Legislature(2015 - 2016)ANCHORAGE LIO
08/24/2015 10:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Discussion: Fiscal Situation & Economic Analysis | |
| Institute of Social and Economic Research Presentation: Economic Impacts of Alaska Fiscal Options: a Study Iser is Starting Some of What We Already Know | |
| Institute of Social and Economic Research Presentation: a Few Observations on Alaska's Fiscal Choices | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
August 24, 2015
10:36 a.m.
10:36:09 AM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 10:36 a.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Lance Pruitt
MEMBERS ABSENT
Representative Cathy Munoz
ALSO PRESENT
Pat Pitney, Director, Office of Management and Budget,
Office of the Governor; Gunnar Knapp, Director and
Professor of Economics, Institute of Social and Economic
Research, University of Alaska Anchorage; Representative
Charisse Millett; Representative Lora Reinbold;
Representative Andy Josephson; Representative Craig
Johnson.
PRESENT VIA TELECONFERENCE
Representative Scott Kawasaki; Representative Tammie
Wilson; Representative Chris Tuck.
SUMMARY
DISCUSSION: FISCAL SITUATION & ECONOMIC ANALYSIS
Co-Chair Neuman discussed the agenda for the meeting.
10:38:23 AM
^DISCUSSION: FISCAL SITUATION & ECONOMIC ANALYSIS
10:38:23 AM
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
(OMB), OFFICE OF THE GOVERNOR, discussed that it was
unusual to have a discussion on the budget in August;
however, she believed the state's fiscal situation
warranted early and frequent communications. The
administration's intent was to provide an update on its
actions over the summer, its plan going forward, and the
framework it was sharing across the state.
10:39:03 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE
introduced a PowerPoint presentation titled "Building a
Sustainable Future: A Conversation with Alaskans" dated
August 24, 2015 (copy on file). He explained that the
presentation was essentially the same as the one the
administration had presented throughout the state over the
summer. He detailed that the message had begun in June with
a fiscal sustainability workshop in Fairbanks. The intent
of the Fairbanks workshop was to discuss the current budget
shortfalls and revenue options that could be used to
balance the budget; however, it had become very clear that
people were not convinced that there was a problem.
Therefore, the administration had been working to increase
the public's understanding about what the administration
and the legislature was facing presently. He shared that
after the workshop concluded the administration felt that
it had been successful and had received good feedback;
however, in a taxi the following day a portion of his
discussion had been playing on the radio, to which the taxi
driver responded "that guy's an idiot." He stated that the
experience had made him realize that there was a long way
to go in getting the gravity of the problem out to the
public.
Commissioner Hoffbeck explained that the presentation was a
companion presentation to several items on Governor
Walker's webpage. The website included a whitepaper on
potential revenue and fiscal options. He noted the paper
was not all inclusive, but provided a good background on
the issues. Additionally, the webpage included a revenue
and expenditure model, which he would address later in his
presentation; the model could be manipulated by a user to
balance the budget. He acknowledged David Teal [Director,
Legislative Finance Division] for many of the ideas. He
added that there were several short videos he intended to
show later in the presentation related to the Alaska fiscal
situation. He read a quote by Teddy Roosevelt from 1910
(slide 3):
It is not the critic who counts; not the man who
points out how the strong man stumbles, or where the
doer of deeds could have done them better. The credit
belongs to the man who is actually in the arena, whose
face is marred by dust and sweat and blood… who at the
best knows in the end the triumph of achievement, and
who at the worst, if he fails, at least fails while
daring greatly, so that his place shall never be with
those cold and timid souls who neither know victory
nor defeat.
Commissioner Hoffbeck stated that there would be many
people throwing stones in the current year. He believed the
people who deserved applause were those who were willing to
have an intellectually honest discussion about the state's
situation. He noted that there may be disagreement about
the solutions, but he did not think people should be afraid
of the conversation. He had encouraged people throughout
the state to support legislators who were willing to have
the conversation; it was not helpful to throw stones at the
people who were trying to put the situation on the table.
Commissioner Hoffbeck addressed that it was clear that the
state had certain opportunities to work the process in a
systematic and diligent way, given the savings set aside
over the last few years. He communicated that there were
real challenges that had only worsened over the summer
including oil prices in the low $40 range and a stock
market that was beginning to correct. He elaborated that
there was currently very little revenue coming into the
state; if the current environment continued the revenue
situation would actually be worse than it had been during
legislative session. However, opportunities were also
presented as well.
10:44:31 AM
Commissioner Hoffbeck stated that there was really not a
crisis unless action was not taken. He relayed that if
nothing was done, the state would be taken to the edge of
the fiscal cliff and would not take advantage of the
savings that had been established over the past several
years. He emphasized the importance of acting immediately
instead of waiting until the state was heading off the
cliff.
10:45:06 AM
Ms. Pitney addressed that the administration had frequently
talked with the public about the makeup of the state's
budget. She pointed to a budget pie chart slide 5: "Fiscal
Challenge." The budget was made up of 27 percent federal
funds; 19 percent Permanent Fund inflation proofing and
dividends; 13 percent other state and Designated General
Funds (DGF); and 41 percent Unrestricted General Funds
(UGF). She detailed that the problem primarily existed with
UGF.
Co-Chair Neuman pointed to the $3.3 billion in federal
funds and asked if the administration had heard whether the
amount would increase, decrease, or remain static. He had
recently been in Washington D.C. and had been told that
federal highway funds coming to Alaska were expected to
maintain at the same level or increase slightly. He
mentioned work on state matching funds.
Ms. Pitney responded that there were federal funds that ran
through the state budget in addition to federal funds
coming into the state through military and other, which
impacted the greater economy. She relayed that there was
continued pressure on federal spending due to the federal
environment, but the amount running through the state
budget would remain the same or increase slightly due to
inflation. She elaborated that she did not anticipate
growth or decline in federal funding. However, Medicaid
expansion would increase the number by $150 million or so
in the near-term and slightly more in the long-term. The
additional funds would only increase the federal funds to
around 28 or 29 percent of the budget.
10:47:20 AM
Representative Gattis asked what portion of the 27 percent
federal funds were dependent on state matching funds. Ms.
Pitney responded that about 70 percent or more was based on
state matching funds. She expounded that there were
different levels and types of matching funds. The federal
money had a 90/10 match depending on certain things and
health funds were 50/50 on existing and would be 90/10 on
the Medicaid expansion population.
Representative Gattis observed that without the state
matching funds, the 27 percent in federal funds shown on
slide 5 could be reduced to as low as 10 percent. She noted
that the state still had to participate if it wanted to
access the federal funds. She believed one question going
forward was how much the state had to participate and what
it received from the federal government.
Ms. Pitney answered that Professor Knapp [Director and
Professor of Economics, Institute of Social and Economic
Research, University of Alaska Anchorage] would address the
question about what federal funding meant to Alaska's
overall economy. She stated that it would be a major driver
in the health of the state's economy at the business level,
even more so than it was at the state conversation.
Ms. Pitney turned to a pie chart on slide 6 titled "Fiscal
Challenge: Unrestricted General Funds Gap." The largest
focus was on the UGF gap ($2.7 billion); the funding that
the state had the choice to prioritize among all of the
competing services it provided. The $2.7 billion under an
oil price of $65 or $66 per barrel of oil was the best case
scenario. She furthered that under the current per barrel
price of $40 to $45, the gap could increase up to $3.2
billion to $3.3 billion. She noted that the gap did not
account for any supplemental budget needs, any gasline
issues, or other.
10:50:21 AM
Ms. Pitney advanced to slide 7: "Fiscal Challenge:
Executive Branch Agencies and Payments and Obligations -
Unrestricted General Funds." She detailed that education,
payments and obligations, debt, retirement, oil tax
credits, and health and social services accounted for
nearly 80 percent of the budget. In order to demonstrate
the order of magnitude of budget costs the slide included
the capital budget, which was the eighth bar on the chart.
She noted that one of the major choices made in the past
year was to reduce the capital budget; it had declined from
$2 billion to $118 million. She relayed that if the state
wanted to assure its federal matching funds, the capital
budget was not an area the state had to utilize. She noted
that the remaining agencies shown on the chart were small
in terms of expenditures.
Co-Chair Neuman wanted to better understand what portion of
the funds for education, health and social services, and
social security was made up of general fund (GF) grants. He
requested the information divided by grants, grants with
matching funds (and the match percentage), and what portion
of the funds were required. He asked for the breakout of
the different expenditures within the various departments.
Co-Chair Thompson wondered if the cost shown for health and
social services (slide 7) was inclusive or exclusive of
Medicaid expansion funding. Ms. Pitney replied that the
chart was before and after Medicaid expansion funds because
it represented FY 16 and GF only.
Co-Chair Thompson had read that other states with Medicaid
expansion had seen significant acceleration in state GF
costs. He noted that other states were having problems
determining how to balance their budgets; a couple of the
states had pulled out of Medicaid expansion. He addressed
that the governor proposed adding 27 employees to cover the
administrative side, but he noted that the federal
government required the state to pay 50 percent of the
administrative costs of expansion. He wondered how the
issue fit into the budget picture. He wondered if the
numbers available took everything into account.
