Legislature(2015 - 2016)SENATE FINANCE 532
03/30/2016 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB114 || SB128 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 114 | TELECONFERENCED | |
| += | SB 128 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 114
"An Act relating to deposits into the dividend fund;
and relating to the Alaska permanent fund."
SENATE BILL NO. 128
"An Act relating to the Alaska permanent fund;
relating to appropriations to the dividend fund;
relating to income of the Alaska permanent fund;
relating to the earnings reserve account; relating to
the Alaska permanent fund dividend; making conforming
amendments; and providing for an effective date."
9:04:27 AM
Co-Chair MacKinnon requested that members hold their
questions until the conclusion of the presentation.
9:05:59 AM
GUNNAR KNAPP, DIRECTOR AND PROFESSOR OF ECONOMICS,
INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH, UNIVERSITY OF
ALASKA ANCHORAGE, introduced the presentation,
"Observations on Alaska's Economy and Economic Implications
of Alaska's Fiscal Choices" (copy on file).
9:07:31 AM
Mr. Knapp presented Slide 2, "Outline":
•Overview of Alaska's economy
•Short-run economic impacts of Alaska fiscal options
•Economic implications of how fast we reduce the
deficit
I am not advocating for or against any bills or
proposals
Mr. Knapp relayed that the presentation would be a general
overview of Alaska's economy and would not speak
specifically to the pros or cons of any specific
legislation.
9:08:51 AM
Co-Chair MacKinnon reiterated her desire that committee
members hold questions until the end of the presentation.
9:09:16 AM
Mr. Knapp discussed Slide 4, "Thanks to the Alaska
Department of Labor and Workforce Development economists
who do an excellent job tracking Alaska's economy." He
related that economists had provided most of the data and
charts used in the presentation, and that he was
responsible for the interpretation of the data.
9:09:51 AM
Mr. Knapp reviewed Slide 5, "Summary of main points about
Alaska's economy":
•There is significant concern about:
-Are we facing a recession?
-Could what we do to reduce the deficit aggravate
the recession?
-Could we be facing a repeat of the 1980s
recession?
•Despite these concerns:
-The best available evidence is that Alaska's
overall economy is not yet in a recession
-There are important positive indicators in the
economy
•Several sectors of Alaska's economy are declining:
-Oil industry
-Construction
-State government
•We probably are facing a recession
•But it is unlikely that it will be as severe or
damaging as the 1980s recession
Co-Chair MacKinnon welcomed Senator Dunleavy to the table.
9:11:27 AM
Mr. Knapp addressed Slide 6, "Alaska has had twenty-five
years of almost continuous but slowing economic growth,"
which showed a graph of the number of jobs in the state
over the previous 25 years. He noted that growth had slowed
since 2009.
9:11:43 AM
Mr. Knapp looked at Slide 7, "The best available evidence
is that the total Alaska economy-as measured by the number
of jobs-is still growing, but at a very slow rate." He
indicated that the preliminary data for January and
February 2016 showed job increases in 2015 at 0.2 percent.
He noted that the state's growth was less than in the Lower
48. He stated that when the economy outside of Alaska was
doing well, while the state's economy faltered, it resulted
in people seeking opportunities out-of-state.
9:13:06 AM
Mr. Knapp turned to Slide 8, "The most recent job estimates
show total employment higher than a year ago." It showed a
bar graph that illustrated month by month, over a year, the
percent change in total state employment. He noted that
there had been negative changes in the number over the past
year, but the most recent three months for which data was
available reflected a slight rise in job numbers.
9:13:38 AM
Mr. Knapp discussed Slide 9, "Alaska personal income
continued to grow in 2015." The chart showed that in 2015,
personal income in the state had grown significantly.
9:13:52 AM
Mr. Knapp showed Slide 10, "Alaska's housing market is not
showing signs of significant weakness." He said that home
prices had risen over the past year.
9:14:13 AM
Mr. Knapp looked at Slide 11, "Alaska's housing market is
not showing signs of significant weakness." He stated that
the foreclosure rate in the state was significantly lower
than in the rest of the country, and was declining.
9:14:36 AM
Mr. Knapp addressed Slide 12, "Alaska's visitor industry is
doing well." He relayed that visitor numbers were strong
and were projected to be high for 2016.
9:14:44 AM
Mr. Knapp turned to Slide 13, "Federal job losses have been
a significant drag on Alaska's economy in recent years -
but these job losses appear to be easing." He said that
there was hope that the state would not continue to see
losses in federal employment.
