Legislature(2015 - 2016)Anch LIO Conf Rm
12/09/2015 09:30 AM House ECON. DEV., TOURISM, & ARCTIC POLICY
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| Audio | Topic |
|---|---|
| Start | |
| Overview(s): Commonwealth North Activities | |
| Presentation(s): Unlocking the Potential of the Permanent Fund; Alaska's Current Economic Climate; and Securing Alaska's Fiscal Future and Arctic Opportunity | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ECONOMIC DEVELOPMENT, TOURISM, AND
ARCTIC POLICY
December 9, 2015
9:29 a.m.
MEMBERS PRESENT
Representative Bob Herron, Chair
Representative Cathy Tilton
Representative Dan Ortiz
Representative Adam Wool (via teleconference)
MEMBERS ABSENT
Representative Craig Johnson
Representative Charisse Millett
Representative Louise Stutes
OTHER MEMBERS PRESENT
Representative Bryce Edgmon (via teleconference)
Representative David Guttenberg (via teleconference)
COMMITTEE CALENDAR
OVERVIEW(S): COMMONWEALTH NORTH ACTIVITIES
- HEARD
PRESENTATION(S): UNLOCKING THE POTENTIAL OF THE PERMANENT FUND;
ALASKA'S CURRENT ECONOMIC CLIMATE; AND SECURING ALASKA'S FISCAL
FUTURE AND ARCTIC OPPORTUNITY
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MARY ANN PEASE, President
Commonwealth North
Anchorage, Alaska
POSITION STATEMENT: Co-presented an overview of the activities
of Commonwealth North.
CHERYL FRASCA, President-Elect
Commonwealth North
Anchorage, Alaska
POSITION STATEMENT: Co-presented an overview of the activities
of Commonwealth North.
SCOTT GOLDSMITH, Professor Emeritus
Institute of Social and Economic Research (ISER)
College of Business and Public Policy
University of Alaska Anchorage
Anchorage, Alaska
POSITION STATEMENT: Presented "Unlocking the Potential of the
Permanent Fund: A Game Plan for Meeting Alaska's Fiscal
Challenge".
NEAL FRIED, Economist
Research Section
Department of Labor and Workforce Development
Juneau, Alaska
POSITION STATEMENT: Presented "Alaska's Current Economic
Climate".
MARTIN CARY, Vice President and General Manager
Managed Broadband Services
General Communication, Inc. (GCI)
Anchorage, Alaska
POSITION STATEMENT: Presented "Alaska's Current Economic
Climate".
ACTION NARRATIVE
9:29:12 AM
CHAIR BOB HERRON called the House Special Committee on Economic
Development, Tourism, and Arctic Policy meeting to order at 9:29
a.m. Representatives Tilton, Ortiz, Wool, and Herron were
present at the call to order. Representatives Edgmon and
Guttenberg were also present.
^OVERVIEW(S): COMMONWEALTH NORTH ACTIVITIES
OVERVIEW(S): COMMONWEALTH NORTH ACTIVITIES
9:30:29 AM
CHAIR HERRON advised the meeting is a coming together to listen
to Alaskans on Alaska's economic outlook, and announced that the
first order of business would be an overview of the activities
of Commonwealth North.
9:31:26 AM
MARY ANN PEASE, President, Commonwealth North, discussed
Commonwealth North's focus on energy related issues and
projects. She discussed slide 2 of the PowerPoint presentation
and advised that Commonwealth North continues to focus on public
policy issues related to Alaska, and that Cheryl Frasca will
take over as president next year. She offered that Commonwealth
North is a public policy membership organization founded in 1979
by Governors William A. Egan, and Walter J. Hickel, with a
mission to address critical issues affecting Alaska in an
objective and non-partisan manner and to offer recommendations.
She said that the dedicated board of directors meet in various
study groups, action collisions, and policy committee meetings
and put a lot of due diligence into public policy issues.
MS. PEASE referred to slide 3, and paraphrased [original
punctuation provided]:
We have completed eight major studies on Alaskan
public policy including the strategic importance of
the arctic in U.S. policy decisions, Railbelt energy,
rural and alternative energy. We've also looked at
Alaska's oil tax structure, the state budget, and have
kind of a roadmap for transportation and energy
infrastructure development.
Our reports provide members and policy makers, and
legislators, and Alaskans who are our major
stakeholder, the fundamental tools needed to make
changes and think about those public policy issues
that, you know, direct our future.
9:34:32 AM
MS. PEASE continued and discussed slide 7:
One of our most recent reports which Cheryl will go
into in a little bit more detail is The State's
Operating Budget: Critical Crossroads, Choices and
Opportunities which has been widely distributed among
policy makers, the state chamber, and is shaping many
of the discussions that we see before our state's
fiscal future.
9:34:54 AM
CHAIR HERRON referred to the above report and requested an
example of significant criticism, and a significant "you hit the
nail on the head."
9:35:13 AM
CHERYL FRASCA, President-Elect, Commonwealth North, advised that
she chaired the fiscal policy study group with Eric Wohlforth,
and explained the following:
Criticism from out study group was that we only wanted
to talk about the operating budget, and ah so, they
really wanted to go and talk about more revenue, but
we know the focus of the reports really focus on [the]
spending side of the fiscal gap which frankly, not a
lot of organizations spend time doing. So I'd say the
limited scope of it was the negative feedback we got.
And the other would be ... we didn't specify ... ah
... specific spending cuts in more identified areas
that we felt should be evaluated further ... um ...
and made more recommendations about how to approach
it.
On the spending cuts side, we didn't have the time to
do that or the resources necessarily, but if necessary
that is an area if the study group wants to go down
that path, we will continue.
9:36:22 AM
MS. PEASE advised that one of the studies performed, with
Representative Bryce Edgmon, was Energy for a Sustainable
Alaska, The Rural Conundrum, and during that study group
reviewed issues associated with transportation, delivery,
alternative energy, renewable energy sources, propane, and the
extremely high cost in may rural parts of the state. The goal
was to get off of the diesel benchmark that many of the villages
use, but each village and community were so different in that
there was no "single bullet" that would magically correct the
energy situation. She listed the transportation difficulties,
icing of the rivers and streams during winter, the distance, and
the ever-changing price which many of the (indisc.) are linked
to in terms of fluctuations in oil, and there is the high cost
of any renewable or other alternatives. She advised that the
"other" report prepared by Commonwealth North a few years
discussed the Railbelt predicament of running out of natural gas
and the possibility of importing LNG. Obviously, she said, the
programs that were put in place to incentivize the
revitalization of Cook Inlet resulted in new wells being
drilled, new energy sources online, and instead of importing
LNG, the state resumed exports of LNG to Asia, and is looking at
the development of other LNG projects in Cook Inlet both for the
interior of Alaska as well as smaller scale for export.
