Legislature(1999 - 2000)
03/24/1999 09:05 AM Senate FIN
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SENATE FINANCE COMMITTEE LOG NOTES 03/24/99 GENERAL SUBJECT(S): BALANCED BUDGET PRESENTATIONS (Legislative Finance Division, Fiscal Policy Council, The Alliance, The Alaska State Chamber of Commerce, Resource Development Council, Alaska General Contractors and The Anchorage Chamber of Commerce) The following overview was taken in log note format. Tapes and handouts will be on file with the Senate Finance Committee through the 21st Legislative Session, contact 465-2618. After the 21st Legislative session they will be available through the Legislative Library at 465-3808. Time Meeting Convened: 9:05 A.M. Tape(s): SFC-99 #61, Side A & Side B PRESENT: X Senator Parnell X Senator Adams X Senator Torgerson X Senator P. Kelly Senator Donley Senator Green X Senator Leman X Senator Phillips X Senator Wilken ALSO PRESENT: SENATOR JOHNNY ELLIS; PHILLIP OKESON, Fiscal Analyst, Legislative Finance Division; CHERYL FRASCA, Fiscal Policy Council of Alaska; PAMELA LABOLLE, President, Alaska State Chamber of Commerce; KEN FREEMAN, Executive Director, Resource Development Council for Alaska; KAREN COWART, General Manager, Alaska Support Industry Alliance; ROXANNA HORSCHEL, Associated General Contractors Association of Alaska. SPEAKER DISCUSSION CO-CHAIR PARNELL Convened the meeting at approximately 9:05 a.m. PHIL OKESON Fiscal Analyst, Division of Legislative Finance was invited to join the Committee. Mr. Okeson explained the handout provided by the Division of Legislative Finance with the assistance of an overhead projector. [Copy on File]. He commented that it was the intent to develop models and tools with which to develop a long-range fiscal plan. Presentation Objectives is to look at the current situation in order to understand the magnitude of the problem. The idea is to develop criteria, which might help addressing the current situation. The discussion will be limited to measurable criteria. When looking at a plan, it is important to look at the assumptions of that plan. The Division will be trying to identify the assumptions, which need to be looked at. To begin the analysis, the current situation must be analyzed. That will better define the magnitude of the problem. It is difficult to imagine a $1 billion dollar deficit. The models that are being used are based on the same projections as used in the Governor's model. The most basic assumption that the State has is the oil prices. He highlighted total state revenue. He continued with his overview of the handout. Mr. Okeson noted the downward trend of the model. CO-CHAIR PARNELL Commented that Mr. Okeson was using the number provided by the Office of the Governor, however, that assumption was not the only one "out there". PHIL OKESON Agreed. He continued with his overview of the handout. Mr. Okeson noted that the downward slope continues when starting the projection. Revenues: Projected General fund Revenues shows a downward trend. There is a production problem, not a price problem. He pointed out that the gap between prices is larger later on. That indicates that as production drops, the price of oil becomes less relevant. Mr. Okeson spoke to other current situation assumptions such as the 3.0% inflation. SENATOR LEMAN Asked if it had been factored in that inflation measured by the CPI may be overstated by 1.1% PHIL OKESON Replied that it had not been factored it in directly, however, Legislators can factor that in. He acknowledged that different inflation rates are used for different projects. SENATOR TORGERSON Stated that the Governor's plan does not show inflation? PHIL OKESON Does have some inflation for the education formula (1.5%). Other agencies, in the Governor's plan do not have inflation averaged in. The model used today is based on 20-year plan. SENATOR TORGERSON Questioned if the Division had spoken with the Administration in assessing a zero percent inflation? PHIL OKESON Mr. Okeson stated that he had not. Continued the overview. Underthe Governor's formula allows for a population growth and education formula funding at 1.5% for the population growth in K-12 Education Formula. The only other population growth in the model would be for the dividend only. A 2% population growth for dividend only. He encouraged members to think about the fact that the proposed scenario allows for no growth in population for all other formula or agency expenditures. The permanent fund total return of 7.75%. He acknowledged that it has done better than that in the past years. however, there is a lot of volatility around the 7.75%. The CBR Total Return is projected to be 5.5% if the amount of the CBR is less than $3B and 8.1% if it is greater than $3B. In the current situation, the