Legislature(1995 - 1996)
02/08/1996 03:30 PM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
JOINT HOUSE AND SENATE STATE AFFAIRS COMMITTEE February 8, 1996 3:30 p.m. SENATE MEMBERS PRESENT Senator Bert Sharp, Chair Senator Randy Phillips, Vice Chair Senator Jim Duncan Senator Loren Leman Senator Dave Donley HOUSE MEMBERS PRESENT Representative Jeannette James, Chair Representative Scott Ogan, Vice Chair Representative Ed Willis HOUSE MEMBERS ABSENT Representative Joe Green Representative Ivan Ivan Representative Brian Porter Representative Caren Robinson COMMITTEE CALENDAR The final report to the Alaska State Legislature of the State of Alaska Long-Range Financial Planning Commission (October, 1995) and related legislation: SENATE CONCURRENT RESOLUTION NO. 23 Relating to long range financial planning. SENATE JOINT RESOLUTION NO. 33 Proposing amendments to the Constitution of the State of Alaska relating to the budget reserve fund. SENATE JOINT RESOLUTION NO. 34 Proposing an amendment to the Constitution of the State of Alaska relating to the permanent fund. SENATE BILL NO. 233 "An Act relating to municipal property tax exemptions for certain residences and to property tax equivalency payments for certain residents; and providing for an effective date." SENATE BILL NO. 234 "An Act relating to taxes on cigarettes and tobacco products; and providing for an effective date." SENATE BILL NO. 235 "An Act relating to excise taxes on alcoholic beverages; and providing for an effective date." SENATE BILL NO. 236 "An Act relating to the tax on transfers or consumption of motor fuel, and repealing the exemption from that tax for motor fuel which is at least 10 percent alcohol by volume; and providing for an effective date." SENATE BILL NO. 237 "An Act relating to motor vehicle registration fees; and providing for an effective date." SENATE BILL NO. 210 "An Act relating to taxes on cigarettes and tobacco products; and providing for an effective date." PREVIOUS SENATE ACTION No previous senate committee action. WITNESS REGISTER Brian Rogers, Chairperson State of Alaska Long-Range Financial Planning Commission P.O. Box 80690, Fairbanks, AK 99708¶(907) 258-8165 POSITION STATEMENT: Presented overview of the Long-Range Financial Planning Commission. Judy Brady, Vice Chairperson State of Alaska Long-Range Financial Planning Commission 121 West Fireweed Lane, Anchorage, AK 99503¶(907) 258-8165 POSITION STATEMENT: Presented overview of the Long-Range Financial Planning Commission. ACTION NARRATIVE TAPE 96-12, SIDE A Number 001 CHAIRMAN SHARP called the joint meeting of the House and Senate State Affairs Committees to order at 3:30 p.m. Members present at the call to order were Senators Sharp, Phillips, Leman and Duncan, and Representatives James and Willis. Members absent at the call to order were Senator Donley, and Representatives Green, Ivan, Porter, Ogan, and Robinson. Chairman Sharp announced that there was another meeting in progress, and the other Representatives and Senators would join the presentation later. CHAIRMAN SHARP introduced Brian Rogers, Chair, State of Alaska Long-Range Financial Planning Commission, to the joint committee members. He announced that Mr. Rogers would present an overview to the legislature of the Long-Range Financial Planning Commission's plan. Number 030 BRIAN ROGERS, Chair, State of Alaska Long-Range Financial Planning Commission, said he would begin by discussing the overall plan of the Commission; Judy Brady, Vice Chair, would present a follow-up, sharing observations regarding the process and the plan. He said he would then discuss specific legislation and address any questions. MR. ROGERS said the Long-Range Financial Planning Commission was established by the legislature and the Governor in March of 1995. It was comprised of five members appointed by the Governor, five members appointed by the Speaker of the House of Representatives and, five members appointed by the President of the Senate. He said one-half of the Commission members were Democrats, one-half Republicans, and one Independent. MR. ROGERS explained the job of the Commission was to examine the size of the fiscal gap; look for budget reductions and revenue increases; examine the state's budget process; consider the impacts of any changes on local governments; and to hear from the public about the choices Alaskans faced. MR. ROGERS presented a slide show demonstration to document his review of the fiscal gap. MR. ROGERS asked, "How big is the fiscal gap?" He stated the gap was $429 million for the current fiscal year (FY96). When the report was completed, however, the fiscal gap was $524 million. The presentation included the current revenue projections, however. He further said the $429 million was almost as much as all the general fund salaries and benefits paid to all state agency employees. It was almost as much as the whole Permanent Fund dividend program, and equaled nearly two-thirds of the entire K-12 public school funding program. MR. ROGERS said the Commission started by building a "base case." The base case included no changes to revenues currently collected, such as the fee schedule and the tax regime, and no changes to the current programs. Inflation was also taken out. The base case showed revenue dropped over the ten year