9:38:34 AM
MS. PEASE pointed out that LNG is very critical in Cook Inlet as
not only does it provide a backstop for energy for Southcentral
during the cold winter months, it also incentivizes additional
exploration drilling and development. Currently, she explained,
should a producer/explorer decide to go after several gas wells,
the gas would basically be stranded and financing on stranded
gas is extremely difficult. Therefore, smaller LNG projects
could provide backup for the state's winter needs and be
available for summer export. Thereby, matching the principle of
"supply and demand."
9:39:21 AM
CHAIR HERRON asked the date of this [report].
MS. PEASE opined that it was approximately four years ago.
CHAIR HERRON surmised that if it was a predicament four years
ago, what is it today.
MS. PEASE responded that it is "an opportunity. It's true ...
the Railbelt opportunity is what we would be looking at with the
new suppliers. We didn't have Furies, we didn't have the Cook
Inlet energies of the world, we didn't have Apache {Corporation]
in full force, Buchaneer [Energy Limited] has changed hands is
now operating under other entities, both Cook Inlet Energy as
well as Cosmopolitan under BlueCrest [Energy]." She pointed out
that all of those are exploring for oil and gas, have been
successful, and need a market to continue their exploration
programs. Early development wells could show possibility, but
it is not until getting into full-on production that there is
security, she remarked. Currently, she noted, it is difficult
to get it onto fully production in that there could be minimal
quantities that would be funded for the development, but full
production requires a substantial investment without a market
today.
9:40:44 AM
REPRESENTATIVE ORTIZ referred to the recent tax credit incentive
program to help solve the Railbelt predicament and asked
whether, based on the state's current fiscal situation, it is
the position of Commonwealth North that it would be a good
decision by the state to scale down that incentive program that
was put in place during the time of the Railbelt predicament.
MS. PEASE advised that their study group that meets every other
Friday has had several presentations from the Cook Inlet
producers, as well as the State of Alaska. The study group's
interest is regarding sustainable long-term economic opportunity
and believes there is opportunity to restructure the existing
tax credit system, but doing away with it completely would be
premature. She acknowledged that it needs to be restructured,
but something still needs to be in place that will continue
exploration and development in Cook Inlet on a go forward basis.
9:42:28 AM
MS. PEASE referred to the Energy Action Coalition [slides 4-6],
and stated that "great" groups of presenters come in with
specific expertise in various areas, such as new coal
gasification projects that Furie Operating Alaska is looking at
to link energy, to the developers, explorers and producers, and
utilities. She pointed to their web site and advised there is a
complete compilation of all of the presenters over the last
three to four years that shows how things have changed in the
Railbelt over time. Commonwealth North brought in state
experts, Department of Natural Resources (DNR) discussed the
upgraded 19 trillion cubic feet of gas potential in Cook Inlet
under the recently released USGS study, and many other experts
in DNR, Department of Revenue (DOR), and other parts of the
state administration that have supported Commonwealth North's
efforts and review of materials.. Commonwealth North has looked
at taxing, different revenue sources for oil and gas - offshore
as well, and it tends to focus more on the Railbelt, she
remarked, but they have spread their wings into other parts of
the state.
MS. PEASE described Commonwealth North's annual legislator meet
and greet today, and said the keynote speakers will be Senate
President Kevin Meyer and House Speaker Mike Chenault regarding
their 2016 legislative agenda. The speeches will be followed by
table conversation between Alaska legislators, Commonwealth
North attendees, and members. Another program, she offered is
with the University of Alaska Anchorage debate team wherein they
review various forms of policy issues. She described it as a
different perspective from these young debaters, and this year
they debated whether the permanent fund should be used. It was
judged by former judges, and the judges' decisions were split
right down the middle. She offered that the argument the
permanent fund should not be used had slightly more attendee
participation.
MS. PEASE, in response to Chair Herron's question of whether it
was a tie, Ms. Pease agreed that it was a tie.
9:46:31 AM
CHAIR HERRON asked the results of the previous "legislator meet
and greet."
MS. PEASE answered that the dialogue was focused on the recent
announcements on the AKLNG project, and what progress was being
made with the producers at that point in time. There was a
fiscal overtone, she said, but that always seems to be part of
the fiscal policy discussion, how the economy is doing, budget
constraints, percent of market value, and what needs to be done
in terms of the reserves.
9:47:59 AM
REPRESENTATIVE TILTON advised she was at the meeting last year
and the discussions at her tables involved the fiscal policies
of what was happening in the state, and especially around the
health and social services area.
MS. PEASE said, "I always forget about the health and social
services issues, and you are right, they do come up."
REPRESENTATIVE TILTON noted it is a large part of the budget.
9:48:28 AM
CHAIR HERRON advised he is a member of Commonwealth North, and
asked Ms. Pease to describe the population of Commonwealth
North.
MS. PEASE described it as a diverse organization focused on
public policy, it is non-partisan and not a lobbyist for any
specific group. Most of the members, she pointed out, are not
oil and gas, mining, or renewable energy, and is a cross-section
focused on public policy. Commonwealth North looks at issues
for the betterment of Alaskans, and does not have a particular
industry it is lobbying on behalf of. Commonwealth North has
also been looking into education, she said.
9:49:51 AM
REPRESENTATIVE EDGMON referred to the February report, and
paraphrased as follows [original punctuation provided]:
Alaskans basically saying, look we've had fiscal
cliffs for the last 25-years ... oil prices come and
go, but in the end we've always been saved by an
uptake in oil prices.
REPRESENTATIVE EDGMON continued that Alaskans, by and large,
mostly throughout the state are unwilling to accept any suite of
hard choices that have to be made. He asked whether that is
still the perception, almost a year later, that Alaskans still
do not think there is a fiscal crisis, and do not think tough
choices have to be made.
