Legislature(1995 - 1996)
02/28/1996 08:15 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
28 February 1996
8:15 A.M.
TAPES
SFC-96, #31, Sides 1 & 2
SFC-96, #32, Sides 1 & 2
CALL TO ORDER
Senator Rick Halford, Co-chair, convened the meeting at
approximately 8:15 A.M.
PRESENT
Co-chairman Halford along with co-chairman Frank, Senators
Phillips, Donley, Rieger and Zharoff were present when the
session was convened.
Also Attending: Senator Jim Duncan; Annalee McConnell,
Director, Office of Management and Budget; Mike Greany,
Director, Legislative Finance Division; and aides to
committee members and other members of the legislature.
Brian Rogers, Long Range Financial Planning Commission
testified via teleconference.
SUMMARY INFORMATION
Co-chairman Halford introduced the agenda to consider
proposals under an overview of potential budget strategies.
Senator Jim Duncan was invited to join the committee and
presented the Senate Democrats' Plan. It is critical that a
long range financial plan be adopted this year that will
close the fiscal gap over the long term. Debate and
discussion must be had on a variety of approaches. The
strategy as submitted by the Senate Democrats closes the
fiscal gap in both the short and long term and commits the
State and the Legislature to continue to have a balanced
budget and keeps the fiscal gap closed as long as possible.
The Senate Democrat plan is a multifaceted balanced approach
using all fiscal tools available to close the fiscal gap.
The three part plan submitted is: first, further budget
reductions in State spending. The Long Range Financial
Planning Commission recommended responsible budget
reductions of $100 million over the next three years; $40
million in the first year and $30 million in the two
succeeding years. It is a significant, responsible level of
reduction. Second, stabilization of our revenue base.
Senate Democrats recognize that this is another fiscal tool
that needs to be considered. The Long Range Financial
Planning Commission had proposed several revenue
alternatives. We have not put any of those in our plan.
Contrary to what has been said in certain news releases our
plan doesn't tax more than anyone else. We built in the
same new revenue figures from taxes that the majority built
in. That doesn't identify any certain revenues. It is my
understanding that the majority's position those revenues
possibly would come about because of increase exploration
and development in the oil industry. It was brought about
because we passed the oil incentive bill last year, SB 207.
Revenues need to be considered and we urged that debate go
forward and that the various revenue measures that were
recommended by the Long Range Financial Planning Commission
be brought to a hearing and considered and if there are any
of those that the Legislature finds acceptable and the
public finds acceptable then we should move forward in that
regard. The important thing to recognize in the Senate
Democrats program is by closing the gap as quickly as we do
and maintaining it closed for a period of seven years we
give ourselves time in the State to responsibly address with
great public involvement a new and enhanced revenue system.
We are not forced to the point where we immediately have to
adopt new revenue measures in order to keep the fiscal gap
closed. For the next nine years we can have a budget in
place, we can have a pattern in the State where we have more
revenues available than expenditures without incurring a gap
because of the way we close the fiscal gap and during that
time we can responsibly address new revenue measures with
the citizens of the State. So the first two parts of our
plan are the State's spending reductions, the responsible
level that we advocate, contrasted to a more in-depth
reduction level which is advocated by another plan, which
would over five years have reductions in today's dollars of
about $600 million. A more responsible level of reduction
at a doable level and consideration of stabilization of a
revenue base is recommended. The third part and cornerstone
of our plan is going to the people of the State and asking
them to join with us in resolving the fiscal crisis over the
long term and making a commitment to one of our highest
constitutional responsibilities in this State, that of
providing K-12 education to the children of this State.
Like the Long Range Financial Planning Commission
recognized, if you are really going to have a plan in place
that closes the fiscal gap, the permanent fund has to be
involved in some regard. A cornerstone of our plan is that
a portion of the permanent fund earnings would be dedicated
to the funding of education. If the people voted to do that
it would close the fiscal gap for the long term. In
contrast to the Long Range Financial Planning Commission's
recommendations, our proposal does not cap dividends.
Dividends grow quicker in the first six years under our plan
than they do under present structure and continue to grow in
years after that. We do not fund permanent fund earnings
into the general fund for unspecified purposes. This would
cause great concern with the public of this State if they
thought we were putting permanent fund earnings into the
general fund and the State Legislature was free to use those
earnings for any need they might find including a growing
and increasing bureaucracy. Our plan includes two pieces of
legislation that would be necessary to enact it. One would
be a constitutional amendment and that constitutional
amendment would be placed before the voters in 1996. The
purpose of that constitutional amendment is to dedicate a
portion of the permanent fund earnings to an education
endowment to fund K-12 education. The way that works would
be that in the first year, FY 97, $350 million of the
permanent fund earnings would be dedicated to education
which would be about fifty percent of the full funding they
would need and reduce the fiscal gap by $350 million. For
the next six years the earnings going into the education
endowment would increase by fifteen percent a year for six
years until we got the full funding of education. That full
funding is determined by projections made by the Department
of Education. After that we would have an increase of three
percent a year to meet increasing needs, increasing
enrollments and other basic needs of educating our children.
Full funding of education would be dedicated and assured.
That money could not be used for any other purpose nor would
it be necessary to appropriate part of it every year. That
doesn't stop us from changing the way the foundation formula
works if that's what concern people may have if they believe
we don't now have an equitable formula. We are talking
about the dollars that are necessary to fund education and
there are not too many people in this State who believe we
are going to need less money in the future. We probably are
going to need more money in the future and how that money is
allocated is a separate decision. That's the first part of
our proposal.
The second part is an appropriation bill that makes a
renewed and continued commitment to the permanent fund. We
appropriated $2 billion from the earnings reserve account to
the permanent fund. This level of appropriation is being
proposed in certain other pieces of legislation. We
appropriate $1.2 billion from the earnings reserve account
to the permanent fund and we additionally would appropriate
$1 billion from the constitutional budget reserve fund for
the permanent fund. The reason we do that is because the
constitutional budget reserve fund balance of $2.3 billion
is no longer needed. It is sitting in a savings account and
would be available for access by three-quarters vote. We
take $1 billion of that, put it inside the principal of the
fund where it cannot be accessed. That, of course, then
allows the principal to grow quicker. It also allows the
dividend pool to increase and results in higher dividends
for the first six years of the plan. The advantages of the
proposal are pretty clear. One approach largely addresses
the fiscal gap which is estimated to be between $400 million
and $500 million in FY 97 by funding $350 million for the
education endowment and the permanent fund. The remainder
of the fiscal gap is covered with possible available revenue
measures if we decide to pass any. If we don't we would
need a much smaller appropriation than under the majority's
plan of the constitutional budget reserve fund in order to
balance the budget this year. We would take a very small
portion out of the constitutional budget reserve fund. The
second advantage is that we make a continuing commitment to
funding education in this State beginning with $350 million
in FY 97 and increasing to full funding by the year 2003.
