Legislature(2017 - 2018)HOUSE FINANCE 519
03/28/2017 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB26 | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 26 | TELECONFERENCED | |
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED |
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.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 26, OMB Budget.pdf |
HFIN 3/28/2017 9:00:00 AM |
SB 26 |
| SB 26, Flat Budget.pdf |
HFIN 3/28/2017 9:00:00 AM |
SB 26 |
| SB26 Sectional Analysis - S(FIN)CS - 3.28.17.pdf |
HFIN 3/28/2017 9:00:00 AM |
SB 26 |
| HB 115 Kenai Borough Mayor Mike Mayor presentation for House Finance 3-28-17.pdf |
HFIN 3/28/2017 9:00:00 AM |
HB 115 |
| SB26 Supporting Document - DOR Presentation on CSSB26 - 3.28.17.pdf |
HFIN 3/28/2017 9:00:00 AM |
SB 26 |
| SB 26 Sponsor Statement - Governor's Transmittal Letter 01.17.2017.pdf |
HFIN 3/28/2017 9:00:00 AM |
SB 26 |