9:51:41 AM
MS. FRASCA responded that since last February several other
organizations have performed public surveys with the results
that there is not a large percentage of Alaska that do think
Alaska does has a fiscal problem, and that there is a dramatic
decline in state revenues. A recommendation from the report is
to engage Alaskans in a true series of dialogues where community
members are provided with balanced information, who come
together to discuss current circumstances. Thereby, enabling
them to talk around a table to their neighbors, family members,
and associates from work about the choices and trade-offs they
would be willing to make. She continued that they could
consider their values as to the choices government faces, which
is different from a traditional town hall meeting. She
described this as a true dialogue engagement process that could
help people truly understand the circumstances and the choices
legislators must make, and give legislators the political
permission to make the difficult choices. In that manner, the
public will understand and legislators will have their
permission.
9:54:35 AM
MS. FRASCA explained that she is the incoming president for
Commonwealth North and has chaired the fiscal policy study group
for a number of years. She said they have been involved in a
number of policy related issues since 1997, when the discussion
was balancing the role of state government {slide 9].
Commonwealth North performs its work through study groups that
meet weekly or every other week, and invite subject matter
experts to discuss fiscal policy issues. She referred to the
February 2013 report (slides 10-12) "Long Term Economic
Sustainability for the State of Alaska," and stated that the
bottom line recommendations include: 1. scrutinize all spending,
not just general fund spending; 2. all revenues are on the table
and available to ensure priority services can be funded; and 3.
reform budget and other practices that inhibit achieving #1 and
#2. She explained that all revenues need to be on the table
and available to fund the highest and most important services of
state government. When dividing the pie, she stated, there are
federal designated funds, other state funds, and general funds
that make up approximately 45 percent of the pure general fund.
She related that that is the only part that is getting "as
scrutinized." With regard to the reports, recommendations, and
areas they examined formula-driven reviewed were formula driven
programs, and that K-12 receives a lot of scrutiny, and noted
this was before Medicaid expansion so they discussed the
optional services under Medicaid and the cost of those versus
the whole Medicaid program. She said other formula driven costs
are recurring and foundational throughout the whole enterprise,
such as state employee salaries and benefits. [She referred to
a slide by the Department of Administration that was not
available during the meeting.] She pointed to the slide and
said that if a state employee had been in the same position for
ten years, 2002-2012, that their wages would have increased 63
percent, while the Anchorage inflation increased approximately
30 percent, and the cost of living adjustment was approximately
22 percent. She asked "if that is the type of mechanism because
there are more than just a cost of living allowance that state
employees contracts provide, that it does provide for merit
increases as well as annual cost of living adjustments." She
remarked that enterprise-wise, this crosses all departments, is
important to examine, and that the Department of Administration
is in negotiations with two of the state's largest unions, "but
that is the way in which you make these kinds of institutional
changes."
9:59:09 AM
MS. FRASCA explained that they looked at health care for state
employees, retirees, Medicare, Medicaid, and the private sector
that all bear the increased costs [slide 13]. She explained
that the 2013 slide was prepared by the Department of
Administration to the health care commission, and interestingly,
the red bars represent employer amounts paid for their
employee's health insurance, and the blue bars represent the
contributions of employees. In 2012, she pointed out, private
employees paid $4,495 of health care, and employers paid
$10,704; public employees paid $3,368, and employers paid
[$12,381]; and with regard to the State of Alaska's economy plan
employees, the State of Alaska pays 100 percent of the cost.
She suggested that this is an area to examine for potential
enterprise-wise type savings, realizing that these changes are
the result of collective bargaining negotiations.
10:00:45 AM
MS. FRASCA said they reviewed information from the perspective
of what Commonwealth North believes the legislature should do
that included a rigorous timely review of all state programs and
services [slides 14-16]. She suggested a series of questions
[for the review]: is this an appropriate government
responsibility; if so, how effective is the program, and the
results; what is the cost to deliver these results; and is the
state the only entity that can deliver the service. They
recommended the following: the governor's budget delivered
November 15; returning to the Alaska State Constitution of 120
day session and if necessary a special session focusing on the
budget work and scrutiny of programs and services, not
necessarily the wheeling and dealing to get a three-fourth vote;
a revenue limit - establish limit on savings in any one year;
create a Joint Ways and Means Committee to review the governor's
November 15 budget and funding plan that, thereby allows, at the
beginning of session, a proposed resolution laying out the
revenue limits - she continued that if the governor's budget
comes in November 15, the committee would be able to implement a
contingency mechanism for mid-year spending reductions when
there is a significant drop in revenue; deposit all savings into
the statutory budget reserve so a three-fourth vote in no longer
necessary to access the CBR while money remains in the CBR; and
if all else fails, establish BRAC-type commission or process to
resize government that can make recommendations to the governor
and the governor could make his tweaks, submit it to the
legislature, and the legislature would have a certain length of
time to reject it, as taking no action means it would be
approved.
10:05:41 AM
MS. FRASCA offered that engaging Alaskans could include: a
statewide dialogue through which Alaskans could be engaged to
better understand the state fiscal issues and constructively
comment on solutions; citizen panels providing input into the
governor's proposed budget; and management review of state
programs by a citizen team to offer a different perspective on
state management [slide 17]. She advised that they are
continuing to stay engaged on the issues.
10:07:14 AM
REPRESENTATIVE ORTIZ related that Ms. Pease mentioned several
times within the presentation the need to prioritize state
spending to the highest, most important services, and asked
whether there has been any process performed by Commonwealth
North to create a priority list of importance and what the state
should, or should not, be doing.
MS. FRASCA answered that they have not, but could. She
explained that when she discusses that issue she is discussing
the constitution, the public protection aspect, public good,
troopers, corrections, and things that individual communities
cannot do themselves, and opined that those are the highest
responsibilities of government. Ironically, she pointed out,
those are funded by pure general funds and have the highest
competition from limited dollars. She reminded the committee
that many years ago Senator Fred Dyson passed a bill requiring
the departments to prioritize their programs. Although, she
explained, it is not performed as he wanted, there is a list of
the priority of programs from [the department's] perspective.
She offered that Commonwealth North can review those lists and
offer observations, but at the same time each program's
effectiveness information is required. She explained that time
and resources are involved in obtaining information, compiling
and reviewing it, and having thoughtful discussions with each
department.