The third advantage is that we don't cap permanent fund
dividends. The real advantage to the public is in addition
to full funding of education we allow dividends to be larger
through the year 2002 than they are under the present
structure and a continued increase into the future. Another
advantage is that we don't have to make large, draconian
budget cuts this year or in the next four years to balance
the budget. We have tough cuts to make because a reduction
of $100 million over three years is not easy. Another
advantage is that this approach relieves the pressure to
immediately implement new taxes and allows more public
involvement in that decision. Finally, it shows our
commitment to the permanent fund by depositing into the
principal of the earnings reserve additional dollars from
the constitutional budget reserve fund. Everything is not
as good as it sounds, and one question folks will have is
what does the permanent fund look like under this plan as
compared to present structure. If we don't ask the people,
by their vote, to dedicate a portion of the earnings to the
funding of education in this State, if we leave the
permanent fund alone, if we allow dividends to grow
uncontrollably, and we use the present structure there, what
is the difference? The difference is that under our plan
the principal of the fund would be about $4.9 billion less
than it would be if we left the earnings untouched. It is
important for us to put that decision before the people of
this State. It does not erode the principal, we don't have
less principal in the future. We have more principal. It
just doesn't grow as quickly because we don't change the
formula on inflation-proofing dividends. But, if the voters
approved this and if the Legislature felt that maintaining
the principal of the fund was the highest priority we surely
could go in and change the allocation of the earnings from
dividend to being a priority to inflation-proofing being a
priority. There are a number of options. It also presumes
we won't make additional deposits to the permanent fund. We
know the record of this legislative body and past
legislative bodies is to make those additional deposits when
we have money available and we would have, under the
democrats plan. We have made three deposits in the past and
we undoubtedly will make additional deposits. The argument
may well be that we need to continue to meet our obligation
of inflation proofing. Clearly we have done more than meet
that obligation. According to the permanent fund
corporation, the actual dedicated principal of the permanent
fund, if we had only the dedicated revenues flowing in,
would be about $7.5 billion. We've fully inflation-proofed
that and added an additional $1.2 in inflation proofing to
the principal of the fund and added another over $4 billion
of additional deposits. The public of this State can
clearly see that we have fully inflation-proofed the fund.
If anyone wanted to say what's the downside, that would be
the downside. The principal does not grow as quickly under
our proposal as it would under present structure. The
people of this State want us to change the way we are doing
business in this Legislature and the way the State is
operating. They don't want to see us have a fiscal gap
every year. They don't want to see us have to dip into our
savings account of $400 million or $500 million each year to
balance the budget. They want us to change things. And,
Mr. Chairman, unfortunately, you can't change things without
changing things. The most balanced approach is the best way
to go. We change the way we are spending dollars because we
reduce spending. We may change the revenue system if this
Legislature agrees to it and the public agrees to enhance
the revenue system. We changed the way the permanent fund
earnings are being used but at the same time we protect the
principal and we protect the dividends. Let me conclude,
there are several charts and graphs that I passed out
clearly showing the difference between the plans. The
Legislature does have a responsibility this session. The
last legislative session the majorities on both sides and
the administration and most of the minorities said we need
to develop a long range financial plan. We put together a
citizen commission of fifteen to do that. They had charge
of coming back to the Legislature with a long range
financial plan that we could consider. If we didn't agree
with it at least we could adopt the long range financial
plan to close the fiscal gap. The public should ask us
whether or not we have put together a plan that closes the
fiscal gap. Has the Legislature adopted a plan that uses
more than one of the tools available to close the fiscal
gap? Have they used a balanced approach? I would suggest
the long range financial planning commission's approach was
balanced. The Senate Democrats plan is balanced because we
talk about budget reductions, new revenue measures and
recognizing that there needs to be something else to fill
the rest of that gap in the permanent fund earnings, by a
vote of the people, as one of the fiscal tools that should
be considered. If you talk only about budget reductions in
your plan that's not using all the fiscal tools and that's a
mark of failure, not success. The second question they
should ask is do the proposals that are before the
Legislature close the gap for the long term? If you put
budget reductions on a piece of paper and say our plan is to
reduce spending for five years those spending reductions are
unrealistic if they do not close the gap for the long term
and if after those five years the fiscal gap immediately
begins to grow. Under the Senate Democrats' plan we close
the gap in two years, develope a surplus for the next seven
years, which flows into the constitutional budget reserve
fund so it can't be easily spent, and for the next nine to
ten years we have closed the fiscal gap. Under the Senate
Majority's plan the fiscal gap is closed in five years, as
contrasted to two under our plan, and then it immediately
begins to grow again. It hasn't been closed over the long
term and when the public asks that question of these three
plans they will see that two of them succeed and one of them
fails. The third question is do the plans permit the
Legislature to close the fiscal gap over the long term, or
is it just a plan on paper only? (Temporary loss of minutes
due to power down of all recording and teleconference
equipment.) Clearly the commission's plan closes the gap
over the long term, because there are commitments there the
Legislature can't go back on. The Democrats plan closes the
gap over the long term because there are also some
commitments there that we can't go back on. There is a
more responsible level of reduction and we have a
constitutional amendment that permits us to close the fiscal
gap. The majority's plan doesn't commit us to anything over
the long term. It is a one year plan only. And we cannot
commit future Legislatures. So, if you ask those three
questions, and you get the answers, I think you will clearly
see that two of the plans succeed, one of the plans fails,
and the public will not be pleased if we walk out of this
session without a plan in place where we can answer yes to
all three of those questions.
Co-chairman Halford inquired if he and the six co-sponsors
supported the $40 million of reduction proposed by the
commission for this year. Senator Duncan advised that the
Senate Democrats do support the level of reduction of $100
million over three years but not the specifics as
recommended by the Long Range Financial Planning Commission
and Governor Knowles.
Co-chairman Halford indicated that he appreciated the fact
that the analysis of their own plan lays out its biggest
questions and that their projections really do give us a
long term look of what it is proposing. In today's dollars
the long range analysis of what happens to the permanent
fund, basically says that for other than the time it takes
to use up the deposit that's made in the first two years,
the principal of the permanent fund, ten years away, fifteen
years away, will be actually smaller than it is today and
will from then on be declining. We will have made a
decision in terms of what the permanent fund is for, in
this, the generation that also spent the remaining three-
quarters of the wealth of Prudhoe Bay. Senator Duncan said
he was glad that the Co-chairman pointed this out. He
suggested that if you look at the Majority's plans and
today's dollars you find that it does not continue to grow
in nominal dollars as would be expected. There clearly is a
difference in the principal of the permanent fund. It is
the public who makes the decision that the permanent fund
has to play a role in this State other than just paying
dividends and inflation-proofing itself. It has to help
close the fiscal gap. That fund is sitting there and then
we cannot fund education, public safety, resource
management, and transportation projects in this State. That
is a decision the public will make. Many times these
projections by the permanent funds are very conservative and
our real rate of return may be much better that what they
are projecting in their runs. That's how we build up that
reserve account. Every time additional dollars are
available you are going to want to put it in the permanent
fund. So the principal will grow. And let me suggest,
under your plan, the problem is by the year 2008 you will
have spent every dime on the table including the
constitutional budget reserve and the earnings reserve
account.
Co-chairman Halford stated that was not the case according
to the projections. What is the plan versus the status quo?
The value of the plan once you get passed the initial
deposit, in your own projections, the permanent fund real
value declines from thereon indefinitely. So, in the very
long range projection the permanent fund's value eventually
goes to zero. Senator Duncan said that he did not assume
that at all for these reasons: one, it is the people who
make this decision; second, we always have the ability to
change the formula that says what shall go to dividends and
what shall go to inflation-proofing. If some time in the
future people want to change that formula they can. We
always have the ability to make additional deposits in the
permanent fund and I am sure that will happen. But there is
another consideration. If you hold the permanent fund, the
public says that they don't want to use that, then we have
to make some tough decisions of what we are going to do for
basic programs and services in this State. Are we going to
fund education adequately? Probably not, if we don't
develope some source of revenue to close the fiscal gap. Are
we going to fund public safety, resource management and
transportation projects? Probably not. Are we going to
meet our infrastructure needs in this State? Probably not.
I would suggest to you that we are actually ending up giving
people two types of dividends. One, a permanent fund
dividend and one an education dividend, and in the long
term that benefits people on the local level. They have
kids to educate and it costs money and if the State doesn't
pay for it local communities may have to. And your property
taxes may go up. Of, if the State doesn't fund other
services, local communities may have to. All we are
suggesting is the public should have before them the
opportunity to decide what they want to do to close the
fiscal gap in the future and if they want to try to avoid
the tremendous negative impact on the economy that would
come with a high level budget reduction, because the only
way the majority's plan would work is with continued budget
reductions. They will hurt the economy. Economists across
the State will tell you that for every $100 million in
budget reductions you are going to lose 1,200 to 1,300
public and private sector jobs. That is a tremendous
impact.