period while expenditures increased. He alleged this was not a projection, but rather an illustration of the population growth impact based on the public school foundation formula. He further said the goal was to start from the base case and bring the revenues and expenditures into balance. Number 100 MR. ROGERS wondered if the state was crying wolf. He cited in 1989, ISER predicted a gap starting in FY89, and a crash by FY92. Mr. Rogers stated several reasons why the state had not experienced the crash yet: For example, the price of oil increased in FY90 and FY91 due to the Gulf War which provided higher revenues than forecasted. Furthermore, the budget was cut more than ISER predicted, and the oil settlements were more significant than predicted. MR. ROGERS referred the joint committee members to a graph comparing the budget history of ISER and the actual prediction using 1996 dollars. The graph illustrated higher spending for two years, the same spending for two years, and significant budget cuts for the last two years. MR. ROGERS referred the joint committee members to a graph comparing the price of oil comparing ISER, the actual, and the DOR mid-case. The graph, he said, did not account for inflation. The graph illustrated the actual price of oil increased in 1990 and 1991, and the DOR predictions were below what ISER predicted in 1989. MR. ROGERS referred the joint committee members to a graph comparing oil production of ISER, the actual, and the DOR mid-case. The ISER and actual were relatively the same while the actual dropped a little below. The mid-case showed a higher anticipated production level. Mr Rogers alleged the crash would not be as bad because of higher oil production. However, based on the previous graph illustrating the lower price of oil, the two cancelled each other out. MR. ROGERS referred the committee members to a graph of cumulative settlement amounts comparing ISER, the actual, and the DOR projection. He stated the graph was based on the settlements from the last Administration. The projection from DOR was higher than what the actual and ISER predicted creating a cushion. This he cited was why the state did not crash land. The DOR projected $5 billion in settlements while ISER predicted $2 billion. The record reflected the presence of Senator Donley. MR. ROGERS explained the plan recommended by the Commission. He said the plan created a new philosophy for state revenues trying to replace the declining oil revenues with the Permanent Fund income; enhanced the ability to save for future generations; imposed spending discipline on the state; defined a role for the Permanent Fund; cleared up some of the confusion over cash reserves; suggested embarking upon structural changes in state government; and involved the public in the decision making process through two constitutional amendments. MR. ROGERS further explained the plan cut spending; increased revenues; established the Permanent Fund as an endowment; and capped the Permanent Fund dividend pool. MR. ROGERS said budget cuts were recommended the first three years of $100 million in nominal dollars. The Commission recommended $40 million in 1996, $30 million in 1997 and $30 million in 1998 which would reduce the general fund spending from $2,476 billion to $2,376 billion. He said this was equivalent to a $300 million reduction in today's dollars, or a 5 percent per year reduction in existing services. He further said it took $100 million in nominal cuts and required absorbing $200 million in inflation. The real reductions, he asserted, would come through legislation. Number 195 MR. ROGERS explained the Commission's spending side recommendations. The Commission suggested a retirement incentive program coupled with a Tier III retirement plan, to reduce retirement benefits for new employees; new geographic pay differentials; and a salary and benefits study. The Commission further recommended consolidating administrative support functions; reducing growth in formula programs such as the education, health and social services correction budget; reviewing and combining plans and where possible considering self-insurance; and repealing the court challenged longevity bonus phase-out plan, if rejected. The Commission further suggested repealing senior citizens' tax exemption as mandatory and replacing it with a local option; shifting inspection functions to local governments; eliminating state funding of troopers for road patrols in communities with population of 2,500 or more; and transferring maintenance of Class III roads. He stated, if the local populous did not want to pay for the service, the state should not automatically have to pick-up the bill. Finally, the Commission recommended reviewing opportunities for privatization and contracting out; and considering out-sourcing and in-sourcing to allow state employee groups to bid against the private sector. He said the state had a talented work force that was prohibited from existing rules and it needed the opportunity to do it better. Number 280 MR. ROGERS referred the joint committee members to an expenditure comparison graph for the next ten years comparing the base case and the endowment plan. The graph illustrated the base case grew due to population growth, and the endowment plan decreased the first