Legislature(2021 - 2022)BUTROVICH 205
09/03/2021 01:30 PM Senate JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| SJR301 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SJR301 | TELECONFERENCED | |
SJR 301-CONST. AM: APPROP LIMIT
1:33:45 PM
CHAIR HOLLAND reconvened the meeting and announced the
consideration of SENATE JOINT RESOLUTION NO. 301 Proposing
amendments to the Constitution of the State of Alaska relating
to an appropriation limit; and relating to the budget reserve
fund.
1:34:09 PM
SENATOR MYERS, speaking as sponsor of SJR 301, stated that this
legislation proposes a constitutional spending limit. As part of
the fiscal plan, the Fiscal Policy Working Group (FPWG)
unanimously recommended revising Alaska's spending limit as part
of a comprehensive solution before revenues begin to rise. The
spending limit would provide a spending limit of 14 percent of
real state Gross Domestic Product (GDP) minus government
spending. It would provide certain exceptions, including the
largest from a non-state source or primarily federal funds. It
would average state GDP over the last five years to smooth out
annual fluctuations. It would allow flexibility by statute to
lower the limit later and adjust the rate as necessary. It would
alter the ability to spend from the Constitutional Budget
Reserve (CBR) to a simple majority vote if the amount available
in the general fund (GF) is lower than the appropriation limit
being proposed.
1:35:25 PM
SENATOR MYERS said that SJR 301 would effectively prevent
unsustainable run-ups in state spending when state revenues
rise. Given the nature of Alaska's boom and bust economy since
territorial days, a future revenue rise is inevitable, he said.
1:36:24 PM
SENATOR MYERS presented a graph titled "Comparison of Alaska
State Real GDP for Private Industry Only and State Total Operating
Budget with Capital UGF without PFD, Bonds and General
Obligation." This graph shows what happened in the past several
decades without an effective spending limit. Further, it shows
how a quick rise in state revenues led to a rapid rise in
spending. It shows that spending compares to the proposed
spending limit, which is shown by the upper gray line on the
graph. This illustrates how the state is dealing with the
"leftovers" from that rise in spending. It shows that the
spending limit has come close to where the state was before the
rise. It has become politically tricky to reduce spending, so it
is not happening, he said.
1:37:24 PM
SENATOR MYERS said that states with spending limits tend to have
higher GPD and population growth. There are multiple benefits
outside of government as well as inside government. Currently,
the POMV 5 percent draw is the only spending limit, but it is
not effective on its own. It is only a partial revenue cap, not
a full spending limit since it does not account for revenues
outside of the permanent fund or investments that rise faster
than state growth. He predicted that the state will face a slow
population growth combined with rapid growth in the stock
market. In fact, this has been occurring over the last 18
months, he said. This means that the money available to spend
will continue to rise during the same time that the state is not
growing, he said.
1:38:44 PM
SENATOR MYERS stated that an appropriate spending limit helps
save for future downturns. He recalled previous testimony
indicated, depending on the how the spending limit was
structured, that the spending limit over the last 15 years could
have provided $150 billion to the permanent fund, thereby
eliminating the fiscal crisis. Even if the state had saved and
not invested, the state would have ultimately saved over $14.7
billion as shown by the red line above the gray line on the
graph.
SENATOR MYERS pointed out that revenue spikes in Alaska tend to
lead to high capital spending. He said a significant amount of
the peaks depict capital spending as shown by the red line.
Since projects happen simultaneously, maintenance costs tend to
fall due at the same time. This often occurs during periods of
low revenue. He argued that one current problem is that the
maintenance from the early 1980s capital projects is all coming
due. However, smoothing out the spending over time will also
help smooth out maintenance costs.
1:40:03 PM
SENATOR MYERS explained that previous spending caps tended to be
based on prior spending using a multiplier, such as inflation or
population. This has caused some perverse incentives when
switching between funding sources such as the state experienced
this year. When state general funds were replaced with federal
American Rescue Plan (ARP) funding it effectively lowered the
state general funds spent this year but it would not allow it to
increase next year. Such occurrences may cause policymakers to
decide not to take federal funding to alleviate some of the
issues. Tying the spending cap to GDP takes the calculation
outside of the government arena. It would fix the problem
because it doesn't depend on previous years' spending. The
proposed 5-year average in GDP growth would also provide a lag
in the effect of a downturn giving the state a year or two of
rising spending while the state tries to find its way out of a
recession.
