Legislature(1995 - 1996)
10/02/1995 09:00 AM House LRP
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
LONG RANGE FINANCIAL PLANNING COMMISSION
BRIEFING TO SPEAKER PHILLIPS, PRESIDENT PEARCE
AND GOVERNOR KNOWLES
October 2, 1995
Anchorage, Alaska
9:00 a.m.
CHAIRMAN BRIAN ROGERS: ...in the long run, the 10- 15- and 20-year
horizon, the permanent fund can pick up part of the loss of
revenues associated with the decline of Prudhoe Bay field. We
think this plan has a number of accomplishments. The stability of
state revenues is improved, we impose some spending discipline on
the state, we clearly define a role of the permanent fund in
Alaska's future, we think it clears up some of the confusion over
the cash reserves, we suggest embarking on some structural changes
in state government, we think we addressed the issue of the public
involvement in that the key element of the plan requires a public
vote, and the suggestion in the out years for an income tax is
subject to triggering and an ability of the legislature and
executive to postpone that by making other decisions. Finally, I
think the plan achieves some balance - two-thirds of the commission
endorsed the three year and the long range plan. Among those who
didn't endorse it, there were both the feelings that too much goes
into the permanent fund and that too little goes in the general
fund. The plan closes the fiscal gap - the current $500 million
fiscal gap by the year 2000 and offers state policy makers clear
choices thereafter. I should note that while most of my comments
are going to relate to general fund spending, we are addressing the
difference between total spending and general fund spending in the
report to clearly identify those areas that affect the fiscal gap
and those gaps that don't affect the fiscal gap. The plan has four
basic elements dealing with state spending, with taxes, with the
role of the permanent fund, and permanent fund dividends. And it
establishes a review process in the winter of 1998-1999 to make
additional decisions. We do suggest, however, that whatever group
is called to make those further recommendations that you adopt a
term limit philosophy and none of us be eligible to serve on that
future commission. (Laughter).
The plan addressed by two-thirds of the commission then is as
follows: First, on the spending side, we suggest reductions in
nominal dollars in the bottom line general fund spending of $40
million - at least $40 million in the 1996 session; $30 million in
the 1997 session; and $30 million in the 1998 session; and then in
the 1999 session, enough restraint on spending that we're balanced
that year. That amounts in the first three years to a nominal
dollar reduction of 100 million against the current general fund
spending of 2,476,000,000. In real dollars, that amounts to
approximately a $300 million reduction or 5 percent per year
reduction in existing services and on a per capita basis, amounts
to a 20 percent reduction over the four year period. The state
currently spends $4,000 per capita and in terms of real purchasing
power, would be about $3200 per capita in the year 2000. Those
spending cuts will not be easy to achieve. I think those
legislators who are present recognize the difficulty that the
legislature's had holding the line the last several years and
cutting somewhat in the last year. Particularly when we're faced
with some real challenges in the next several years. The biggest
challenge being the probability of transfer of federal
responsibilities to the state and in addition, a pent-up demand on
the capital side to address issues such as village safe water,
deferred maintenance, the public schools. Notwithstanding those
demands for services that the federal government will place on us
and the existing demands for infrastructure, we still recommend
those nominal dollar cuts of about 100 million, real dollar cuts of
about 300 million.
Second, over the same three-year period, we recommend about 150
million in new taxes and user fees. The -- we recommended in the
1996 legislative session, the adoption of a dramatic increase in
the taxes on tobacco and tax on alcoholic beverages. The tobacco
tax, we recommend an increase of a dollar per pack of cigarettes,
and equivalent increases on other tobacco products and a rough
doubling in the total take on alcohol taxes with a balancing
between beer, wine and distilled spirits. We also recommend the
adoption of the marine motor fuel tax and a highway motor fuel tax,
bringing us up to national median of about 22 cents a gallon on the
marine -- excuse me, on the highway motor fuel tax or roughly a
penny a mile for a total tax level. In the 1997 session, we would
recommend increasing motor vehicle license fees, roughly doubling
the motor vehicle license fees and removing most of the exemptions
from payment of the motor vehicle license fees. And we recommend
new taxes to take a portion of the -- to hit at the tourism
industry and tourists, generally. We don't have specifics on that
one and second on fisheries and other resources. And we recommend
indexing of other user fees to generate an additional $3 million
every year.
