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