Legislature(1999 - 2000)
05/12/1999 06:15 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 231
"An Act relating to income of the Alaska permanent
fund, to the Alaska Income Account, and to permanent
fund dividends; and providing for an effective date."
HOUSE BILL NO. 232
"An Act making a special appropriation from the budget
reserve fund under art. IX, sec. 17(c), Constitution of
the State of Alaska, to the Alaska Income Account; and
providing for an effective date."
SCOTT GOLDSMITH, INSTITUTE FOR SOCIAL AND ECONOMIC RESEARCH
stressed that the Healthy Alaska Plan is not a raid on the
permanent fund. He maintained that the poor would not suffer
under the plan. Mr. Goldsmith acknowledged that no one will
agree with all the assumptions and elements of the Healthy
Alaska Plan, but emphasized that support should be given to
those elements in the plan that make sense. Constructive
criticism should be given in areas that need improvement.
Mr. Goldsmith discussed four criticisms of the Health Alaska
Plan:
1. It is a raid on the Permanent Fund. The corpus of
the fund is protected by the constitution and cannot be
spent. The value of the fund would continue to be
protected by automatic inflation proofing.
2. This plan endows a growing state government.
Revenues to pay for government will fall short by over
$1 billion in FY 99. The gap will widen as oil revenues
continue to fall. Some permanent mechanism is needed to
help fill it. Unfortunately the earnings will not be
large enough to do the job in the out years which is
why this plan projects a continued decline in real
state spending in spite of population growth. The
crafters of this plan want continued budget cuts to be
part of the solution.
3. The burden falls on those with the least ability to
pay. It is true that the immediate impact of rolling
back the dividend from the extraordinarily high levels
of the last 3 years hits lower income households the
hardest. But if implementing a plan maintains important
public services like quality schools, lower income
household's benefit. And if a rollback in the dividend
reduces the inflow of new residents, who collect a
dividend and use public services without contributing
in taxes, lower income household's benefit. Most
importantly the reality is that the fiscal gap is big
enough that all Alaskans will get to share in the
burden of filling it, if not now under this plan, Then
in the new future. This plan is a step toward full
sharing of the burden just as was the soon to be
finished decade of budget cutting.
4. Non-residents should be the first to pay. Aside from
the curious notion that when people merely visit Alaska
they should pay for the privilege, but when they settle
here they should be exempt, the reality is that we
would be able to collect a trivial amount from non-
residents relative to the size of our gap. Of course it
is a good idea to keep an eye on the profits from oil
production to make sure we get our fair share. I think
it is extremely difficult to expect legislators to
craft and. bureaucrats to implement a tax and royalty
structure that manages to skim off every dollar of
profit without also taking that extra dollar that
convinces the industry to look elsewhere. Is it not
better to err on the side of caution? Let the industry
walk away with a modest profit rather than go elsewhere
with all the profit and all the jobs?
Mr. Goldsmith maintained that the Health Alaska Plan is
absolutely critical to any strategy for addressing our
fiscal problems. He noted that the Health Alaska Plan does
the following:
1. It sustains the real value of our financial assets.
Financial earnings will generate twice the revenue from
oil this year and their dominance will continue to
grow. Since there is no replacement revenue source on
the horizon we would be dead in the water if we let our
financial assets waste away. (It doer, this by
inflation proofing the entire portfolio.)
2. It provides a basis for getting the maximum return
on our financial earnings. The portfolio can be managed
for maximum long run real return consistent with a
predetermined level of risk without the need to assure
a constant annual flow of income.
3. It provides a stable, predictable, and growing
revenue source from our financial assets. This frees
the state for the first time since big oil from the
annual uncertainty about how much money will be
available to pay for government.
4. It uses a portion of that revenue stream to pay for
government. As anticipated when the permanent fund was
established, falling oil and other revenues are no
longer large enough to pay for government. We have
relied on reserves and budget cuts to reduce the size
of the gap. Taxes and economic development will also be
necessary. It is time also use a portion of Permanent
Fund earnings,
5. It breaks the cycle of unbounded permanent fund
dividend growth. The longer the dividend is allowed to
grow above the level that is sustainable, the more
difficult it becomes to get our fiscal affairs in
order. Re-establishing realistic expectations about the
dividend size Alaska can afford to distribute is
critical to any fiscal plan.
6. It recognizes that taxes will be necessary as part
of a solution.
7. It puts in place flexible fiscal structures that can
be adjusted as changing conditions warrant.