Ms. Pitney replied that the administration felt comfortable
that its numbers were real at the startup phase [of
Medicaid expansion]. She detailed that as the match
increased from zero up to 10 percent the numbers would
move. Additionally, the administration was aggressive on
reform efforts and hoped to see the changes translate into
ongoing savings.
10:53:54 AM
Representative Gara asked for verification that the biggest
portion of the Department of Health and Social Services
(DHSS) budget related to the state match for regular
Medicaid.
Ms. Pitney replied by directing attention to a bar chart on
slide 10, which showed the top three UGF spending
categories. She pointed to the third bar, which showed both
formula and nonformula components of the DHSS budget. She
detailed that the formula funds included Medicaid, senior
benefits, foster care, and subsidized adoption (over $600
million was related to Medicaid matching funds).
Representative Gara asked for verification that less than
$400 million in the DHSS budget was associated with non-
federal match programs. Ms. Pitney agreed, but noted that
some formula programs were driven by the state legislature.
Co-Chair Neuman requested a breakout of the costs. He
discussed that when dental and other similar programs had
been expanded, it had been made mandatory via legislation.
10:56:00 AM
Representative Gara followed up on Co-Chair Thompson's
question related to administrative staff for Medicaid
expansion. He wondered if the administration maintained
that Medicaid expansion alone would save the state
approximately $6 million in the first year. Ms. Pitney
replied in the affirmative; savings were expected to
increase to $16 million in the second year.
Co-Chair Neuman communicated that the committee would not
delve into Medicaid expansion and related issues during the
current meeting. The meeting was intended to address the
state's fiscal situation.
Ms. Pitney continued to discuss slide 10. She addressed
spending for the Department of Education and Early
Development (DEED) and explained that the K-12 formula
accounted for money that went to school districts and
communities. Any reduction in the formula would mean a cost-
shift to communities. She pointed out that the non-formula
UGF spending was significantly smaller and had reduced in
the last year due to tremendous reductions.
Co-Chair Neuman referred to a current education lawsuit
with Ketchikan. He asked if the state would be expected to
backfill the $220 million to $225 million if the law suit
moved forward. Ms. Pitney answered that the plan was to
cross the bridge when necessary.
Co-Chair Neuman remarked that the lawsuit pertained to a
significant amount of money. He noted the issue would be
saved for another day. He requested that the administration
keep the committee informed on the issue.
Ms. Pitney continued to address slide 10. She reiterated
that the K-12 formula was significant and DEED non-formula
funds were declining. She detailed that roughly two-thirds
of the non-formula spending went to grant programs and Mt.
Edgecumbe; and one-third went to DEED administration. She
referred to the bar associated with payments and
obligations, which was broken into debt, retirement, and
oil tax credits. The state's existing debt commitment was
$200 million; the figure was solid for the upcoming five
years and would decrease slightly over time.
10:59:01 AM
Co-Chair Neuman believed the state had paid $228 million in
debt obligations the prior year. He wondered if any of the
obligations were expected to be paid off in the near
future, which would result in a decrease in the overall
debt.
Ms. Pitney responded that debt obligations would not
significantly decline in the near future. She surmised that
the amount could decrease by $1 million to $2 million, but
the range would remain between $200 million to $220 million
over the course of the coming five years. There would be
some sharp decreases 5 to 7 years in the future accompanied
by some balancing opportunities.
Ms. Pitney continued to address slide 10. Retirement costs
were $262 million in the current year. She relayed that
with a recent $3 billion investment, retirement would be in
the $200 [million] to $250 [million] range if a straight
cash basis was continued. She elaborated that a pension
obligation bond opportunity may provide some relief in the
right environment. She stated that it would not be a "slam
dunk" but it was a consideration that may be worthwhile in
the event of a significant market correction. She stated
that the commitment was ongoing and long-term.
Co-Chair Neuman remarked that when the legislature had
appropriated $3 billion out of the Constitutional Budget
Reserve (CBR) in 2014 it had reduced the Public Employees'
Retirement System (PERS) and Teachers' Retirement System
(TRS) retirement costs. He elaborated that actuaries had
estimated the state's payments would have been between $700
million to $1.2 billion; however, [given the cash infusion]
the state's payments were about $268 million in the current
year. He wondered if there would be any significant debt
reduction if the legislature allocated another $1 billion
from the CBR towards the PERS and TRS pension obligation.
Ms. Pitney answered that OMB could price the scenario out
for the committee. She stated that given that the state was
burning $3 billion annually in CBR funds, taking money off
the table should be thoroughly considered.
Co-Chair Neuman observed that having $700 million less to
pay [towards the retirement liability] in the current year
had been helpful. Ms. Pitney agreed that it had been
tremendous.
11:01:35 AM
Ms. Pitney continued to address payments and obligations on
slide 10. Another large obligation pertained to how the
state continued with oil tax credits. She stated that the
governor's veto of $200 million was to start the discussion
on the long-term. She expounded that the current unbounded
program was unsustainable. She added that all of the "big
ticket" items on slide 10 were tough to move.
Ms. Pitney moved back in the presentation to slide 8:
"Fiscal Challenge: Agency Reductions FY 15-FY 16." She
relayed that on a percentage basis, the most significant
reductions (20 to 35 percent) had been made to: Department
of Commerce, Community and Economic Development (DCCED);
Department of Military and Veterans Affairs; Department of
Labor and Workforce Development; Department of Natural
Resources; and the Office of the Governor. She added that
DCCED had grant programs, tourism, and Alaska Seafood
Marketing Institute and some of the reductions had been to
its grant program. She noted that the decrease did not
translate directly to people. Reductions of 12 to 20
percent had been made to the following agencies, which were
more people oriented: Department of Fish and Game;
Department of Revenue; Department of Law; Department of
Administration; Department of Transportation and Public
Facilities (DOT); and Department of Environmental
Conservation (DEC).
11:03:34 AM
Vice-Chair Saddler asked what portion of the 20 to 35
percent reduction in the Office of the Governor budget was
based on one-time reductions from elections, redistricting,
and other related items versus ongoing programs. Ms. Pitney
replied that 17 percent of the reduction was associated
with ongoing programs. One time reductions were associated
with the Council on Domestic Violence and Sexual Assault
and elections. She noted that the state would be entering
an election year and the costs would increase again. She
stated that the ongoing versus one-time reductions were
about 50/50.
Co-Chair Neuman believed there needed to be better
discussions on the numbers. He remarked that a portion of
the decrease to DCCED was related to Alaska Travel Industry
Association (ATIA) and had nothing to do with the day-to-
day administrative costs of the department. He wanted to
see the cuts associated with the departments' day-to-day
operations not including other reductions. He stated that
the 20 percent reduction to DCCED shown on slide 8 was
meaningless.
Ms. Pitney continued to address significant reductions on
slide 8. Compared to the prior year the DHSS budget had
been reduced by $88 million, the DOT budget had been
reduced by $34 million, the Department of Corrections (DOC)
and University of Alaska budgets had both been reduced by
$20 million. The figures did not count the elimination of
the fuel trigger mechanism that had an additional impact on
each of the departments (primarily DOT). Although oil
prices had decreased, the price of gas had not decreased to
the same degree, which had resulted in another significant
reduction.
Co-Chair Neuman remarked that the fuel trigger was a result
of oil below $80 per barrel. He stated that subsequently
"you should be expected to pay less for the price of fuel
whether it's heating fuel or transportation fuels for the
cost of these departments as opposed to recall them in the
reduction in the budget."
Ms. Pitney replied that the price of oil had not translated
to the same reduction in heating and motor fuel costs.
11:06:23 AM
Ms. Pitney addressed efficiency efforts on slide 9. She
relayed that the initiatives would not redefine the price
of government, but they would increase its efficiency and
effectiveness. She detailed that some of the efforts were
further along such as smart justice reforms and Pew group;
whereas others were at the beginning. She elaborated that
the statewide information technology (IT) consolidation had
begun in the spring and was moving forward. Procurement and
lease contracts efficiencies had begun in late May. The
remaining items on the list were in the development phase
and would produce savings over a two to three year time
period. She reiterated that the savings would not be major,
but they would enable the state to manage attrition forced
through cost reductions. Every agency was moving forward on
internal savings efforts to absorb as much of the costs as
possible. She added that from December 2014 to July 2015
there were 500 fewer full-time permanent state employees,
which did not count the University of Alaska or the Alaska
Court System.
Co-Chair Neuman asked for further detail on the smart
justice reform efforts. He requested information on the
cost to different agencies.
Commissioner Hoffbeck pointed to slide 11: "The
Conversation: Options." He stated that four different
options had been addressed. The first option was to do
nothing. He believed there was a fairly large constituency
who felt that doing nothing was the correct answer; that if
nothing was done, eventually the problem would work itself
out as it had in the 1980s, 1990s, and 2000s. The
administration was working hard to try to convince people
that the option was not workable. The option to continue
making reductions to government spending was on the table.
He stated that people had made it clear that additional
expenditure reductions were needed; people were not
convinced that government was as small as it could be or
that it had the right focus. The administration recognized
the option as a valid part of the process. He relayed that
another option people brought up was that oil and gas would
bail the state out again. Finally, the administration would
discuss some potential revenue options.
11:10:07 AM
Ms. Pitney discussed a bar chart on slide 12: "Options (Cut
Government)." She pointed out that the legislature had
significantly reduced the size of government by roughly $1
billion per year since 2013. The FY 16 was currently at
$4.9 billion; including transfers from one-time sources the
FY 16 budget was closer to $5.1 billion.