1:41:05 PM
SENATOR MYERS offered his view that when government obtains the
majority of its funds from investments like the permanent fund,
it does not need to rely on the private sector for funding. This
can lead to a tendency for government to not be concerned about
what happens in the private sector. Growth in the private
economy tends to attract more workers to Alaska to spread the
spending among more people without raising the amount available
to spend. He said the state needs to encourage government to
grow the economic base as a whole. Tying government growth to
GDP would encourage that to happen, he said. As the private
economy grows, it affects government services since it means
more students are enrolled in schools, more money is needed for
road maintenance due to increased traffic or more troopers are
needed since economic booms tend to bring more crime. However,
tying spending to GDP will increase government for the right
reasons. He emphasized that this will help the government be the
servant and not the master in Alaska.
1:42:26 PM
SENATOR MYERS stated that the current spending level is already
within the proposed limit. Therefore, it is possible to enact a
spending limit without forcing significant immediate cuts. He
stated that Representative Kaufman created this concept and
sponsored HJR 301, which is the companion bill to SJR 301.
1:43:15 PM
SENATOR HUGHES said she likes the premise in SJR 301 because it
is important for the cost of government not to exceed what the
private sector can afford. She related her understanding that
once the permanent fund reaches $100 billion, the amount of draw
would be large enough that the state will not need to be
concerned about what happens in the private sector. She
cautioned that government spending increased during boom periods
in oil production.
1:44:18 PM
SENATOR HUGHES played the devil's advocate by asking whether a
boom in GDP should increase government spending. She noted that
this proposal incorporates a rolling average. She highlighted
one problem with the original spending cap in the Alaska
Constitution was that the inflation rate and population growth
allowed government spending to increase. She explained that as
government grows, there is not a 1:1 correlation between
population and the need for additional government employees. For
example, adding 100,000 more children in the 54 school districts
doesn't mean that the Department of Education and Early
Development (DEED) needs to increase their employees on an equal
basis since enrollment occurs in 54 school districts. However,
that scenario would require additional law enforcement or
prosecutors. She commented that the GDP goes up with a boom. She
asked how this would be different under SJR 301.
1:45:51 PM
SENATOR MYERS responded that part of the conflict reflects that
up until recently oil represented 20 percent of Alaska's GDP but
it provided 85-90 percent of the state's revenue. Thus, revenue
rose much faster than GDP, which is the reason Alaska ended up
overspending. Since SJR 301 proposes tying the spending cap to
GDP, it will help encourage the state to broaden other sectors
of the economy. He agreed that government does not need to grow
at a 1:1 ratio compared to GDP, but the 14 percent proposed in
SJR 301 is a 1:7 ratio. SJR 301 will still provide for necessary
growth as the population grows, he said. He noted that GDP
already incorporates inflation plus it indirectly incorporates
population growth. In a sense, this resolution already addresses
those easily identified indices, he said, but it does so in a
rational way by basing it on how government can best serve
Alaskans.
1:47:41 PM
CHAIR HOLLAND pointed out that the table in members' packets
shows that many states base their tax and expenditure limits on
personal income growth. He asked whether any other states were
using GDP.
SENATOR MYERS answered no. He explained that one problem in
Alaska is that the state has a higher concentration of higher
wage jobs, such as those in the oil sector, and lower wage jobs
in others, such as retail and restaurants, but fewer mid-range
jobs. Thus, personal income growth doesn't track as well using
GDP as it does in a number of other states to determine how well
the economy is functioning.
1:48:52 PM
CHAIR HOLLAND asked the rationale for using 14 percent as the
statutory cap in SJR 301.
1:50:10 PM
MATTHEW HARVEY, Staff, Representative James Kaufman, Alaska
State Legislature, Juneau, Alaska, on behalf of Representative
James Kaufman, responded that initially the companion bill, HJR
301 started with the statutory limit of 11.5 percent, which is
the current level. Next, he reviewed the savings at various
rates and found that 2.5 percent higher would provide a good
rate, based on what has been drawn down in the CBR, the spending
growth, and the overall savings.