On the permanent fund side - this is the major structural change -
the commission recommends going to the voters with a constitutional
amendment which does two things. First, establishing the permanent
fund as an endowment fund with a set payout rate of 4 percent of
the average market value of the permanent fund for the preceding
five years. That endowment and payout approach -- that the payout
approach of 4 percent of a five-year average is common in endowment
funds across the country and over the long run preserves the
purchasing power of the endowment by basically. on the good years,
making large inflation-proofing deposits, on the bad years, small
inflation-proofing deposits, fully covering inflation. We
recommend this 4 percent level with the expectation that the
permanent fund will be able to retain earnings in excess of
inflation-proofing; thus building up the fund in the early years.
We also recommend in that same amendment raising the dedicated
percentage of royalties and bonuses to the permanent fund from 25
percent to 50 percent. The current Constitution says 25 percent
and current statute says 50 percent on new fields. And this would
recommend going to the 50 percent on all fields. Thus, holding on
to a greater proportion of Alaska's oil capital wealth in the form
of the permanent fund capital wealth. We also recommend deposit of
the entire permanent fund earnings reserve into the permanent fund
and depositing from the constitutional budget reserve all amounts
in excess of 1.5 billion on an annual basis into the permanent
fund. We recommend either in the same constitutional amendment or
as a separate constitutional amendment, revisions to the
constitutional budget reserve: First to allow use of funds from
the CBR based on revenues rather than spending and to eliminate the
sweep provisions of the constitutional budget reserve. And
President Pearce, you asked us to look specifically at that issue.
We think that those two changes take care of the most severe
problems with the current CBR.
Those -- that series of steps - the spending and tax decisions of
the next legislative session, the -- oh, excuse me, and then
finally related to the permanent fund, on permanent fund dividend
we recommend a stepping down of the permanent fund dividends
payment. The current year, the state will be spending 565 million
on permanent fund dividends; we recommend dropping that dividend
pool by 50 million per year for three years which would have the
effect of stepping down the dividend from the current 990 to
approximately 900 next year, 800 the year after that, and 700 the
year after that, and freezing the dividend pool at $415 million
thereafter. That puts us in a position in 98-99 where a new
commission would look at making a call for the next five to ten
years. The two-thirds majority of this commission would favor the
next step being an income tax that would be adopted the year before
-- it would be actually have to pass two fiscal years before the
state would next run a projected deficit. And the two year advance
is because of the gearing up time for an income tax. It's our
projection, based on the assumptions we've used, that that would
require action in the 1999 or 2000 legislative session for an
income tax beginning in 2001 or 2002, depending on what happens
with revenues between now and then.
Turning a little bit to the spending side, we have some general
recommendations on the spending side. Our interim report listed
four scenarios of budget reductions that would totally close the
gap today. We don't endorse as a commission any of those
particular scenarios, but we have a series of budget
recommendations that we would ask the legislature to consider.
First, in the area of salaries and benefits. A large proportion of
state spending is on salaries and benefits for state employees and
for the employees of the school districts that are largely funded
with state dollars. We recommend adoption of a retirement
incentive program with a new tier-three retirement system. The new
tier-three would reduce retirement benefits for new employees first
hired after passage of the new retirement system and while we don't
have specifics, generally the issue would be number of years to
vest, the amount of annual income from vesting, and issues such as
that reduce the long-term cost of the retirement system. In
addition, things like employer contributions might be considered in
that. The retirement incentive plan, together with the tier-three,
offers substantial opportunity for personal service savings for the
state, local government and school districts. We also recommend
implementation of new geographic pay differentials for non-covered
employees and a regular look at geographic pay differentials that
might be used in negotiations with employees involved in collective
bargaining. And we recommend that the state undertake a study of
salary and benefits for comparable employers, which in some cases
would be employers, say in the Northwest states, in other states --
in other cases, it might be comparable employers in the private
sector in Alaska and a move over time to peg Alaska's public
salaries and benefits to the market. Second, we ask that the
Administration undertake an administrative realignment,
streamlining, re-engineering -- there are a number of buzz words
for that, but look at opportunities to consolidate administrative
support functions, possibly reduce the number of state agencies,
and look at more efficient ways of providing the public services
that the state can continue to afford after making the kinds of
budget reductions that are called for in the plan.