Representative Pruitt asked if the figure included capital.
Ms. Pitney responded affirmatively. She detailed that the
figure included all UGF commitments; the majority of the
decrease was due to reduced capital budgets. The difference
between FY 15 and FY 16 was about 50/50 capital and
operating budget decreases.
Co-Chair Thompson acknowledged that spending reductions
were necessary; however, he wondered at what point
reductions would begin to cause the state's economy to
crash. Ms. Pitney stated that Professor Knapp would address
the question later in the presentation. She explained that
he would discuss how each of the options would affect the
economy.
Commissioner Hoffbeck added that the conversation was about
more than just numbers. He stated that it was possible to
calculate how to balance the budget, but the impacts of
various decisions needed to be discussed. He furthered that
each of the options had some impact and accompanying
baggage.
Representative Gara asked Ms. Pitney how much state
services would be cut due to population growth and
inflation if the budget was kept at $4.9 billion. Ms.
Pitney used an inflation estimate of 2 percent. She stated
that much of the discussion about population was about the
choices the state made; there could be modest population
increases similar to the past 20 years or the state could
make choices that would impact the growth. She furthered
that population was an important thing to consider when
making choices that might impact it in the future.
11:13:57 AM
Vice-Chair Saddler asked for the Consumer Price Index (CPI)
and the population growth in Alaska over the past ten
years. Ms. Pitney did not have the data on hand.
Co-Chair Neuman noted that Mr. Knapp would have the
information.
Vice-Chair Saddler asked what number OMB assumed for
inflation in its budget. Ms. Pitney replied that OMB used
an inflation of approximately 2.25 percent. She stated that
the figure had been higher 5 to 8 years back and had been
closer to 1 percent a couple of the years as well.
Commissioner Hoffbeck relayed that the long-term average
inflation used in the budget was 3.25 percent, but the
current number used was 2.25 percent.
Representative Guttenberg observed that the state had not
begun to feel the impacts of the reductions. He wondered if
the administration was tracking the impacts of the cuts on
various things like the backlogs at the state Recorder's
Office, or lines at the Division of Motor Vehicles (DMV).
Ms. Pitney replied that to a certain degree the
administration would have the ability to talk about the
differences. The administration was working diligently
through streamlining and efficiency efforts to avoid direct
impacts as much as possible; however, there would be
impacts and programs that would be discontinued.
Co-Chair Neuman requested any information on potential
delays for administrative services within the departments.
11:16:00 AM
Representative Gattis referred to the 500 fewer state
employees discussed on slide 9. She wondered how many of
the positions had been vacant. Ms. Pitney responded that
the number pertained to 500 fewer full-time employees. She
acknowledged that the deletion of unfilled positions did
not mean a reduction in employees. The number shown on
slide 9 accounted for an actual reduction of employees from
December 2014 to July 2015. She stated that less than 60
people had been laid off; much of the reduction was
associated with employees who retired or resigned. She
stated that given the information systems it would be
difficult, but she was working to move the conversation
away from vacancies to address what reductions meant in
terms of people delivering services.
Co-Chair Neuman recognized that government services would
take longer under a reduced budget. He reiterated his
request for information on potential delays.
Ms. Pitney turned to a graph on slide 14: "Options (Cut
Government): Real State Budget, Adjusted for Population, in
Thousands." The graph showed a significant reduction to the
capital budget in 2016 (represented in green). She noted
that the capital budget expenditure was so small it was
almost nonexistent on the graph. She added that statewide
operations continued to be a driver with all of the
payments and obligations (shown in red). She highlighted
that the budget was currently lower than most years during
the post-pipeline boom. The budget picture looked
considerably different when it did not factor in population
adjustments (slide 13 compared to slide 14).
11:19:28 AM
Ms. Pitney discussed a chart on slide 15: "Options (Cut
Government): Average FY2009-2013 Total State Expenditures
by Population." She discussed that much time had gone into
considering how Alaska looked relative to other states. A
line on the chart represented overall government spending
based on the national average. Alaska had been
significantly above the line in 2009 to 2013; however, it
would be touching the line in 2016. More time would be
spent looking at other states to determine how they
operated at their given levels. For example, 50 percent of
the school funding in North Dakota came from its
communities. The issue was important to explore because
government spending in Alaska was a major issue in the
public.
Ms. Pitney turned to slide 16: "Options (Cut Government):
Governor Protected Life, Health, and Safety ($2 Billion)."
She discussed that the hope was to cut government to fit
into $2.2 billion for the year (if oil prices held at the
predicted average of $66 per barrel). She detailed that the
administration had presented a new budget bill of roughly
$2 billion when the CBR [draw] was not passed [during
regular session]. The bill had included funding for
troopers, DOC, half of DHSS, and one-quarter of the funding
for the education foundation formula. The bill had not
included the retirement contribution, any oil and gas tax
credits, and only included one-quarter of the funding for
all other state agencies. She stated that "it's a big
difference between where we are and a $2 billion revenue
standpoint."
11:22:10 AM
Representative Pruitt expressed his concern that the
discussion would fall short of addressing government
reductions. He discussed that during his campaign the
governor had stated he would cut government by 16.7
percent; however, the governor's amended budget had
actually increased over the FY 15 management plan by 0.3
percent. He detailed that in the end, after the governor's
veto, the budget had ended up with a 4.6 percent decrease.
He believed the ideas for cuts had barely been highlighted.
He observed that the issue had been generalized to how the
cuts may impact people and that efficiencies would be
looked for. He believed that before the state took money
from its residents that it cut its own budgets
sufficiently; he stated that there had not been a real
discussion how to make it happen. He addressed what the
administration would present to the legislature in the
current year would allow the legislature to determine its
comfort level with the size of government and with the
discussion about what role the public would play and
provide with its own pocketbook. He believed the
presentation was glossing over the issue.
Commissioner Hoffbeck replied that when the presentation
had been developed the administration had spent as much
time on cuts as it did on the revenue aspects. The goal of
the presentation was to outline the various options
available. The administration recognized that cuts were a
part of the discussion going forward; however, if the state
became bogged down in cuts it would not get to the final
answer. He stressed that it was not possible to cut
government enough to get to the final answer. He
acknowledged that although it was necessary to continue to
have expenditure reductions and the discussions on the
table, it could not be the only discussion because the
numbers did not add up. He shared that the first day of the
workshop in Fairbanks had been spent on discussions about
what people were willing to cut out of the budget. He
detailed that the participants had only been able to
identify $20 million to cut from government programs. He
agreed that it was a pertinent part of the discussion going
forward, but the answer would not be achieved without work
in other areas.
11:25:25 AM
Representative Pruitt understood; however, he believed it
was much easier to take money from someone else than it was
"to look in your own life and determine whether you're
doing the right thing with your own budget." He asked about
the goal of cuts and the size of government. He wondered
what the legislature should expect to see in the coming
year. He was frustrated that in the past the governor had
been willing to make a statement about what percentage he
wanted to see cut from the budget and although that figure
had not been met, the governor had not communicated how
much would be cut in the future. He believed that there
were two sides to the coin, but it appeared more focus was
being given to the income side.
Ms. Pitney responded that the administration would likely
have an early indication in the beginning of October. She
detailed that the administration was into continued
constraint. She stated that "16.7 percent is a number. We
actually cut 19 percent in unrestricted general funds last
year to this year." She relayed that the cut from executive
agencies (excluding Medicaid, the education formula,
courts, and the legislature) was an average reduction of
13.5 percent. She noted that the legislature and courts had
not been cut quite as much. She pointed out that there had
been some significant reductions, which were as high as 20
and 30 percent. She emphasized that the administration was
interested in continued constraints. She conceded that
there were some things working against the goal. For
example, it would be difficult to keep the capital budget
at $118 million, which had been funded largely by
reappropriations. Additionally, oil tax credits exceeded
the amount of funding in the particular pot. She stated
that there were many things and many drivers. She
reiterated the administration's interest in continued
constraints.
11:28:22 AM
Representative Pruitt clarified that he had been using
figures that included total General Funds. He had found
that in the past year the legislature had focused so much
on UGF, that it had glossed over DGF, yet it had moved UGF
into DGF. He had felt that it was not an honest
conversation with the public because he believed General
Fund was the whole pot.
Co-Chair Neuman asked committee members to think about
their operating budget questions in terms of what part of
the budget was made up of grants, state General Funds,
required, and additional due to legislation.
Representative Gattis referred to Ms. Pitney's statement
about the plan to have budget information out in early
October. She asked for verification that Ms. Pitney had
stated the governor intended to have a budget out in the
first part of October and planned another cut of 16.7
percent.
Ms. Pitney replied in the negative. She clarified that the
administration planned to have a budget framework out in
early October; it would not have a change record and other
items. She detailed that it would include targets, revenue
expectations, and so forth. The administration's interest
was continued spending constraint; it would do everything
it could to keep the budget as low as possible, hopefully
below the current year's budget, but there were things that
were tough to control such as the earned oil tax credits.
Items with a General Fund obligation made the total number
difficult. The administration planned to make continued
reductions in agency operations; the cuts would not be in
the 20 to 30 percent range from the prior year. The cuts
could be around 2 to 5 percent; some could be larger based
on a choice in the change of service.