10:09:23 AM
CHAIR HERRON commented that when discussing the competition for
the limited number of general fund dollars "usually what happens
is, it's not necessarily what's the best program, it's who is
the strongest politician."
^PRESENTATION(S): UNLOCKING THE POTENTIAL OF THE PERMANENT FUND;
ALASKA'S CURRENT ECONOMIC CLIMATE; AND SECURING ALASKA'S FISCAL
FUTURE AND ARCTIC OPPORTUNITY
PRESENTATION(S): UNLOCKING THE POTENTIAL OF THE PERMANENT FUND;
ALASKA'S CURRENT ECONOMIC CLIMATE; AND SECURING ALASKA'S FISCAL
FUTURE AND ARCTIC OPPORTUNITY
10:10:01 AM
CHAIR HERRON announced that the next order of business would be
"Unlocking the Potential of the Permanent Fund: A Game Plan for
Meeting Alaska's Fiscal Challenge," by Dr. Scott Goldsmith.
10:10:23 AM
SCOTT GOLDSMITH, Professor Emeritus, Institute of Social and
Economic Research (ISER), College of Business and Public Policy,
University of Alaska Anchorage, said he is an economist with the
University of Alaska Anchorage, Institute of Social and Economic
Research, has lived in Alaska for 40-years, and that his area of
concentration has been state fiscal policy. He paraphrased,
[slide 2] of his presentation, "Unlocking the Potential of the
Permanent Fund: A Game Plan for Meeting Alaska's Fiscal
Challenge," take away message as follows [original punctuation
provided]:
There is no solution to our Fiscal Challenge without
use of the earning of the Permanent Fund. We can use
those earning without compromising either the
Permanent Fund or the Permanent Fund dividend. Use of
the earnings is challenging since no other state, and
probably no other nation, has had a fiscal structure
relying primarily on the earnings of its accumulated
wealth. We have several proposals for implementing
the use of earnings to help us start thinking about
the best solution. Crafting a successful solution, or
game plan, will require everyone working together.
10:12:01 AM
DR. GOLDSMITH said the fiscal challenge is the unrestricted
general fund fiscal gap [slide 3]. He pointed out: the black
line is the current trend in spending; the "pies" at the bottom
of the graph depict the current source of revenue; the orange is
non-petroleum revenues; black is oil revenues; green is an
estimate of additional oil revenues the state may take in that
are not currently projected by the Department of Revenue; and
red is the CBR with the gap between spending and revenues
currently running about $3.5 billion. He commented that the gap
doesn't go away.
DR. GOLDSMITH remarked that time is running out in that the
constitutional budget reserve at the beginning of this fiscal
year was in the neighborhood of $5 billion [slide 4], and at the
start of next fiscal year the reserve will be down to about $2
billion, or less.
DR. GOLDSMITH noted that solutions have been proposed over the
years to deal with the fiscal challenge that he puts into
categories, such as "Zombie Solutions" that have been shown to
be dead, but won't die and keep coming back [slide 5]. He
explained that diversifying the economy or investing in
renewable energy are things to work on, but will not solve the
problem this year. He described the next category as "Nickel
and Dime Solutions" that are reasonable to consider but only
generate approximately $5-$10 million [slide 6]. He explained
that $10 million, over the course of one year, solves one day's
worth of fiscal gap problem; therefore, 365 of those nickel and
dime solutions would be necessary. He allowed that they should
be considered but will not solve the $3.5 billion problem.
10:14:56 AM
REPRESENTATIVE ORTIZ commented that several solutions depicted
on the slides are solutions the governor will suggest adopting
in the next session. However, he asked, would any of the
solutions actually be harmful to Alaska's economy, and whether
Dr. Goldsmith is nervous about adopting any of the solutions.
DR. GOLDSMITH responded that all of those solutions would have
some negative impact on the economy because all of the solutions
take purchasing power out of the private sector, and when that
happens there is a negative impact on jobs and the economy.
REPRESENTATIVE ORTIZ surmised that Dr. Goldsmith would not
recommend any of those.
DR. GOLDSMITH disagreed with that statement, and clarified that
one has to be very careful when thinking of implementing any new
tax because any new tax will have some negative impact.
10:16:31 AM
CHAIR HERRON pointed out that some taxes are called "sin taxes"
that will have an economic effect on that industry and less
money in the pocket book. Yet, he pointed out, a school tax is
a tax wherein a citizen has "skin in the game," in that they
have more interest in what is going on. He said, that is where
the argument is, that there should be some of these taxes so the
citizens are paying attention.
DR. GOLDSMITH agreed that having skin in the game is an
important consideration, but if the legislature wants to have
skin in the game they should impose "broad based taxes," such as
an income tax or general sales tax. He explained that the
solutions these taxes will affect is a small share of the
population, such as tobacco products, but then there will be
some indirect effect on the broader economy. (Indisc.).
10:18:26 AM
REPRESENTATIVE WOOL referred to the "nickel and dime solutions"
that are all specific users, except the school tax which would
be for the general population, and wouldn't go just to schools.
DR. GOLDSMITH opined he is correct in the manner people are
talking about that tax.
REPRESENTATIVE WOOL surmised that it is more along the lines of
an income tax.
DR. GOLDSMITH responded that it is not based on income per se,
but it would be broad based, generally.
10:19:13 AM
DR. GOLDSMITH pointed to his third category of solutions [slide
7], "Silver Blank Solutions, not the Silver Bullet Solutions."
He offered that the following two suggestions certainly have
merit and should be considered [original punctuation provided]:
Those would be to squeeze more out of the petroleum
industry, or to optimize our financial asset portfolio
to increase the rate of return, but these are very
complicated questions, complicated issues, that
require a lot of thought and a lot of discussion
before implementation. And ... they are not short-
term solutions, and they may not be long-term
solutions either in terms of the amount of money these
can generate.
10:19:48 AM
DR. GOLDSMITH explained that it comes down to three real tools
[slide 8]: more budget cuts, broad based taxes or reduction of
the permanent fund dividend; or using the earnings from the
state's assets. He said that given the size of the gap, pick
any three.
CHAIR HERRON said "You've chosen all three."