9:15:24 AM
Mr. Knapp discussed Slide 14, "But job losses are occurring
in selected economic sectors…" He said that significant
layoffs by oil companies due to low oil prices were
affecting hiring in the state.
Mr. Knapp looked at Slide 15, "National Oil Industry
Employment" and pointed out a graph that showed that
nationally there had been a drop in the oil rig count,
which had resulted in a drop in oil industry employment. He
said that the state had not experienced the same drop in
employment, in fact; through the third quarter of 2015,
North Slope employment at Prudhoe Bay was the highest it
had ever been. He stated that significant oil industry
investment reflected that the oil industry was doing better
than expected given the dismal state of the industry.
9:17:14 AM
Mr. Knapp turned back to Slide 14, which showed that the
industry was reporting sizeable, year-over-year, job
losses. He expressed that this was an area of concern and
uncertainty in the economy due to the unpredictability of
the situation.
9:17:48 AM
Mr. Knapp spoke to Slide 17, "Job losses in selected
economic sectors . . ." He thought one factor contributing
to the problem, and that was likely to make the loss in
construction jobs grow over time, was the fact that that
capital budget had been sharply cut over the past four
years. He spoke to Slide 18, "The capital budget has been
cut very sharply over the past four years." He discussed
the dramatic reduction in capital budget, which he believed
would result in further reduction in construction jobs in
the future.
9:19:30 AM
Mr. Knapp showed Slide 19, "State Government Job Losses
Growing 2015-2016." The graph showed the job losses over
2015 and 2016. He opined that the state could experience
further job losses in the future.
9:20:02 AM
Mr. Knapp referred to Slide 20, "Job losses in selected
economic sectors…", which illustrated job losses of 5
percent, year-after-year, into the future.
9:20:11 AM
Mr. Knapp looked at Slide 21, "We are losing jobs in high-
wage sectors of the economy," which showed a bar graph
illustrating Alaska's 2014 average annual earnings. He
noted that retail trade jobs had been growing, but
specified that those jobs paid much lower than oil and gas
jobs.
9:21:01 AM
Mr. Knapp discussed Slide 22, "Alaska's Population Gains
Grew With National Recession -- But Now Slowing: Alaska's
total 2015 population count was 737, 624." He explained
that the reason that the population growth had slowed was
that people were leaving the state [represented by the blue
bars] and over the past two years Alaska had more people
moving out than moving to the state.
9:21:14 AM
Mr. Knapp turned to Slide 23, "Alaska Migration, U.S.
Jobless rate Track Together." He indicated that the reason
that people were leaving that state was that the national
economy was doing substantially better than Alaska's
economy.
9:22:01 AM
Mr. Knapp moved to Slide 24, "Alaska Department of Labor
and Workforce Development economic projections for 2016…"
which depicted the annual employment growth in Alaska. He
stated that several organizations, looking at the short
term future, had projected significant total job losses for
Alaska's economy. He said that those projections were based
on predictions for the oil industry, construction industry,
and state government.
9:22:45 AM
Mr. Knapp showed Slide 25, "Alaska Department of Labor and
Workforce Development economic projections for 2016", which
charted the departments percent employment change from
previous years.
9:22:53 AM
Mr. Knapp spoke to Slide 26, "Alaska Department of Labor
and Workforce Development economic projections for 2016",
which reflected forecasted loss of 2,500, or .7 percent,
jobs in 2016. He reiterated that the projection was based
on predicted job losses in government, the oil industry,
the construction industry, and professional and business
services. He communicated that those losses could be offset
by continuing growth in health care, leisure and
hospitality, manufacturing, retail trade, and
transportation.
9:23:31 AM
Mr. Knapp discussed Slide 27, "Alaska Department of Labor
and Workforce Development comparison of their economic
projections for 2016 ("ours") with other projections…" and
qualified that the projections were fairly similar. He
noted that the projected job losses varied by region;
Southeast Alaska, a government job heavy area, was
predicted to have more job losses than other area of the
state.
9:24:16 AM
Mr. Knapp showed Slide 28, "The Extent Of Job Losses During
Alaska's "Great Recession" Of The 1980s," which showed a
graph of jobs lost and gained between 1985 and 1988.