Representative Gattis remarked that there were people in
her district who believed the state had not even begun to
scratch the surface of the problem.
11:31:27 AM
Co-Chair Neuman reported that he had recently met with the
governor who had committed to try to get the budget to the
legislature up to 30 days prior to the December 15 release
date to the best of his ability. He noted the
administration had done pretty well in its efforts to get
the budget out early the prior year. He stated that the
sooner the legislature received an indication on the
administration's budget, the sooner it could begin its
work.
Representative Gara recalled that the prior year the
administration had stated that firing every state employee
would only cut the budget deficit in half. He wondered
about the status of the analysis given the state's current
revenue and the expected budget. Ms. Pitney replied that
the UGF component for state workers was in the range of
$1.4 billion to $1.5 billion. There was a gap of $2.7
billion or $3.2 billion depending on oil price; the
termination of all state employees would reduce the gap by
less than half.
Commissioner Hoffbeck highlighted slide 17: "Options (Oil
Taxes): FY 16 General Fund Revenue." The chart addressed
whether oil and gas could bail the state out again. He
detailed that the chart showed price and production
sensitivity. The red portions of the chart showed prices
and production that were not sufficient to generate enough
revenue to balance the budget. The white cells in the chart
indicated a balanced budget with little to spare; the green
cells indicated a budget surplus. In order to balance the
budget at the current production of 500,000 barrels per day
the oil price would need to be $109 per barrel. He stated
that the most optimistic price forecast was $60 to $80 per
barrel as a stabilized price. He detailed that at those
prices shale oil and others started getting turned back on.
Subsequently, the increase in supply capped how much the
price could rise. The less optimistic forecast was for
stabilized oil prices between $40 and $60 per barrel. He
recalled speaking with a price forecasting agency the prior
year that had projected a price of $40 per barrel, which
had been pretty accurate. He reported that there was
nothing on the horizon indicating that oil prices would
increase up to $109 again in the near future. He reasoned
an increase of that magnitude would not be a result of
supply and demand, but would take an international
disruption that would possibly create a temporary price
spike.
11:35:13 AM
Co-Chair Neuman asked if DOR had a fall oil price forecast.
Commissioner Hoffbeck responded that the revenue forecast
would be substantially lower than the spring forecast. The
department was preparing to generate the forecast in early
October. He added that experts from "all over" would be
brought in to get ideas on the prices.
Co-Chair Neuman asked for an oil price forecast estimate.
Commissioner Hoffbeck believed that optimistically the oil
price would be $60 per barrel, but probably lower in the
short-term.
Co-Chair Neuman asked for verification that the figure
would be down from the current $66 price per barrel.
Commissioner Hoffbeck replied in the affirmative.
11:35:51 AM
Representative Guttenberg referred to slide 17 and believed
500,000 barrels of oil per day was the long-term production
forecast. He asked where 600,000 to 800,000 barrels per day
on the chart had been derived. He did not believe the
numbers represented reality.
Commissioner Hoffbeck answered that the numbers had been
included on the chart in response to the belief of some
individuals that increased oil production would bail the
state out. The goal had been to show what could be expected
with various increments of additional production. There was
nothing on the horizon indicating that production would
increase to 800,000 barrels per day. He stated that when
the chart had been developed, oil prices had been about $55
per barrel; at that price it would take 1.6 million barrels
per day to balance the budget. He stressed that production
would not bail the state out.
Vice-Chair Saddler discussed that the state had seen
reductions in oil throughput of about 6 to 7 percent over
the past several years. He asked if tax credits offered to
the oil industry to incentivize drilling exploration had
made a difference in maintaining the production level.
Commissioner Hoffbeck replied that it was difficult to make
a definitive statement on the effectiveness of the credits
on the production level. He stated there was no doubt that
the state had seen more activity due to the credits.
However, he did not believe the state had seen the "big
score" that would indicate it was on the winning side of
the equation. He expounded that there were some potential
oil fields that could be brought online that if attributed
entirely to credits would indicate the credits had been
successful. He added that the larger issue related to
credits was about what the state could afford. He remarked
that there were a multitude of many good programs, but the
reality was there was a limited budget.
Co-Chair Neuman relayed that the committee would have
discussions on the credits in the future. He asked members
to provide associated questions to his office or to Co-
Chair Thompson.
11:38:13 AM
Representative Edgmon asked what amount would be needed to
backfill the budget under the scenarios presented on slide
17. He noted that the FY 16 budget was based on $66 per
barrel. He spoke to a scenario in which the average price
was closer to $50 per barrel. He remarked the state was
looking at $3 billion for FY 17 to make things work;
however, it may need to backfill the existing budget.
Ms. Pitney responded that $50 per barrel would generate
$1.8 billion. The projected price was $66 per barrel, which
would generate $2.2 billion. The difference was $400
million. At a price of $40 per barrel, revenue could drop
by as much as $700,000, which would need to be backfilled
for FY 16 before a discussion on FY 17 even began.
Commissioner Hoffbeck added that revenue would drop
approximately $120 million with every $5 decline in oil
price (at the lower oil prices). He skipped over slide 18
titled "Options (Increase Revenue)," which showed a
screenshot of the interactive budget balancing model.
Co-Chair Neuman remarked that the administration had used a
model developed by LFD and had reworked it to fit their
scenarios. The model had been brought to the public and
looked at different prices of oil, different taxes, and
generated revenue under the scenarios.
Commissioner Hoffbeck turned to slide 19: "Options
(Increase Revenue): Modify Oil and Gas Taxes." He stated
that at $40 per barrel there was not significant revenue
for anyone within the tax system. He stated that some of
the items shown on the slide had more pertinence in the
discussion going forward with various gasline scenarios. He
noted that the list encompassed the main tax structures for
modifying the existing oil and gas taxes:
· Base Rate
· Minimum Tax
· GVR (New Oil Rate)
· Cook Inlet Production Taxes
· Hazardous Release Surcharge
· Natural Gas Reserves Tax
Commissioner Hoffbeck noted that the hazardous release
surcharge had been done in the past year and had been
included because it provided an idea of how difficult the
discussions would be. He elaborated that the surcharge was
almost one penny, but nearly did not pass the legislature
because it was a new tax. He discussed that there had not
been a new tax in 10 years other than oil and gas taxes (10
years back the new tax had been on alcohol and cigarettes).
The department recognized that the appetite for taxes in
Alaska was not high.
11:41:52 AM
Representative Gara discussed one of the reasons he
believed the state needed to take a look at oil tax reform.
He pointed to GVR [gross value reduction] oil on slide 19.
He explained that GVR related to fields unitized after
2002. When oil had been $110 per barrel, Dr. Scott
Goldsmith [Institute of Social and Economic Research,
University of Alaska Anchorage] had put out a chart showing
that the state's production tax for new oil provided a near
zero or negative net present value. He surmised it would be
a negative net present value at current prices. He wondered
if the administration had done any analysis on the issue.
He agreed with incentivizing new oil production; however,
he wondered if it was a wise investment if the state was
spending significant money to achieve a negative net
present value under the oil tax.
11:42:59 AM
Co-Chair Neuman did not want to get too far into oil and
gas during the current meeting.
Commissioner Hoffbeck replied that the analysis by Dr.
Goldsmith was accurate.
Commissioner Hoffbeck turned to slide 21: "Options
(Increase Revenue): Modify Non-oil and Gas Taxes." He
relayed that Senator Cathy Giessel was currently assembling
a panel to begin an active discussion on the issue. He
elaborated that the administration had done significant
work on the topic over the summer; it had been meeting with
the investment community and smaller producers/explorers to
get an idea of some plausible answers. He relayed that it
would be an active discussion in the coming year. He read
the various non-oil and gas taxes shown on slide 21:
· Corporate Income Tax Rate
· Mining Taxes
· Fisheries Taxes
· Motor Fuel Taxes
· Sin Taxes
Commissioner Hoffbeck noted that the state's motor fuel tax
was the lowest in the country at $0.08 per gallon. He
believed the average was approximately $0.30 per gallon. He
reasoned that there was some room to move some of the taxes
without becoming onerous in the state's tax structure. He
commented that no one liked taxes, but some of the taxes
were substantially lower than those in other states.
However, Alaska had some of the higher alcohol and tobacco
taxes (sin taxes) in the country.
Co-Chair Neuman requested current information on how much
each of the taxes (shown on slide 21) brought in and recent
history related to any structure changes. Commissioner
Hoffbeck agreed and relayed that the information was on the
department's website and was included in the interactive
model as well.
Co-Chair Neuman asked Commissioner Hoffbeck to provide the
information to the co-chair offices.
Representative Gattis referred to Commissioner Hoffbeck's
statement that Alaska's sin taxes were some of the highest
in the nation. She asked if the department had compared the
state's taxes to the average of those in the Lower 48.
Commissioner Hoffbeck asked for clarification.
Representative Gattis clarified that she was referring to
the non-oil and gas taxes shown on slide 21, excluding sin
taxes. Commissioner Hoffbeck replied that it had done the
comparisons where the data was available.
Co-Chair Neuman asked the department to include the
information with the other materials he had requested.
11:45:22 AM
Representative Edgmon followed up on the statement that
there had been no new taxes in the past ten years. He
remarked that the previous year in particular had seen a
multitude of license and fee increases within the agencies,
including fees for the Whittier Tunnel, parks, and other.