four years then remained level for the next six years. MR. ROGERS referred the joint committee members to a per capita state spending graph comparing the general fund operations and the total general fund and dividends. The graph illustrated the general fund operations and the total general fund and dividends gradually decreased over a four year period. MR. ROGERS explained the Commission looked at new taxes and user fees totalling over $150 million for the next two years. The Commission suggested a dramatic increase in tobacco and alcohol taxes of $1 per pack for cigarettes and 10 cents per drink for alcohol. He stated the tobacco tax was popular in the state of Alaska. He cited a tobacco tax would raise about $40 million per year and an alcohol tax would raise about $20 million per year. The Commission further cited increasing the marine motor fuel tax from 5 to 8 cents per gallon; doubling motor vehicle license fees; eliminating the exemption for motor vehicle fees; increasing the highway motor fuel tax from 8 cents to 22 cents per gallon; increasing user fees; establishing tourism industry taxes; and increasing fishery and other resource taxes. Number 318 MR. ROGERS addressed a "mid-course correction" in 1998 and 1999. The correction established a follow-up commission to assess the progress in 1998 and 1999. Furthermore, a new commission would recommend the next step whether it was more budget cuts, more revenue increases, more use of Permanent Fund income, or greater Permanent Fund dividend reductions, for example. The current Commission recommended to reinstated the individual income tax. In today's dollars this equated to $200 million. He further cited each 1 percent of taxes raised about $75 million per year, of which, nonresidents would pay about 11 percent. This could be manipulated so that nonresidents paid more than residents by including property tax credit, for example. Number 409 MR. ROGERS stated the Permanent Fund was the cornerstone of Alaska's fiscal future. The Commission suggested establishing the Permanent Fund as an endowment by setting payout rates of 4 percent of the average market value for the preceding five years. He explained, 4 percent was common for funds across the country to preserve the purchasing power by making large inflation-proofing deposits in years with good returns and smaller inflation-proofing deposits in year with bad returns. The purpose was to make a greater portion of the state's budget a predictable revenue source. MR. ROGERS stated the endowment plan insured growth of the Permanent Fund by raising the dedicated percentage of royalties and bonuses from 25 percent to 50 percent of all fields. The state constitution required at least 25 percent, and the legislature required at least 50 percent. He cited the effect was $250 million of volatile revenues taken from the annual stream and placed into the Permanent Fund. He further cited the Commission recommended depositing the entire Permanent Fund Earnings Reserve, and all amounts in excess of $1.5 billion from the Constitutional Budget Reserve on an annual basis into the fund. The intention was to have the money available in the event there was a decline of oil revenues. MR. ROGERS reiterated the Commission wanted to replace oil revenue with income from the Permanent Fund at a 4 percent rate. He referred the joint committee members to a graph illustrating the oil revenue and permanent fund income for the next 15 years. When the use of the permanent fund income was added, the graph in today's dollars illustrated the state came close to stabilizing, but there were many unknowns in the later years such as ANWR creating a shift. MR. ROGERS explained the Commission recommended stepping down the dividend payment for the Permanent Fund by $50 million for the next three years to approximately $990 in 1995, $900 in 1996, $800 in 1997 and $700 in 1998. The current FY96 payment was $565 million. MR. ROGERS referred the joint committee members to a graph comparing total expenditures of the current programs and the Permanent Fund dividend. The graph illustrated a decrease in expenditures over the next four years then stabilizing. MR. ROGERS referred the joint committee members to a revenue sources graph comparing the existing general fund revenues and the existing Permanent Fund earnings. He said, the 4 percent endowment earnings contributed the most significantly. The highway motor fuel tax contributed a smaller amount. The marine motor fuel tax added a negligible amount compared to the total amount. The tobacco tax added somewhat. The motor vehicle and user fees, fishery, resource, tourism and alcohol taxes were a small proportion of the total. He said other than using the Permanent Fund earnings, the income tax proposal was the most significant. MR. ROGERS referred the joint committee members to a graph of the endowment plan illustrating the close of the fiscal gap comparing revenues and expenditures. A deficit would exist for the next three fiscal years balancing in FY00 followed by a surplus for a few years which would go to the Constitutional Budget Reserve Fund (CBRF). MR. ROGERS referred the joint committee members to a graph of the Permanent Fund principal comparing the base case and the endowment plan. The Permanent Fund illustrated