Co-chairman Halford said that one of the interesting twists
of the Senate Democrats' plan is that unless the voters
agree to this long range change in the future of the
permanent fund and the reduction in its eventual principal
the deposit to the principal of the permanent fund that is
very strongly supported in every poll that anyone takes does
not take effect. Basically, unless they go along, the $1.2
billion in reserves does not go into the principal. Is that
an intentional effort to draw them into confusion as to how
to really protect the permanent fund? Senator Duncan
advises that it is not. If this proposal were brought to
the floor and put before the people and the $1.2 billion in
earnings was deposited before the vote, I don't think you'd
have a problem with that. The real tie to the effective
date was taking the money out of the constitutional budget
reserve. We made an additional commitment of $1 billion in
constitutional budget reserve fund because if this was
approved by the voters we wouldn't need that. But if it is
not approved you would probably want to keep that in the
savings account. So the real tie was on that $1 billion.
We put the appropriations together. The Democrats would
agree that if this proposal were put before the voters of
the State that the $1.2 billion in earnings reserve could be
deposited immediately. It is the $1 billion from the CBR
that should be tied to the effective date because that
depletes our other savings account which we may need if the
voters didn't approve this. If the voters did not approve
this it is a clear signal to this Legislature they either
want new taxes, income tax, some other type of taxes, or
large budget reductions.
Senator Rieger commented on the point of deposit. In
Senator Phillips district fifty-eight percent opposed the
deposit to forty-two percent favouring it.
Co-chairman Halford indicated that it combined the deposit
of the permanent fund reserve and the budget reserve to the
principal of the permanent fund. It was not a single
question.
Senator Phillips concurred that it was combined. The
question was asked on two separate accounts where one was to
spend the constitutional budget reserve or put it in an
account and they said "yes" and then they had four choices
of what to do with the earnings reserve account and they
chose fifty-two percent out of the four choices to make the
deposit into the principal of the fund. That was last
year. This year I just combined the two.
Senator Frank asked if the additional funds that the State
will be spending in the next fiscal year and add them to the
other funds the Governor has proposed in his spending plan,
that totals $89 million and subtract $70 million, if we were
successful in making that $70 million reduction, you would
still have a positive or an increase in the amount of money
that the state would be spending this year. Which economist
were you relying on to suggest the majority's plan would
send the State into a tailspin?
Senator Duncan clarified that he did not specifically say an
economist had analyzed the majority plan. What the
economists have told me is that budget reductions of the
following amounts would have an impact on the economy. He
referred to information which had been provided by David
Reaume, a Juneau-based economist.
Senator Frank asked if this was the same economist who said
we have a $3 billion surplus and no problem.
Senator Duncan advised that Senator Frank might contact
other economists what the impact of budget reductions are.
It does not make any difference which economist is used.
The estimates that are used by economists at large are that
when you have reduction in government spending you are
going to have an impact on the economy. You are going to
have job loss not only in the public sector but also in the
private sector. That formula was used in 1986 when we had
budget reductions and it really hasn't changed. At that
time Scott Goldsmith from ISER and others were saying the
same thing. We've talked generally and the projections are
for every $100 million in cuts that we are going to see 800-
900 state jobs lost, 100-200 private jobs lost, and an
additional 360-400 across all sectors. 1200 to 1500 jobs
per $100 million. If you are going to cut $70 million this
year which is really $140 million in today's dollars, you
are going to have impact. If you are going to cut almost
$600 million in today's dollars over five years you are
going to have impact. Some will say they are not all sure
that happened in 1986 but let me tell you what happened to
total government spending in 1986. We don't like to think
that government is important to the economy of the state but
it is. Senator Frank interrupted to say that he would just
like him to provide an economist to back up his statement.
Senator Duncan said that he was just putting facts out. The
majority budget proposal cuts spending by $600 million over
five years.
Co-chairman Halford asked how a cut this year could be
applied to what its inflation effect will be five years away
and then bring that back to today's impact on the economy.
This is compounding things ahead of time. Senator Duncan
referred to this year. Discussion between Senator Duncan
and Senator Frank over which chart was being used. Senator
Duncan advised that the chart being used was prepared by the
majority plan. It was a chart produced at his request on
the majority plan projection by OMB. This was prepared in
today's dollars. One of OMB's staff people who had the
model for the Long Range Financial Planning Commission did
the chart and it clearly shows in FY 97 that the spending
cut in today's dollars by the majority plan is $140 million.
Co-chairman Halford suggested that there is no way you can
add one year's inflation onto a $70 million reduction and
make it into $140 million. Senator Duncan said he would let
OMB defend that figure.
Senator Rieger pointed out that at a level of spending that
is around $2.4 billion a year, if you have three percent
inflation and you don't adjust for inflation that is a $72
million real cut. Over five years it is about $400 million
if you do not adjust for inflation. Over one year it is
about $70 million. Senator Duncan concurred in what Senator
Rieger stated. He felt it was a fair assumption that what
the Senate Democrat plan suggested, and what the Long Range
Financial Planning Commission suggested was not to let the
government grow uncontrollably. There was a Long Range
Financial Planning Commission that was appointed, five
members by the republican leader of the Senate, five members
by the republican leader of the House and five members by
the democrats and they carefully evaluated where the State
should be going and what level of spending reductions this
State could live with. Their recommendation and our
recommendation was that government spending should grow by
population increase and one-half of inflation in future
years. Not full inflation, one half of inflation. It is
unreasonable to expect that you can continue to reduce
government spending forever and not allow inflation and
population growth to have an impact.
Brian Rogers, chairman Long Range Financial Planning
Commission testified by teleconference. He discussed why
the commission reached some of its recommendations and
reviewed some of the goals that this or any other plan
should seek to achieve. There are a number of problems with
Alaska's finances. Any long range financial plan must
address a series of problems. The first one is that annual
unrestricted general fund spending exceeds recurring
unrestricted general funds revenue. That is the first of
several financial problems that have to be addressed in the
long run. The second set is that Alaska is overly dependent
upon one revenue source for its unrestricted general fund
revenues and that is Prudhoe Bay oil. It is a very volatile
one due to the volatile nature of oil prices in the world.
It is also a declining revenue source that is not
sustainable over the long run. A third problem is that
while there is a direct connection between population growth
and the need for spending on certain State services, unlike
the other forty-nine states, there is not a direct
connection between population growth and the revenue needed
to support that spending. What that means is taking the
fact that we are out of balance, that we are dependent on
one source that's declining, and that there is no
relationship in population growth, seeing the current
spending levels are not sustainable with the current revenue
level. What the commission found was that State spending
exceeds the national average by a significant margin. They
also found that state revenues from individuals and
businesses excluding oil revenues fall far behind the
national average if you look at revenues on a per capita
basis, which may not always be appropriate. They found that
much of State spending is really beyond the direct control
of the finance committee. It is driven by statutory or
constitutional requirements that would need to be changed to
achieve significant cuts.
(tape SFC-96 #31 switched to side 2)
Finally, state spending on operations, on capital projects
and on the permanent fund dividends is a major part of the
economy and changes in the state spending pattern or for
that matter changes in the level of taxation affect the
economy but not necessarily in the exactly same way due to
Federal tax shifting in a proportion of benefits received or
taxes paid by non-residents. The effect of different cuts
for different taxes change. The ideal financial plan would
ultimately balance recurring revenues with recurring
expenditures. It would reduce the State's dependence on
volatile revenue sources, such as oil, and conversely
increase the proportion of the State's revenues that come
from a stable or predictable source. It would provide a
greater link between population change and state revenues.
Because oil will still be a key part of the state's revenue
mix we would need a cushion against an unexpected downward
spike in oil revenues. We need a plan that had a level of
spending acceptable to the public in aggregate while still
providing a level of services the public wants from the
State. And to also have a level of taxation that was
acceptable to the State. Or maybe putting those two
together, better stating it, that balances the level of
spending and taxation in a manner acceptable to the public.