We suggest changes in policy that would slow the growth of the
major formula programs, slowing the growth of education, of the
health, social services and the corrections budgets.
Unfortunately, the commission did not have enough time to really
get into these issues, but we believe that in aggregate, there must
be changes that reduce that growth. And we think that others, with
more time, may have some suggestions in that area. We suggest the
look at health plans and we have a lot of public employer health
plans - state government, local government, school districts,
university and then the substantial Medicaid expenditures of the
state and look for ways of combining, self-insuring, and other
methods to reduce over the long run the substantial cost of those
health plans.
We looked at the Alaska Longevity Bonus program and there's strong
feelings on that program; it's one of the highest cost non-needs
based programs in the state. We make a recommendation that if the
-- there is a -- if the lawsuit -- if the court were to determine
the current phase-out plan for longevity bonus - if the court were
to throw that out, we would recommend a repeal of the program. The
state cannot afford that program without the current phase-out
plan. We do not have consensus on the commission about what to do
with the plan - whether to make further reductions, although there
is substantial sentiment on the commission to make other changes to
reduce the cost of the Alaska Longevity Bonus program. But again,
we don't have a consensus or a report item on that.
In the local government area, we have several suggestions. Some
small ones in terms of closing the gap such as repealing the senior
citizen tax exemption mandate at the state level. The state
currently mandates that the local governments provide a full
exemption for $150,000. The state only funds approximately 15
percent of the cost of that and we recommend that that state
requirement be repealed and replaced with a local option that would
allow local governments to determine the size of senior citizen tax
exemption that they wish to offer - if they wish to offer one at
all. We suggest shifting inspection functions to local government
wherever possible and eliminating state general fund support for
troopers in communities with a population over 2500, with the
ability of those communities, if they wish to contract for police
protection with the troopers, to do so.
We have a series of other budget issues, most of which provides
smaller savings and I think the majority of the commission believes
that if we had more time, we would have been able to give you
better -- a better series of recommendations and go through a
series that might give a majority. We do suggest looking at issues
of privatization and contracting out where there are opportunities
and looking at opportunities for, I guess, the converse of out-
sourcing which is in-sourcing, allowing groups of state employees
who are currently providing a service to effectively bid to
continue to provide that service with -- if they can do it at a
lower cost than the private sector.
This plan, we believe, has something to offend everyone. We think
that no one will be happy with every element of the plan, just as
the majority members of the commission. For each of us, there are
provisions of the plan which we don't like, but the majority of the
commission felt that on balance, this plan is the best plan for
closing the fiscal gap and providing a long-term opportunity for
the state to live within its means. We hope that the Governor and
the legislature will take both the final report, once it's out, and
the interim report which lists other choices, and use those to
secure a stable fiscal future for Alaska. We think that failure to
take action - while on many of these, politically preferable -
would have the state drive off the revenue cliff in three or four
years and create a very tarnished future for Alaska. We think this
plan keeps Alaska, keeps the opportunities that Alaska has, and
again allows us to live within our means.
Let me turn now to other members of the commission to add any
ancillary points or additional points that I may have missed. We
finished our work at 4 o'clock yesterday and we expect to -- we
still have the report to write so it's quite possible that in my
notes I've missed elements of the plan. Let me first turn to the
vice chair of the commission, Judy Brady in Anchorage.