1:50:54 PM
CHAIR HOLLAND commented that it seemed as though 14 percent was
selected to curtail spikes in spending yet still provide for a
little growth.
1:51:44 PM
SENATOR KIEHL asked for a general overview of what is included
in GDP.
1:52:11 PM
MR. HARVEY answered that GDP would add factors such as
population, inflation and productivity that lead to personal
income, plus business factors and government spending. Since SJR
301 backs out government expenditures, GDP would be based on
personal income and business activity.
SENATOR MYERS added that GDP is personal consumption, business
investment, government expenditures and net exports, which
includes oil, fish and mining. SJR 301 backs out government in
an effort to proportion government to the private economy. He
said he would like to see net exports grow but those are often a
product of business investment.
1:53:30 PM
SENATOR KIEHL stated that the Alaska Constitution discusses
managing the resources for people's use and benefit. He asked
why SJR 301 bases the spending limit on business activity and
exports rather than basing it on what directly benefits
Alaskans, which is personal income. Personal income would
reflect and be dependent on business activity, which also
includes resource activity into the foreseeable future.
MR. HARVEY answered that in Alaska GDP is volatile, which is why
a smoothing factor was included. He explained that personal
income runs along that same line. Government should be
proportional to the population for services like law enforcement
and schools. Other government spending includes regulators,
audits, permitting, project management and engineering. He said
that including business activity may better tether government to
needs of Alaska as a whole, which relates to population,
inflation, productivity and business activity because government
should support all of those functions.
1:55:45 PM
SENATOR HUGHES asked for an assessment of the current GDP and
where the state is with its spending.
REPRESENTATIVE JAMES KAUFMAN, Alaska State Legislature, Juneau,
Alaska, speaking as sponsor of HJR 301, the companion bill to
SJR 301, answered that the GDP is currently at 11.5 percent. He
said these resolutions propose a new constitutional spending
limit set at 14 percent with high head room, but it allows the
legislature to dial it back statutorily. For example, he
introduced HB 4006, which would set the appropriation limit to
11.5 percent. Currently, the legislature is seeking budget
reductions so a bill can provide the mechanism for the
legislature to dial down spending by setting a strategic target.
He said the resolution is a robust indicator and measure of the
economic sector using a trailing 5-year average of the private
sector economic performance to smooth it out. The appropriation
limit was designed to create something relevant, robust and
flexible but not so rigid it will break. He opined that is why
SJR 301 is set at 14 percent, even though spending at that rate
would be too much. The bill allows the state to fine tune the
rate.
1:58:06 PM
SENATOR HUGHES wondered if there would be a conflict if the
constitutional amendment is set at 14 percent and the statute at
11.5 percent. She asked if that would provide a guideline since
the courts might view it as such.
REPRESENTATIVE KAUFMAN deferred to Legislature Legal Services to
respond. He suggested that it can provide something to point to
spending, which the legislature does not currently have. The
legislature is so far out of range with the expenditure limits
that it is irrelevant. He characterized the current legislative
discussions as arguments over spending rather than setting a
healthy spending limit.
1:59:16 PM
CHAIR HOLLAND stated that Legislature Legal was not available
today.
1:59:35 PM
SENATOR MYERS responding to Senator Hughes' question, referred
to page 2, lines 2-4 "The percentage that applies to the
calculation in this section shall be established by law except
that the percentage shall not be more than fourteen percent." He
said he would need to ask Legislative Legal or wait for the
courts to weigh in to see the result. This language seems to
strongly state that the spending limit would be set and
followed.
2:00:28 PM
SENATOR KIEHL said Senator Hughes' question leads to a broader
question. He acknowledged that the current limit in the Alaska
Constitution has not limited spending. It hasn't stopped the
legislature from cutting budgets, growing budgets or arguing
over the right level, which is the role of representatives in a
republic. He asked why it is necessary to limit future
representatives.
SENATOR MYERS responded that unfortunately politicians do not
always do what is rational. Instead of looking ten years out,
the legislature often only considers two-years out since that is
an election cycle. As money becomes available, the legislature
devises ways to spend money, including when the pipeline was
built. He advocated for saving more and spending less. However,
it is easy for spending to rise but it is difficult to downsize
spending unless the state runs out of money. The arguments in
the legislature show how difficult it can be to reduce the
budget. SJR 301 would provide a significant piece of the puzzle
by putting the state on a long-term, sustainable fiscal path. As
most financial planners would agree, a long-term, sustainable
financial path can provide stability and a look-forward instead
of looking at how much money is in the bank account today.