We thought the ideal financial plan would be sustainable
over the long term and that would require leaving some of
the oil wells for future generations. None of the six plans
really do follow these goals, in dealing with
sustainability, reducing the revenue volatility, balancing
the level of services and spending against taxation and
revenue, leaving some oil wells and being politically
acceptable. Look at Roger Cremo's plan, long range
financial plan, Steve Rieger's minority report on the long
range financial plan, Dave Rose's plan, and then the
majority and minority plans. In the long fun, Cremo is
probably the most sustainable, but it requires extreme
sacrifice in the short term. In terms of sustainability,
the long range financial plan comes next and then Rieger and
Rose and then the minority and majority plans. The revenue
volatility probably has the same spectrum. In terms of the
level of services you get a different mix. If you were to
take each of the goals of the plan and set forward a matrix
you would find that the different plans meet different
objectives. You or any other observer could rank the plans,
but on the spectrums I would urge that you to do so or find
a neutral party that could do so. The long range financial
plan attempted to find a balance among these goals. In
cutting spending we chose to cut $100 million over three
years. When we add the $75 million a year in inflation on
the existing $2.5 billion budget over three years that came
to a fifteen percent reduction in State services. That
contrasts with about a twenty-five percent reduction in
State services in the majority plan and probably a thirty
percent reduction of State services in the short term for
the Cremo plan. Our plan increases state revenues by about
$150 million in the short term and then uses the income tax
as the next revenue source. We considered sales tax and
property tax as the other two broad taxes that do link
taxation and population growth and the feeling was that both
of those taxes should be left to the local governments of
Alaska, although there was a lot of sympathy for statewide
sales taxes being easier to administer and easier for people
to swallow politically than an income tax. There were
people who felt that an income tax was fair. Our plan
establishes the permanent fund as an endowment and builds
that endowment through an averaging approach that builds
inflation-proofing in, retains a portion of the earnings,
increases the mandatory deposit into the permanent fund and
then has several special appropriations into the permanent
fund. We also suggest and a fundamental piece of our plan
is that there be a review in three years. We suggested that
take place in the interim between the 1998-1999 sessions.
That coincides with a new gubernatorial election and a
commission should report following that election with a sort
of mid-course correction, a look at where we've been and how
successful the legislature and governor have been in closing
the fiscal gap and reducing dependence on volatile revenues
and the other goals. At that point the decision can be made
whether further cuts, further revenues, further reduction to
the permanent fund dividend, or some other approach is most
acceptable. That is the problem of Alaska's fiscal gap and
its dependence on volatile sources. It is a difficult one
and has been grappled with by a number of legislatures. I
would urge you and the other members of the legislature and
the governor to try and avoid to the extent possible in an
election year, partisanship on this issue. This is a
problem that will be best solved by statesmanship and a bi-
partisan solution is much more likely to stand the test of
time.
Senator Zharoff asked if in the recommended reduction of
over $100 million over three years an evaluation was done of
what that would cost in terms of jobs, state, private or
other? Brian Rogers advised that they did not do a specific
evaluation of the plan. In trying to devise a plan, they
based part of their decision on the work that was done by
ISER and others that analyzed the differential impacts of
cutting the dividend versus cutting State spending versus
increasing revenues. The depth of work on that issue has
been done by ISER in the late 1980's and the most recent
report in 1991. Clearly reductions of that nature will cost
jobs and have a negative economic impact, cutting the
dividend affects to an even greater extent and so does the
imposition of taxes. Look at that ISER report to realize
the differential impacts of the three courses of action.
Co-chairman Halford asked if in looking at the in state
economic impact does it need to be isolated it in that way?
It has been easy to export the tax burden to basically the
world oil market but once you start choosing between taxing
within the State of Alaska to pay salaries within the State
of Alaska there is not any real wind there or is there?
Brian Rogers responded that if the purpose of the taxation
is solely to pay taxes, no there is not a wind there or a
loss there except to the extent there are some tax
substitutions by reduction of Federal taxes or some
collection from non-residents. It is important to recognize
that while we all have heard the number seventy percent of
public spending is for salaries the salaries and benefits
for State employees are about a quarter of the Alaska
general fund budget with a major proportion of the general
fund budget going for education, municipal systems transfer
payments, things that don't go directly to salaries of State
employees.
Co-chairman Halford asked if the education component in the
majority of that also go through to salaries for employees
funded through State and local contributions? Brian Rogers
indicated yes.
Senator Halford said the numbers still go back up again when
the actual spending of the pass throughs are counted. Brian
Rogers again indicated yes. Co-chairman Halford said the
hardest thing to assess, and he assumed that it is different
when you are sitting the center of State government, the
impact of tax that transfers jobs from the private sector to
the public sector may have a very significant positive
impact on one area of the state and it may have a very
significant negative impact on another area of the state.
If there is no net gain then I would hope that we do not
look at those places such as the permanent fund revenue
stream for example. Brian Rogers responded that one way of
looking at the problem might be that Alaska has about a $14
billion economy and we have $0.5 billion hole in that
economy. One approach might be to look at what method of
change in spending and revenue maximize the proportion of
that $500 million hole that is filled outside the State of
Alaska versus inside the State of Alaska. That message
would say go for oil taxes first, and go for an income tax
second, and sales tax third. Those kinds of actions would
have other deleterious impacts on our economy.
Co-chairman Halford said that one of the things Mr. Rogers
started with was a statement that has been significantly
disagreed with by the Juneau economist Mr. Reaume, and that
is we are spending more than we are taking in. Mr. Rogers
said that he had not read all of Mr. Reaume's information
and he felt maybe he didn't understand just what he was
getting at. The portions that he did understand he felt
that he was correct in saying that portions of revenue
coming in are devoted to specific purposes and not included
in a balancing and an example of that is the twenty-five
percent of Prudhoe Bay's revenue and fifty percent of other
oil field revenues that are deposited into the permanent
fund and the tax settlements that are coming in we have not,
in our work, nor has the Legislature counted that in the
annual available for appropriations because of prior
decisions by the voters to segregate those funds. The
voters decided in 1976 that the twenty-five percent would go
into the permanent fund and not be available and the voters
in 1992 and 1994 dealt with the constitutional budget
reserve. He is correct in saying that is revenue but he is
incorrect in considering it to be unrestricted revenue.
Co-chairman Halford said that Mr. Rogers' threshold
statement was that the State is spending more than it is
taking in on an annual basis. Is that correct in the
dictionary terms or is that only correct when looking at the
general fund component? Mr. Rogers said that he believed
his statement was unrestricted general fund spending and
specifically chose those words because the work in closing
the fiscal gap that the commission focused on, unrestricted
general fund spending. Certainly, the voters could decide
to stop putting money into the permanent fund and make up a
$250 million a year of the deficit through that action.
That's a choice that could be made that I believe no one on
the commission could have supported.
Co-chairman Halford said that was most likely where the
economist in question and the whole process kind of go head
to head. It is not understood that there's a significant
limitation on the terms. Essentially both of the statements
are correct.
Senator Zharoff asked the basic intent of having the
permanent fund in place. Mr. Rogers advised that he was on
the staff of the State House when the constitutional
amendment HJR 39 was debated and recalled at the time the
amendment was being debated was on setting aside a portion
of Alaska's oil wells so we could deal with the State's need
once the oil was gone. Most of the discussion in 1976
focused around whether it was ethical for the current
generation to spend the windfall that had been millions of
years in the making. The decision was it was not ethical
and that it was important that a portion of that oil well be
saved to benefit future generations. In the debate and the
discussion over the summer of 1976 it was primarily on
insuring that there would be revenue sources available to
the State once the oil was gone. In the next year, after
the permanent fund was adopted, the discussion at that time
shifted to whether this was a trust fund or a development
finance fund and there were two approaches at the time.