Mr. Goldsmith gave the following suggestions:
1. Give careful consideration to the mechanism for
determining and protecting the annual withdrawal rate
from financial assets, It would be the first line of
defense against eating into assets and Pressure to
spend more would concentrate there.
2. Offset declining oil revenues with continued
additions to financial assets. Sustaining the value of
total state assets, not just our financial assets,
requires "depletion proofing' them.
3. Retain a reduced Constitutional Budget Reserve to
perform its mandated function of acting as a shock
absorber against fluctuating oil prices and to provide
a safety valve against pressure to increase the
financial asset draw.
4. Periodically sweeps inflation proofing into the
permanent fund corpus from the Alaska Income Account.
The constitutional shelter of the Permanent Fund
provides further protection of financial assets.
5. Do not earmark the earnings flow. Let each
legislature determine the highest and beat current use
of available revenues.
6. Explicitly recognize that taxes are a necessary part
of the solution since inflation and population growth
will defeat the budget cutting strategy.
Re-establishing the link between economic development
and revenues (overcoming the "Alaska disconnect) argues
for a personal income tax.
7. Tell your story to the public honestly. Credibility
is essential to acceptance.
Mr. Goldsmith reviewed information he felt was key to
present to the public:
1. We have cut the budget - the general funds are $1
billion below what it would be today if it had grown
with inflation and population. Nominal growth that does
not keep pace with inflation is a real cut.
2. All must share in the burden of closing the gap.
3. This plan is a critical stop toward closing the gap,
but it is not the entire solution. We will need to
continue to work to achieve a Healthy Alaska.
Mr. Goldsmith compared the Healthy Alaska plan to the
Knowles plan. He stated that the main difference is that the
Knowles plan maintains a higher dividend through the
personal income tax, Important similarities are the notion
of using fund earnings to pay for government and the goal of
using the real value of financial assets. He noted technical
differences; the Knowles plan is not an endowment, does not
inflation proof all financial assets, and maintains the
Constitutional Budget Reserve with dual functions. It does
result in more sharing of the burden through an income tax
and it does not earmark financial earnings for either the
dividend or general funds spending.
Mr. Goldsmith addressed arguments that non-residents should
pay. He pointed out that the amount that would be collected
from non-residents would be minor.
Mr. Goldsmith noted that the general fund is about $1
billion dollars less than real inflation. He stressed that
not funding inflation means real cuts. The current level of
the dividend is not sustainable. It is critical that we make
the break from large dividends sooner than later. The plan
is flexible, in that it can be adjusted later on. He
maintained that it is critical to give consideration to the
draw rate of 5.35 percent. He noted that there would be
continuous pressure to adjust this amount upwards. He
cautioned not to earmark the earnings flow.
In response to a question by Co-Chair Mulder, Mr. Goldsmith
noted that the savings accumulated and translated to several
billion dollars.
Representative G. Davis asked why the dividend should be
halted. Mr. Goldsmith explained that the problem is that if
the dividend continues at an increasing rate other
government functions would suffer. He pointed out that it is
the only source of revenue the state has to fund public
programs. As the dividend becomes larger it will attract
people to the state.
Representative Grussendorf questioned where the
Constitutional Budget Reserve funds should be placed. He
pointed out that inflation proofing is the state's buffer.
Mr. Goldsmith acknowledged the need for a buffer. He stated
that a large buffer is needed against oil price fluctuations
Representative Austerman observed that it is difficult to
explain that the permanent fund dividend will not continue
forever. Mr. Goldsmith stressed that the public can be
educated. He noted that the level of skepticism seems to be
related to the length of residency in the state.
MS. CHERYL FRASCA, FISCAL POLICY COUNCIL, ANCHORAGE added
that the survey asked person's if they agreed with the
statement that the original purpose of the permanent fund
was to save money for a decrease in oil revenues. Only 49
percent agreed with the statement. Of these two-thirds
approved of the use of the fund to support government
services.
Co-Chair Mulder provided members with a report by Callan
Associates, Inc (copy on file). The report concluded that
there is a 25 percent chance that the permanent fund
dividend would be zero with the Governor's approach. The
report also concluded that there is not enough money to pay
inflation proofing in the future.
MIKE NAVARRE, PRESIDENT, ALASKA CONFERENCE OF MAYORS
provided members with a resolution from the Alaska
Conference of Mayors, Resolution 99-03 (copy on file). He
pointed out that it would be necessary to use earnings of
the permanent fund to support state government. It will also
be necessary to implement a broad-based tax. He observed
that the Healthy Alaska Plan recognizes that inflation is
real.