He added that the legislature had increased the gas tax by
$0.009 for the Spill Prevention and Response (SPAR) Fund.
Commissioner Hoffbeck discussed slide 22: "Options
(Increase Revenue): Repurposing Financial Assets":
· Pension Obligation Bonds
· Permanent Fund Earnings
· Permanent Fund Dividend Cap
· Collateralization & Securitization
Commissioner Hoffbeck elaborated that the department was
looking at pension obligation bonds in more detail as the
market had begun to correct. He detailed that DOR had been
looking for an opportunity within the market, which may
have begun to form. He addressed Permanent Fund earnings
such as a percent of market value (POMV) model that would
require legislative action or use of earnings, which would
be an appropriation. He stated that Permanent Fund earnings
represented the biggest option available to the state in
terms of bringing additional money in for government use.
He stated that the use of earnings would be most effective
as a cap, but could be done as a percentage to the state as
well. He addressed collateralization and securitization,
meaning the state would borrow against its existing assets
to "supersize" the Permanent Fund and generate more
revenues in order to spin more revenues off for state
purposes. He noted that the option related to borrowing
would come with some risk.
Representative Wilson wanted to clarify that the motor fuel
tax included heating oil and not just gasoline.
Commissioner Hoffbeck responded that a tax program had not
been developed for the motor fuel tax; it had simply
compared motor fuel tax to other places in the U.S. He
furthered that if the tax was included in the package
brought forward by the administration, it would detail the
information out.
Representative Wilson stated that if there was a
conversation about heating oil it needed to include
gasoline. She stated that some people did not heat their
homes "that way" and she wanted to ensure things were kept
on a fair level.
11:48:18 AM
Vice-Chair Saddler asked for clarification on what
collateralization and securitization may look like.
Commissioner Hoffbeck responded that the program discussed
earlier in the year related to borrowing against the
state's existing financial assets and reinvesting. The
difference between what Alaska could borrow and what it
could achieve in the investments would enable the state to
increase the size of its revenues and/or the size of the
Permanent Fund. Securitization would then mean selling the
future revenue for a one-time infusion into the budget, but
then the state would not pay out the ongoing revenues.
Vice-Chair Saddler asked if Commissioner Hoffbeck was
talking about using the Permanent Fund in an "arbitrage
play." Commissioner Hoffbeck replied that essentially that
was how it would work. He communicated that it would not be
a true arbitrage play, but because of the state's advantage
as a government entity it could borrow taxable money
against what it could return in investments. He reiterated
that there was some associated risk; however, there was
risk in doing nothing as well. He believed the lead option
on slide 22 would be pension obligation bonds, which was a
similar play.
Co-Chair Neuman requested an analysis of stock market
projections. He remarked that the market was not very
secure at present. He asked the department to provide the
committee with its idea related to collateralization and
securitization.
Commissioner Hoffbeck responded in the affirmative. He
assured the committee that the concept would be vetted by
the best minds before action was taken.
Ms. Pitney clarified that the options on the list were only
options and did not mean the administration was endorsing
them.
Representative Gara asked for an estimate on how much
pension obligation bonds would help towards the deficit.
Ms. Pitney answered that it depended on the myriad of
assumptions and risk tolerance. Currently the state was
paying roughly $265 million in past service obligations.
Additionally, the state was paying $0.22 on every $1.00 for
PERS employees (including every municipality and school
district). She stated that it would be helpful to the
degree that either of the components' payment into the
retirement system. She continued that the administration
would look at what the state was currently paying, what it
could offset in the ongoing operating budget, and the
associated risk.
Commissioner Hoffbeck elaborated that whether the money was
used to cover the state's "on behalf" payment or to allow a
lower employer contribution depended on who would get the
benefit.
11:52:34 AM
Co-Chair Neuman thought the state paid 24 percent as
opposed to 22 percent [related to PERS contributions}. Ms.
Pitney responded that each employer paid $0.22 on every
employee whether they were in the Defined Contribution or
Defined Benefit plan. She noted she had forgotten to
include TRS, which the state paid a larger "on behalf"
payment on. The actuarial rate through the prior year was
35 percent and employers picked up 22 percent; the on
behalf payment was the difference between the 22 and 35
percent for PERS. On the TRS side it was the difference
between the employer payment for TRS of 12 percent and the
roughly 30 percent.
Co-Chair Neuman interjected that the committee would delve
further into the issue.
Ms. Pitney continued that the pension obligation bond
option had more potential than other items, but it would
require significant analysis and discussion.
Co-Chair Neuman noted that for many of the different issues
it came down to how much of the load the state could
continue to carry.
Commissioner Hoffbeck pointed to a chart on slide 23:
"Options (Increase Revenue): Per-Capita Broad-Based State
Tax Revenues, by State, 2014." The chart included various
revenue generating taxes used by each state. For example,
if the state implemented a state income tax at 15 percent
of federal earnings, it would bring in about $550 million.
He estimated that at 700,000 residents it would increase
the per capita state tax burden by $800, which would be
about $1,300 per person. He explained that even with a
personal income tax the state would be the second lowest
taxed state in the nation. Additionally, residents would
continue to receive a Permanent Fund Dividend. He stated
that "the sky was not falling," the state taxes could look
different, but it would not resemble a state like
Connecticut [with very high taxes] in order to balance the
budget.
11:54:48 AM
Commissioner Hoffbeck highlighted options for new taxes on
slide 24:
· Health Care Provider Tax
· Business License/Gross Receipts Tax
· Income Tax
· Capital Gains Tax
· Payroll/School Tax
· Sales Tax
· Statewide Property Tax
Commissioner Hoffbeck elaborated that all of the options
(on slide 24) had been talked about by the legislature
within the past few years. He addressed slide 25: "Options
(Increase Revenue): Lottery/Gaming":
· State Lottery
· Permanent Fund Lottery
· Gaming Rates
· Card Rooms
· Casinos
Commissioner Hoffbeck expounded that he had given two
Powerball interviews in Fairbanks. He relayed that people
were interested in the idea, but it did not generate
significant revenue. He noted that it could generate
between $12 million to $15 million in revenue.
Co-Chair Neuman asked what it would cost to operate.
Commissioner Hoffbeck replied that initially the state
would probably have a contract with the corporation that
ran Powerball nationally. He surmised the cost would be a
percentage. He did not have the information.
Representative Gara believed there was an unintended
loophole in the state's corporate tax. He detailed that C
Corporations paid a corporate tax, but S Corporations only
paid a $100 license fee and no tax. He wondered how much
revenue would be generated if S Corporations were included
under the corporate income tax. In the distant past he had
heard that revenue would be approximately $40 million.
Commissioner Hoffbeck did not have the information on hand;
however, the administration was looking at what it would
take to introduce an S Corporation or Limited Liability
Company tax. He noted that the number was not huge.
Co-Chair Thompson relayed that his office was looking at S
Corporations and was working with the administration. He
offered to work on getting answers to questions committee
members may have on the subject.
Ms. Pitney addressed a flow chart on slide 27 titled "Path
to Fiscal Stability." She explained that the chart
represented the administration's road map to session. She
relayed that the administration was focused on raising
public awareness. She moved to slide 28: "Sustainable
Future Dialogues" and relayed that the administration had
held 17 events to date. The largest had been the June 5 and
6 kick-off meeting. She noted that multiple department
heads had been involved in the events including herself;
Commissioner Hoffbeck; Chris Hladick, Commissioner,
Department of Commerce, Community, and Economic
Development; and Governor Walker. Additionally, there were
a minimum of 25 upcoming events. She thanked members of the
business community and public who were hosting events
including Commonwealth North, Institute of the North, the
Rasmuson Foundation, and others. She discussed the goal of
developing a framework for discussion to provide more in
depth analysis about a proposal from the governor that was
expected in early October. She noted that the proposal
would not include detail on change records and the specific
number of people, but it would include targets and levels
it would propose to the legislature. She continued that the
proposal could be refined throughout the fall; the
administration intended to participate at the Alaska
Federation of Natives (AFN) and Alaska Municipal League
annual conferences to continue moving the dialogue forward.
The formal submission would be made in December, which
would not be a surprise. She discussed that there would be
such a change for the state and the decisions would be
impactful, but the more people who were on board the
better.
Co-Chair Neuman referred to the final column in the road
map on slide 27 pertaining to finalizing legislation and
reporting to the legislative leadership for vetting. He
asked if the administration was considering any specific
legislation and what it would be. For example, a change to
tax credits, a POMV for the Permanent Fund, or other.
Ms. Pitney replied that the information would be made clear
in the October timeframe. She elaborated that the
administration was actively having the conversations
internally and wanted to bring a solid framework forward
that would result in robust conversations.
12:01:07 PM
Representative Gara referred to the list of sustainable
future dialogues on slide 28. He agreed that the groups on
the list were all good; however, it was important to engage
the general public as well. He asked if the administration
had any focus on getting out to the general public who did
not attend Chamber of Commerce, Commission on Aging, and
other meetings. He wanted to hear thoughts from the public
on everything, including oil taxes. He wanted the debate to
include all options.
Ms. Pitney replied that based on the slides, all options
were on the table. She communicated that the administration
was working to engage the public in the discussion as much
as possible. She stated that the Rasmuson Foundation was
moving forward on a larger education campaign. The
administration was committed to getting as much information
out as possible; it was open to providing whatever it could
to legislators or groups to enable them to take the
conversation to "their world."
