cut. Any
option that takes income away from Alaskans will have negative
consequences. This includes the extent to which the endowment
model affects the dividend amount.
SENATOR HUGHES asked if the impact of a state sales tax is
really like an income tax when outside money from tourists is
factored in.
2:31:14 PM
DR. GUETTABI said they made assumptions about the number of
Alaskans and non-Alaskans who would pay sales tax and the two
options were close. The modeling was based on the distribution
of income of Alaskans and it reflects the regressive nature of a
state sales tax. Lower income people tend to spend more of their
total income, so they are more affected by a sales tax.
SENATOR HUGHES asked why spending cuts are so much more negative
than bringing in revenue.
DR. GUETTABI explained that the state government cut option
starts with the loss of jobs. Those people in turn reduce their
spending and that reduction in spending results in additional
job losses.
SENATOR HUGHES expressed difficulty reconciling that with the
multiplier.
2:35:03 PM
DR. GUETTABI said the interdependence is very important. The
reduction in spending that results when a state employee loses
their job hurts the private sector. An apples to apples
comparison would ask, what hurts the economy more, losing 100
jobs in oil and gas or losing 100 jobs in state government. If
the multiplier for oil and gas jobs is higher, there would
eventually be more job losses in that scenario.
CHAIR COSTELLO asked him to answer the question he posed.
DR. GUETTABI said, based on multipliers alone, there would be
more losses stemming from the loss of the oil and gas jobs. They
make more money and the multiplier is potentially larger. He
clarified that these are sectoral multipliers; they reflect how
independent a sector is with the rest of the economy.
2:38:11 PM
SENATOR STEVENS asked if ISER would be willing to take on the
question about the value of oil tax credits; if the legislature
could assist in finding an answer; and if an answer could be
forthcoming in a reasonable amount of time. "It is so enormously
important, and nobody knows the answer right now," he said.
DR. GUETTABI said he understands a report is in progress to
explain the mechanics of a tax credit and how it affects
companies.
DR. TOWNSEND added that the oil and gas credit program is not a
single program. There are multiple pieces that function in
different ways and have different impacts on the state budget.
ISER has a small project underway to provide an explanation of
that. Regarding the specific question, he said ISER could
conduct the study, but not in two or three weeks and it would
not produce a yes or no answer.
SENATOR STEVENS noted that Legislative Budget and Audit and
individual members were talking about working with a consultant
to find some answers. He said he'd appreciate hearing from him
if this is something ISER is willing to do.
2:45:33 PM
CHAIR COSTELLO thanked Dr. Guettabi and Dr. Townsend.
2:45:47 PM
At ease
2:48:39 PM
CHAIR COSTELLO reconvened the meeting and welcomed Mr. King with
Northern Economics.
^Northern Economics Presentation: Forecasting Alaska's Economy
2016-2017
Northern Economics Presentation: Forecasting Alaska's Economy
2016-2017
2:49:28 PM
JONATHON KING, Vice President and Senior Economist, Northern
Economics, stated that Northern Economics would be happy to
contract with the legislature to look at oil tax credits. He has
a very competent oil and gas economist who is currently under
employed. He informed the committee that he would talk about the
current recession, the timing, where the state is headed, and
how health care plays into the current situation.
MR. KING agreed with Dr. Guettabi that this is Alaska's great
recession. By the time it is over, job losses will total 6-7
percent. He discussed gross state product (GSP) in Alaska and
the reasons economists do not use it to measure recessions. He
said if we were to use GSP to estimate recessions it would show
that Alaska has been in recession for five years. He displayed a
graph that shows that the value of the private economy in Alaska
peaked in 2012 and has been shrinking since then.
MR. KING said economists measure recessions by looking at
monthly or quarterly changes in employment and comparing it to
what happened the year before. He displayed a graph that shows
year-over-year employment changes from 2003 to 2016. Except for
a quick dip into negative territory in 2009 and 2010, job gains
and losses were above the zero percentile much of this time. He
pointed out that job losses dipped below the zero percentile in
late 2015 and throughout 2016 there were fewer jobs in the
economy than the year before. The economy started to show signs
of slowing in 2011 and has continued through 2016. He noted that
gross state product was declining during that period, primarily
because the oil industry was spending and investing less.
Because Alaska was still in a growth mode during that time, not
many people noticed the decline.
2:54:45 PM
MR. KING displayed a graph showing that from 2006 to 2016
Alaskans earned between $4 billion and $4.5 billion in real
wages every quarter. He pointed out that the red line connects
the winter minimums of quarterly wage earnings. What is
important is that Alaska has moved from what was very likely an
investment recession to a wage recession. The effects of the
initial cut backs have spread throughout the Alaska economy.