The Alaska Municipal League and Alaska Conference of Mayors
do not support the inclusion of further reductions. He
pointed out that reductions have occurred in the form
inflation. He stressed that other plans should be
deliberated. He asked the economic impact of the permanent
fund dividend. He noted there are increased retail sales at
the time the state faces a deficit. He questioned which mix
has the least onerous impact on Alaskan residents. He noted
that there is a reduction of oil and gas related jobs. He
expressed concern with the accumulative impacts of the plan.
He observed that there have been public hearings to discuss
the need for a budget plan.
Representative Austerman noted that there are concerns
regarding the affect of taxes.
In response to a question by Representative Austerman, Mayor
Navarre pointed out that a state income tax would be
credited against federal taxes. He reiterated that all
aspects need to be weighed. He maintained that another look
needs to be taken on taxes.
Representative Williams asked how Mayor Navarre would fill
the gap if there were no more reductions. Mayor Navarre
noted that there has been a tremendous impact from not
funding inflation. He stressed that additional hearings are
needed. He noted that a lot of money has been spent out of
reserves. He stressed that the public wants to have a say.
He noted that the criticism and analysis is just starting to
percolate. He reiterated that there should be discussions in
member's communities before the discussion is finalized in a
special session. He emphasized that this is one of the most
important decisions of the decade.
(Tape Change, HFC 99 - 131, Side 2)
KEN FREEMAN, EXECUTIVE DIRECTOR, RESOURCE DEVELOPMENT
COUNCIL (RDC) testified via teleconference in support of the
Healthy Alaska Plan. He observed that the original intent of
the permanent fund was to pay for some state government
services. He maintained that now is the time to begin using
the earnings in order to bring stability to the budget
process. He stressed that the Health Alaska Plan is well
balanced because it recognizes the role the dividend pays in
a local and state economy, while using the earnings to
maintain the essential services and government
infrastructure. He felt that the state could generate new
revenues through the promotion of programs to encourage the
development of Alaska's economy. He stated that RDC would
support, as a last resort, the use of a broad-based tax to
close the fiscal gap. He pointed out that new or increased
taxes on industry is not the answer. He maintained that
increased taxes on industry could shake the confidence of
investments.
Representative Foster observed that the RDC does not support
taxes on industry. Mr. Freeman pointed out that industry is
already taxed. He stated that tax would be a last resort.
APRIL JENSEN, PRESIDENT, ANCHORAGE CHAMBER OF COMMERCE
testified via teleconference in support of a long-term
fiscal plan. She reiterated that they would like to see the
problem handled this session.
Representative Foster questioned Ms. Jensen's position on a
broad-based tax. Ms. Jensen stated that they would support a
broad-based tax if all other avenues were addressed.
CARL ROSE, EXECUTIVE DIRECTOR, ALASKA SCHOOL BOARD
ASSOCIATION, JUNEAU testified in support of further
discussions on a long-term fiscal plan. He noted that
members are concerned about the long-term economy of the
state of Alaska. He observed that the long-term viability of
Alaska would depend on a lot of things. He stressed vision
should drive the plan not politics. He noted that there is a
sense of urgency and importance. He encouraged the use of a
special session to allow the population time to digest the
plan. He noted that there are some difference of opinion
among the leadership and administration. He maintained that
the public understands the problem and is willing to pay
taxes. He stressed that attention should be focused on what
the plan should look like.
Representative Foster observed that school districts have
not come forth with a solution to the problem. Mr. Rose
reiterated that the issues need to be framed to enhance
discussions in the communities.
Representative G. Davis echoed the importance of a long-
range vision.
JOHN CYR, PRESIDENT, NEA-ALASKA, JUNEAU testified in support
of a long-term fiscal plan. He emphasized that the plan
needs to consider educational needs. He maintained that the
state needs a curriculum that does more than meet the
basics. He pointed out that there has been an increasing
burden placed on public schools. He maintained that in order
to achieve the mission placed on them by the legislature,
they must be protected from student and economic inflation.
He stressed that the real issue is how quality schools can
be judged. He stated that if education is not funded with
goals in mind that students would be shortchanged. He
emphasized that class size, teacher expertise, salary
levels, professional preparation and opportunities for
direct teacher/student interaction are the key resources for
student learning. The quality and quantify of student
interactions is influenced by these factors. He recommended
that schools be protected against student and economic
inflation, education mandates be fully fund, class size
reductions and curriculum testing be put into place, and
attention placed on student technology and strategies to
make schools safe. He maintained that the public supports
use of the earnings reserve for education. He spoke in
support of a broad-based tax. He expressed concern with the
affect of the plan on local government. He spoke in support
of removing the cap for local education contribution.