JUDY BRADY: Thank you, Mr. Chairman. I -- I think that you
covered all of the main points very well, just as you have been a
wonderful chair for this organization -- for this commission. We
did have, as you can imagine, lots of disagreements and lots of
trade-offs and it did come down finally to those of us - to the
majority who voted on this plan - is that doing something was more
important than doing nothing. And that giving up some things we
never thought we would give up was more important than never doing
anything. Everyone does participate. All Alaskans do participate
in resolving this issue. Everybody does have to give up something
and we come out as Bruce Ludwig talks about a lot, something for
ourselves and something for our grandchildren. And actually our
great-grandchildren. We, I think, are all very proud of what we've
accomplished - proud of our ability to make trade-offs and we
commend this plan to you, hoping that both the Administration and
the legislators can make the same kinds of trade-offs so that we do
end up bringing this to closure this next session. Thank you.
BRIAN ROGERS: President Pearce, if you're still on the line, I
know you have to leave quickly, are there - do you have any
questions before you leave?
SENATE PRESIDENT DRUE PEARCE: Thank you, Brian. I don't have any
specific questions. I've been sitting here furiously taking notes.
I knew how hard the group had worked and I would just say we do
very much appreciate all the hard work and I look forward to
reading your final report. I see some things that I'm not only
very glad that you looked at, but also very glad that you had the
courage to come up and step forward and say these are things that
need to be done. And I, along with Gail and the Governor, do plan
to take your commission report to the people and work with you to
continue to explain what you came up with and I hope we go back to
Juneau and begin to put some pieces in place.
BRIAN ROGERS: Well, thank you and let me turn to other members.
First, at the Anchorage site, other members of the commission who
may have comments, I see Bruce Ludwig, Sean Parnell and Pat
Pourchot. There may be others who are off camera right now. Bruce
do you have anything you want to add.
BRUCE LUDWIG: I think you've covered the plan real well. I just
stress,like Judy did and you mentioned that -- that there's
something in here that offends all of us, there's things that --
that we don't like, there's things that we do like, but it's
important that we do something. I've been real impressed with the
ability of the different members to compromise and work with each
other. I think we've all represented pretty diverse groups and
feel real proud that we do have a plan.
BRIAN ROGERS: Sean.
REPRESENTATIVE SEAN PARNELL: Thank you, Mr. Chairman and Governor
and Madam Speaker and Madam President, if you're still on the line.
As the chairman knows, I was one of the dissenters from this
majority report or super majority report, and I am going to
strongly dissent for a couple of reasons. One is for what I call
an ornamental reason and secondly for a more fundamental reason.
On the ornamental side, we mean the kinds of ornaments or tools
that have been used here on this tree, I disagree that the people
of Alaska will accept use of the permanent fund earnings, cuts in
their dividends, raising taxes, without any meaningful downsizing
of state government. I just do not feel that -- yes, there have
been a lot of trade-offs around this table, but fundamentally,
we're assuming that status quo is okay in terms of the size of
state government spending. And I believe that fundamentally we
have to assume that we will not be able to spend at the same rate
as we have been in the past. So, that's one -- one problem I have
with the plan. More fundamental than that and this -- this is
where I diverged philosophically from the group. I do not believe
we have defined what is a sustainable level of spending. I think
we are still dependent upon volatile oil prices. We have not yet
been able to define what in the future we will have to spend. I
don't think this plan does it. I think, however, on the positive
side because I do not like to be negative in toto here. On the
positive side, this group and every member of this group has spent
hundreds of hours coming to this point and so a number of wheels
have been invented that I think we all will need to take back to
the legislature, we will need to further open it up to public
debate and scrutiny and I look forward to working with the
Governor, the Speaker, the President, the other members, and the
members of the public in crafting a plan that will work for the
future of Alaska because I think we're all in this together and
we're all going to work together to make it happen. Thank you.
BRIAN ROGERS: Pat.