revenues and expenditures of the State fluctuate a little with the oil revenues. The deficit is $1.2 billion dollars. That will go down a little from the drop in oil prices. Over time the 3% inflation will create a bigger deficit. The Permanent Fund Dividend (PFD) per capita cannot touch the principal because it is protected by constitution. CO-CHAIR PARNELL Asked Mr. Okeson to continue the overview. PHIL OKESON Commented that when creating a plan, it is important to think about sustainability. Alaska Savings Accounts. Savings Account Analysis. CO-CHAIR PARNELL Commented on the current situation savings account analysis. He asked if this was inflation proofing the CBR or all the savings accounts? He believed that this would not apply to the current situation as it would not inflation proof the CBR. PHIL OKESON Replied it would be all savings accounts except the CBR, which would be inflation, proofed. SENATOR TORGERSON Added that it would not inflation proof the earnings reserve or the unrealized gains. He pointed out that account was over $10 billion dollars, consequently, the chart is not realistic. PHIL OKESON Noted that from a financial point of view, a distinction is not of where the State keeps their money. The key is how the purchasing power is maintained. However, the graph shows that we are not keeping up with the purchasing power. He noted the budget deficit line on the graph. The fiscal gap requires a certain amount of saving in order to be filled. The amount that the permanent fund could earn is represented by 7.75%. Everything else is left to fill the gap. If we are not careful with our fiscal assets, "we may be killing the goose that lays the golden egg". SENATOR WILKEN Questioned why the fall would occur in 2007- 2008. PHIL OKESON Provided a brief explanation referencing the graph. SENATOR TORGERSON Commented that $300 million dollars earning does not make sense. PHIL OKESON Replied that the earnings would average 7.75%. More earnings need to be used. He emphasized that the amount available to fill the deficit is a very small amount. Percentage of Capital Gains Realized. Mechanisms we presently use combine to make matters go bad quickly. He suggested that this was an early warning radar. CO-CHAIR PARNELL Explained that the assumption is that the Permanent Fund will realize 21% of their unrealized gains every year. If the State does nothing to reduce budget spending, more of the unrealized gains will be used. PHIL OKESON Noted that the unrealized gains are no longer available to sell. SENATOR TORGERSON Clarified that dividends are calculated on a 5- year average. He questioned how much of the 100% would go back into the dividends. PHIL OKESON Offered to check the exact percentage. SENATOR TORGERSON Questioned the consideration of other revenues. PHIL OKESON Replied that the revenues indicated are hypothetical and that no new revenues had been added to the equation. SENATOR TORGERSON Voiced concern regarding the path the State is taking, however, there are reductions to make and that all the facts have not been presented at this time. PHIL OKESON Stressed that this is only the beginning of the discussion. Mr. Okeson pointed out that money now is always better than money later because you have the ability to use that money to earn interest. CO-CHAIR PARNELL Requested that all questions be repeated for those in attendance in the audience. SENATOR KELLY Referenced Page 9 of the handout and asked about growth pattern. He commented when at 100%, the State would not be receiving funds for the stocks, but would receive funds from the bonds and the real estate. PHIL OKESON Replied that there would continue to be stocks available. SENATOR KELLY Noted that one could not turn stocks to cash without selling the assets? PHIL OKESON Noted that the restraint would be the one put on themselves, not touching the principle. SENATOR KELLY Commented that there would not be cash available even to go to the permanent fund. The State would not be earning anything to turn into principal. PHIL OKESON Understood that the restriction however, believed that probably still would be able to turn it over, but it would be more difficult to earn 7.75%. He refereed to Permanent Fund asking the amount under this scenario. The State could never let the permanent fund go below a specific level. Mr. Okeson continued the overview: $34/bbl Oil Assumptions-Same as Current Scenario, except oil goes to $34/bbl in FY 2000; or Oil never goes down from $34/bbl, in fact it rises every year at the inflation rate of 3% (in FY2020 Oil = $61.41/bbl) and in a good years we are going to put money away because in later years we will need it. Mr. Okeson asked, "What does all this mean?" The Model shows that the problem is not a cyclical problem, but