He said that Northern Economics has run a household confidence
index since the first quarter of 2010. Each quarter 800 Alaska
households are asked how they feel about the state economy, the
local economy, their personal finances, and their expectations
going forward. The Alaska confidence index went up from 2010 to
the third quarter of 2014. He noted that coincided with the vote
on Senate Bill 21. It has come down since then and broke through
the recessionary line in 2016. State and local expectations for
the economy have rebounded somewhat but the rating is still 35
out of 100.
2:58:23 PM
MR. KING displayed a graph of the year-over-year change in jobs
in high earning sectors. He pointed out that in 2013 the oil and
gas sector was not adding jobs. Between 2013 to the third
quarter of 2014 jobs were added but things started to slow. In
early 2015, the oil and gas sector fell below the zero
percentile and is still shedding jobs. The construction sector
transitioned to negative growth at about the same time as oil
and gas, but it is now in positive territory. That could be a
data blip or related to the F-35 construction in Fairbanks, he
said.
He relayed that the professional and business services sector
did not add jobs during 2013 and 2014 and it transitioned below
the zero percentile in 2015. He opined that this sector has
another year of accelerating losses because there is not any
spending coming out of the oil and gas industry or state
government and those are the drivers for that sector.
3:02:08 PM
MR. KING displayed a graph showing year-over-year changes in
jobs from 2013 through 2016 for state government and retail. He
pointed out that retail recently went negative which reflects
the multiplier effect. Retail shopkeepers are noticing less
economic activity and they are cutting back. State government,
excluding education, started shedding jobs in early 2015 but the
losses have leveled off.
He said health care is the only sector that showed
consequential growth in the Alaska economy last year. He
displayed a chart showing that this sector was slowing down in
2013 and 2014 and started growing again the month after the
decision to expand Medicaid in 2016.
3:05:16 PM
MR. KING discussed where Alaska's economy is headed. He said
the state brings money into the economy primarily through oil
and gas and the federal government, but it is not very good
at holding onto its money. This goes to the multiplier
effect, he said. Alaska imports much of what it uses,
particularly in rural Alaska.
3:08:15 PM
He described Northern Economics' Regional Economic Model
Incorporated (REMI) and relayed that in 2015 the company used
that model to do an economic forecast of the state's
recession. Total employment, which is wage and salary jobs
and self-employment, was expected to be between 450,000 and
460,000 for 2013 and 2014. He noted that this is federal
data. The expectation was to drop to about 440,000 jobs in
2020 or 2021 and rise thereafter. The driver that was predicted
to pull the state out of recession was the Alaska LNG pipeline.
It was a reasonably foreseeable event at that time.
What happened is that employment in 2015 was better than
expected because it took longer for the capital budgets to come
out of the economy than expected. He noted that the actuals
for 2016 are close to what was predicted.
3:12:53 PM
He said the forecast has been updated and they've run three
scenarios.
Scenario 1 is a $4.2 billion unrestricted general fund and a
reduced permanent fund dividend. The general fund currently is
$4.35 billion this fiscal year so it is a small reduction, but
the money comes out of Alaskans' pockets through a PFD
reduction.
Scenario 2 is a $4.2 billion unrestricted general fund and a
broad-based tax, probably some combination of sales and
income tax. He did not differentiate within the modeling
because they are similar as proposed and both remove money
from the economy.
He explained that a sales tax and an income tax would generate
about the same amount of money only because the governor
proposed the tax be 6 percent of federal liability. The
average U.S. state with an income tax taxes at 6 percent to
6.5 percent of gross income. If that metric were used, the
revenue projection would be between $1.2 billion and $1.5
billion.
Scenario 3 is a $3.3 billion unrestricted general fund that
steps the budget down $500 million this year and next fiscal
year.
He listed the caveats and assumptions. A strong oil price
recovery is not predicted, which follows the U.S. Energy
Information Agency (USEIA) predictions. Everything is in nominal
dollars. There are no overall positive economic movers such as
the gas pipeline and there is no significant oil production
beyond what the state is already modeling in its own forecasts.
Also, it does not account for potential black swans such as
issues in health care. He said situations change but this does
give an idea of what the future could look like, he said.
3:17:45 PM
MR. KING displayed a line graph of the 2017 to 2026 employment
forecast under the three budget scenarios. It shows the peak in
2015 the decline in 2016 and continued job losses until 2019
under Scenario 1 and Scenario 2. Scenario 3 bottoms out in 2020,
primarily because of the two-stage $500 million reductions this
year and next year. Total employment in this scenario is
significantly lower. That goes directly to the discussion about
multipliers. State government employment is in the top one-third
of all occupations and sectors in the economy. It spends a lot on
people and it does not spend a lot of money on things that
come from out of state.