9:25:04 AM
Mr. Knapp acknowledged fears that the state would
experience a recession similar to the one in the 1980s. He
believed that even with the significant negative factors
that the state now faced, and the economic consequences
that the state would experience as the result of responding
to the current deficit, things would be less dramatic than
in the 1980s. He turned to Slide 29, "The 1980s and now:
What's different?":
•Economy (as measured by jobs) is about 50% larger
•Older population bringing in much more retirement
income
•Alaska Native Corporations bringing significant
income to Alaska
•Much larger Permanent Fund dividend a stabilizing
factor in the economy
•Visitor industry has grown dramatically
•Bank lending has been more conservative: people are
less overextended in their borrowing
•Housing markets are much tighter and stronger
•We have not been experiencing a construction boom
Mr. Knapp turned to Slide 30, "Alaska housing markets are
much stronger now than they were in the 1980s":
Anchorage residential building permits issued in 1983:
9082
Total Anchorage residential building permits issued,
2006-2015:
6,808
Mr. Knapp reiterated that housing prices were high and that
there were fewer newly built homes than when the recession
hit in the 1980s. He noted that another way in which the
situation differed from that of the 1980s was that the
state had not been experiencing a construction boom. He
shared that in the 1980s, employment in construction was
high and the economy was being supported by people earning
money in that field. He said that the slowing in
construction notably contributed to the recession during
that time.
9:29:50 AM
Mr. Knapp spoke to the number of residential building
permits that had been issued in 1983: 9082. He pointed out
to the committee that the total from 2006-2015 had been 6,
808.
9:30:26 AM
Mr. Knapp discussed Slide 31, "As Alaska's population has
aged, retirement income represents a significantly larger
share of Alaska income, and a stabilizing component of the
economy." He observed that in 1985, the population was much
younger.
9:31:12 AM
Mr. Knapp displayed Slide 32, "ISER's study of Short-Run
Economic Impacts of Alaska Fiscal Options."
Mr. Knapp addressed Slide 33, "What we studied, for
selected fiscal options…":
•Revenue impacts of taxes and dividend cuts
-What share would non-residents pay?
-What share would be offset by lower federal
taxes?
-What would be the relative impacts on different
income groups?
•Short run economic impacts of spending cuts, taxes
and dividend cuts. Per hundred million of deficit
reduction:
-What would be the impacts on Alaskans' incomes?
-What would be the impacts on Alaska jobs?
•Total economic impacts of reducing the deficit
-What would the total short-run impacts on income
and jobs of reducing the deficit by different
amounts?
•Regional economic impacts
-How would the impacts of different options vary
between regions?
9:32:21 AM
Mr. Knapp reviewed Slide 34,"We only studied short-run
direct economic impacts of fiscal options. There are many
other important potential impacts which we didn't study":
•A few examples of impacts we didn't study:
-Economic impacts of reductions in government
services
-Impacts on investment
-Impacts on infrastructure development & resource
industries
-Impacts on labor markets & population
•Our fiscal choices will significantly affect Alaska's
future
•We should think about not only their short-term
economic impacts but also their longer-term economic
and social impacts.
Mr. Knapp warned that these short term fiscal option had
important, indirect, and longer term impacts on the economy
that were more important in the long run. He offered an
analogy of choosing from 4 different treatment options for
an illness; the treatment that would keep you healthiest,
longest, would be the most economical choice.
9:34:20 AM
Mr. Knapp spoke to Slide 35, "Of all the options for
reducing the deficit, only saving less (and using the money
to fund government) would have no short-run economic
impacts on the Alaska economy,":
•Options for saving less include:
-Reducing inflation-proofing transfers to PF
principal
-Adding less to the PF earnings reserve
•Saving less would not:
-take any money out of the economy
-have any short-run impacts on jobs or income
•But it would reduce:
-our future investment earnings
-how much savings we leave for future Alaskans
9:35:41 AM
Mr. Knapp discussed Slide 36, "From 2010 to 2015, we saved
an average of $1.4 billion annually of Permanent Fund
realized earnings." The blue line showed the realized
earnings and the brown bars showed that approximately half
of the earnings were spent on dividends. He furthered that
the rest of the earnings had been saved overtime,
represented by the dark blue and lighter blue bars. He
noted that the state had been saving approximately $1.4
billion annually, and could potentially be reduced. He
mentioned that the "re-plumbing" proposals from Governor
Walker would effectively reduce the amount put into the
savings.
9:37:01 AM
Mr. Knapp addressed Slide 37:
All of the other options for reducing the deficit,
including spending cuts, taxes, and dividend cuts,
would have significant short-run economic impacts.
They would all take significant amounts of money out
of the economy.
But they would do so in different ways, with different
impacts on different Alaskans and different relative
impacts on public and private income & jobs.
Mr. Knapp emphasized that any of these actions taken by the
legislature would have an effect on the economy.