2:03:24 PM
REPRESENTATIVE KAUFMAN highlighted that SJR 301 would provide an
instrument of agreement. He said the spending limit was
intentionally set high. He directed attention to the peaks on
the graph that reflect the periods of excess spending. He stated
that had this spending limit been in place, it would have
prevented the legislature's worst excesses. First, the state
would have $3 billion in the bank and it would have smoothed out
the peaks. Second, if the statute had limited spending to 11.5
percent, the state would have $22 billion in the bank. This
would have occurred simply through the smoothing process without
taking the drastic measures using the five-year lag formula. In
addition, the spending limit could provide a sense of the
agreement on spending. The legislature could argue over the bill
and build consensus. Certainly, he would like to see the
smoothing of maintenance costs. Finally, rather than funnel the
legislature into a constricted path, it would provide stability.
He characterized it as a reasonable path with good boundaries.
2:05:59 PM
REPRESENTATIVE KAUFMAN pointed out it is important to look at
the right factors. In his background in quality management, he
has found it is important to select a key indicator to use as a
reference and build the metric. SJR 301/HJR 301 selected the
best key indicator to reference spending and build that metric,
which is how the range between 14 and 11.5 percent was selected
to use as guidance. He said he has discussed this concept with
economists and it seems to fit Alaska's unique experience and
spending history.
2:07:15 PM
CHAIR HOLLAND related his understanding that one reason for SJR
301 was to create concern for state government and success for
the private sector. He highlighted some concern exists over
appropriating matching dollars to capture federal dollars and
about living within 5 percent POMV to the detriment of the
state's economy. Under SJR 301, as the state GDP grows and the
private sector economy is encouraged to grow, the state will be
invested in it and benefit from it. He acknowledged that
personal growth was a consideration.
REPRESENTATIVE KAUFMAN agreed. He stated that the relevant
indicator should show the economic health as a key performance
indicator of what is happening in the economy. Although the
permanent fund is great for the state, it also has a moral
peril. In fact, the legislature is grappling right now to decide
what the right disbursement to the public should be and what is
best moving forward. One thing the legislature must do is to
guard against dependency at the expense of other growth. He
concluded that the state needs to decide how to proceed and if
it should spend or store its wealth.
2:10:10 PM
SENATOR MYERS stated that the smoothing and fiscal stability
that SJR 301 will provide would encourage private investment.
States with effective spending limits end up with higher GDP
growth because they are more fiscally stable. He directed
attention to the red line on the graph to illustrate the state's
instability. He recalled Dr. Reitveld discussed Harvard's
endowment and other endowments and how those funds are used.
Further, the City of Fairbanks has had a permanent fund for 25
years but it does not live on it. Neither does Harvard, he said.
The state proposes that the permanent fund provide the bulk of
the funding, supplemented by other revenues. This is backwards,
he said. Many endowments, including Harvard and the City of
Fairbanks, build their budgets based on their regular revenue.
He compared the two scenarios. One is retirees who live on their
savings. The other are workers in the workforce who rely on
income earned to provide for living expenses and their savings
to smooth it out. The state is in danger because it relies on
the permanent fund to provide budgetary funds thereby acting
more like a retiree. He questioned what the state actually
produces. He characterized the state as acting as the master and
not the servant.
2:14:06 PM
SENATOR KIEHL said Representative Kaufman and Senator Myers just
provided the justification for a broad-based tax. He questioned
the notion of trying to limit what government has available in
relation to income and production but not tying regular income
to it. He stated that under SJR 301 the state still runs the
risk of a distorted tax policy with only one or two industries
paying all the bills.
2:15:42 PM
At ease
2:15:47 PM
CHAIR HOLLAND reconvened the meeting.
2:16:00 PM
SENATOR HUGHES asked that the sponsors request a legal opinion
to address the discrepancy between the language in the
constitutional spending limit and the statutory language. In
response to Senator Kiehl, she said one of the main reasons for
the constitutional spending cap is to attract businesses by
providing certainty. Many businesses and organizations,
including the Alaska Chamber and the Alaska Support Industry
Alliance, have stability as their first priority.