3:21:42 PM
MR. KING said the three 2017 to 2026 population scenarios are
very similar but the line for Scenario 3 drops slightly more at
the end of the period. He explained that population numbers are
similar for all three models even when employment numbers differ
because Alaska is becoming a more multi-generational society.
People tend to stick around after the loss of a job if they have
family ties in the area. He agreed with Dr. Guettabi that the
people who leave are the ones who are highly educated, have
skills that are in demand in the Lower 48 economy and perhaps
they do not have as strong a cultural tie as the individuals who
stay.
MR. KING summarized the REMI results. For Scenario 1 and 2
employment bottoms out in 2019 to 2020 and 25,000 and 24,000
jobs are lost respectively. He noted these numbers are about the
same because they model a lower percentage of PFD money being
spent than ISER has modeled. This is based on Northern
Economics' quarterly survey on the household index. "We've found
out that about 40 percent of PFD money is not spent in that
first year." By comparison, ISER models 100 percent of that
money hitting the Alaska economy. This more conservative
viewpoint of the PFD is balanced with the broad-based taxes. The
other thing that helps the broad-based tax scenario 2 is that non-
Alaskans pay into that system. Sales taxes and income taxes are
deductible from your federal income tax, so the federal
government picks up some of the effect of having those broad-
based taxes. Under Scenario 3, the expectation is to lose 33,000
jobs and employment will not recover meaningfully until 2026.
Population losses are expected to start in 2017 and continue
through 2026. Scenario 1 predicts the loss of 32,000 citizens,
Scenario 2 predicts the loss of 31,000 citizens and Scenario 3
predicts the loss of 34,000 citizens. The statewide population
is about 700,000 so this means a 3-4 percent population loss, a
5-6 percent loss in the number of jobs.
3:26:21 PM
MR. KING reviewed the key takeaways. Without stimulus, there
are years left in this recession. In aggregate, there isn't
much difference between a PFD reduction and a broad-based
personal income tax because both reduce income for all or
nearly all Alaskans. However, there is a very different effect
on the population at the individual level in terms of who pays
and what percent of their income that is. The PFD has outsized
effects in rural/poorer areas while the income tax captures
income from non-Alaskans. The likely solution is somewhere in
the middle, he said.
The $3.2 million unrestricted general fund plan has the greatest
overall effects because in involves directly cutting about
18,000 state supported jobs with indirect effects accounting
for an additional 12,000 job losses. People who have lost
their jobs are more likely to sell their homes and leave.
Unless those people have moved into retirement, that income
is unlikely to be replaced immediately, particularly in an
economy that is in recession. Whereas if everyone's income is
replaced a little bit, it leaves everyone a little poorer, but
the broader economy is still intact.
3:28:34 PM
MR. KING displayed a line graph of year over year employment
growth from 2016 to 2025 to put the ISER and Northern Economics
forecasts in perspective. This reflects Scenario 2 projections
with a full PFD and broad-based taxes. He noted that including
the tax makes the Northern Economics projections a little more
negative that ISER's going forward. Taking that into account,
ISER and Northern Economics are saying basically the same thing
about the recession and the economy going forward. Job losses
going forward are on the same order of magnitude.
3:29:29 PM
MR. KING said he wanted to shift gears a bit and talk about
health care costs because it is the next big thing that will
affect the Alaska economy. He said the state insures roughly
400,000 lives through its management of health care. Four major
groups profit from health care. These are: insurance companies,
drug companies, hospitals and providers. These are essentially
oligopolies because they have price-setting power, but insurance
profits are capped under the Affordable Care Act. The maximum
gross margin for insurance companies is 20 percent.
Alaska has among the highest per capita expenditures for health
care of any state. The reason is that Alaska ranks the highest
or close to the top for hospital, physician and clinical
services costs. Charges for prescription drugs and other
nondurables are in line with other states. To illustrate the
rising cost of services in Alaska, he displayed a bar graph of
2006 consumer price index adjusted charges for knee surgery. In
2006, Alaska surgeons charged roughly $6,000 which was
equivalent to the 2006 CPI adjusted cost. By 2016 Alaska surgeons
charged nearly 160 percent of the 2006 CPI adjusted amount.
3:33:38 PM
MR. KING listed the reasons that medical costs in Alaska are
higher. First, limited competition makes it easy to price
set. Another reason is that the state passed the 80 percent
rule in the early 2000s. This greatly expanded the number and
type of services in state, but made it easy for specialists to
set prices and avoid networking. Also, the state does not
have a law regarding price transparency. Providers are not
required to disclose their prices so there is no opportunity
for comparison shopping. Finally, the system is not set up to
accommodate flying to Seattle or another location for a
procedure. He related a personal story.