DR. GOLDSMITH recommended choosing all three and there are a
number of people who "dance" around the three available tools
who do not realize the need to use all three. He posed the
question "what if we do nothing," and postpone dealing with the
$3.5 billion gap this year [slide 9]. He pointed out that the
economy would go into a tailspin because the state may be able
to convince the general public that the problem can be
postponed, but the investment community and the business
community will not be fooled in that it understands the
magnitude of the problem and will respond in a negative manner
[slide 10]. He posed the question of how to fill the fiscal gap
without using the permanent fund and suggested the following
scenario: [slide 11] cut the budget by $700 million and take
$400 million out of operations; and take $300 million out of the
investment tax credit for the petroleum industry; which drops
the general fund budget for 2015 down to about $4.5 billion. He
said that has some impact on the size of the fiscal gap, but it
is still huge. He then suggested, within the scenario, [slides
11-14] adding an income oil sales tax at approximately the
national average rate which would generate about $700 million -
$1,000 per capita, and it has a positive impact but there is
still a huge fiscal gap. He then doubled the oil production tax
and said it has some impact but at low oil prices it has a very
modest impact. He noted that if things work out for the state,
the gas line will begin generating revenues in nine-ten years,
assuming natural gas revenues of about $2 billion a year in the
future. He pointed out that it would go a long way in filling
the gap in the future, but there is still a short-term hold even
though introducing these new measures have extended the life of
the constitutional budget reserve for several years.
10:24:16 AM
DR. GOLDSMITH explained that in taking the permanent fund
earnings off the table there would be some negative economic
consequences [slide 15-18]. He further explained that the
budget cuts will take money out of the economy and cut
employment directly and indirectly, and taxes on households will
also take purchasing power out of the economy and have a
negative effect. Reducing the investment tax credits will have
some negative effect on the petroleum industry, and business
community confidence will be at a low point because the state
will not have solved the problem in substantive long-term
fashion. In the meantime, he remarked, the permanent fund is
continuing to grow with the principal and earnings reserve from
about $52-$55 billion today, over the next 24-25 years up to
close to $200 million a year total annual earnings increasing
about tripling, and the permanent fund dividend would increase
to over $3,000 per year.
10:26:03 AM
DR. GOLDSMITH offered an alternative method to trying to fill
the fiscal gap including use of the permanent fund earnings
[slides 17-18]. He offered a scenario of cutting the budget the
same way as before down to $4.5 billion, use the earnings of the
permanent fund each year, and not pay the dividend to help fund
the general fund. He described this as a significant
contribution to filling in the gap and extending the life of the
Constitutional Budget Reserve for 6-8 years. Then, he pointed
out, if a gas line comes in, things look better in terms of the
state's ability to fund the unrestricted general fund [slide
19]. He offered that if the gas line, in a couple of years,
appears it will not happen, an alternative is to impose a broad
based tax, a sales tax or an income tax [slide 20]. Thereby,
use of the earning of the permanent fund, in addition to the tax
and cutting the budget, extends the life of the Constitutional
Budget Reserve for about 15-years. Under this scenario, he
advised, the permanent fund is not able to grow as rapidly as it
would have, but the permanent fund does continue to increase in
value, continues to be inflation proof, and continues to grow in
real terms because it is still receiving contributions from
royalties from oil, gas, and other resources [slide 21].
10:28:41 AM
DR. GOLDSMITH noted that the permanent fund earnings continue to
grow and the permanent fund dividend continues at about the same
level as today, about $2,000. Using the earnings of the
permanent fund does impact the size of the dividend, he related,
but in exchange, about $1-$2 billion in additional annual
revenue can be used to reduce the size of the fiscal gap [slides
22-23]. In the event the earnings of the permanent fund
earnings are used, the economic impact is a plus for the economy
for two reasons [slide 23]. First of all, he said, using the
permanent fund earnings means that money is not drawn out of the
pockets of Alaskan households or businesses so purchasing power
is not reduced; and secondly, it sends a strong signal to the
business community within the state, and outside the state, that
the State of Alaska stepped up to the problem and crafted a
solution. He remarked that there will be an inevitable,
horrendous "tug of war" in Juneau among the various ideas of
those who do not want an income tax, or sales tax, or dividend
cut, or budget cuts, and suggested dealing with the easiest
solutions first, such as using the earnings of the permanent
fund [slide 24]. When discussing implementation of the strategy
for using the earnings of the permanent fund, it gets
complicated [slide 25], he said. The slide depicts how the
Alaska fiscal structure works and, he noted, the general public
does not understand it so the messaging to the public has to be
very simple. There are at least four complicated proposals on
the table for use of earnings of the permanent fund [slide 26].
He offered that each proposal addresses the problem of how to
access the earnings of the permanent fund a little differently
in terms of what would be included in the permanent fund and how
to draw from the permanent fund. He explained that each of the
four alternatives emphasizes one of the elements of this type of
solution: POMV is a 15-year proposal concentrating on the idea
of accessing the total earnings of the permanent fund and
methods for better management of the corpus of the permanent
fund; a statutory version of POMV, Senate Bill 114, because it
is easier to pass a law than pass constitutional amendments, and
it emphasizes that this is an easy solution with few moving
parts; Governor Bill Walker's proposal is the Statutory
Sovereign Wealth Fund that concentrates on the idea of
stabilizing the stream of revenue moving forward and recognizes
that historically one of Alaska's main problems has been that
revenues gyrate up and down and with that, expenditures. He
described the proposal as complicated with many moving parts;
and the sustainable spending approach is to balance the needs of
the present generation with the needs of future generations
recognizing that Alaska's petroleum revenues are a non-
sustainable resource. He said all of these proposals are simply
proposals and none are written in stone.
10:35:57 AM
DR. GOLDSTEIN offered a "pitch" for his proposal of having
sustainable revenue spending, and defined it as [original
punctuation provided]:
A spending level based on current and projected future
petroleum revenue stream which, if adopted now, could
be maintained consistently long into the future --
adjusted for inflation and population growth.
DR. GOLDSMITH explained that future generations would share
equally in the petroleum wealth of Alaska [slide 27].
10:36:39 AM
DR. GOLDSMITH shared criteria to consider when discussing how to
move forward and using the permanent fund earnings [slide 28].