2:17:49 PM
SENATOR HUGHES asked why the GDP rolling average would be better
than the current system. She noted that some spending limit
proposals are pinned to an inflation adjustment, which would be
smoother since Alaska's GDP is volatile. Second, she asked how
many states have a spending limit. Lastly, she asked whether
this would create a revenue gap between the POMV draw and the 14
percent limit. She predicted that legislators would likely use
the entire 14 percent, creating a spending gap if it were in the
Alaska Constitution.
2:19:57 PM
MR. HARVEY responded that there are two types of spending caps.
One limits how much spending can grow and the other is an
absolute limit on spending. There are various factors that can
be used, including population, inflation, business and
productivity. One possible problem with limits on growth tied to
population and inflation was raised in the sponsor's initial
statements. This relates to replacing general fund spending with
another source not subject to the cap, such as federal spending.
This can cause the general fund spending to be decreased at
least temporarily due to a fund source swap. If the spending cap
is tied to the growth factor, it would be possible to ratchet it
down. Since the proposed cap in SJR 301 is an absolute spending
limit, it would not necessarily have that ratcheting effect.
State spending would have some peaks and troughs but the
smoothing factor would remove the peaks and troughs due to GDP
volatility.
2:21:46 PM
REPRESENTATIVE KAUFMAN responded that with respect to inflation
and population, Alaska's inflation is often disconnected, which
is why this proposal would move away from that concept. Ten
years ago, the cost of living differential between Alaska and
the Lower 48 was much greater than it is now. Alaska has
stagnated. However, Alaska's situation is unique in the nation.
If it were linked to the national inflation, it might measure
something that isn't necessarily true in Alaska, he said.
2:23:03 PM
SENATOR MYERS pointed out that Representative Kaufman mentioned
that the rate of inflation is not the same rate as the national
inflation. It is more difficult to measure inflation in a state
with a small population like Alaska. Senator Hughes mentioned
GDP spikes, which he acknowledged can occur, but an inflationary
spike can also occur. In fact, that is currently happening in
the US. Inflation has been hovering under 2 percent since the
Great Recession but right now it is at 6 percent. One reason for
Alaska's GDP spike historically is due to the state's dependence
on commodities such as oil. However, oil prices can swing
wildly. Part of what he hoped SJR 301 would do is to broaden the
state's economy to other areas without resulting in wild swings.
2:34:39 PM
SENATOR MYERS reviewed the list in members' packets of 23 states
that have spending limits. He pointed out that some have revenue
limits, some have constitutional provisions and others have
statutory ones. Some states have both revenue and spending
limits. He said that Alaska technically is one of the 23 states
that has a spending limit. However, the state's spending limit
is effectively meaningless, he said.
2:25:15 PM
SENATOR HUGHES reiterated her third question, which was whether
it would create a fiscal gap from 11 to 14 percent.
MR. HARVEY answered that if SJR 301 was in place there would be
a gap. It would be up to the legislature to determine if it
wanted to seek additional revenue to spend up to that limit.
SENATOR HOLLAND pointed out the state currently has a fiscal
gap.
2:26:16 PM
SENATOR HUGHES asked for the gap calculation between the 5
percent POMV draw and the 14 percent limit.
MR. HARVEY answered that including all revenue, the current
spending of $1 billion falls just under the 14 percent proposed
in SJR 301.
2:26:50 PM
SENATOR KIEHL asked if he could elaborate on the choice of GDP.
When things are going poorly, it is important for government to
spend counter cyclically. As Senator Myers alluded to, it can be
done in foolish ways, but it can also be done in responsible
ways that help the private sector recover. Given the fluctuation
in oil revenues and resource extraction in Alaska, he asked if
the other factors like personal income smooth in ways that would
allow the government to act more counter cyclically.
2:27:57 PM
MR. HARVEY answered that the counter cyclical effect is shown on
the gray line in the graph. He explained that the smoothing
effect levels the peaks and valleys to resemble rolling hills,
which are funds that would not have been spent if the spending
limit was in place. The counter cyclical effect takes effect
when revenues decrease and the limit is above that spending. The
net effect would result in a savings of $3 billion.