9:38:04 AM
Mr. Knapp looked at Slide 38, "Alaska Fiscal Options: Who
Would Pay?" He said that some of the fiscal options would
have the effect of reducing how much money Alaskans have,
either by taxing them or by cutting dividends. The green
bar illustrated the amount of money the state could expect
from non-residents; an income tax would capture money from
people working in the state, a sales tax would capture
money from visitors. He noted that the numbers ranged
between 7 and 11 percent, which was a "silver lining" in
that non-residents would contribute something. He countered
that the contribution from cutting dividends would come
entirely form Alaskan residents. He elucidated that the
some of the burden felt by residents could be eased by the
fact that federal income taxes would be reduced. He
explained that the state income tax could be deductible on
federal income tax; federal income taxes on dividends would
be reduced, which would offset a reduction in the dividend.
9:40:54 AM
Mr. Knapp addressed Slide 39, "We estimated effects of
taxes and dividend cuts for 10 groups of Alaska households,
grouped by their per-capita cash income in 2013, from the
lowest 10% to the highest 10%." He discussed the graph that
divided Alaskan households into 10 groups based on
household income. He highlighted that there was a great
disparity between the rich and poor in the state. He
expounded that the highest, to 10 percent, income
households in the state had an average income of over
$200,000, while the lowest had an average household cash
income of $14,000.
9:42:04 AM
Mr. Knapp discussed Slide 40, "The three lowest-income
groups had average household incomes of less than $45,000.
9:42:07 AM
Mr. Knapp looked at Slide 41, "How options affect different
groups: income reduction per person." He explained that
the graph summarized how the tax and dividend options would
affect how much money people would have left over a
disposable income. He pointed out to the committee the
brown line on the chart, which illustrated that dividend
cuts would disproportionally affect the poor. He then
pointed out that an income tax would disproportionately
affect the highest income families. He summarized that
income taxes versus dividend cuts would affect various
income groups in different ways. He said that sales taxes
and property taxes would reflect more of a middle ground.
9:44:21 AM
Mr. Knapp turned to slide 42, "How options affect different
groups: percentage income reduction per person." He
explained that the largest impact would be felt by the
lowest income households, who saw their dividends cut.
9:45:00 AM
AT EASE
9:45:23 AM
RECONVENED
Mr. Knapp turned to slide 43:
Short-run economic impacts of spending cuts depend on
what is cut
What is cut affects the extent to which the cuts
directly affect jobs and income of government and
contractor workers and the resulting multiplier
effects on the economy.
What is cut also affects the extent to which the cuts
have other short-run impacts on the economy, such as:
-Transportation (Marine Highway service, road
plowing, etc.)
-Resource management (fish catches, mine
permitting)
You can't generalize about economic impacts of
spending cuts. Our estimates illustrate a range of
potential impacts.
Mr. Knapp emphasized that the effect on the economy was
very dependent upon the where the cuts were made.
9:47:21 AM
Mr. Knapp looked at Slide 44, "Income Impacts." The slide
contained a bar graph that detailed the estimated income
impacts per $100 million of deficit reduction ($ millions).
The low and high estimated were based on different
assumptions about how households and markets would react to
changes in disposable income. The slide reinforced the
argument that actual impacts of broad-based and capital
spending cuts could be significantly higher or lower
depending on how cuts were made.
9:49:15 AM
Mr. Knapp moved to Slide 45, "Job Impacts." The graph
estimated job impacts per $100 million of deficit reduction
(FTE jobs). He noted that the job impacts would be highest
because of cuts in government spending. He said that
cutting out a job through cutting government spending would
result in the loss of the job, and the income that would be
spent as a result of being paid for the job. He said that
both the cutting of jobs and the cutting of dividends would
reduce the spending in the economy.
9:50:16 AM
Mr. Knapp looked at Slide 46, "Alaskan Summary of Fiscal
Options & Estimated Impacts per $100 Million of Deficit
Reduction."
9:50:41 AM
Mr. Knapp turned to Slide 47, "The Permanent Fund "re-
plumbing" proposals would reduce the deficit through a
combination of cutting dividends and saving less." He
postulated that some of the funds from the ERA would be
diverted in order to pay for state government. He believed
that the dividend cuts would have a high effect on the
economy, while saving less would have no effect on the
economy.
9:51:41 AM
Mr. Knapp spoke to Slide 48, "Examples of Ranges of
Estimated Economic Impacts Per $100 Million of Deficit
Reduction Resulting from Selected Potential Combinations of
Fiscal Options." The slide showed a table that plotted
examples of potential combinations of options and the range
of estimated impacts.
9:52:18 AM
Mr. Knapp moved to Slide 49, "Estimated income and job
impacts of reducing the deficit by different amounts using
different options."