He pointed out that Alaskans want an alternative resulting in:
stability of the revenue stream and what can actually be spent
in a year; disciplining Alaska's spending level; sustainable
solutions over the long-term; fairness to all Alaskans of this
generation; understandability by the public at-large;
implementation today and for the long-term; flexibility and
ability to deal with an uncertain future; protection of assets;
and minimizing unintended consequences. He described that as
particularly important because this is unchartered territory in
opening up and using the earnings of the permanent fund, and an
unintended consequence is how the state protects the corpus of
the permanent fund. Historically, he explained, the permanent
fund has grown as much as it has due to the permanent fund
dividends, in that they have protected the corpus because the
public understands the relationship there. He pointed out that
if the dividend is eliminated or to fund the dividend by some
other means, such as a portion of the stream of royalty
revenues, then the "bulwark" would be removed protecting the
corpus of the permanent fund. The public may decide that the
permanent fund is not that important as they are receiving their
dividend from another source of revenue and, he warned, that is
something legislators need to be very careful about and to
consider the consequences of breaking that link. He explained
that the strategy this year in moving forward would be budget
cuts and structured use of the permanent fund earnings; and next
year, continue the budget cuts and have the inevitable four-way
tug of war [slide 29]. He said with this strategy, one thing is
implemented at a time, beginning with the easiest, and
recognizing that the fiscal gap solution is something that will
take many years to get to where the state wants to be. He
emphasized that the legislature must start implementing a game
plan immediately or the state will be in dire economic straits.
10:40:59 AM
REPRESENTATIVE ORTIZ noted that a portion of the presentation
reflected moving forward with a fiscal solution without
impacting the current amount of the permanent fund dividend of
approximately $2,000, and it can continue. He then noted that
Governor Walker's plan reduces that dividend to approximately
$1,000 based on a dividend generated from oil revenues per se,
or oil tax revenue as opposed to the permanent fund itself.
Representative Ortiz asked why Dr. Goldsmith's permanent fund
dividend is able to maintain the $2,000 level.
DR. GOLDSMITH opined that the governor's proposal, in moving
forward, the dividend would be paid out of 50 percent of the
royalties, primarily from oil and gas and other resources as
well, and that is estimated to result in about $1,000 dividend.
He explained that the remainder of the royalties would go into
the permanent fund corpus, the production taxes would go into
the corpus, and out of the permanent fund earnings comes the
annual flow for the unrestricted general fund revenues. Dr.
Goldsmith asserted that in looking forward, the state can take
between $1-$2 billion a year out of the earnings of the
permanent fund if the state was able to access the total
earnings - including the unrealized gains, and at the same time
continue to generate a dividend from the rest of the earnings.
He explained that there are enough earnings being thrown off by
the permanent fund that it can fund both the dividend and a
significant contribution of the unrestricted general fund on an
annual basis, and still be inflation proof. He is not saying,
he clarified, that the state could continue the existing
dividend forever, "but that if we were to implement this policy
today of just using the earnings, we could still pay it ... the
same dividend as we would have without using the earnings."
10:44:44 AM
CHAIR HERRON referred to [slide 26] "Proposals for Use of
Earnings" and the four points and, he noted the danger of
returning to Juneau, trying to do something in 2016, and coming
up with a sausage formula by taking of piece of each of them,
and it may not work. "Obviously," he stated, that will take a
lot of political courage for the legislature to figure something
out.
DR. GOLDSMITH related that the sausage formula may work, "and
that's the up side."
10:45:36 AM
CHAIR HERRON announced that the next order of business would be
a presentation by Neal Fried, Research Section, Department of
Labor and Workforce Development.
10:46:03 AM
NEAL FRIED, Economist, Research Section, Department of Labor and
Workforce Development, said that he will offer a quick overview
of the [current] Alaskan economy, trends and current numbers.
He advised that the [Resource Section] is preparing a forecast
for 2016 that will be available in early January. He noted that
the broad psychologies "out there" are defined [in slides 1-3]
and said he doesn't believe it "really even matters." While the
employment growth has not been fast over the years, he
explained, the growth will not necessarily continue in 2016.
With regard to the percent of employment change from previous
years for Alaska and the U.S., [slides 4-6], he said Alaska has
been growing and during the last three years continues to grow
slightly at less than one percent. He related that unemployment
is not a "great" economic indicator, but Alaska's unemployment
rate, around 6.0-6.2 percent rate, has not changed at all in the
last four-five years, while the nation's unemployment rate has
dramatically declined. He reminded the committee that the
nation had a long way to recover and Alaska did not, and in fact
the only time in history that Alaska's unemployment rate was
below the nation was during the great recession.
10:49:40 AM
REPRESENTATIVE ORTIZ quiered why Alaska has less unemployment
rate volatility than the nation.
MR. FRIED clarified that, historically, Alaska does not have
less volatility and he suspected it possibly had more. During
this period, he pointed out, Alaska was largely untouched by the
great recession, while for the rest of the country this was
probably the most dramatic recession the country had experienced
since the great depression. Interestingly, he said, within
Alaska's whole history this is the only period of time it
enjoyed lower unemployment rates, and that population in Alaska
has a larger effect on the unemployment rate, more so than
elsewhere. He noted that [slides 7-8] represent the latest GDP
numbers (value of all goods and services produced in this
state,) and he guessed it will come down in 2015 due to oil and
the value of oil.
MR. FRIED explained that [slides 9-10] represent continual
growth of the total income of Alaskan residents, and that
Alaska's income figure "looks still pretty good." He referred
to the comparison regarding housing and the foreclosure story
and advised that Alaska's picture looks significantly better
because it did not experience the great recession {slides 11-
12]. He noted that housing is often considered an important
economic indicator and Alaska is in a very different trend again
as the value of homes have continued to increase sales, but
possibly new home construction has not.
10:53:07 AM
MR. FRIED remarked that the timber industry has been "flat as a
pancake" for years, mining employment looks "pretty good," but
not the exploration portion of mining, and he projected that
2015 fish harvesting and processing employment in Alaska will
look similar to 2014 [slides 13-15]. Although, he noted, there
is stress with the salmon prices and if those low prices
continue it could cause fewer employed people in the fishing
industry in the future.
10:54:54 AM
REPRESENTATIVE ORTIZ asked where fishing ranks on the overall
Alaskan economy, and further asked whether it ranks second only
to the oil industry, or another industry.
MR. FRIED said "No, I mean you have fishing, you have
government, you having fishing ... I mean, you have oil, you
have federal government, and then you have, you know ... fishing
and tourism are quite similar, mining is smaller, so it's trends
if you look at the broader industry."