PAT POURCHOT: Thank you, Mr. Chairman. Sean's remarks make me on
one level want to start our debates all over again, but I'm going
to refrain. We've already put in enough time on that. I did want
to take the opportunity though to thank the presiding officers for
their appointments to the commission. Of course, we all know the
Governor's appointees were great, but we just really appreciated
and learned and benefitted from the work of all the commission
members and, in particular, your choices and Senator Pearce's
choices of public members were excellent and it really contributed
to a good working relationship. Thank you.
JUDY BRADY: Mr. Chairman.
BRIAN ROGERS: Judy, I want - I want to go all the way around and
then we'll come back. We've got Hugh Motley on the telephone line,
I believe.
HUGH MOTLEY: Yes, I don't have anything to add at this time. I --
I think we came up with the best plan we could come up with
(indisc.) time constraints with the people who were there and it
was a rewarding experience.
BRIAN ROGERS: I see Mike O'Connor in Anchorage. I think -- no?
UNIDENTIFIED SPEAKER (female): No.
BRIAN ROGERS: No? I guess not. Let's move to Fairbanks. Senator
Lincoln.
SENATOR GEORGIANNA LINCOLN: Thank you very much, Mr. Chairman.
Governor and Speaker of the House and I think I heard the President
took off. I, too, want to express my appreciation for, especially
the public members, who gave us a considerable amount of their time
and their personal resources to getting things to a plan, which I
think that the citizens of the state of Alaska can be very proud
of. As was mentioned, we didn't agree on everything. There was a
lot of give and take as our chairman said in his presentation that
this report will offend all, and I had to smile at that when he
said that, because I think also on the other side of the coin is
that the plan also -- I think everybody will be pleased with
certain portions of it. I also believe that the one shining point
of the plan is that for us to say, look we cannot balance this
beyond five years, beyond three years, but at that point in time
that the recommendation is for the Governor and presiding officers
to appoint a group again to follow this along; that this isn't the
plan all the way out to 10 years or 15 years, but that being the
fork in the road that in 99 or 2000 for a group to then look at it
again and reassess where we're at and we should be going. So, I
think that this is a plan that all Alaskans can live with and be
proud of the work that their citizens of the state came up with on
their behalf. And I, too, want to appreciate -- express my
appreciation to the chairman, to the staff, to - as I said,
especially the public members who gave up so much of their time to
come up with a report for Alaska.
BRIAN ROGERS: Mary.
MARY NORDALE: Thank you, Mr. Chairman and I, too, want to express
my thanks for the opportunity to serve on this and especially to
Speaker Phillips. I was one of the dissenters on the plan perhaps,
principally, -- well only because the plan has its cornerstone is
an endowment plan which I disagree with. But I think that the
spending goals, the management of the state's resources as
expressed in the plan, are the best that we could come up with. I
was impressed with the thoughtfulness with which everyone on the
commission addressed the issues. I have concerns, as we all do
that the spending goals, if met, may mean a reduction of essentials
in state services and it's going to call for an enormous amount of
goodwill and discretion on the part of the legislature to preserve
the (indisc.) for Alaska development. The -- I guess I forgot --
I'll just say thank you very much. Again, I wish all you goodwill
and much strength in dealing with the issues now that we have
turned the work basically over to all of you. I again want to
express my appreciation to Brian Rogers. He did an absolutely
magnificent job as chairman of the group of disparate people and
kept us together and I endorse the concept in the next few years it
should be reviewed. I think the most important thing that may come
out of this is that it gives the people of Alaska an overall view
of their state finances and it will make their ability to
participate in the budget process more meaningful because they will
understand their own position with respect to the state's resources
and its goals. Thank you Mr. Chairman.
BRIAN ROGERS: Analee.
ANALEE MCCONNELL: Thanks. Well, I'm real excited about the
opportunities that this plan presents. It is a living document -
we're going to have to be sure not only do we take its overall
sense of direction and move forward public debate on that, but as
we go along, we'll (indisc.) depending on what (indisc.), but I'm
enthusiastic about getting started on that process. I really look
forward to what I hope will be a lot of public support for the fact
that we do now have a sense of direction and some idea of not only
where we're going, but how to get there.