9:53:01 AM
Mr. Knapp addressed Slide 50, "How big is Alaska's
economy?" He noted that in 2014, personal income in the
state was $39 billion and total employment was 465,130.
9:53:34 AM
Mr. Knapp looked at the table on Slide 51, "Estimated
percentage income impacts of reducing the deficit by
different amounts using different options." He explained
that the table offered ball-park estimates of the scale of
impacts from reducing the deficit at different magnitudes.
9:54:53 AM
Mr. Knapp discussed Slide 52, "Estimated percentage job
impacts of reducing the deficit by different amounts using
different options."
9:55:21 AM
Mr. Knapp looked at Slide 53, "Income distribution varies
for different regions of Alaska." He noted that Juneau was
the highest income region in the state and the Kusilvak
Census Area was the lowest - in the state and in the
country. He reiterated that dividend cuts would have a
greater effect on lower income Alaskans and an income tax
would affect more high income Alaskans.
9:56:26 AM
Mr. Knapp spoke to Slide 54. The chart listed the share of
state government jobs in wage and salary earnings.
Regional economic impacts of state spending cuts would
depend on how important state government jobs and income
were in the regional economy. Some regions were much more
dependent than others. He pointed out that Juneau was
highly dependent on state government jobs, more so than the
North Slope Borough - which had no state jobs.
9:56:56 AM
Mr. Knapp looked at Slide 55. The chart listed the share of
local government jobs in wage and salary earnings. Regional
economic impacts of cuts to revenue sharing, K-12
education, and other ways that state spending helped fund
local government would depend on how important local
government jobs were in the regional economy. Some regions
were much more dependent than others. He noted that the
poorer areas of Western Alaska had a relatively far greater
dependence on local government, much of which was school
district employment.
9:58:07 AM
Mr. Knapp looked at Slide 57, "We have lost billions of
dollars of oil revenues":
We will experience significant economic impacts of
adjusting to lower oil revenues.
•Impacts of spending cuts we've already made:
-Impacts of capital budget cuts on construction
industry
-Delayed because capital projects take several
years
-Actual capital spending will decline as money
from past large capital budgets runs out
•Impacts of future adjustments we will have to make
-Spending cuts
-Taxes
-Dividend cuts
•It's not a question of whether we will face these
impacts.
-It's only a question of when.
Mr. Knapp asserted that the most optimistic projections
showed the state having billions of dollars less in oil
revenue than in the recent past. He contended that the
state would need to adjust to the loss of oil revenue
sooner rather than later.
9:59:49 AM
Mr. Knapp showed Slide 58, "Alaskans are justifiably
concerned about the impacts of deficit reduction on an
already weakened economy":
•We are already experiencing the impacts of:
-Oil industry job losses
-Past state capital budget reductions
-State government job losses
-Mining industry downturn
-Low salmon prices
•These impacts would be increased by large:
-Spending cuts
-New taxes
-Dividend cuts
10:00:43 AM
Mr. Knapp moved to Slide 59:
We can reduce the direct short-run economic impacts of
reducing the deficit by continuing to draw down our
savings.
BUT
Continued large deficits and draws from our savings
would also have significant negative economic impacts.
10:01:25 AM
Mr. Knapp looked at slide 60, "Negative economic impacts of
continued large deficits…" He stated rating agencies would
certainly downgrade the state's credit rating if the state
continued to run large deficits and did not show creditably
that it had if financial house in order, which would
increase future borrowing costs.
10:01:50 AM
Mr. Knapp discussed Slide 61, "Negative economic impacts of
continued large deficits…" The slide reflected the loss of
future investment income for every $1 billion that the
state drew down from savings.
10:02:48 AM
Mr. Knapp spoke to Slide 62, "Negative economic impacts of
continued large deficits…":
Potential future insufficiency of cash in Permanent
Fund earnings reserve to cover otherwise sustainable
payouts of Permanent Fund investment earnings in low-
earnings years.
10:04:05 AM
Mr. Knapp addressed Slide 63, "Negative economic impacts of
continued large deficits . . .":
Lack of time for new taxes to begin to bring in
revenues before we really need the money.
10:04:37 AM
Mr. Knapp spoke to slide 64, "Negative economic impacts of
continued large deficits . . .": He said that the biggest
negative impact of continued large deficits would be the
continued and growing uncertainty about Alaska's fiscal and
economic future among Alaskans, Alaska businesses, Resource
industries, and Public and private employees.