more significant growth under the endowment plan. The chart, however, did not reflect the recent book value which changed the numbers the first two years. MR. ROGERS stated, in conclusion, the plan made the Permanent Fund the cornerstone of Alaska's fiscal future; closed the fiscal gap by the year 2000; ensured growth of the Permanent Fund to offset declining oil and gas revenues; stabilized and diversified the state's revenues; controlled state general fund spending; and maintained a reserve to dampen the effect of oil price swings. MR. ROGERS cited 22 percent of the gap was closed through program cuts, 14 percent by taking money from the Constitutional Budget Reserve Fund, 32 percent by using the Permanent Fund earnings, 13 percent by reducing Permanent Fund dividends, 3 percent by using user fees, and 15 percent by increasing taxes. Mr. Rogers said, the numbers, however, changed after the year 2000. He cited the program cuts stayed the same at 21 percent; new taxes increased from 15 percent to 22 percent; the Constitutional Budget Reserve Fund dropped from 14 percent to 3 percent; and the Permanent Fund Earnings increased by 5 percent. MR. ROGERS rhetorically asked what would happen if nothing was done and the spending and revenues continued at the current rate. He alleged the money would run out in the Constitutional Budget Reserve Fund by Halloween in the year 2000. The state would be about $700 million to $800 million in deficit and faced with cutting programs, increasing taxes, cutting the dividend, or using Permanent Fund Earnings, for example. Number 433 MR. ROGERS stated the Commission's job was not to develop the most popular plan. He said the current plan was not the preferred plan for any of the 15 Commission members. However, for 11 out of the 15, it was the plan most members could live with. In conclusion, he urged the legislators to use the plan as a starting point. He stated there were several pieces to build from and cited the target balance year, the comparison of plans, and the current fiscal year target. Mr. Rogers said if the legislature worked on the above three pieces, the goals of the Commission would be met. MR. ROGERS introduced Judy Brady, Vice Chair, State of Alaska Long- Range Financial Planning Commission. Number 465 CHAIRMAN SHARP announced the teleconference sites today were: Glennallen, Kenai, Anchorage and Fairbanks. Number 467 JUDY BRADY, Vice Chair, State of Alaska Long-Range Financial Planning Commission, shared with the committee members three observations made as the Commission struggled with a plan. She cited the first frustration regarded the budget figures. It took about one-half of the time together to agree on a base case. Ms. Brady cited the discussion included questions such as what would be used for inflation; what would be used for population; what was a real cut; what was smoke and mirrors; what really influenced the fiscal gap and what did not; and how should the Commission treat the Permanent Fund and the reserves. She stated, for closure, the Commission needed to agree on the base case and the budget figures. MS. BRADY stated the second frustration was how to weigh the consequences. She cited everyone wanted to solve the problems with the least amount of harm. She wondered if $100 million taken off the table meant the same in terms of consequences if the Permanent Fund was taxed or if $100 million was cut over a three year period. She questioned what it meant to the people of Alaska; the rural versus urban communities; and the wage earner versus the non-wage earner. Ms. Brady said there were a variety of opinions among the Commission members regarding the consequences. She also stated the Commission members realized through the process they did not know as much about Alaska as believed in the beginning. She asserted many communities did not know how dependent they were on state spending. She reiterated that to resolve the issues a plan was needed to agree on the principles of the consequences, and the information gaps needed to be filled-in to reach decisions. MS. BRADY stated the third frustration for the Commission was the complexity. She asserted the Commission was trying to prevent a recession before it happened. The Commission did not agree on any isolated piece of the solution such as an income tax. The Commission's discussions ended in deadlock because no one wanted to be first to take the brunt of the solution for fear it would be the only thing that would happen. MS. BRADY reiterated the frustrations of the Commission were over the budget figures, what was necessary to close the gap, how big the gap would be over the next five years, the consequences, and the complexity. Number 528 MR. ROGERS referred the joint committee members to SCR 23. He said the Commission did not have to follow the single-subject rule which, he alleged, was a luxury. He stated SCR 23 expressed the legislative sentiment regarding the financial plan that would give the flexibility to make modifications to meet the constituency needs and validate the legislative process. The resolution suggested using the plan of the Commission as a starting point, narrowing the fiscal gap to $387 million, reserving the right to change the mix of spending reductions and revenue increases, closing the fiscal