Representative Foster asked if Mr. Cyr would support the
plan without the inclusion of taxes. Mr. Cyr responded that
he could not state that NEA-Alaska is in 100 percent of the
Healthy Alaska Plan. He stated that some kind of broad-based
tax should be built into the plan.
Representative Grussendorf summarized that NEA-Alaska wants
100 percent funding. He emphasized that NEA-Alaska's help
will be needed to education the public and promote the plan.
Mr. Cyr committed to assisting a plan that supports
education and solves the long-range economic problems.
(Tape ended)
Mr. Cyr stressed that the plan needs to be supported by the
entire legislature. Vice-Chair Bunde noted that the public
does not support the income tax and pointed out that the
body reflects the public.
Representative J. Davies disagreed that the public would not
approve an income tax. He stressed that the answer should
not be prejudged without asking the question.
Representative Foster stressed that this is the most
important issue that he has seen the legislature address in
his six terms. Mr. Cyr pointed out that he did not object to
the use of the earnings reserve. He emphasized that the
state cannot go forward with a billion-dollar deficit. He
stressed that "we need to do what we can".
Representative Austerman maintained that the endowment is
the crucial aspect of the plan. Vice-Chair Bunde agreed that
doing nothing is not an option.
PAM LABOLLE, PRESIDENT, ALASKA STATE CHAMBER OF COMMERCE,
JUNEAU testified in support of a long-term fiscal plan.
Criteria for a long-range fiscal plan have been the top
priority for the State Chamber. To do nothing is not an
option. The chamber also wants to see further reductions in
the size of Alaska's government. She observed that
residents are unwilling to give up dividends or pay taxes to
maintain the status quo. She suggested the use of
investment earnings. The current plan does meet the
criteria of the Chamber.
Ms. LaBolle stated that the plan could address Alaska's
future. The Chamber believes that the Legislature should
make the decision. It is important that the information is
put out to inform the membership of the final outcome.
Ms. LaBolle noted that according to an analysis by the State
Chamber of Commerce that the overall spending has increased
in the last 20 years.
Co-Chair Mulder asked if the analysis incorporated all
spending. Ms. LaBolle stated that it did include all
spending and 3.2% for inflation cost.
(TAPE CHANGE, HFC 99-132, Side 1)
Co-Chair Mulder thought that it is misleading to say that
overall spending has increased. It has increased because
the population has increased. Ms. LaBolle stated that the
dividend was not included in the analysis. When the
analysis was done, it was done in a logic manner and
included the inflation factors and did recognize that there
are things that are not obvious to the general public. It
was a simple approach.
Representative J. Davies maintained that with adjustments
for population and inflation that the per capita spending is
less now than in years passed. The amount of government
that we have now is favorably equivalent. The size of the
economy has increased dramatically in the past 20 years.
The rate of expansion in the economy has increased more
rapidly than the population. He emphasized that government
has been cut. He countered the idea of cutting
expenditures. He concluded that "we have come to the bottom
of the barrel." There are no big-ticket items that can be
reduced and keep doing the adequate work of the State. He
maintained that consideration must be given to a broad-based
tax or the use of the earning revenues. He supported a
combination of a broad-based tax or the use of the earning
revenues.
Ms. LaBolle observed that government is not a profit
organization.
Vice-Chair Bunde observed that federal funds have increased
in the state of Alaska. Ms. LaBolle suggested that there
are items that can no longer be afforded. Vice-Chair Bunde
countered that the "wants" and "needs" have become confused.
The quality of life is better now than it was 30 years ago.
Representative Grussendorf asked what areas the State
Chamber would fund. Ms. LaBolle expressed support for
education, transportation, and public safety. She observed
that these are constitutionally mandated items.
Representative Grussendorf pointed out that transportation
is important and expensive. Ms. LaBolle spoke in support of
the Task Force on Privatization.
Representative Moses asked if the average income of the
State Chamber membership. He suggested that middle to high-
income households would rather give up their dividend check
than pay an income tax.
Ms. LaBolle responded that the dividend created a "monster."
People think of the dividend as entitlement. State services
need to be supported.