10:55:23 AM
MR. FRIED advised that these are actual oil industry numbers
(counts of paychecks) that are healthy through the first half of
2015 [slides 16-19], but will probably change. He explained
that during the past three months unemployment records indicate
an increase in the number of individuals, previously working in
the oil industry, filing for unemployment claims, and the
numbers will probably get a lot softer next year. He described
Alaska's oil industry as more "project based" and guessed "we
are postponing some of this," such as Point Thompson. He
pointed out that the national data for oil industry employment
is a picture of Alaska's future to some degree, and that there
are two big struggles for this forecast: how hard the oil
industry will fall in 2016; and the struggle related to the
budget.
MR. FRIED referred to Alaska's visitor industry and described it
as the "shining star" for next year. He noted that Alaska lost
a significant piece of its civilian federal workforce, but it
appears that the loss has come to an end and is now leveling
off. Although, he conveyed, there has been a steady drop in
state employment in that there are 1,400 fewer state jobs in
October 2015 compared to last October [slides 20-22].
MR. FRIED said [slide 23] represents a long term growth of where
Alaska's growth has come from and indicates vulnerabilities in
the future. He said that oil and gas is interesting given that
it is a very small industry from an employment standpoint. He
remarked that out of all the industries, it added the second
largest number of jobs in absolute numbers in Alaska's economy
during the last decade.
11:00:12 AM
REPRESENTATIVE ORTIZ questioned whether this factored in jobs
held by Alaskan residents versus jobs held by non-residents.
MR. FRIED responded no, it is a strict job count, but that the
non-resident count has kicked up in recent years.
Interestingly, he pointed out, oil and gas was almost competing
with health care in growth.
MR. FRIED explained that [slides 24-26] represent the average
earnings for the different industries, median household income
in 2014, and a study for full-time, year-round workers adjusted
for inflation. Interestingly, he pointed out, Alaska lost a lot
of ground in earnings during the 1990s due to a lot of growth in
lower wage industries when there was the "big retail invasion,"
and lost a lot of jobs in the oil patch and timber industry
during this period of time which were all high paying
industries. He noted recovery has taken place during the recent
decade, but there was not as much growth in the lower wage
industries, and he guessed the oil industry had an effect on
pushing the median earnings up.
11:02:14 AM
MR. FRIED said [slides 27-36] offer similarities between the
1980s and now, and noted that oil prices and oil revenues are
falling and the economy remains very dependent on oil. He
pointed out the good differences, as follows: Alaska is not
preceded by an economic boom or population boom; different
demographics; the problems are not a surprise; this time Alaska
has savings; there is more control this time; more economic
diversity, a larger service sector, Native Corporations; much
lower interest rates; and "Tax Reform Act of 1986?" and, the big
bad difference is that there is much less oil production. Since
1988, 2014 is the first time Alaska's population fell, which has
nothing to do with the price of oil and everything to do with
the national economy. He pointed out 2013-2014 represent two
negative years in migration, although in 2013 there were enough
births to make up the difference, but that 2015 will look
somewhat like 2014. He said, "that's what's interesting is ...
we just don't ... it ... it's hard to find any ... and we've
been looking really hard for numbers that sort of represent this
sort of ... huge uncertainty that exists ... um ... right now in
our economy. It's probably just all about timing." The next
slides [slides 37-38] represent the volatility in Alaska's
population and the number of people moving in and out, and that
car sales are doing very well in Alaska, right now.
11:08:34 AM
CHAIR HERRON noted that [Dr. Scott Goldsmith] and he are both
upbeat about Alaska's opportunities moving forward, other than
the price of oil. He asked, when comparing back in history to
today whether there is a correlation to learn from in that
history repeats itself.
MR. FRIED responded that the late 1990s and early 2000s were
very much as today with low oil prices, losing jobs in the oil
patch, and sizable fiscal gap, but the difference is that the
gap has never been this dramatic. He said, "Of course, in the
1980s we didn't look at that ... that just sort of happened to
us. I don't know of anyone that predicted what happened ...
that sat around 1985 and said this is what 1986 is going to look
like and were (indisc.)."
11:10:39 AM
REPRESENTATIVE ORTIZ asked whether Mr. Fried believes it is
essential for the health of the over-all economy and betterment
of all Alaskans, that the legislature do something significant
toward the fiscal gap this year.
MR. FRIED replied yes, it is important and there's no doubt
about it.
11:11:16 AM
CHAIR HERRON announced that the final order of business would be
the presentation "Securing Alaska's Fiscal Future and Arctic
Opportunity," by Martin Cary, Vice President and General Manager
of General Communication, Inc.
11:11:42 AM
MARTIN CARY, Vice President and General Manager, Managed
Broadband Services, General Communication, Inc. (GCI), said his
comments come from his perspective of over 30-years' experience
in working to provide opportunity to those living and working in
rural Alaska. He began his career in Barrow building distance
learning systems and tele-medicine systems in the late 1980s and
early 1990s, and joined General Communication, Inc. (GCI) in
1997 after selling his business to GCI. He described himself as
GCI's primary advocate into GCI's expansion into rural Alaska
that includes infrastructure and services for hospitals, the
health care market, education, business, and consumers. He
explained that robust telecommunicational services are critical
to Alaska's participation in a modern economy, in that telecomm
and technology are the engines of economic growth and can also
culturally and socially bind people together. He explained that
GCI has invested the following: more than $3 billion in its
network in Alaska since 1979; and since 2008, $800 million of
that has been invested over 200 rural communities; and has
deployed $210 million in the construction of its TERRA network -
terrestrial network that extends out into western and north-
western Alaska. In 2008-2009, he offered, he began pursuing
building TERRA because their customers were demanding more
bandwidth, but mainly lower latency. The satellites they use,
he explained, are parked 22,000 miles away at the Equator and
even at the speed of light it takes about 125 milliseconds each
way to travel. It became clear that they needed to evolve away
from satellite wherever they could and move to terrestrial
networks, he said.