3:38:52 PM
MR. KING listed the key takeaways. Without stabilization, the
economy will stay in recession until 2018 to 2020. Without
some stimulus, the population recession could last much
longer. The economic differences between the analyzed policy
options is relatively slight between the PFD and income tax
scenarios, but the "on the ground" societal implications are
very different. The $3.2 unrestricted general fund scenario is
likely to remove about 20 percent more jobs from the economy than
the other two scenarios. Finally, Alaska's health care system is
an economic driver, but it takes money away from the rest of the
economy.
CHAIR COSTELLO expressed appreciation for the discussion on the
cost of health care, because it's information that policymakers
need as they consider ways to face the budget challenges.
3:41:02 PM
SENATOR STEVENS asked him to comment on continuing to offer
oil tax credits and the impact of Congress's apparent decision
to repeal the Affordable Care Act.
MR. KING said the early estimates show that a full repeal of
the Affordable Care Act would result in the loss of an
additional 3,000 to 5,000 Alaska-based jobs. Regarding
continuing the oil tax credits, his answer would be the
same as Dr. Townsend's. It is a complex program and it
would be a difficult connection to say exploration
happened because of tax credits and that resulted in
production. He reiterated his interest in working with
ISER to research the question. Responding to a further
question, he said he could prepare a proposal by next
week. He agreed with Dr. Townsend's estimate that it would
be difficult to arrive at any conclusions in 60 days. He
cautioned that a rushed product impacts quality.
3:45:18 PM
SENATOR MEYER noted that an economist or lawyer in the
building suggested the legislature cut the budget by another
$1 billion and not touch the PFD. But if he understood the
three scenarios, it would be better to reduce the dividend
than cut the budget by $1 billion.
MR. KING clarified that the Northern Economics modeling shows
it's better to use the earnings reserve or initiate broad-
based taxes than to essentially cut 2 0 percent from the
unrestricted general fund. He added that it might be time to
look at cutting entire programs instead of continuing to make
horizontal cuts. Critical services must be provided for and
it's up to policymakers to figure out what those are.
SENATOR MEYER commented on Alaska's three-legged economic stool
and asked if there is a "Trump effect" that could provide the
needed stimulus.
MR. KING replied it's too early to tell because the statements
and tweets from the president-elect might not be what he decides
to do.
3:50:47 PM
SENATOR HUGHES asked how Scenario 3 would be affected if the
cuts were strictly to formula spending. She clarified that she'd
be interested in hearing about cuts to both education and
Medicaid.
MR. KING reminded members that last year one of the larger
trusts said it was no longer following the 80 percent rule. It
would pay Medicare rates plus 50 percent. That is anticipated to
save thousands of dollars. If the large insurance pool that is
run by the Department of Administration were to adopt that same
policy, it would help rein in health care spending. He added
that getting a handle on why Medicaid spending is increasing on
a per unit basis will help to bend the curve and buy the state
some breathing room.
SENATOR HUGHES asked, "The multiplier effect for cutting formula
spending, is it as high as the multiplier effect for the worker
cut, pay cut or the broad-based cut across the board."
Mr. KING suggested she pose that question to the regional
economists on the panel tomorrow.
CHAIR COSTELLO added that Lori Wing-Heier the director of the
Division of Insurance would be in committee next week to talk
about the health care markets. She said her understanding is
that the department is accepting public input on suggested
changes to the 80 percent rule. It is something that can be
changed through regulation.
SENATOR HUGHES asked if other states have a similar ratio of
health care workers to population as Alaska.
MR. KING said he would follow up with an answer by email.
CHAIR COSTELLO asked him to send the answer through her office
and she would distribute it to the committee members. She
thanked Mr. King for the presentation and listed the
participants and agenda for the next meeting. She asked
anyone who has a question to send it to the committee Facebook
page and she would pose it to the panelists.
She expressed satisfaction with the discussion and optimism
about its direction.
3:58:49 PM
There being no further business to come before the committee,
Chair Costello adjourned the Senate Labor and Commerce Standing
Committee meeting at 3:58 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2016.01.18 - ISER L&C Presentation.pdf |
SL&C 1/18/2017 1:30:00 PM |
Labor & Commerce Hearings on the Economy |
| 2016.11.01 - ISER What Happened to AK Economy Since Oil Prices Dropped.pdf |
SL&C 1/18/2017 1:30:00 PM |
Labor & Commerce Hearings on the Economy |
| 2017.01.18 - Northern Economics Forecast 2016-2027.pdf |
SL&C 1/18/2017 1:30:00 PM |
Labor & Commerce Hearings on the Economy |
| 2017.01.18 - Presenter Bios.pdf |
SL&C 1/18/2017 1:30:00 PM |
Labor & Commerce Hearings on the Economy |