Commissioner Hoffbeck added that the administration had not
limited the discussions; it had worked to accommodate a
discussion with anyone who had asked. He noted there were a
couple of YouTube videos available for a "meeting in the
box" idea for people to utilize in smaller group
discussions.
Co-Chair Neuman commented that individual legislators had
all be talking to their constituents. He detailed that he
would work with finance committee members on visiting their
communities to hear what the public had to say on the
state's direction.
12:03:35 PM
Vice-Chair Saddler referred to slide 27, column 5 that
related to finalizing a recommendation on a preferred
option. He requested to receive the information as early as
possible, which would benefit the conversation between the
legislature and the administration. He asked the
administration not to wait until it had "it all wrapped up
in a bow" in October. He stated that receiving the
information in advance would allow time to work out a
better deal.
Co-Chair Neuman communicated Representative Pruitt's
request for information on where the administration saw
reductions in the current budget.
Representative Edgmon felt differently than the prior
speakers. He was less concerned with the detail the
administration would provide the legislature on what it
proposed for the next legislative session because he did
not believe any of the options would go forward until the
public bought in. He discussed that the first part of the
presentation had been titled "fiscal challenges" but in his
world it could be labeled "political challenges." He stated
that everyone involved understood that new revenue needed
to come from someplace and that the legislature would not
act until the general public felt the same thing. He
recommended consulting AFN as he believed the federation
planned to address the topic of a sustainable future during
their upcoming convention. He thanked Co-Chair Neuman for
holding the meeting and communicated his appreciation to
the administration for a presentation well done. He
believed the approach would take time and would need to be
a layer by layer method.
Co-Chair Neuman referred to recent news coverage related to
the U.S. stock market. He remarked that the value of
Chinese currency had significantly impacted the market. He
stated that Standard and Poor's had recently provided
thoughts related to downsizing Alaska's credit rating. He
asked for information on how the situation impacted Alaska.
Commissioner Hoffbeck replied that there would be some
impact, particularly if the state decided to begin using
the Permanent Fund earnings as a source of revenue for
state government. He detailed that Permanent Fund earnings
would suffer like anything else in the event of a major
downturn in the market. He relayed that the CBR was pretty
well protected; money had been moved from the subaccount
into safe investments in the main account in the preceding
year in order to protect the funds. He qualified that the
money would decline if the market went down, but it would
not decrease as dramatically as the market. The state had
very little revenue coming in at present due to low oil
prices and a market that was appearing to correct, which
would probably exacerbate the problem going into the FY 17
budget. However, a correction in the market provided
numerous opportunities that were not available when the
market was high; the correction would allow the state to be
more aggressive with investing. He communicated that a
couple of weeks earlier Standard and Poor's had let the
state know it would take Alaska's bond rating back to its
credit committee. He noted that the practice was concerning
and highly unusual. Subsequently, the department had
traveled to meet with the agency and had relayed that the
state was on track with plans outlined by the governor the
prior February. He furthered that due to substantial cuts
made by the legislature the prior session, the state was
ahead of expenditure reductions it had discussed. The
department had shared that the administration had been
traveling around the state preparing to bring a revenue
package forward. He relayed that the agency was comfortable
that the state was on track with its plans, but it made a
strong statement that if they did not see a substantial
closing of the revenue and expenditure gap that the state's
bond rating was in jeopardy going forward. He believed the
end of the legislative session would probably trigger
another response from the rating agencies. He hoped that at
that point the agency would be comfortable that the state
was continuing to move forward. He noted that the problems
would not all be solved in the current year; the process
would be ongoing.
12:09:00 PM
Co-Chair Neuman spoke to work committee members had done to
reduce the state's operating budget. He believed the work
had to be recognized by Wall Street. Commissioner Hoffbeck
replied that it had been recognized.
12:09:24 PM
AT EASE
12:13:52 PM
RECONVENED
^INSTITUTE OF SOCIAL and ECONOMIC RESEARCH PRESENTATION:
ECONOMIC IMPACTS OF ALASKA FISCAL OPTIONS: A STUDY ISER IS
STARTING SOME OF WHAT WE ALREADY KNOW
12:13:52 PM
GUNNAR KNAPP, DIRECTOR AND PROFESSOR OF ECONOMICS,
INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH (ISER),
UNIVERSITY OF ALASKA ANCHORAGE, provided a PowerPoint
presentation titled "Economic Impacts of Alaska Fiscal
Options: A Study ISER is Starting Some of What We Already
Know" (copy on file). He discussed that there was
significant interest as the legislature and administration
spoke about all of the possible ways of dealing with the
fiscal situation. He relayed that ISER was starting a study
that would finish in the fall related to economic impacts
of Alaska fiscal options. His primary message was making
the study as useful as possible for decision makers;
therefore, ISER was interested in any questions the
committee may have about economic impacts. He added that if
time permitted he would talk about what was already known
from past ISER studies. He addressed that Alaska was facing
difficult choices between difficult fiscal options (slide
2):
· We have been running very big deficits
· We have been using reserve funds to pay for the
deficits
· Our reserve funds are running out
· Within a few years, we will have to reduce the
deficits
· Our only options are:
o More spending cuts
o New revenues
o Using Permanent Fund earnings
One of the issues in making these choices is how
different options would affect our economy.
Co-Chair Neuman suggested making an addition to the slide.
He stated that there were plenty of laws directing the
state. He communicated that the committee would look
heavily at passed legislation that increased the budget. He
elaborated the intent to review the legislation to
determine whether all of the projected costs had come to
fruition and whether all of the employees were needed. He
believed the legislature needed to take a look at taking
some laws off the books and refining statutes guiding
regulations.
Mr. Knapp agreed and viewed the option as a method to get
spending under control. He would add the idea to the
options considered in the study. He turned to slide 3
titled "ISER is doing a study of economic impacts of Alaska
fiscal options":
· $60,000 study funded by DOR and OMB
· Study is just beginning
· Timeline
o Mid-September: Preliminary report
o Mid-December: Draft final report
o Early January: Final report
Mr. Knapp expounded that the preliminary report would
summarize the past analyses on the topic and the draft
final report would include new information. He turned to
slide 4:
We welcome your advice about this study
· We want the study to be helpful to Alaskans
o Particularly to the legislature which has to
make the hard choices
· We welcome your advice:
o Today or any other time
o By email, phone, meetings
o What fiscal options do you want to know about?
o What economic impacts do you want to know
about?
· We will form an informal study advisory group:
o Looking for a wide range of perspectives
o Will meet by teleconference two or three times
ƒ To advise about study design
ƒ To review preliminary and draft final
reports
o We would welcome legislative participation
Mr. Knapp elaborated that ISER was interested in learning
about the kinds of economic impacts that were of interest
to the legislature (e.g. employment, jobs, and others).
12:18:44 PM
Mr. Knapp addressed slide 5 and emphasized that ISER was
not advocating for or against any options. The goal of the
study was to help inform the discussion and to compare
impacts of different options in a consistent, objective
way. He moved to slide 6 and relayed that the study would
look at economic impacts of a broad range of fiscal options
including spending cuts, bringing in new revenues, or using
Permanent Fund earnings.
Representative Guttenberg asked if the ISER analysis was
connected with DOR's view and analysis of tax credits. Mr.
Knapp answered that the ISER study was independent of any
analysis done by the department; however, it would try to
use similar names and basic assumptions. He detailed that
if the department looked at a specific income tax, ISER
would analyze the impacts of the same kind of income tax.
He explained that ISER would try to look at the same kind
of thing if the department looked at how much a certain
option may raise.
Representative Guttenberg referred to oil and gas credits
and taxes. He wondered where new economic benefitted jobs
went and who got the jobs when there was talk about new
jobs and production. He wondered if the jobs would actually
benefit the Alaskan economy. Mr. Knapp replied that the
question was important and was of interest to ISER and many
others.
Co-Chair Neuman replied that the committee would continue
to explore the question. He relayed that he had spoken with
Mr. Knapp about how the oil and gas industry would react to
oil and gas taxes. He noted that there had been many
applications for the current credits, which did not pay
anything unless money was spent. He questioned how the oil
and gas industry would react if the credits were
discontinued.
Mr. Knapp answered that the specific issue was particularly
difficult and complex with significant uncertainty. He
elaborated that part of the economic impact of changing oil
taxes or credits was related to how the industry may react,
which was uncertain to start with. Secondly, if the
industry changed its exploration or behavior as a result of
the changes to taxes or credits, how it could impact future
production was also uncertain. He stated that some of the
issues were inherently complex or uncertain; therefore,
ISER would try to lay out a way to think about the issues.
12:23:00 PM
Co-Chair Neuman asked members to consider any questions
they may have related to the issues so they could be
included in the presentation. He relayed that one of the
concepts he had discussed with Mr. Knapp was what would
happen if the influx of cash did not go into the state's
economy under a POMV methodology. He explained that many
businesses depended on the Permanent Fund Dividend for up
to 30 percent of their annual revenue. He wondered what
would happen if the money no longer went into the state's
economy to private industry or small businesses. He wanted
to spur committee members to come up with similar questions
to refine the direction of the conversations the committee
would have on the subject.