One, use the fund to build up Alaska and two, it was more
the nature of a trust fund. After the 1979 oil price
increase the idea of protecting the funds from raze by the
Legislature by using a dividend came up. It was in your
first term, Senator, and that of Senator Halford that the
issue of how to preserve the fund as a trust and how to
avoid allowing it to lead the way as was the case in
Alberta, through development projects, that the dividend was
proposed and came forward. The long range financial
planning commission in our report, attempted to balance both
the initial trust fund to use for State government and
protect that trust fund by giving out a dividend in the plan
that calls for some reduction in the dividend but preserving
the dividend.
Senator Phillips added that in 1969 when there was the bonus
lease of $900 million essentially most of that money was
spent on government which triggered the discussion about
having a permanent fund for future generations. That is why
in the late 70's early 80's we had a symbolic $900 million
deposit sponsored by Representative Freeman as a replacement
for the first $900 million. Mr. Rogers concurred. Co-
chairman Halford stated that it was a creation of a
coalition that never really reached a conclusion as to the
absolute purpose of the money but recognized some of the
responsibility to carry some of it forward. Many people
thought it was for government. Some thought it was to avoid
spending it. Every new revenue projection increased the
availability for appropriation by hundreds of millions of
dollars in the 1979-1980 era. Mr. Rogers concurred. The
votes cast in the Legislature on the deposit in those two
Legislatures were probably among the best votes because they
did prevent the budget from growing even further and
creating bigger fiscal problems today. Co-chairman Halford
said that whenever asked about what should be done with the
money he answers that "our kids should get to decide".
Senator Zharoff said that at some point down the road during
this period of time the discussion were that fifteen to
twenty years down the road, which we are at that point right
now, and the revenues of the State would start to decline
then the earnings and not the principal of the fund could be
utilized to some degree to supplement the government
spending or start to bring it down in a reasonable fashion.
We are at that point now and we might be deviating from
that and maybe there is a little misunderstanding of all the
stories that are going out that we are getting into the
permanent fund, when actually we are not. The basic intent,
initially, what was on the ballot that was sold to the
people was not to say that we were going to put this money
in there and continue to keep putting it in there
perpetually and not be able to get to the earnings at some
point. Of all of the plans in front of us it appears that no
one plan is the absolute solution. It is going to take a
combination of some of these plans put together or maybe one
plan in its entirety along with others. This is best
achieved by taking a bi-partisan approach to resolving this
fiscal gap.
Senator Phillips asked for a history on the purpose of the
dividend. Mr. Rogers stated the major driving force for the
dividend was the protection of permanent fund principal.
The linking of the annual dividend to investment performance
of the fund was the greatest security that the fund
principal would not be raided either directly or indirectly
through subsidized loans in a fashion that they eroded the
principal. The second effect was that the State was rolling
in so much money that there were not enough worthwhile
things to spend it on and that a number of legislators were
looking at ways of getting a portion of revenue off the
table to avoid having significant budget growth. A third
reason was that a study that had been commissioned about a
year before the dividend finally passed by the Legislative
Affairs Agency, Legislative Research Division, the effect
of State spending was very disproportional among the
legislative districts of Alaska and that some districts had
very high state spending, some nearly none and we were
looking for a way to boost the impact of State money
spreading around to communities in the fairest way possible.
The dividend was one way of doing that. There were per
capita appropriations as well. The strongest reason was to
protect the permanent fund principal. The other two were to
take money off the table and try to spread it around more
equitable. Senator Phillips recalled the first half and the
dividend was sold to the public because the public felt they
could spend the money better than the Legislature. The
second half of that was the dividend was supposed to be used
to purchase the services that you wanted. That was an
argument by the main proponents, that the public can spend
the money better than the Legislature and that the money was
to be used to purchase the services to be used or that were
wanted.
Co-chairman Halford concurred. Governor Hammond, as the
advocate, used the dividend payment in arguing against State
expenditures, saying, in some cases, different people would
make different choices in how they would spend the money.
Senator Phillips said that the dilemma that we were in now
was that the perception of the second half of the argument
has been diluted over the past fifteen years because now a
lot of folks feel it is a trip to Hawaii or whatever. The
Anchorage area is going to be going through a vote here in
April and they are going to be voting on some bonds. If
they choose to go ahead and vote in favour of the bonds that
means increased taxes would take part of your permanent fund
dividend and pay the increased taxes for the services that
you requested or wanted. Co-chairman Halford stated that
was an individual choice based on individuals and it is
fairly allocated across the state, probably more so than
anything else we do, and it has the maximum positive impact
on the overall economy of all the expenditures we make.
Senator Phillips cautioned that he did not want us to lose
the foresight we had fifteen years ago stating that you pick
the services your request because you as an individual
citizen have a better ability to spend that money than the
Legislature collectively. Co-chairman Halford said that
former Governor Hammond carried that one step further saying
to leave it there as a payout and if you need it tax it back
for services that people want to pay for collectively.
There is a strong disagreement on whether that would ever
occur in that format or whether people would go back to the
dividend directly.
Senator Donley said that he corresponded with the commission
on the formation of the plan and this is to address point
number one about what the purpose of the dividend originally
was to protect the corpus, give the people a stake in the
corpus and of the permanent fund and promote its increase
over time because it would be politically protected by the
dividend program. The commission in recommending capping
the permanent fund dividend did not look instead if you had
to propose to do that to a percentage reduction in the
dividend. Currently it is fifty percent of the interest on
the permanent fund. It doesn't make any sense to simply cap
it if it is going to be used as a revenue stream and you can
achieve the same amount of revenue by reducing the
percentage of the interest that goes to the dividend
annually and you would still preserve the link between the
total corpus and the amount people get in their dividend and
preserve that number one principal of protecting the corpus.
Mr. Rogers said he would agree that's one of the biggest
problems with the capping of the dividend in the plan
advanced by the commission. Senator Rieger and himself were
some of the strongest advocates on the commission for not
breaking the link between investment performance and the
dividend payout. We were in the minority on the commission
on the issue of capping the dividend. Co-chairman Halford
asked on the topic of the commission, if $100 million were
taken out of the dividend revenue stream and used it to fill
the spending gap would that have a net positive impact on
the internal economy of the State of Alaska as a unit or a
net negative impact. Mr. Rogers felt it would be a negative
impact.
Senator Steve Rieger was invited to testify before the
committee. The minority report was built on the work that
the long range financial planning commission did. The
commission did look through a number of issues and tried to
get a reasonable base line about what the future revenue
sources would be from a variety of alternatives of taxes or
user fees and what the unrestricted revenues would be.
They also looked at the projected population growth of the
State, used inflation assumptions and what they did was
create a large number of building blocks which had some
degree of objectivity to them. What happened in writing the
minority report was using the assumptions which were
developed by the long range financial planning commission
even though they might not have been exactly what would have
been crafted in a vacuum as far as the choices made. The
commission did pursue two courses: one was a variation of
an endowment approach, and the other was a variation of what
was sometimes referred to as a SB 51 approach. The spread
sheets contained in the reference packet, labeled the Rieger
Composite Scenario are really the result of the commissions
review of the Senate Bill 51 type of scenario with some
modifications they made. The basic premises which are
important for closing the fiscal gap are three big tools
that are available: budget cuts, interest earnings and
taxes. The conclusion is that any two of those could close
the fiscal gap. The two that should be used are budget cuts
and interest earnings. Obviously no single one of those
three tools will get you there. No one disagrees that
budget cuts are necessary. The budget cuts incorporated in
the Composite Scenario are substantial and they are an
absolute necessary part in getting the State onto a sound
footing. The use of interest earnings in this plan are off
of the permanent fund. The principals that are applied here
are that not a penny has been earned on endowment, not in
the permanent fund, the university foundation or any other
until you have at least exceeded inflation. Inflation-
proofing as it is commonly used should not only be the first
priority in the treatment of any endowment, it should not be
on the table as a consideration of whether it should be a
priority or not. It should not even be considered earnings.