10:05:23 AM
Mr. Knapp turned to slide 65,"Economic implications of
uncertainty":
· Alaska businesses postpone investment
· Alaskans postpone spending and investment
· Young Alaskans leave
· The best employees leave
· Resource industries invest elsewhere
People focus on the negative impacts of what is coming
rather than on moving forward.
10:06:39 AM
Mr. Knapp addressed Slide 66:
We face a tradeoff between the short-run negative
economic impacts of reducing the deficit and the
significant short-run and longer-run economic impacts
of not reducing the deficit.
10:07:08 AM
Mr. Knapp looked at Slide 67, "How can we minimize the
economic impacts of adjusting to permanently lower oil
revenues?":
•Probably not by fully closing the deficit this year.
•Certainly not by running another huge deficit this
year.
10:07:51 AM
Mr. Knapp turned to Slide 68, "We will have a smoother
economic tradition to the reality of lower oil revenues if
we…":
•Significantly reduce the deficit this year
•Make real choices about how we will reduce the rest
-Even if we implement them over several years
•Reduce uncertainty and build confidence about our
economic future
10:08:28 AM
Mr. Knapp addressed Slide 69:
If the fall in our oil revenues was temporary then it
would make sense to run deficits to help support the
economy. But the fall in our oil revenues is not
temporary. We can't indefinitely support the economy
by running deficits.
10:09:17 AM
Mr. Knapp concluded with Slide 70:
Not paying for what we spend this year means that our
children will pay for what we spend this year.
10:09:59 AM
Co-Chair MacKinnon thanked Mr. Knapp for his presentation.
10:10:09 AM
Senator Dunleavy asked how many years, realistically, the
process would be for Alaska to regain economic footing. He
wondered what kind of action the state should take
immediately. He believed more reductions were necessary
before revenue measures were considered.
10:12:12 AM
Mr. Knapp thought there was a trade-off, negative economic
impact of acting immediately versus the negative economic
impact of doing nothing. He said that there was an
advantage to taking time in making important decisions
about taxes and spending cuts; however, the state's savings
were down to a level that did not allow for much time to
delay. He stated that he did not know the answer. He
guessed that since there was an urgency to make significant
progress in reducing the deficit, the thing that would have
the biggest, most obvious, impact should be done first.
Leaving the most complicated, and/or minimally effective in
raising revenue, for a later date.
Mr. Knapp urged the committee to limit the amount of time
spent on the exact way to design a tax that would bring in
$20 million. He thought that focusing on the Permanent Fund
proposals was a smart place to begin because that was where
very large amounts of money, that could make a meaningful
reduction in the deficit, would be realized.
10:15:43 AM
Mr. Knapp stated he was very cognizant of the complexity of
the Permanent Fund proposals.
10:16:10 AM
Senator Dunleavy asked whether waiting a year would result
in lost opportunities or gained opportunities.
Mr. Knapp thought one year was both a lost and gained
opportunity. He said that billion dollar deficits were a
major lost opportunity for the future. He countered that a
year could also buy time for clearer thinking and making
better choices.
10:16:51 AM
Co-Chair MacKinnon stated that Mr. Knapp's approach to the
problem mirrored that of the committee. She relayed that in
a press conference the committee had committed to taking
the highest priority issues, with the largest impact, first
at the table.
10:17:13 AM
Vice-Chair Micciche pointed out that early ISER studies had
counted on revenue that was no longer a possibility. He
said that the study made the claim that the state could do
a sustainable draw without requiring new taxes to fill the
deficit. He wondered whether it would be possible to fix
the fiscal gap problems without additional taxes.
Mr. Knapp replied that the state needed to determine a
sustainable level of spending that could be reached without
taxes or dividend cuts. He said that the answer depended on
assumptions about future oil revenues. He lamented that
there was no sure answer, only an either optimistic or
pessimistic attitude toward the oil revenue outlook and the
future of Permanent Fund investment earnings. He opined
that the state did not have a better handle on the future
revenue outlook. He reiterated that an agreement on what
size budget was sustainable was imminent. He counselled the
committee to determine what a long term savings goal for
the state. He thought that a semantic conversation on the
word "sustainable" could help. He said that these variables
meant that the amount that would need to be saved for the
future could vary widely. He said that his best guess for
future oil revenue was $2billion to $2.5 billion in oil
revenue moving forward and $2.5 billion on potential
Permanent Fund earnings, which meant $4 to $4.5 billion was
the amount of money that would be available for both
dividends and government combined.
10:21:53 AM
Mr. Knapp relayed that if the committee did not want to
change dividends there would be approximately $3 billion to
fund government. He thought that number was low and that
new revenues would be needed. He said the only way to find
out if the gap could be filled without taxing Alaskans
would be to determine a realistic spending limit moving
forward, while also determining a goal for dividends.