gap by the year 2000, adopting to annually balance state revenue with expenditures, adopting the recommendation to report annually to the people, urging Alaskans to learn about the fiscal situation, and urging the Twentieth Alaska State Legislature to create and appoint a Long-Range Financial Planning Commission successor. Mr. Rogers stated SCR 23 set a broad framework for discussion and urged the legislators to adopt or modify the plan to meet the legislative goals. Number 564 CHAIRMAN SHARP thanked Mr. Rogers and Ms. Brady for their work. He said the Commission was successful by including more Alaskans and involving them in the process. He said there were difficulties but the Commission offered options and recommendations. He asked Mr. Rogers which bills he would like to discuss today. Number 574 MR. ROGERS replied there were other substantive legislation such as the Tier III retirement program, the retirement incentive program, and the salary and benefit survey. He said the legislature did not give the Commission enough time to complete their job - May 1 to October 1 - therefore the Commission did not flush-out the complete legislative package. Number 580 REPRESENTATIVE JAMES said the Commission behaved marvelously for the huge challenge that was before them, given the short length of time. She stated the plan had a lot of merit. However, the consequences of the plan distressed her because of the various sector responses. From her perspective, she asserted, the plan was very serious. Representative James thanked Mr. Rogers for his efforts and appreciated his concerns for the legislators having served in the legislature himself. She stated when all was said and done he would be able to see his fingerprints. TAPE 96-12, SIDE B Number 999 MR. ROGERS said the Commission recognized passing legislation took a lot of time and work. It was harder to work with 60 people than 15 people. He cited the goals of the Commission would be met if the legislature would be able to meet some budget targets by the end of the session. It would be good for Alaska as well as the bond market and business climate. He further stated economic development was not included as a recommendation because it was discovered it generally did not pay its own way. He said economic development required more services creating a larger gap. He stated that it was a very perverse situation and most other states had a form of taxation so that economic development yielded enough to cover the state expenditures. The current situation, he alleged, created a disincentive. Number 981 REPRESENTATIVE JAMES responded she agreed with Mr. Rogers that economic development by itself could not help the state treasury. However, economic development went hand-in-hand with an income tax to develop the infrastructure needed. She stated it must not be left out of the formula otherwise there would be a worse problem with a declining population and more and more people needing government services because they could not find work. MR. ROGERS said the Commission agreed with Representative James. REPRESENTATIVE JAMES replied she was glad Mr. Rogers broached the subject. however, she was disappointed to not see economic development included in the plan, but she understood it was difficult to address. MR. ROGERS responded there was the possibility of pairing economic development discussions with a broad based tax, but there was not enough time. He said certain economic development paid its own way, and recommended looking at balancing that. Number 966 SENATOR RANDY PHILLIPS announced in about one week he would be forwarding to Mr. Rogers the views of his district regarding the plan, and suggested he take a good hard look at it because it would be interesting. Number 963 MR. ROGERS reiterated the goal of the Commission was to not find the most politically popular set of recommendations, but rather to recommend a balanced plan that would get the most votes. He said he would be very interested to see how the constituents would replace the pieces they did not like. SENATOR RANDY PHILLIPS said he would mail it to all the members next week. Number 960 SENATOR LEMAN said he appreciated the work of the Commission and the information presented. He cited the reduction recommendations were fairly modest, and the plan lacked specific reductions in other areas of the formula programs which were a big part of government cost. He stated this legislature was unable to address significant budget reductions in the education; and Health, Education and Social Services (HESS) budget, for example. He commented there were ways to do it, and wondered if the Commission spend time addressing formula programs. Number 946 MR. ROGERS responded the Commission looked at the formula programs and spent a good deal of time on the public school foundation formula. At the same time, however, there was another task force working on the formula so it was set aside. Similarly, in the welfare reform area, the Governor and the legislature were close to passing legislation this year and recognized the difficulties. He said there would be harm done to some areas of the budget if it was looked at from the status quo, but if it was looked at in fairness, harm took on a different meaning. He cited there was a wide variety of opinions