2:28:50 PM
SENATOR MYERS responded to Senator Kiehl's point on the
difference between using GDP versus personal income. Alaska's
economy is heavily influenced by commodities prices. The sectors
such as oil, mining or fishing tend to be high-paying jobs, but
they tend to be the jobs lost when those commodity prices dip.
He offered to double check but said the lower-paying jobs such
as retail and hospitality typically last longer. Although he
would need to check with an economist, he offered his view that
occurrence would ratchet down the spending faster than measuring
GDP as a whole.
2:30:15 PM
SENATOR KIEHL stated it would be interesting to see those
figures. He suggested that a significant number of peaks in
state expenditures were due to increases in the capital budget.
Historically infrastructure often results in deferred
maintenance when revenues are down, which are covered when
revenue increases. That is fairly valid. However, with the
spending cap, when revenues increase, the ability to fund
deferred maintenance is constrained. He expressed concern
related to ongoing deferred maintenance for buildings driving
costs up. He asked for the mechanism to cover deferred
maintenance other than general obligation (GO) bond debt, which
he noticed was exempt.
2:31:45 PM
SENATOR MYERS responded that while there is not a mechanism, the
incentives have changed. Currently, the legislature finds ways
to spend additional revenue. The spending cap will force the
legislature to do long-term planning. It will primarily force
the departments, primarily the Department of Transportation and
Public Facilities (DOTPF), and legislators to plan ahead. It may
mean keeping the operating budget constrained to allow for a
capital budget or planning capital projects and building
maintenance schedules because the projects will not be added
after the operating budget is approved. It will help the economy
because capital budget spikes tend to result in bringing in
operating engineers or construction workers for a couple of
years. These workers make substantial money and go home, he
said. Under a spending cap, it would tend to turn transient
workers into residents because the work is steady. These new
residents raise families and help build the state moving
forward.
2:33:47 PM
REPRESENTATIVE KAUFMAN highlighted that it also relates to how
well the state optimizes the funds on the few critical things.
He recalled committee testimony that gave Alaska a very low
score on its infrastructure. However, the state has spent $1
billion per year for ten years. He said he wondered why the
state received such a low score. The theme of this resolution is
continuous improvement. SJR 301 does not institute a partisan
cap that is designed to slash budgets or start arguments but is
designed to help the state learn to do a better with its revenue
and find processes to smooth out the financial situation.
2:36:36 PM
DAN ROBINSON, Research & Analysis Chief, Division of
Administrative Services, Department of Labor and Workforce
Development (DOLWD), Juneau, Alaska, remarked that the division
is policy neutral on SJR 301. He offered to answer any technical
questions members may have
2:37:03 PM
SENATOR MYERS asked him to address whether using GDP or personal
income is the better approach.
2:37:28 PM
MR. ROBINSON explained that the volatility of GDP is primarily
tied to the volatility of oil prices in Alaska. Those swings are
dramatic compared to other states. Personal income tends to
bounce around significantly less. He explained that it is
definitional in terms of which one is better for the economy.
GDP is hard to measure but conceptually it is simple. It is the
value of goods and services produced by the economy. Those
figures must be backed into as some previously mentioned.
However, much of that value does not stay in Alaska. For
example, BP makes a lot of money in Alaska because oil prices
are high, but shareholders of BP make a lot of that money. It
leaves the state. Personal income is a different definitional
concept. It is income going to residents. About two-thirds of
income is wages but it also includes transfer payments, which is
money from government, such as the permanent fund dividend. The
additional personal income component is derived from dividends,
interest and rent, which is investment income.
2:39:17 PM
SENATOR KIEHL asked for the value of Alaska GDP attributable to
federal government spending.
MR. ROBINSON answered that the federal government was
approximately $2 billion for the military and $2 billion for
non-military out of $52 billion.
2:40:24 PM
CAROLINE SHULTZ, Policy Analyst, Office of Management and
Budget, Office of the Governor, Juneau, Alaska, stated that she
was available to answer questions on the governor's bill, SJR 5.
She suggested that there was synergy between the two proposals.
The main priority from the administration's perspective is to
establish a working appropriation limit in the Alaska
Constitution. SJR 301 has a lot of potential, she said.