10:23:33 AM
Mr. Knapp stated that his instincts told him the state
could not solve the problem without new revenue measures.
10:23:41 AM
AT EASE
10:24:22 AM
RECONVENED
Vice-Chair Micciche referred to Slide 67, which referred to
not running a large deficit in the current year. He asked
how to differentiate between a sustainable draw and a
"relatively" sustainable draw. He asserted that no draw
would be deficit spending and unsustainable.
10:25:21 AM
Mr. Knapp stated that sustainably saving less meant, on
average, what the expected earnings would be from the
Permanent Fund, and what the average savings would be.
Drawing down the ERA would not equate to sustainable
savings.
10:25:59 AM
Senator Bishop commented that Page 4 of the presentation.
He relayed that he appreciated the sentiment on Page 69. He
agreed that the state could not indefinitely support the
economy by running deficits. He believed that the
legislature needed to act immediately because a dollar
spent in deficit spending today was a dollar that would not
be recovered.
10:28:20 AM
Co-Chair Kelly referred to Page 68 of the presentation. He
asserted that Mr. Knapp's original presentation had not
been embraced by the administration. He quoted the original
presentation:
"We will have a smoother economic transition to lower
oil revenue if we make significant progress this year
than if we fail to make significant progress at all,
or if we fully close the deficit this year."
Co-Chair Kelly was concerned that Mr. Knapp had adjusted
his rhetoric in response to feedback from the
administration. He encouraged Mr. Knapp not to get pulled
in to the politics of the situation. He referred to recent
layoffs in the oil industry. He asked whether the job
losses discussed on Slide 24 used a 20 to 1 multiplier.
10:31:18 AM
Mr. Knapp responded that anytime multipliers were discussed
it was necessary to define what was meant by a multiplier.
He said that every time an oil company stated that they had
laid off a certain number of employees it was safe to
assume each job loss affected several more jobs in the
state. He felt that a 20 to 1 multiplier was too large a
number.
Mr. Knapp asserted that he believed in the rhetoric of his
current presentation. He thought that there were
significant, negative economic impacts of reducing the
deficit this year. He added that he had been troubled that
this had been interpreted as nothing needed to be done
immediately. He clarified that the state faced a difficult
and uncertain trade-off; he thought that something needed
to be done this year, but that doing everything this year
that the administration suggested would not be the best
solution. He stated that he had focused on the problem as a
professional economist, examining the different ways that
all of the different choices would affect the economy, and
had given his best professional opinion. He assured the
committee that he was not trying to say what was
politically popular on either side of this complicated
debate.
10:33:39 AM
Co-Chair Kelly expressed confidence in Mr. Knapp's
conclusions. He felt that all options should be on the
table and at a certain point revenue measures would need to
be discussed. He believed a serious progress needed to be
made this in in budget reductions and use of investments so
that the state could provide a shock absorber to
fluctuating oil prices. He expressed concern that people
were uncomfortable discussing systemic change to
government, which he believed should be one of the issues
on the table. He spoke of legislation under discussion in
committee that dealt with some of the "dumb that was
hardwired into government." He believed that the
administration was trying to protect the current size of
government, which he did not believe needed to be sustained
at current levels. He thought that the discussion about
reducing the size of government had to occur, as well as
discussions surrounding using investment income.
10:37:01 AM
Senator Hoffman referred to Slide 5, which discussed a
summary of main points about Alaska's economy. He noted
that there had been no mention of local governments in the
presentation. He asked Mr. Knapp to comment where he saw
local governments and their economies in the current fiscal
environment.
Mr. Knapp thought that local governments were going to play
an important role in the matter. He said that local
governments, including school districts, were major drivers
of the economy. He felt that it would be important into the
future to clearly define the responsibilities of state and
local governments. He relayed the state could reduce
spending by shifting more responsibility to local
governments, which could result in an increase in local
taxes, user fees, and other revenue measures. He thought
that the legislature made concerning state government would
directly impact local governments.
10:40:10 AM
Senator Hoffman referred to Slide 38, which discussed
Alaska's fiscal options and who should pay, and asked what
flat rate had been used in the flat tax projection.
Mr. Knapp replied that he did not know.
Senator Hoffman had heard that the flat rate was
approximately 6 percent of the federal rate.
10:41:09 AM
Mr. Knapp agreed to get back to the committee with the
information. He added that the numbers in the presentation
had been standardized to the effect per $100 million
raised.