rather it is a structural problem. He commented that these problems cannot be overcome by riding them out rather needs a structural solution. The State will not be saved by oil prices in the long term. The State must begin long-term financial planning. Mr. Okeson stated that the issues facing the Legislature are pivotal at this time in Alaska's history. We will no longer be making large deposits. This is not a short term/cyclical problem, but rather a long term/structural problem. In response to Senator Torgerson, Mr. Okeson explained the large amount of earnings reserve usually was kept in the permanent fund. He referred to the "blow-up" factor; When things go bad, they go bad quickly. It is important to consider that a plan must be looked at long- term dealing with a long-term asset. SENATOR PHILLIPS Commented when referring to "Us", really referring to the Alaska public? PHIL OKESON Agreed, noting that it was not just the Legislature. CO-CHAIR PARNELL Commented that the House and Senate have set aggressive targets and if reductions can be made this year that would mean money gained over the next twenty years. He believed that the more revenues accumulated today, the better off the State will be in the long term. PHIL OKESON Replied that was correct. He noted that the Model does not care if it is cuts or raising revenue programs otherwise, the State begin to systematically use the State's Savings Accounts. The final choice would be a combination of the above concepts, which he believed was the best choice. The end result will need a combination of choices. SENATOR TORGERSON Asked ways in which revenues could be raised. PHIL OKESON He replied that the Division has looked at what the Legislature has suggested, however, have not performed an in depth analysis. He continued with the overview: Potential measurable goals of the long-range plan: 1) Sustainability and intergenerational equity and 2) Stability-Protect the Principal, and 3) Predictability. He explained each component separately. Traditionally, sustainability was attempted to be maintained by the permanent fund. The second traditional method used was inflation proofing. TAPE CHANGE 99-61,B Tape Change. SFC 99-61, Side B. PHIL OKESON He continued speaking to inflation proofing. He asked what sustainability would mean to an accountant. There are other mechanisms available to provide sustainability. An accountant would mean purchasing power when referring to sustainability. He asked if the goal to protect the purchasing power of the Alaska's Savings Accounts He questioned what time horizon is appropriate when speaking about sustainability noting that allocations of portfolios do change. SENATOR TORGERSON Argued what government views their budget for one hundred years? He commented that perhaps with regards to investing? PHIL OKESON Questioned if it was realistic to look at budget over one hundred-year period. He believed that it maybe. Alaska's state government is different from other state governments. We do have potential to think differently because of the financial asset that we do have. Other states do not have the assets we do. He offered that perhaps Alaska should take advantage of that difference. CO-CHAIR PARNELL Repeated, is it realistic for us to look at a long-range plan for one hundred years, however, the State should be protecting and preserving the advantage for generations to come. He acknowledged that this was a different perspective. PHIL OKESON Recommended that the systematic use of the permanent fund may want to look at longer periods of time. He voiced caution that a long-term financial plan will have to be updated as the years pass, however, a long-term financial plan, if good, would establish broad base philosophies of intent. It does provide guidelines. Mr. Okeson suggested that one could get a fairly good detailed five or ten- year plan. In response to Senator Torgerson's query, assumptions of incorporation would be a judgment call. There are many variables involved, which could have major effects on the revenues, and one must be careful when incorporating a long-term plan. SENATOR KELLY Commented on the danger of "hanging onto what the system currently is". Many of the decisions made by the Legislature must be toward what the next economy will be. That is not known at this time. He voiced fear that decisions made at this time would not work into a long-range plan. He recommended productive spending. PHIL OKESON Agreed, pointing out that the suggestions made are possibilities so that discussions can begin. He noted that referring to intergenerational equity means that all generations would be held equal. There are many ways there can be intergenerational equity. The question is in what form do we really want it to take? There are many