BRIAN ROGERS: Governor, Speaker Phillips we'd also like to thank
each of you for dedicating your staff resources to this commission
- having Melissa Fouse from the Speaker's Office, Brad Pierce from
OMB, Bob Walsh from the House Rules Office really assisted the
commission and there's no way we could have accomplished this work
without their help. Let me turn now to you and see if you have any
questions you want to ask of the commission.
GAIL PHILLIPS, SPEAKER OF THE HOUSE: Thank you, Mr. Chairman. I
first want to say I have to express a great, great sense of
overwhelming gratitude to all the Alaskans who have participated in
this this summer. And I know what it means to give up a summer in
Alaska. And even though the weather wasn't that good this summer,
and the times we to out fishing probably weren't that plentiful.
I just have this overwhelming gratitude to each of you. Alaskan's
desperately want us to do something. The message has been received
loud and clear that we cannot continue on a -- on a trend that we
were perceived to be continuing. There's very strong general
awareness that fiscal disaster must be avoided and that we must be
wise in our choices. And I just want to have -- to say one thing
right now that I think is going to be more clear and more important
than anything else as the legislature and the Administration get
into the nuts and bolts of this plan, there has got to be
partnership on behalf of all of Alaskans for us to make those wise
choices. I do have questions that I would like to have addressed
and we can do that at a later time on the specific cuts, whether or
not you went into any kind of discussion on administrative cuts and
also whether or not you went into any kind of detailed discussion
on privatization - contracting out. Those -- that part of the
discussion will come later. We are -- I will -- we'll coordinate
with Senator Pearce and plan for a joint finance committee hearing
between the House and Senate so that the plan can be brought to
their attention and we'll open that up to the entire legislature
before we get to Juneau so that we can start the preliminary work
on this. But right now I just want to say, Mr. Chairman, how very,
very grateful I am to you and to this whole body for the work that
you've put into this. I appreciate it very much. Thank you.
GOVERNOR TONY KNOWLES: Chairman Rogers, Vice Chair Brady and
members of the commission, I would like to thank you for the effort
that you have put into this. I think that we're all aware that we
are involved and frankly, I'm very proud to be involved in what I
consider to be a historic movement that Alaska is making in getting
its financial house in order. We're beginning to take action on
something that frankly people have talked about - what for 10-15
years. The situation that you have addressed in this report is a
very important first step on that. The very first thing that House
Speaker Phillips and Senate President Pearce and I talked about at
the very beginning of the legislative session was how we could
begin putting Alaska's budget on track. We all agreed a) to the
importance of it and number 2, the need to look for some valuable
help; you have certainly responded to that. You've responded to it
really with intelligence, with honesty, responsibility, certainly
courage, I would also say the humility and humor that you've
approached it in recognizing that you have a plan to offend
everyone. I think it's certainly appreciated. What I would say
you have done it using the sports metaphor of the season - you've
certainly stepped up to the plate. It's now our turn to continue
that sense of responsibility. Everybody's gonna have to ante up.
I think the message that I have certainly heard from Alaskans about
the need to do it, because it's the right, but certainly also as we
look to our financial future, there isn't anyone who is going to
want to do business, invest in Alaska unless we do have our
financial house in order. So this is, I think something that is
going to have enormous repercussions in a very positive sense. I
pledge to work with the legislature in formatting the process by
which we can address this responsibly and I do take very seriously
the one message that I've heard from everybody involved in it, as
well as those who have watched it, that our biggest enemy is
inaction - failure to do anything. You clearly have provided a
very strong alternative. I thank you and I will be in touch as the
final plan gets put out and I will be working certainly with the
public and with the other branch of government in terms of the
details of how we go about putting it into action. Thank you.
BRIAN ROGERS: Thank you, Governor. I think that's -- that's
everything on behalf of the commission. Are there any members of
the commission that I missed in the earlier round? If not, then
again thank you for the opportunity to look at these issues and
we'll look forward to your deliberate consideration of our report.
UNIDENTIFIED SPEAKER (male): Thank you very much.
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