11:14:41 AM
MR. CARY offered that along the way, GCI has become the leading
Arctic telecommunications provider in the country, serving over
110 locations in the U.S. Arctic. GCI's services provide
tangible benefits, increased opportunity, jobs throughout
Alaska, and it continues to build, expand, and innovate. He
explained that GCI's high definition video conferencing network
is used throughout the state for assisted learning. For
example, the Lower Kuskokwim School District is a leader in
distance learning not only in Alaska, but in the country and its
superintendent, Dan Walker, has been recognized for that. The
Lower Kuskokwim School District runs three simultaneous classes,
serving 26 communities, from Bethel all day long, he noted.
There are three teachers and three studios teaching students
across their 22,000 square mile school district throughout the
day. He related that Kodiak students recently performed a squid
dissection via two-way videos with the SeaLife Center, because
the SeaLife Center employs two teachers who provide outreach and
opportunities for students throughout Alaska and the country.
11:16:00 AM
MR. CARY referred to the health care area and explained that it
has changed dramatically as broadband connectivity has been
expanded into rural Alaska, and other markets as well. For
example, the Indian Health Service (IHS) built the Norton Sound
Health Corporation a beautiful hospital a couple of years ago.
He offered that as part of that, it implemented a very
sophisticated, industry leading hospital management system
called "Cerner." The hospital management systems are complex,
he advised because in order to implement, a data center must be
built in the hospital, filled with servers, it must be cooled,
and power to the servers, which is expensive. Typically, he
pointed out, many professional services labor must be imported
to build and operate it. On the low end, he said, these
hospital installations are in the $25 million range, and have
very expensive ongoing costs. He expressed that due to the fact
that [GCI] built TERRA to Nome, they had other options and chose
to implement a "cloud-based" version of Cerner. He relayed that
the hospital is operating out of Cerner data centers across the
lower-48 and they estimate they saved $20 million in their
implementation by being able to use the broadband infrastructure
versus having to build the infrastructure in Nome.
11:17:36 AM
MR. CARY offered a scenario of a patient who presents in a
village clinic, and a health aide that is essentially an EMT in
training, in a Medivac situation. He opined that in a stressful
situation they will probably transport because they do not want
to make the wrong decision. Video conferencing, he offered,
allows the health aide to communicate with an ER doctor in the
regional hospital and they can work with the doctor to make a
decision. He opined that health corporations feel they are
saving money with this, but actually they are more concerned
with better patient outcomes with better service.
MR. CARY related that GCI is looking ahead and planning to spend
$200 million in capital next year, and $150 million a year after
that is their five-year forecast. Previously, he said, GCI's
capital spends have run an average of $135-$185 million over the
past three or four years. He remarked that of the above amount,
$70,000 million is slated to be spent on GCI's TERRA terrestrial
network in the northwest, which would be villages around Nome,
Kotzebue, "and closing the ring which is basically creating a
ring to create redundancy up the Yukon River to Nenana from just
north of Shaktoolik."
11:19:23 AM
MR. CARY expressed the following [original punctuation
provided]:
We cannot in good faith, though, advocate for these
investments, or at least I can't, if the state does
not adopt a stable fiscal plan this next session.
Lack of action will jeopardize future investments
which will ultimately cost Alaskans jobs and contract
the economy. The status quo for the state fiscal
health will put many rural villages and communities at
risk of disappearing. Adoption of proposals that
would more readily eliminate key anchor institutions,
such as schools in rural communities will have a
devastating ripple effect throughout whole
communities. There's no debate Alaska's economic
health is in decline and there is no magic cure for
the problem. As Alaskans, we must identify how we can
insure an environment for growth, jobs, and investment
that includes the Arctic. A sustainable, stable
budget is key to the economic growth in the Arctic
region and the rest of Alaska. Knowing we have
communities that will survive and prosper well into
the future is critical for GCI to continue its record
of investments and sustainable infrastructure
throughout Alaska. So we appreciate the hard work
that's ahead ... um ... we look forward to working
with you and the legislature, the governor, and
Alaskans to help secure a long-term sustainable fiscal
plan for Alaska. So, thank you very much for the
opportunity to present to you, Alaska's future is
GCI's future.
11:20:58 AM
CHAIR HERRON offered that the committee asked Commonwealth North
to present and Commonwealth has been and will continue to work
on having a grassroots debate to encourage the legislature and
executive branch to move forward given the fiscal crisis; Dr.
Scott Goldsmith gave his opinion to the committee of a
relatively clear path of moving forward; and Neal Fried painted
the picture historically, and currently, and it does look
positive. He pointed out that the private sector is also here
today, and [after the testimony today and meetings around the
state] Chair Herron offered a scenario of the legislature not
doing anything, for whatever reason, and questioned what kind of
hard decision GCI would make.
MR. CARY replied that should the legislature not act and it
creates that risk especially in rural communities, the
legislature will see a pull back on GCI's willingness to take
those risks. He noted they are already risky investments in
that they are very thin markets, and when there are proposals to
close certain schools, GCI starts to evaluate whether that
village is on the list, and if it is, GCI will not put money in
there. GCI has spent a lot of capital in this state, the
construction industry is concerned that there may be some civil
construction left over from a lot of the federal money that has
been in the pipeline, but there is not a lot of vertical
construction in next year's pipeline at all. He related that
architectural firm friends and companies that perform
environmental work are all looking at next year and not seeing
much in the pipeline. In the event the commercial sector starts
getting nervous they will start hoarding cash, he pointed out,
and if that happens and GCI's revenues start to be impacted by
that, "really the only lever we've got to maintain free cash
flow, which is what our investors look at, is going to be to
dial back on capital spending."
CHAIR HERRON thanked the presenters and stated that clearly the
legislature must do something.
11:25:35 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Economic Development, Tourism, and Arctic
Policy meeting was adjourned at 11:25 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 12.9.15 EDA - Goldsmith.pdf |
HEDA 12/9/2015 9:30:00 AM |
|
| 12.9.15 EDA - Neal Fried.pdf |
HEDA 12/9/2015 9:30:00 AM |
|
| Agenda EDA 12.9.15.pdf |
HEDA 12/9/2015 9:30:00 AM |
|
| EDA 12.9.15 Presenter Bios.pdf |
HEDA 12/9/2015 9:30:00 AM |
|
| 12.9.15 EDA - Martin Cary.pdf |
HEDA 12/9/2015 9:30:00 AM |
|
| CWN MAP House Committee updated 120915 (1).pptx |
HEDA 12/9/2015 9:30:00 AM |