It should be an automatic thing that you don't even count
your earnings until you have first exceeded inflation. The
present statutes say the five-year average in pay out for
the permanent fund is a reasonable approach for permanent
fund payouts. We should continue the policy we have had of
paying out half of the actual earnings of the fund as a
dividend. It is not necessary to go beyond that policy in
the foreseeable future. What has been done during the last
ten years is not only paying out half of the earnings of the
fund in a dividend, we are also paying out half of the
inflation-proofing. If there is fourteen percent earnings
and four percent inflation we don't say we had a good year
by earning ten percent above inflation and we'll pay five
percent out in dividends, we pay the five percent out plus
the two percent of the original four of inflation. That
tends to put a squeeze on the permanent fund to do anything
except cover dividends and cover inflation-proofing. The
permanent fund, because of that, is perpetually at risk of
being eroded by inflation. We even saw a plan today which
said that is a consideration that should be there, whether
to continue inflation-proofing. Inflation-proofing should
be first and what should be on the table for our
consideration is the real earnings of the permanent fund.
What SB 51 does and what this composite scenario does is say
yes, inflation-proofing is off the table. The payment of
dividends is based on the performance of the fund after
that. The rest is available to help close the fiscal gap.
It is step number two after the first priority which is
budget cuts. Some of the smaller measures that the long
range financial planning commission developed, tobacco tax,
alcohol tax, highway motor fuel tax, user fees and so on, it
was not only a significant set of revenue without going to
any major new tax, it was more than necessary. What the
spread sheet shows instead of a zero and five it is a zero
and three. Even if you did not take some of the measures
which are proposed there it is a zero and three. Since that
time a couple of things have changed. The permanent fund
since the commission did its deliberations last summer has
had a banner year. The principal is significantly higher
than what it was in the assumptions that were used here.
That is a plus. The long range unrestricted fund forecast
that has come out in the fall is lower, that is a negative.
There is a curve that drops off more steeply and because it
based primarily on known economic activity, reserves,
revenues, and it does show the need for continued economic
development. That has to be a given that is in all these
plans. There has to be economic development to offset some
of the other fields that pay out. The other thing that has
changed is that the permanent fund has adopted a very
conservative, long-term total earnings assumption of 7.17
percent. After the next couple of years that is there long
term assumption of what they are going to earn totally.
That seems somewhat low but it does tend to change if you
were to adjust this somewhat, the amount of earnings that
are available for whatever, whether it is dividends or for
the use of the remainder after dividends. What these
numbers show is that you don't need a state-wide sales tax
or a personal income tax, but you do have to use interest
earnings and you do have to use budget cuts to close the gap
and the numbers here are representative of what that plan
would look like. Just like on inflation-proofing of the
permanent fund, the discussion on the budget has tended to
ignore inflation. The permanent fund uses as inflation
assumption for the next five years 2.99 percent next year
and then 3.18 percent for the next four years. Just
compound that out and apply that to the budget we have
today. If there is no adjustment for inflation and just
hold nominal dollars of the budget constant for the next ten
years, that is a cut in real dollars of $409 million. What
has been observed from the plans that are generally proposed
is that there is discussion of the nominal cuts, should it
be zero, which perhaps Dave Reaume was talking about in his
column, or $100 million as the long range planning
commission used or $250 million, those are dwarfed by the
fact that if you hold the line against inflation you've cut
$400 million, then it is a question do you cut another $100
million on top of that or $250 million all these plans do
talk about using interest earnings and budget cuts to get
you there. The Governor is saying that we should do a
state-wide income tax before we take a look at anything that
has to do with the earnings. Senator Rieger disagreed with
that but said excluding that exception all the plans work
off the assumption of using interest earnings and budget
cuts. The majority report will now use interest earnings
off the constitutional budget reserve, AHFC, AIDA and it is
the same concept. That is the answer of how we get out of
here. What this plan does is put the permanent fund on a
more sound basis because the inflation-proofing is
automatic. It puts the dividend payout on a more rational
basis because we are paying out based on the actual
performance of the fund. It does continue, as Brian Rogers
pointed out, the link between the performance of the fund
and the size of the dividend is vastly preferable to capping
the dividend at a dollar figure. That would be an open
invitation to pressure for inferior investments by the fund
because no one could say that this would hurt the payout.
This is critical to maintain. The Rieger Plan basically
incorporates SB 51 and budget cuts and is open to other
conditions.
Senator Zharoff said that he saw a report indicating that as
the principal of the permanent fund continues to grow the
more it will take to inflation-proof it and at some point
the inflation-proofing starts to almost take up its entirety
so it does have a definite affect on whatever there is as
far as undistributed monies as well as on the distribution
of the dividends. Senator Rieger noted that the projections
tend to match what today's situation is. Right now inflation
is less than half of the returns of the fund so that isn't
the case. But in the past inflation was more than half of
the total return and that was the case.
(change to tape SFC-96, #32, Side 1)
If inflation-proofing is made automatic and the policy of
five year averaging is continued, which is a good policy and
the commission also considered a fixed percentage payout
based on the size of the principal instead of actual
earnings, you would have to have poor earnings for a number
of years before you could not make a pay out. There could
be a fluke situation, but on a five year that is not very
realistic to expect with good management.
Co-chairman Halford asked about the averaging being washed
out in five years from now what would be the percentage
reduction in dividends from what it otherwise would be.
Senator Rieger said that if you make the same assumptions
you still have a variable and that is how many people are
going to come into the state for the sake of getting the
dividend, if it grows much beyond on where it is today. It
might be there is no difference because you just have a
fewer people dividing a smaller pie instead of fifty percent
more people coming in because we are trying to pay some
phenomenal quantity in the dividend. If you make the
assumption we have walls on our borders the estimate is that
it would be something like a twenty-five or thirty percent
change. Co-chairman Halford referred to Rieger plan, page
two, annual dollar cut in per capita dividend from status
quo. The cut starts out very small because it is averaged
but when we get out to five years from now it is forty
percent. It seems to run between forty and forty-seven
percent reduction from then on. Is that figure accurate?
Senator Rieger said he wasn't sure if the figure was
accurate. It depends on the performance of the funds and
the relative size of inflation and the total return. If
inflation were nine percent and the total return of the fund
were ten it would be a very significant cut in what we were
paying out. If the inflation were one percent and the total
return were ten there would be a very insignificant
difference between the two. The permanent fund is using
extremely conservative total return assumptions compared to
what they have done. Senator Halford said that it seemed to
be a major reduction if the projections are anywhere near
what the numbers come out to. Senator Rieger said that the
hidden assumption is that the payout can grow forever
without attracting people, which has not been the
demographic experience we have had in the case of the
longevity bonus. Co-chairman Halford said that any of the
other projections we see shows the payout growing. The
minority's package showed dividends basically in real
dollars staying at about where they are now indefinitely.
Basically the dividend in today's dollars by the year 2010
is $961. In purchasing power there is no difference. The
dividend is probably not going to change significantly
although we may see a spike up and they probably show that
in 1996-1997 we may see a $50 to $100 increase. Senator
Rieger said that he had observed that the nominal dollar
projections of what was presented by Senator Duncan as the
majority plan is different than the nominal dollar
projections labeled status quo on this minority report. If
percentage are being referred to you are not comparing SB 51
to Senator Duncan's presentation of the majority plans but
what was labelled a status quo on an old run. Co-chairman
Halford said that it probably depends on the timing of the
runs for those small differences. The trend is basically
still the same amount of dollars in real value.