2:41:45 PM
SENATOR HUGHES asked Mr. King to provide his background.
2:42:01 PM
ED KING, Staff, Senator Roger Holland, Alaska State Legislature,
Juneau, Alaska, on behalf of Senator Holland, answered that he
has worked as an economist for the last seven years for the
State of Alaska. He said he served the state working at the
Department of Revenue (DOR), Office of Management and Budget,
the Department of Natural Resources (DNR) on behalf of the
governor and for the legislature in various roles. He related he
is a professional economist with a master's degree in Economics.
2:42:51 PM
MR. KING explained GDP versus personal income. Most states with
constitutional amendments tied to the economy have been linked
to personal income. Most of those limits were put into place in
a different era. The economy continues to become more digitized
and connected. As the state's population is aging, more and more
of the personal income is coming from retirement income versus
wages. Over the last 40 years the way the economy functions
significantly changed.
2:43:43 PM
MR. KING said he was unsure when those constitutional amendments
were put in place, but if they had been in place prior to 2000,
the economy was different. Thus, a case could be made that GDP
is a better reflection of what happens locally. If the
government is designed to provide services locally, government
would want an economic measure that measures locally, he said.
If personal income is increasingly coming from pension accounts
and federal government transfer payments, an argument could be
made that the connection to the economy is becoming diminished.
He acknowledged that he would need to confirm if that was a
valid argument. However, GDP is a measure of the value being
produced locally so it is a better direct tie to what is
occurring domestically. As Mr. Robinson stated, GDP in Alaska is
very volatile because the value of the oil, which is price
multiplied by quantity, is volatile.
2:44:50 PM
MR. KING said when oil price changes, the GDP changes. When oil
volume declines, GDP declines. The tie for Alaska's economy is
very connected to the price and production levels of what occurs
on the North Slope. That is becoming less important as the
production gets closer to zero production. If the state seeks a
constitutional amendment that has durability 50-100 years from
now, that issue may not exist. In the meantime, there is more
volatility in GDP than for personal income, which is more so in
Alaska than in other states.
2:45:34 PM
MR. KING said the five-year average, does a lot to solve the
problem and smooths out volatility over time. He explained that
the modeling shows it does seem to reduce the volatility.
2:46:04 PM
SENATOR HUGHES asked whether due to the greater volatility of
oil, it should be based on a ten-year rolling average instead of
the five-year average. It could be reconsidered if the economy
diversifies over time.
2:46:28 PM
MR. KING answered that the balance is difficult with smoothing
factors. The longer the smoothing factor is, the less it tracks
what is currently happening. Ideally, a spending limit should be
connected to what is currently happening but also does not have
very high swings. He characterized it as finding the sweet spot
that smooths out volatility but not so far that it is detached
from the current environment. He opined that five years would
provide a better balance than 10 years because situations can
arise in which the economy grows quickly or falls sharply. It
would take 10 years before the government spending limit caught
up to the economy. He also pointed out that the five-year
smoothing provides a transition period into dramatic and
permanent changes in the economy. As Senator Kiehl pointed out,
government should perform counter cyclically. The legislature
would not want the government to be forced to drastically reduce
spending if the economy is facing a dramatic decrease at the
same time. That smoothing factor detaches somewhat so if a
dramatic fall in the GDP occurs, there is not a corresponding
immediate fall in the requirement for government spending.
Instead, it transitions to that new level, he said.
2:48:17 PM
CHAIR HOLLAND advised members that Mr. King is available to
answer questions that arise.
2:48:40 PM
SENATOR HUGHES, with respect to the allowance for disasters or
disaster declarations in SJR 301, asked whether a sudden drop in
the economy would allow the state to go outside of the limit.
She asked if the disaster statutes address a drastic drop in the
economy.
SENATOR HUGHES recalled concerns were raised about deferred
maintenance. She pointed out that no new highways have been
built since the 70s. She stated that opening up areas of the
state can help the economy. She asked whether the sponsors of
either constitutional amendment might be open to an amendment
that would allow for new infrastructure if a windfall occurred.
She acknowledged that Alaska is a young state so there is need
for new infrastructure.