10:41:25 AM
Senator Bishop requested clarification on Mr. Knapp's
statement that, "doing everything is not best." He
concurred that the state should not implements a broad
based suite of taxes all at one time, but they should be
meted out over time.
Mr. Knapp believed that if the state tried to eliminate the
deficit with a combination of spending cute, taxes, and
smaller dividends all this year, the impact on the economy
would be enormous very quickly. He thought that phasing in
the solutions, while using savings to fill gaps, could be
less harsh. He asserted that the state was not broke; the
state had savings enough to reduce the deficit for a while.
10:44:13 AM
Senator Hoffman referred to his statement that the state
was broke, and he clarified that in the current and
subsequent fiscal year, the state would burn through $7.7
billion. He thought that the state needed to take drastic
measures or the state would be bankrupt. He hoped that the
people of Alaska realized the state was in a fiscal crisis.
10:45:20 AM
Senator Olson asked Mr. Knapp what specific action the
legislature should take to begin to solve Alaska's economic
problems.
Mr. Knapp said that he practiced neutrality in his role as
ISER director. He thought that the choices would reflect
political value judgements and well as hard numbers. He did
not think that it was his place to answer the question.
He advised that the state begin partially using the
investment earnings of the permanent fund to address the
deficit. He pointed out to the committee that the
investment earnings were higher that oil revenues. He
believed that great thought should be given to the use of
the earnings, but that time was of the essence. He
highlighted that people who believed that Permanent Fund
earnings should not be touched by definition believed that
drastic cuts to state government should be made and taxes
increased. He urged the committee to develop a responsible,
sustainable way to use the earnings that would provide for
the needs of Alaskans for state services.
10:50:33 AM
Senator Olson wondered which bill Mr. Knapp would have his
own child invest in: SB 114 or SB 128.
Mr. Knapp replied that he leaned toward the POMV approach.
He believed that strong arguments could be made for both
pieces of legislation.
10:51:38 AM
Co-Chair MacKinnon referenced Slides 41 and 53, which
looked at how the options affected different groups: income
reduction per person, and how income distribution varied
for different regions of Alaska, respectively. She wondered
whether data on which individual Alaskans were receiving
services from programs that received the most government
funds. She highlighted that some Alaskans were more
dependent on government subsidies; beyond the dividend or
their work they were receiving food stamps, Medicaid
services, or other services for which the state was
contributing. She said that when looking at the income base
and comparing a dividend impact on an individual, versus an
income tax, when 48 percent of Alaskan's would not pay. She
wondered about the 48 percent that would not pay the income
tax and queried the impact percentage for subsidies that
they received from state government. She believed it was a
question of fairness.
Mr. Knapp stated that ISER had not studied the topic, but
thought it was an important question. He thought it was
important to look at the distribution of benefits of
services.
10:53:51 AM
Co-Chair MacKinnon asked who paid for the study of the data
on Slide 41.
Mr. Knapp replied that he had approached the Commissioner
of DOR, who had provided $30,000 of the funds to research
the data, and the Office of Management and Budget (OMB) had
contributed $30,000; both DOR and OMB had left the design
of the study to ISER.
10:55:56 AM
Co-Chair MacKinnon wanted to know if DOR and OMB could do
some research and answer her question about how much the
state was already investing in certain individual families
livelihoods, before valuing a dividend deduction versus a
state income tax.
Mr. Knapp assured Co-Chair MacKinnon that he thought the
topic was important.
10:56:48 AM
Co-Chair MacKinnon referred to Slide 54. She requested the
actual number of state jobs deployed in each region.
Co-Chair MacKinnon referred to Slide 55. She requested the
dollar value of the percentage in order to augment the
information as the committee considered the information.
Dr. Knapp replied that he would provide the information to
the committee.
SB 114 was HEARD and HELD in committee for further
consideration.
SB 128 was HEARD and HELD in committee for further
consideration.
10:57:08 AM
Vice-Chair Micciche hoped to ask Dr. Knapp more questions
at a later date.
Co-Chair MacKinnon stated that she would be sure that he
was available to the committee for further discussion.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 128 - 114 Public Testimony Support 5.pdf |
SFIN 3/30/2016 9:00:00 AM |
SB 128 |
| SB 128 - 114 Public Testimony Opposition 5.pdf |
SFIN 3/30/2016 9:00:00 AM |
SB 128 |
| SB 128 - SB 114 033016 Gunnar Knapp-Presentation for Senate Finance Committee Corrected.pdf |
SFIN 3/30/2016 9:00:00 AM |
SB 114 SB 128 |