Senator Steve Frank testified before the committee. In
using his charts he stated the majority plan does make more
reductions in sending, $250 million in the course of the
next five years and we use less tax revenues than the long
range financial planning commission. Importantly the
constitutional budget reserve is protected and used as an
ongoing source of revenue and the permanent fund is
protected. No changes are made as to how the permanent fund
is handled. No change in the constitution and no change in
the dividend. No income tax is required and the bounds of
the CBR of the permanent fund are not depleted. Looking at
a graphic plan of the majority plan versus the long range
financial planning commission plan cuts of $250 million are
made by the majority plan over a five year period. If the
effect of the long range financial planning commission over
five years is looked at, because of their provision for
inflation and population growth in the budget, they are
actually spending more after the fifth year than we are
today. Under our plan once we get down to $250 million in
cuts over five years we hold the line. Taxes over the next
five fiscal years, the majority plan calls for $281
accumulative taxes over that period of time versus $971 by
the long range financial planning commission. One of the
primary elements of the majority plan is to conserve the
constitutional budget reserve and have the earnings
available in an ongoing, sustained basis to help support
closing the fiscal gap. The fiscal gap is closed in the
fifth year and while doing that the constitutional budget
reserve is allowed to grow. Actually there is more in it
after the fifth year than today. A graphic example of the
declining fiscal gap in relation to the revenues is that
revenues are growing slightly due primarily to some new
revenues and to increased earnings from the interest on the
constitutional budget reserve. This is a further example of
how our fiscal gap would be reduced of a five year plan.
This can be done primarily through conservation of the
constitutional budget reserve, use of earnings from the
constitutional budget reserve and the spending cuts. Those
are the two primary elements of the majority strategy.
Senator Rieger's plan goes more with earnings and budget
cuts. The permanent fund is not used in the majority
approach. It is simple and does not require a change in the
constitution or the dividends. What is asked for is a
greater sharing of the revenues from AHFC. That is
consistent with what they have agreed to provide. AIDA was
asked to share half of their earnings over the course of the
next five years and on into the future. Projected earnings
are shown by the constitutional budget reserve by asking the
permanent fund to manage these funds to increase from about
5% to 7% the rate of return on the constitutional budget
reserve where we pick up over $40 million a year. They can
manage it over a longer term than they are currently doing
in the Division of Treasury. There are new revenues of
cigarette, alcohol, motor fuel, plus new development
revenues which can go to fill that. That is rather modest
in comparison to other plans in terms of new revenue. Going
to the expenditure line it shows part of the reduction of
$60 million of the $250 million is accomplished through debt
service reductions. The capital budget is held constant over
those five years. The rest of the items are the
supplementals and revised programs. The projected fiscal
gap does go down to zero over the next five years and the
constitutional budget reserve grows over the course of these
five years due to additional settlements. There is
widespread agreement on the fact that there will be new
settlements. The administration has about $800 million now
in projected revenues from the new settlements. The long
range fiscal planning commission used $600 million and the
majority plan used only $500 million over the course of the
next five years. That is a more conservative approach on
additional settlements over the next five years. The
permanent fund is maintained in its existing status and the
future value of the permanent fund is not diminished by
eroding the inflation-proofing. The dividends are
maintained under the current structure and current law.
Even after dropping the additional money into the permanent
fund in SB 84 there is still a growing amount of money in
the earnings reserve of the permanent fund and an actual
growing amount of the excess over and above the amount
necessary to inflation-proof and provide for dividends.
This plan gets us down to a five year fiscal gap reduction
and it does not require a change in the constitution. No
income tax is required nor and use of the permanent fund
dividend. It does, in summation, require additional
relatively modest cuts that require us to tighten our belts.
It will not allow government to grow at whatever is
convenient and the Legislature will be required to use
budget discipline to control expenditures.
Co-chairman Halford asked about taxes and new revenues in
combination. Senator Frank answered that it is specified as
new resource revenues. Hopefully there would be some
revenues from some of the incentive legislation passed on
oil and mining development. New taxes may be required on
partially new revenue development.
Co-chairman Halford referred to alcohol and tobacco tax.
Hopefully this would be filled in with incentive driven
development. Senator Frank concurred.
Senator Zharoff asked about protecting the integrity of this
majority plan beyond this year. Senator Frank indicated
that one of the strengths of this program is that it does
not rely on changing the constitution. The people of Alaska
have a role in changing the constitution and this program
basically follows the people's direction to live within our
means. This plan tells the people that it is going to take
a modest reduction in the budget over the next five years
rather than coming to them for more taxes. Every plan
requires that the Legislature pass a budget. The long range
fiscal planning commission requires budget reductions. The
democrats want some budget reductions. Every plan depends
on the Legislature acting responsibly in the future.
Co-chairman Halford stated that it looked as if the minority
analysis of the majority plan as apparently done by OMB
seemed to be showing a different set of results in the long
term than expected. What are these differences? Senator
Frank responded that one has to keep in mind whether we will
be better off in five years under the majority plan or under
other plans. The majority plan shows the reserves will be
greater. There will be more in our constitutional budget
reserve in five years than today. If the permanent fund can
be allowed to grow and we can get our spending rate down to
a more sustainable rate then we will be better off in five
years than today. Future unrestricted revenues do begin to
trail off at a faster rate. As the ten year plan is
projected out there is still more money in the budget
reserve in ten years than today. Some responsibility has
been shown by reducing the expenditures and we are better
positioned for the future.
Senator Phillips commented on the "hub of the wheel". If
the Legislature collectively does not follow this strategy
the rest of the wheel falls apart. Most people are in the
middle column wanting budget reductions. If we don't
achieve this everything sort of flies off the wheel, so to
speak. Senator Frank concurred.
Annalee McConnell, Director, Office of Management and Budget
was invited to join the committee. The governor outlined in
his State of the Budget speech some principals by which he
was evaluating plans and the process we are in now is
looking at the elements that have been proposed under
various plans their strengths and weaknesses. In the
discussion today one can see that there are strengths and
weaknesses in each of the plans and it is incumbent on us to
figure out as a bi-partisan group, with a lot of public
discussion, how to bring these elements together. Some were
discussed by Senator Rieger about inflation-proofing, some
elements from the Senate minority plan, and one or two from
the majority plan are valuable to bring to the table.
Another is looking at some higher earnings on the CBR and
actually treating the CBR interest as a legitimate revenue
stream for the State. That was a concept that Dave Rose
advanced. With enough public discussion of all of this a
plan could be fashioned both responsible and one that the
public would be willing to accept.
Senator Phillips referred to a six year plan by the Governor
that one of his constituents asked about. Ms. McConnell
indicated that the individual from Eagle River may have
confused this with the six year capital plan that would be
out shortly. The Governor had said that he thought the gap
should be closed within no more than six years.
Co-chairman Halford asked if the Governor had a plan on the
table for a long range fiscal plan. Ms. McConnell advised
that he had not set a separate piece of paper on the table.
He is looking at all the elements of these plans and also
trying to look at some other things like the economic impact
of them. She referred to the Long Range Financial Planning
Commission's recommendations updated for the fall revenue
forecast for some other adjustments. Initially the plan
that was out in the commissions report, the newspaper print
report, included twelve months of alcohol, tobacco and motor
fuels taxes. When the commission did its bills that was
translated into nine months for the first year because of
the implementation date. There are some tune-ups like that
in it. She clarified the number of $140 million shown in
the material the senate minority put out which was produced
at their request by OMB for the cumulative impact of cuts.
That is 1996 dollars and it takes into account the impact of
inflation between 1996 and 1997 plus the $70 million in
cuts. There has been a fair amount of discussion on what
the economic impacts are and in particular the job loss that
would be represented by various levels of cuts. Not
referring to specific plans they were trying to pull
together some summary information from the ISER materials
that were presented to the long range financial planning
commission. Some rough estimates based on the information
that ISER developed in the late 1980's and using their
model, a cut of $100 million would produce a combined State,
local government and private sector job loss in the
neighborhood of 2200 jobs. At the $250 million cut level,
it would be about 5600 jobs. The work that David Reaume has
done that was referred to earlier, produced some different
numbers. One of the recommendations that would be very
valuable for Senate Finance would be to bring together some
of the folks who analyzed the impacts not only of budget
cuts but cuts in dividends and revenue and it would give you
an opportunity to question the assumptions they used for the
economic multipliers and that sort of thing. One of the
major differences that accounts for the wide range in
numbers that are produced by economists in this area is
their own assumption about where the budget cuts would
happen. If you take budget cuts in some areas you have a
greater job loss than in others. Cuts in the capital
spending area have a less significant job impact on State
employment, public, private together than operating.