Co-Chair Thompson pointed to slide 6 and stated that he had
heard that many people would prefer to see a sales tax
instead of income tax. He believed there were already 90
communities that had a sales tax. He wondered how an
additional sales tax would impact those communities.
Co-Chair Neuman added that the topic was of interest
particularly with the loss of revenue sharing.
Representative Gattis addressed new revenues. She asked
whether money taken from private business for government
operations would make it back into the hands of private
industry. Mr. Knapp replied that ISER would definitely
explore the topic. He noted that some of his slides
addressed ISER's past research on the topic.
Vice-Chair Saddler wondered if ISER planned to create a
complex model based on the interaction of all of the
different options. He asked whether the impacts of a
combination of approaches would be considered together. For
example, spending cuts combined with the creation of an
income tax. Alternatively, he asked if the study would only
consider options on a one by one basis.
Mr. Knapp answered that the study would do two kinds of
things. The first goal was to determine the relative effect
different options would have on the economy. For example,
if the goal was to reduce the deficit by $500 million, the
study would look at how various changes would impact the
state (e.g. cuts to capital spending, school spending,
through a sales or income tax, or through dividends).
Secondly, the study would look at how utilizing various
options simultaneously would add up together to impact the
economy as a whole.
Co-Chair Neuman relayed that he and Co-Chair Thompson had
been talking with ISER and OMB. He asked committee members
to provide specific questions to the co-chairs and relayed
that they would look at putting together a contract or
proposal for ISER from the House Finance Committee. He
wanted to ensure that members were as informed as possible
on the economics. He had asked Mr. Knapp to look at the
impacts of the budget reductions in terms of jobs. He
elaborated that every $100 million reduction in operating
funds equated to about 866 jobs, whereas, every $100
million reduction in capital funds equated to about 950
jobs. He stated that the reductions made the past session
could mean 8,000 to 10,000 existing jobs. He addressed how
the impact would affect the economy. He spoke to a long-
term sustainable budget between $4 billion and $4.5 billion
and how it impacted the economy.
12:28:18 PM
Representative Gara did not believe the state was close to
fixing the problem. He noted there were many people looking
at oil tax reform, income tax, sales tax, and cutting the
budget; however, he believed the best thing the state could
be doing was to hear from people. He thanked Mr. Knapp for
the work. He thought it was important to debate all of the
options. He addressed income tax and asked Mr. Knapp to
provide information on its impact. He provided a scenario
of a 15 percent state income tax, which would be deductible
from a person's federal taxes. He surmised that with the
federal deduction the income tax may provide a smaller
number to the state. He addressed oil taxes and credits. He
discussed that Mr. Goldsmith had done a net present value
(NPV) analysis the preceding year using a price of $110 per
barrel for new oil. He asked for an NPV analysis of what
the production tax was bringing in for new oil at current
expected prices. He remarked that the analysis on an oil
price of $110 per barrel was probably no longer relevant.
Mr. Knapp answered that the study would certainly include
the first item mentioned by Representative Gara. He agreed
that a state income tax was slightly offset by the
reduction in the federal income tax. On the other hand,
studies of things like the NPV of an income tax was a whole
different topic. He recognized the importance of the topic,
but it was not part of the planned ISER study. He
elaborated that ISER was not studying how much money the
different options would generate or whether the state was
gaining or losing money from tax credits. The study was
simply addressing how the changes would impact jobs and the
economy in Alaska.
Co-Chair Neuman asked members to get questions to the
committee chairs.
Representative Pruitt asked about the overall impact to the
housing market in Anchorage if a person's income was
affected by a change made by the state. He noted that any
impacts would have secondary ramifications of affecting
property tax values. He was interested in the "finer
things" that could potentially have longer-term impacts.
Mr. Knapp answered that ISER had received a set funding
amount from OMB and DOR for the study. Given the set
funding, ISER had set its focus on jobs and income-type
impacts. He agreed that the effects different changes would
have on the housing market was clearly very important;
however, it was beyond the scope of the current study. He
relayed that if additional funding was provided, ISER could
expand the study.
12:33:45 PM
Representative Pruitt wondered if the study included a
discussion on salaries. He asked how changes in the state
would trickle down through the economy. For example, if a
person was currently making $70,000, but changes in the
state meant that jobs would remain albeit at a lower wage.
Mr. Knapp replied that he had not considered the issue. He
observed that another effect could be on the labor market,
which could end up impacting wages. He had not planned to
study the topic, but it could be added on. He added that he
would need to think about how the topic would be included.
Co-Chair Neuman stated that the presentation was aimed at
inspiring the questions.
Representative Edgmon asked if the study would help him (as
a representative of smaller communities) better understand
the economic multiplier impact of budget cuts. He spoke to
potential cuts of $500 million to $700 million by the
legislature in the next legislative session. He stated that
many of the cuts would hit smaller communities much harder.
He believed that the state was currently in an
unprecedented chapter in Alaska's history and if so, that
the cuts would be sustained. He elaborated that it would
not be possible to backfill a school that was shutdown, the
Village Public Safety Officer (VPSO) that left, or a public
radio station that was closed down. He noted that a
symbiotic relationship existed. He asked if the
relationship could be measured by ISER's analysis to the
extent that many of the cuts would land statewide, but many
would be borne proportionately more by small communities.
Mr. Knapp replied that it was the goal of the study to
address the topic, albeit perhaps not as completely as
Representative Edgmon would like. He referred to slide 7
and explained that the study would look at how various
things like spending cuts, taxes, and cutting dividends
would impact different sectors of the economy, industries,
regions, and income groups. He pointed to cities like
Juneau and Fairbanks where state government jobs made up a
significant part of the economy. He pointed to rural areas
where local government and school districts made up a big
part of the economy; much of which was funded by state
spending. The study would try to show how different kinds
of places were affected in different ways. He elaborated
that [Permanent Fund] dividends were a much larger part of
residents' incomes in rural areas of the state; therefore,
a change in the dividend would be a relatively larger hit
in those regions. Likewise, an income tax would be a
relatively bigger hit in cities like Anchorage where
incomes were higher. The study would address how different
kinds of things would impact different communities in
different ways.
Co-Chair Neuman asked for presentation highlights due to
time limitations.
Vice-Chair Saddler remarked that there was distance between
what was good for the state's economy versus what was good
for the state's financial cash flows. He reasoned that
making more jobs could be a good thing on one hand, but it
could cost more services, schools, and roads on the other
hand.
Mr. Knapp replied that the goal of the study was look at
how different fiscal options might affect people, which the
legislature and administration could then factor into their
equation when making decisions.
12:39:11 PM
Vice-Chair Saddler had heard the "rhetoric" that the budget
could not be balanced on the backs of state workers. He
reasoned that it was also not possible to insulate state
workers at the expense of the rest of the state's economy.
Mr. Knapp addressed how ISER would conduct the study (slide
9):
· Review major findings of past ISER studies
· Update past ISER studies using current data
· Review other studies
· Use "input-output" modeling" to estimate short-run
job and income impacts of different options
· Use ISER's Alaska Economic and Demographic Model to
estimate long-term economic and demographic impacts
· Use IRS income data to estimate how fiscal options
would affect different income groups
Mr. Knapp discussed limits to the study on slide 10. He
relayed that ISER could not provide precise answers about
exactly what would happen under different fiscal options.
He communicated that there was significant uncertainty. For
example, the effect of budget cuts depended largely on how
the cuts were made (e.g. reduced employees, reduced rent,
reduced photo copy bills, and other). Additionally, longer-
term "feedback" impacts of fiscal options on investment,
migration, and economic development were harder to project
and analyze. He relayed that ISER would do the best it
could to provide the information.
Co-Chair Neuman noted that the committee was looking at
different administrative budgets by department. He wondered
if there was a way to look at reductions in certain budgets
and how they would impact the economy. For example, the
Department of Natural Resources (DNR) was responsible for a
substantial amount of the state permitting, which created
more jobs.
Mr. Knapp replied that a function such as permitting was
essential to the functioning of many different industries
such as mining, construction, and other. He stated that if
the budget was cut too much and permitting slowed as a
result, it could slow a large segment of the state's
economy. He believed it may a different effect than cutting
a school budget, which may not have an immediate impact,
but could slow the economy later. The study would try to
address the issues, but it involved significant detail
given the difference between each of the departments.
Co-Chair Neuman relayed that the committee members needed
to know what the information would look like for the
different departments in their roles as finance
subcommittee chairs. For example, Representative Pruitt
looked at the DNR budget to determine how it would impact
other businesses and their ability to operate within the
state.
Mr. Knapp replied that the items were outside of the
current scope of the study. He relayed that an expanded
budget would enable ISER to study additional things. He
pointed to a 1987 ISER study on slide 11 titled "A
comparative Analysis of the Economic Effects of Reimposing
Personal Income Taxes, Reducing Permanent Fund Dividends,
or Reducing State Spending." He communicated that ISER had
been studying the issue for a long time. He pointed out
that the topic of the paper was eerily similar to the
questions the state was considering at present. He
addressed what had been learned in past studies on slide
13:
· There are no painless options
· All our fiscal options would affect Alaska's economy
· Different options have different economic impacts
o Different impacts on industries, income groups
and regions
o Different effects on investment, development
and future revenues
Mr. Knapp elaborated that any fiscal option would have
economic impacts. He stated that it was a matter of "what
kind of pain do you want to take." He referred to language
from the 1987 study (slide 14): "...either reimposing
income taxes or reducing dividends would reduce purchasing
power of Alaskans and, therefore, cost the economy jobs and
income." He expounded that because people had less money to
spend, jobs and income would be impacted. The study had
also considered whether implementing a personal income tax
or cutting Permanent Fund dividends would have a bigger
impact on the state's economy. It had found that a personal
income tax would have a lesser impact on the economy than
cuts to dividends because dividend money tended to go
directly into spending, whereas, income taxes generally
came from wealthier residents who tended to save more of
their income. He explained that it was necessary to analyze
whether the evidence still pointed to the same conclusion.