possibilities and there are good reasons to do this. Mr. Okeson referred to time he spent in Washington State and what happened there in the timber industry. They are now using those profits for investments. He emphasized that there are benefits to providing for future generations. Mr. Okeson continued: Stability- which would guarantee that the plans could weather the worst case scenario. Additionally, the plan needs to be able to reduce the State's revenue volatility. Predictability- He asked what level of predictability does the State want to assume for revenue assumptions. Expenditure Assumptions-Would these assumptions and cuts help with the current year and market assumptions. Market Assumptions-The State must determine the level of predictability that are willing to assume for these assumptions. It does have implications for risk and asset allocation. He stated that was the end of his prepared presentation. SENATOR PHILLIPS Should there be another piece for measurement and accountability. PHIL OKESON Replied that it was limited this to what could be measured. SENATOR PHILLIPS Pointed out that voters will be looking to the Legislature for specifics and accountability. PHIL OKESON Concurred. CO-CHAIR PARNELL Indicated that there were several statewide guests to testify. He thanked Mr. Okeson for his time and effort. CHERYL FRASCA Fiscal Policy Council of Alaska She referenced the handout provided by the Fiscal Policy Council of Alaska, "Criteria to Evaluate Fiscal Plans". She explained they wanted to provide input and analysis of various proposals for a long-term fiscal plan. She acknowledged that there were important choices that will be faced. Ms. Frasca explained the criteria evaluation form that was used to evaluate fiscal plans. The first criteria was: *Stability: (a) Does it provide for stable and predictable annual flow of revenues; (b) Is it a predictable tax regime; (c) Does it provide stable spending; (d) Does it have the ability to adjust to changing needs; (e) and can it be implemented. *Sustainability: (a) Does it protects and grows the permanent fund; (b) Does it maintain revenue-generating capacity of other financial assets; (c) Does it advances financial investment policies that achieve maximum financial return. *Fairness: (a) Are the trade-off's between taxes, dividends, and public services balanced across all Alaskan households, businesses, and communities; (b) Are the links between economic activity and a return to the State treasury; (c) Does it connect Alaskans to financial decisions; (c) Does it provide a smooth transition between any change in the size of dividends, taxes, or public services. SENATOR TORGERSON Asked if she considered the Governor's plan to be fair? MS. FRASCA Replied that income based tax was not a fair plan. She suggested that a flat tax would have to be analyzed. SENATOR LEMAN Countered that an incorrect statement was made that "no one currently pays taxes". He acknowledged that Alaska does not have a broad- based income tax or sales tax but we do have means for collecting taxes from individuals. He recommended that the term should be used correctly. MS. FRASCA Thought she had said "personal income tax". CO-CHAIR PARNELL Requested Ms. Frasca to continue. MS. FRASCA Asked if there was more of a connection between Alaskans as individuals and the financial decisions being made on their behalf. SENATOR PHILLIPS Requested that Ms. Frasca define the "connection" with permanent fund dividend. He asked if most individuals really understand the history of the PFD? MS. FRASCA Explained that because people receive financial benefit, they pay more attention to what the permanent fund is doing. She agreed that most people do not understand the calculations. She added that another point would be simplicity. She observed that Alaskans tend to be less trustful if it looks like a game is being played. Plans must be straightforward and not confusing. She noted is the purpose for each fund clear? She asked if it would be an investment-earning tool. She suggested a more clear definition be used. Finally, Ms. Frasca recommended complete and full disclosure. Are the assumptions realistic? Her group proposes that a plan be proposed for twenty years just as Legislative Finance proposes. PAM LABOLLE President, Alaska State Chamber of Commerce. She recommended that there needs to be a time frame, target and goals for spending and revenue generation. She stated that she was not promoting further cuts across the board, however, recommended a 30% reduction by streamlining, privatizing, and consolidating methods. Ms. LaBolle refereed to SB 33. She requested that the Permanent Fund be inflation proofed first. Whatever need is left should be filled with broad-based taxes which hopefully should not amount