expressed to the Commission regarding the Permanent Fund Dividend Program. Some Alaskans thought it was absurd the state gave money to every resident when it was short of cash, and some Alaskans believed it was a sacred right. Similarly, some Commission members saw cutting the dividend as taking money away from Alaskans, while others saw it as money yet to be given, therefore, not taken away. He said the universal entitlement programs were the hardest to address in any state government, and the dividend program was a universal entitlement. Number 916 SENATOR DUNCAN appreciated the work the Commission had done to produce a good foundation to resolve the fiscal problems in Alaska. He stated it took a multi-faceted approach. He cited it was commonly heard from the public to solve the fiscal crisis by cutting spending only when, clearly as the Commission recognized, a reduction in spending alone would not close the fiscal gap. He further stated he appreciated the approach of responsible reductions, the need to stabilize revenues, and the need to look at the Permanent Fund as the final element of any plan to close the fiscal gap. On the other hand, he was concerned about some of the recommendations. He asserted he was not criticizing the Long-Range Financial Planning Commission and if any body should be criticized it should be the legislature because it did not give the Commission enough time and money. He said he was afraid the suggestions made might lead the public to believe this was an easy task when it was not. He cited the education formula program. He was not sure how to decrease the education budget when the population was increasing. The growth was natural, he stated. The inefficiencies needed to be reduced, but not the growth for proper education. He also cited the correctional system. There was an increasing population and tougher crime laws that required more spending. He cautioned the public that talking about reducing government spending and actually doing it were two different things. He said he was not convinced a great reduction was possible in the overall growth and education funding or the correction program. He further cited the Tier III retirement program might not be in the best interest of Alaska as it tried to attract and retain quality school teachers and state employees. He further said the revenue base needed to be stabilized and suggested looking at the income tax over a consumer tax because it captured lost income. He cited approximately $900 million in salaries went outside Alaska. He said there were other alternatives to the Permanent Fund and thanked the Commission for considering them. In conclusion, he stated, the Commission did a good job, but he disagreed with some of the specifics. He asked Mr. Rogers why the nonresident income tax was deferred to the year 2002, and to respond in general to his allegation the cuts were not as easy as the plan implied. Number 861 MR. ROGERS responded the Commission discussed the target amount to cut, and the affects of inflation. The majority of the Commission members believed reaching $100 million over three years was a real challenge because of the $200 million worth of inflation. There were also unfunded needs that needed to be addressed during the period, such as the maintenance of roads, harbors, airports, and highways. He said the state's infrastructure was declining in value because it was not being maintained. He also cited the federal government's budget problems and wondered if more financial responsibilities would be shifted to the states. The Commission did not leave room to accommodate those issues, it just said to set the target level. He reiterated it would be a very difficult task. The legislature cut the budget in the past two years, and the Commission was asking for even greater cuts. He said it was assumed the legislature made the easier cuts before the harder ones. MR. ROGERS said the Commission projected the growth in the school and corrections areas. The Commission did not expect the programs to stop growing, but that the rate of increase would slow down which required changing elements of the formula. The majority of the Commission members felt that the income tax would not be supported until the budget cut targets were reached. Some felt the tobacco tax, for example, had more wide-spread support and the Commission members had to give up something to put together a plan. Number 814 CHAIRMAN SHARP said a moving five year plan was realistic because it allowed gradual implementations and measurements. The measurements would determine the effects of the implementations that could change the plan the following year. Number 802 MR. ROGERS wished the legislators good luck and hoped an agreement could be reached between the House, Senate and Governor. The vast majority of Alaskans believed closing the fiscal gap was a top priority for this legislature. Number 798 CHAIRMAN SHARP again thanked Mr. Rogers and Ms. Brady for their efforts these past six months. The plan provided a lot of tools and everyone would put a lot of effort forward to see what could be put together. Thank you again. ADJOURNMENT CHAIRMAN SHARP recessed the Senate State Affairs Committee meeting and adjourned the Joint House and Senate State Affairs Committee meeting at 4:45 p.m.