Additionally, the 1987 study had found that cutting state
spending could have an even greater impact on jobs than
imposing taxes or cutting dividends, but it depended on the
type of spending.
Mr. Knapp addressed a question on slide 17: "How many jobs
are created by $1 million in state spending?" He noted that
the question could be run in reverse by asking how many
jobs would be lost if $1 million was cut from state
spending. He noted that the estimates shown on slide 17
were from 1999. He pointed out that "you get the most jobs
for your dollar from hiring people directly." He elaborated
that state workers spent their income and injected it into
the economy; therefore, in a job sense, cutting state
spending would cost more jobs than cutting the dividend.
However, there was a larger impact on residents' incomes if
they were directly given a dividend because individuals
tended to spend the money, thereby creating more income for
other people.
12:46:02 PM
Mr. Knapp addressed how different ways of state spending
impacted jobs (slide 21). He stated that how a cut was made
to spending really impacted the effect. For example, if the
number of employees were kept at the same level, but their
pay was cut (jobs had not been cut, but income had gone
down), the amount of money recirculating in the economy
would decrease. Additionally, different types of options
had very different distributional effects in terms of "rich
people, poor people." He noted that Alaska residents had
widely varying incomes. He pointed to estimates from a 1993
ISER study on slide 22. The study addressed how different
fiscal options would impact how much income residents would
give up. He elaborated that an income tax impacted
wealthier people more, while eliminating dividends impacted
poorer people more. Slide 23 illustrated that different
parts of the state varied tremendously in how dependent
they are on state and local government as part of their
economy. For example, state spending cuts to something like
education that supports a significant part of local
government would have a different relative impact in
different places. He remarked that all of the information
needed to be updated for the present. He added that there
were also many more questions to be answered in addition to
information included in the past ISER studies. He
reiterated that in addition to studying the information,
ISER's goal was to help the legislature and administration
answer questions that mattered to them.
Representative Gattis observed that federal government had
not been included in the chart related to "State and Local
Government as a Share of Total Employment" on slide 23. Mr.
Knapp replied that the study could include the portion of
federal government spending that was dependent on state
matching funds. Representative Gattis believed "it makes a
difference in different regions on what type of income that
they have." She surmised that if state government was cut,
the local and federal government would have to pick up the
slack if available.
Representative Gara remarked that the past 20 years of
ISER's work had looked at cuts and spending, income and
sales tax, and dividend cuts; however, it had not looked at
oil taxes. He hoped that would not continue and believed if
it did that the public would become alienated.
Co-Chair Neuman asked Mr. Knapp to briefly address his
second presentation.
AT EASE
12:50:55 PM
RECONVENED
12:52:27 PM
^INSTITUTE OF SOCIAL and ECONOMIC RESEARCH PRESENTATION: A
FEW OBSERVATIONS ON ALASKA'S FISCAL CHOICES
12:52:27 PM
Mr. Knapp addressed a PowerPoint presentation titled "A Few
Observations on Alaska's Fiscal Choices" (copy on file). He
relayed that over the past six months he had been trying to
figure out how to help explain the state's difficult fiscal
challenge to Alaskans. He had recently given a presentation
to the Fairbanks Chamber of Commerce and had taken several
slides from that presentation to help frame some of the
items under discussion by the legislature. He stated that
it was well known that the lower the price of oil, the
larger the funding gap became. He pointed to a chart on
slide 2 illustrating what the funding gap would be based on
different oil prices. At $100 per barrel the funding gap
would be $1.4 billion, whereas at $60 per barrel the
funding gap would be $3.2 billion; the lower the price the
bigger the problem. He noted that the state faced two
different choices (slide 3):
When will we fill the funding gap?
How will we fill the funding gap?
Mr. Knapp expounded that the state faced a tradeoff between
acting later and acting sooner. The longer the state
delayed, the longer the immediate pain and effect on the
economy would be put off (slide 4). Additionally, there
would be less unnecessary pain if oil prices recovered.
However, there were negative repercussions of waiting to
act (slide 4):
The sooner we risk draining our reserves
The bigger the risk of facing drastic immediate
adjustments
The greater the risk to our credit rating
The greater the risk to investor confidence
The lower our future investment earnings from savings
The less savings we leave for future generations
Mr. Knapp addressed how the state would fill the funding
gap on slide 5. He remarked that none of the options were
easy or popular. He turned to slide 7 titled "How Much
Could Spending Cuts Fill the Funding Gap." The vertical
bars illustrated how much money the state may get from
taking certain actions. Three of the bars showed savings
that may be achieved from different levels of spending cuts
and one showed what may be saved by some approaches to
changes to oil and gas taxes that DOR had looked at. He
mentioned revenue that could be generated from statewide
income, sales, or property taxes (slide 10). He addressed
different ways of using Permanent Fund earnings (slide 15).
He stressed that if oil prices remained low, it would take
a multitude of things to fill the funding gap.
Co-Chair Neuman remarked that legislators needed to look at
how much government the state could afford. He stated that
ISER and Institute of the North had both looked at a
sustainable budget scenario where expenditures were $4.1
billion to $4.5 billion. He wondered if the amount was
still accurate.
Mr. Knapp replied that the analysis had been done by Dr.
Goldsmith who had determined that with all of the revenue
sources combined (e.g. oil, gasline, and investment
revenues from Permanent Fund earnings) the state could
sustain a spending level of about $4.5 billion. He
qualified that the state could only sustain the amount if
it was willing to use investment revenues from the
Permanent Fund, which had not been done in the past. Dr.
Goldsmith updated the information annually based on the
current estimate of future resource revenues and investment
earnings. He communicated that the analysis was not an
official ISER recommendation. He reasoned that the
legislature could decide how useful the analysis was in
informing its decisions about the direction it would take.
1:00:02 PM
Co-Chair Neuman stated that the information from
organizations like Institute of the North and the business
industry was helpful for the legislature find a target
point.
Co-Chair Thompson observed that the estimates were all high
compared to the current oil prices. He thought it was
prudent to look at what would happen if oil prices did not
increase. He believed contingency plans were necessary and
did not foresee the situation being a short-term problem.
Mr. Knapp shared the concern. He was scared about oil
markets and some of the recent analysis. He believed
everyone had been hoping that low oil prices seen in the
prior year were a very short-term phenomenon; however,
recent news did not make it look like oil prices would
increase.
Representative Gara bristled at the fact that Dr.
Goldsmith's analysis always left out oil taxes when
considering a sustainable amount of expected state revenue.
He agreed that it was a number, but it was a number
assuming that industry was not asked to contribute more of
its share.
Mr. Knapp believed Representative Gara's observation was
correct. The number [in Dr. Goldsmith's analysis] was based
on assumptions about the way the state taxed oil and what
would be possible. He believed that the observation was
fair. He reasoned that perhaps a different sustainable
number could be achieved if another way of taxing oil was
assumed. On the other hand, changing oil taxes introduced
how it would impact future production. He stated that of
course how much money the state would have in the future
depended on what kind of taxes the state had and how they
were structured. However, he stated that "it doesn't mean
that you could just sort of change the tax in some way and
just choose a higher future number because there are limits
to how much you can get."
Co-Chair Neuman wanted the presentation to spur different
questions from committee members. He mentioned the
possibility of entering into a contract or negotiations
with ISER and was interested in the types of questions
committee members may have. He noted that questions could
be targeted to members' specific finance subcommittee
budgets. He remarked that the committee had good regional
balance. He relayed that he had asked Ms. Pitney to provide
information on where a proposed $30 million unallocated
reduction that covered the cost of increases for salaries
for union employees would come from. He wondered where the
various departments had taken the reduction. He asked if
the reduction was really $30 million or $60 million. He
noted that Representative Munoz had sponsored legislation
that increased funding for the SPAR Fund under DEC. He
communicated that SPAR Director Kristin Ryan had assured
him that the increased funding had not been used to
backfill reductions to the department.
ADJOURNMENT
1:05:37 PM
The meeting was adjourned at 1:05 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Fiscal Stability House Finance 8-24-15 FINAL Revised.pdf |
HFIN 8/24/2015 10:30:00 AM |
|
| Gunnar Knapp-a few observations on Alaska fiscal choices.pdf |
HFIN 8/24/2015 10:30:00 AM |
HFIN Fiscal Stability ISER |
| Gunnar Knapp-Testimony for House Finance Committee Economic Impacts of Alaska Fiscal Options - Aug 8 2014.pdf |
HFIN 8/24/2015 10:30:00 AM |
HFIN Fiscal Stability ISER |
| Final response with attachments.pdf |
HFIN 8/24/2015 10:30:00 AM |
Interim OMB - HFIN - Response |