to more than 15%. Ms. LaBolle outlined the Chamber of Commerce recommendations. CO-CHAIR PARNELL Referred to item #2 and asked what the 30% referred to? MS. LABOLLE Replied that related to 30% of the $6.2 billion dollars total spending. CO-CHAIR PARNELL Commented that the organization would not ask for $2 billion cuts in the next year? MS. LABOLLE Explained that they were not proposing that the 30% was expected within a year, but rather, as determining the length of the plan for reaching a balanced budget, a 30% of that process needs to come from reductions in state spending. CO-CHAIR PARNELL Acknowledged that there is agreement that further reductions are needed for a viable state plan. He thought that 30% was aggressive number. MS. LABOLLE She asked what the time frame the Legislature was looking at. CO-CHAIR PARNELL Commented that he had encouraged a 20-year plan, however, it appeared that a 10-year plan was more realistic at this time. SENATOR ADAMS Voiced concern about the stability of the economy with a 30% reduction to state spending. He referred to the loss of jobs occurring within the oil companies. He recommended looking more deeply at a 30% reduction suggested by the Chamber of Commerce. Senator Adams stressed that this is not acceptable and would not help the state economy. MS. LABOLLE Responded that there are businesses in the State that have experienced 20% reductions to stay in business. SENATOR LEMAN Agreed that the proposed approach was rather aggressive. He commented that the State is going to have to change how we deliver education and make changes to other formula programs. Senator Leman asked if the State Chamber would support such changes? He referred to Page 3 of handout, and asked about the per capita spending. MS. LABOLLE Responded that the Chamber is committed at participating in looking at all portions of state government. She believed that the Chamber would support the Legislature's decisions. SENATOR TORGERSON Asked what the 15% represented in the handout? (item #4) He asked if that was the investment earnings. TAPE CHANGE 99-62 A Tape SFC 99-62, Side A MS. LABOLLE The Chamber will be happy to work with the committee on recommendation made. KEN FREEMAN Executive Director, Resource Development Council for Alaska (He read a prepared statement into the record.) Mr. Freeman explained that RDC is a non-profit, economic development organization with a broad statewide base and focus. Members range from individuals to leading companies throughout Alaska's basic resource sectors, including oil and gas, mining, timber, tourism and fishing. Also included in the ranks are Native corporations, construction, labor and a number of local communities. All of these interests come together under RDC to work on common issues - issues which transcend all resource and economic sectors. RDC is represented statewide by a 78-member Board of Directors and a 22-member Executive Committee. The latter of which formulates policy and provides direction to a staff of four. With the fiscal gap as our number one public policy issue this session, RDC helped coordinate the economic summit held last month in Juneau and our resident testified to the fiscal gap before the Anchorage Caucus in late February. What many have heard at the economic forum was an assessment of business in Alaska. From the development sectors you heard that low oil prices and a slumping Asian economy have hit Alaska hard. You also heard that the timber and fishing industries are in the tank, both hit hard by weak Asian markets. Timber production is down by 70 percent or more, budgets have been drastically cut and the industry employment has fallen to all-time lows. Meanwhile, the mining industry, which has shown record growth and production over the last several years, is now struggling to cope with low commodity prices. RDC is here today to express their support and encouragement of the Legislature in finding a long-term solution to the State's fiscal dilemma and to offer suggestions on specific tools to develop such a solution. He continued that the issue is important to the RDC membership and would like to see action this session. He acknowledged that there are many good ideas that would help to close the fiscal gap. RDC supports the use of the following tools: 1) Continued reductions to State spending 2) Continue to develop programs that encourage Alaska's economy; 3) Incorporate performance measures by which State agencies are evaluated; 4) Evaluate and determine ways to deliver State services such privatization. RDC further advocates for diversifying and stabilizing state revenues through the expanded use of the permanent fund earnings. Also, on the revenue side, in addition to the use of the earnings, the state must aggressively pursue to increase