2:50:38 PM
SENATOR MYERS responded that he would be open to it if it
required a vote of people. He said SJR 301 allows for it but
instead of spending it requires the state to issue a general
obligation (GO) bond, which is not counted towards the spending
limit. There is something to be said for spending current funds
rather than borrowing.
2:51:22 PM
SENATOR KIEHL referenced Mr. Robinson's response. SJR 301 states
that the value of real GDP shall not include expenditures for
government spending. However, it does not differentiate between
federal or state government spending. He recalled that during
the time he spent serving on the Juneau Assembly, he wanted the
US Coast Guard to put fast response cutters in the community for
jobs, infrastructure and maritime security benefits. He asked
the sponsors of SJR 301 and HJR 301 why that infrastructure
should be excluded from GDP since it impacts schools and other
services when transient families reside here.
2:52:56 PM
REPRESENTATIVE KAUFMAN responded that the reason to seek federal
infusions is not solely related to direct spending, but for the
stimulus effect on commerce. He stated his goal was to measure
the beneficial or detrimental effects on the private sector
economy.
2:53:33 PM
REPRESENTATIVE KAUFMAN responded that the state does not have
direct control over federal decisions on where to place fighter
planes. However, the state can monitor and guide state
appropriations based on the indirect effects it has on the
private sector economy. The military spending in communities
provides a private sector bump in communities.
2:54:10 PM
SENATOR KIEHL pointed out that this approach does not provide
funding to educate the children of military members.
REPRESENTATIVE KAUFMAN pointed out that it consists of the best
way to measure but to also consider the factors, such as what is
being sampled and the length of the time lag to smooth it out
and if it is 12 or 14 percent. He reviewed those factors in
models to see the effects. He offered his view that this
adequately rolls in the dynamics of the economy. The state would
not want to gauge state spending on federal spending for a
building. Instead, the state should measure the economic
activity created locally by that federal decision.
2:55:48 PM
SENATOR MYERS pointed out there are four components of GDP.
Senator Kiehl is asking whether the third component of
government spending, which is federal spending in Alaska, should
qualify as government spending or if it should be considered as
an export. In some ways it has the same effect as an export,
which is to bring in funds from outside the economy. He asked
Senator Kiehl whether he was alluding to amending SJR 301 on
line 5, which currently reads, "shall not include expenditures
for government spending." It would read "shall not include
expenditures for state government spending."
SENATOR KIEHL agreed conceptually it was.
2:56:36 PM
SENATOR MYERS said he would want to consider this further. At
first blush, it seemed like a decent clarification because as
Representative Kaufman cautioned, this resolution should not
base government spending on how well government is doing.
Instead, government spending should be based on how well the
rest of the economy is doing. The effect that federal spending
has is to provide an injection into the state. It makes sense to
treat it differently, he said.
2:57:23 PM
MR. KING pointed out that there is a feedback mechanism in
government spending to have it tied to GDP. He assumed that
government spending was being excluded due to that feedback
mechanism. Representative Kaufman is correct that big federal
projects provide a multiplier effect even if the spend is not
included. It gets captured in GDP so there is a connection, but
it is not 1:1. The Bureau of Economic Analysis in its
disaggregation of GDP does separate state and local spending
from federal and military spending. Thus, if there was a desire
to exclude state and local spending but not federal spending it
is possible to do so. However, it is not possible to separate
state spending out since state and local spending must be
combined.
2:58:48 PM
SENATOR MYERS said he was happy to bring SJR 301 forward.
2:58:32 PM
REPRESENTATIVE KAUFMAN said what is important is to find an
awesome indicator and apply it correctly to provide a steady
hand on the rudder so the state can operate more smoothly with
better results. If it is not this model, it will be because
members found a better one, he said.
[SJR 301 was held in committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SJR 301 _ Sponsor Statement.pdf |
SJUD 9/3/2021 1:30:00 PM |
SJR301 |
| SJR 301 Table 2_State comparison state tax and expenditure limits.pdf |
SJUD 9/3/2021 1:30:00 PM |
SJR301 |
| SJR 301_Sectional Analysis.pdf |
SJUD 9/3/2021 1:30:00 PM |
SJR301 |
| SJR 301 Table 1_Real Alaska GDP Private Industry Only compared to State UGF.pdf |
SJUD 9/3/2021 1:30:00 PM |
SJR301 |