Representative G. Davis spoke to the petition circulating
Kenai Peninsula (against any reduction to the permanent fund
dividend). He acknowledged that a reduction in permanent
fund dividends would adversely affect businesses. He voiced
concern in how to educate business about the affect of not
acting. Ms. LaBolle was surprised that there are so many
people in the state that don't recognize the seriousness of
the problem. The biggest battle is to get beyond the media.
the public must be educated regarding the state's dilemma.
Vice-Chair Bunde suggested that there is no difference
between taking $500 hundred dollars out of the economy
through a reduction in dividends or through paying taxes.
Representative Kohring expressed concern with the Healthy
Alaska Plan. He expressed fear that it would reduce the
incentive for further reductions to government spending. He
spoke in support of an advisory vote on the issue of
spending permanent fund dollars to support government. He
expressed concern with the transfer of dollars from the
private to the public sector.
MARK CHRYSON, CHAIRMAN, ALASKA INDEPENDANCE PARTY, MATSU
testified via teleconference against use of the permanent
fund without a vote of the people. He spoke in support of
public contact. He spoke in support of moving public land
into the private sector as a manner to increase municipal
income. He observed that rural areas would be negatively
impacted by the reduction of permanent fund dividends.
Representative Kohring stressed that it takes courage to
place a plan on the table.
Representative Austerman questioned how giving a million
acres away would help the state. Mr. Chryson responded that
the plan should not be on the table without a vote of the
people. He pointed out that Alaskans are not allowed to own
their resources. He maintained that the permanent fund
dividend is a payoff for not owning the resource. He
stressed that public land is like a bank and should be
disposed before new taxes or a reduction of permanent fund
dividends. He maintained that there should be more land in
private ownership.
Representative Austerman emphasized that the legislative
process is necessary to place something on the table.
Mr. Chryson suggested that land could be exchanged for an
agreement not to collect their permanent fund dividend check
for 10 years.
Vice-Chair Bunde pointed out that most of the desirable land
in the Matsu belongs to the borough. He disagreed that land
should be given away. He observed that the addition of small
residences would create more demand on state services.
Co-Chair Mulder concluded that there has been an attempt to
integrate ideas. He stressed that the future of the dividend
is at risk if nothing is done. He emphasized the need to
take preventative action in order to protect the long-term
value and substance of the dividend overtime.
Representative J. Davies observed that the Division of Lands
in the Department of Natural Resources has been reduced. Mr.
Chryson noted that there is only one person in the Division
of Land to dispose land.
DAVID MCGRAW, ALASKA LIBERTIAN PARTY, MATSU testified via
teleconference against reductions to the permanent fund
dividend without an equal reduction to government.
Representative Austerman asked if Mr. McGraw recognized the
$200 million dollar reductions the legislature has made to
government or the reduction for inflation. Mr. McGraw did
not equate the curtail in the growth of government as a cut.
Vice-Chair Bunde pointed out that residents of the Matsu
Valley felt that they did not get sufficient funding in SB
36. He concluded that some people in the Matsu Valley would
feel that government has been cut.
(Tape Change, HFC 99 - 132, Side 2)
MIKE MILLIGAN, KODIAK testified via teleconference. He
expressed concern with the Healthy Alaska Plan. He
maintained that everything should be on the table. He noted
that Fairbanks had a sales tax when he moved to the state.
He maintained that the purpose of the permanent fund
dividend was to keep the money out of the hands of
government. He spoke in support of diversification of the
tax base. He pointed out that tourists, out-of-state
workers, and retired residents living out-of-state do not
contribute through taxes. He asserted that the use of the
permanent fund punishes the residents of Alaska. He
concluded that there should be a greater variety of taxes.
He stressed that an income tax or sales tax would lessen the
affect on the permanent fund.
Co-Chair Mulder noted that there have been discussions
regarding the creation of the permanent fund. He read the
ballot question from the 1976 election pamphlet: "Now is
the time to ask ourselves the question, when the oil and gas
is depleted, where will the funds to feed government come
from, the answer the permanent fund."
Representative J. Davies added that the dividend program was
not part of the original plan to create a permanent fund.
Mr. Chryson stressed that government provides services. He
maintained that most of the money goes to government
workers. He observed that the important issue for non-
government workers is health care.
Representative Austerman stressed that it takes something on
the table to begin the discussions.
Co-Chair Mulder pointed out the Healthy Alaska Plan is a
starting point. It does not preclude the discussion of
taxes. Taxes can be used to offset a higher dividend or more
services.
Representative Foster observed that demands are made on
daily bases for cuts to government, but added that no one
wants the cuts to come from them.
HB 231 and HB 232 were held in Committee.
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