revenues through resource development activities. Mr. Freeman continued, in the event that these tools are not enough, RDC would entertain implementation of a broad-based tax. He noted that there is little support for an income tax at this time. RDC believes that a combination of the tools would make this possible, no one tool is the answer. SENATOR ADAMS Asked if RDC had prioritized what State-funding cuts should be done and what should be held harmless. MR. FREEMAN Replied that RDC has tried to work with the Legislature and offered suggestions. He commented that State services have not been ranked to date. Mr. Freeman explained it was difficult for RDC because they only deal with particular segments of State agencies and do not have the entire perspective on what is important. He reiterated that it is difficult to rank beyond the resource development phase. SENATOR LEMAN Asked if RDC had taken a position on the consolidation of the resource agencies. MR. FREEMAN Replied that RDC had discussed potential consolidations. He voiced concerned with consolidating programs and who would then take over function of the program. He questioned the impact? Mr. Freeman warned the need to be extremely careful in not jeopardizing the programs. CO-CHAIR PARNELL Requested that Ralph Samuel's written statement be recorded into the record. He was not able to be present. Mr. Samuel's is the Anchorage Chamber of Commerce Chairman. KAREN COWART General Manager, Alaska Support Industry Alliance (The Alliance) Ms. Cowart was invited to join the committee. (She read her statement into record.) Ms. Cowart thanked the Committee for the opportunity to provide comment and provide perspective. She stressed that the Alliance represents statewide industry as a whole. The Alliance members oppose a state income tax to balance the budget. She noted that the Alliance appreciated the Legislatures ongoing commitment to create a balanced budgeting plan. She suggested that Alaskan's need to say YES to a fiscal stable government and economy. The tools to reach that stability which are most palatable to the Alliance are: 1) Support continued cuts to government spending; 2) looking at the permanent fund, both the dividend and the earnings; 3) oppose a statewide income tax. Ms. Cowart concluded that the Alliance would be willing to provide feedback at the Legislature's request. She noted that the Alliance requests that plans put forth would be put to the people. She encouraged budget dialogue. CO-CHAIR PARNELL Called the last speaker. ROXANNA HORSCHEL Associated General Contractors of Alaska (Ms. Horschel read her statement into the record.) She noted that State employees wages should be more comparable to that of the private employees. The Association believes that the State should maximize the use of federal matching funds for capital work. No federal offer should be lost. Also, the State should maintain a structured approach to a capital program. Also, reduced State government functions. Other states operations could serve as a guideline such as basic functions. State employees should more resemble private sector employees in similar work. Ms. Horschel pointed out that the private sector could not compete with the wages and benefits, which the State offers. She continued that there should be lower state expenditures through increased privatization of services. Additionally, some of the non-designated permanent fund earnings to balance the budget. The use of bonding for capital programs should be used to address the short-term fiscal gap. The Association supports an increase in the state's motor fuel tax provided that those revenues are used for additional maintenance of transportation structure and distributed through a designated fund. The Association believes that if all these points were implemented State income tax would not need to be considered. SENATOR PHILLIPS Recommended the idea of having a constitutional amendment addressing the motor fuel tax designated fund. SENATOR LEMAN Asked why public construction projects in Alaska cost so much. Asked if the Alliance was providing a study looking at construction costs. ROXANNA HORSCHEL Replied that the study was not complete, and would be willing to share what they have learned. She believed that working together, solutions can be found. SENATOR TORGERSON Commented on the motor fuel tax which could be used for additional maintenance dollars. CO-CHAIR PARNELL Noted that the Committee had been summoned to the floor. He recessed the meeting until 6:00 p.m. Discussion on the long-range fiscal plan would continue. He noted that any written testimony could be included in the record. ADJOURNMENT The meeting adjourned at 11:05 A.M. SFC-99 (1) 3/24/99 a.m.
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