Co-chairman Halford asked about cuts in debt service. Ms.
McConnell indicated that cuts in debt service obviously do
not have a job loss directed with them. If it is assumed
that there will be no new debt issued and the capital budget
is to be kept at the level you are suggesting what we will
find is that the public will most likely say that we are at
an unacceptable level for maintaining our infrastructure let
along doing some of the things that have been identified
that need to be dealt with such as rural sanitation, getting
rid of honey buckets, municipal water and sewer projects,
the schools, which have been a great concern for the public,
that we are way behind not only in major maintenance of them
throughout the State, also the building of new schools.
These are some things we think are going to be necessary, no
to go back to the days of having lots of capital dollars to
spend on nice things, but in terms of what is really
essential, the primary kinds of responsibilities for water,
sewer, roads, school facilities and dealing also with
deferred maintenance which has received more attention at
the university level than any other individual level, but is
also a serious problem for other state facilities. It would
be helpful not only to have some discussions with finance
committees, but a chance for the public to hear about this
job impact business. Those folks would be happy to come in
and talk about the impacts of various types of fiscal tools
not just the budget cuts.
Senator Frank asked if this is her personal assertion about
these impacts on the economy or was she repeating other
economists. Ms. McConnell advised that she was repeating a
summary of the information from ISER and David Reaume. The
ISER information was part of the public record at the
commission and she is trying to pull together some things
that summarize that information. No independent analysis of
job losses had been done. That kind of economic modelling
is fairly extensive and at this point there is no need to
repeat the work of others. Senator Frank asked if taking
the Governor's budget cut at $40 million plus the $70
million you are saying that you would have, $70 million plus
$40 million is $110 million, you are saying that your budget
would result in 800 to 900 State jobs lost and 100 to 200
private jobs lost as a direct result and so your budget is
going to be sending our economy into a tailspin? Ms.
McConnell answered no, actually some of the reductions in
our budget, like debt service, for instance, offsets some
other increases that are in the budget that have to do with
formula increases, labor contracts, other increases. It
shows that the cumulative impact is more than just the
dollar amount of the "nominal amount of a budget cut".
Certainly, these figures do not take inflation into account.
These are just straight cut figures so inflation would need
to be dealt with. A number of changes have been proposed
that would deal with them into the future like geographical
pay differential. There were conversations last year and
again this year on tier three and other things like that
which can help in bringing down the rate of growth, welfare
reform and medicaid reform. These are being done now in
HESS even before there are any legislative changes to bring
down the growth rates for those very large drivers in our
budget. One is plus inflation and the other is not. There
will be some impact. These are the places where the
Knowles' Administration proposed to make cuts and the public
has a chance to say, "we don't like this" or "these are
alright with us". Given that your plan does rest, as
Senator Phillips pointed out, on that column of budget cuts
that's basically the primary tool, it is going to be very
important for people to know how does that primary tool
affect them. As long as it is a faceless number, kind of an
anonymous budget cut, nobody has any particular reason to
say they don't like it. Then you get the more popular thing
of saying, "sounds good to me, the budget is going down".
Even some of the proposals that we had made in our budget
like the income limit on the longevity bonus, for instance,
the Legislature is not too inclined to go with those, so
what are the alternatives that you are proposing? That's
when we will begin to find out if the public feels that the
impact of your budget proposal is one that they find
acceptable or not. It is very difficult to tell until those
cuts are shown. It is exacerbated in a sense because your
plan depends twice as much as ours in the next year on
budget cuts and that's even more reason why the public needs
to know where those cuts would happen. That also affects
very much where the job loss would be or how much it would
be.
Co-chairman Halford said that one of the differences, in
particular, is in capital budget. Without the difference in
capital budget, the only difference between the majority
plan and the plan that you are at least trying to reach in
following the commission's recommendation is a total of $30
million. Ms. McConnell stated that the majority capital
budget is at $100 million or $110 million for 1997 plus,
remember, you are not using AHFC for capital as we had
proposed so that adds $20 million more impact. In terms of
what is out there on the street in the way of money to do
schools, water, sewer, fixing up the pioneer homes, the
transportation match for federal funds, as well as some work
on corps of engineers problems and airports and so forth,
all of that, what you are proposing is to reduce that to
$100 million and our current proposal has some money from
AHFC. Co-chairman Halford asked how much was the
Administration's current proposal. Ms. McConnell replied
that it has $110.2 in general fund dollars and $53 million
in total AHFC of the portion that usually goes to housing.
Senator Halford asked in regards to the Court System. Ms.
McConnell replied that the Court System has suggested that
they would like $4.5 million for the first three projects on
their list.
Senator Frank said that the Governor's total capital
spending is approaching $600 million. Ms. McConnell advised
that it was $660 million with the federal funds and all
other miscellaneous funds like university receipts and some
things like that which would add up to a total of $660
million. Senator Frank would like to know how that would
compare to last year as he would be surprised, even
subtracting out $20 million from AHFC and using it in the
operating budget where it spends over more times and creates
a greater multiplier, our capital budget was actually a
reduction over last year. This is relevant because the
economic impacts have been brought up.
Co-chairman Halford noted that the increase was about $50
million in the capital spending side. Our proposed decrease
is $30 million. Senator Frank said that we would actually
be spending more under our approach than we did last year,
when added to the increased dividends. Any assertion that
we are going to have some deleterious effect on the economy
is factually incorrect. Ms. McConnell said that it would be
important to see where it is proposed to spend capital
dollars. What are you planning to put into education or
deferred maintenance at the university, or water and sewer
or whatever? Senator Frank asked what difference that would
make on the economy. Ms. McConnell said that there were
two critical impacts: one, what is the impact on the
economy, and that is certainly an important effect; the
second, what is the impact in terms of meeting the needs
that Alaskans have. Senator Frank said that was a
legitimate question, but what about reducing the capital
budget of AHFC and the economic impacts? Ms. McConnell said
that in talking about the capital the concern was on the
needs part.
Senator Phillips wanted to know the Administration's
definition of a "cut" and a "reduction". What is here is a
$70 million reduction of which $55 million is actual cuts
and there is another $15 million less that we are paying
this year than last year on debt. Ms. McConnell pointed out
that this was one of the first questions the Governor got in
his first public appearance when he released Governor
Hickel's budget basically, a year ago December 15, and
someone asked him if when he was talking about holding a
line on spending was he talking about really holding the
line or was there going to be an increase for inflation and
then say he was holding the line. The Governor said that he
absolutely meant "holding the line". For purposes of
saying what is the total impact, that is a very different
discussion than what's happening with numbers. We have all
been prey to this frenzy about showing budget reductions
without thinking about the impacts. When we said we made
$35 million in cuts and $5 million more in shifts to fees
from general funds we were perfectly up front about saying
this is $40 million in these two fashions. The commission
had suggested $3 million in fees and $40 millions in cuts
and we said we were modifying that to be $8 million in fees
and $35 million in cuts for the same mix of the fiscal gap.
Senator Phillips asked if she was saying of the $40 million
cuts $15 million of it is debt retirement? Ms. McConnell
concurred. $15 million is a lower expenditure for debt
service than last year, however, it was in the materials
presented to you initially. If you are going to talk about
the "automatic reductions" the things that happen in spite
of you, you also need to point out what the automatic kinds
of increases, the things that are happening in spite of you,
or the obligations that you have for the future.
Contractual obligations, increases in entitlements where we
have enrollment increases are shown, but we say that we are
not necessarily going to increase the total budget by that
amount. We are going to balance things that are cuts some
of which happen with or without us and others of which we
have to work hard damn hard to accomplish, we balance those
with the increases.
Senator Phillips stated that he personally was having a hard
time to accept $15 million as a cut, a reduction, $5 million
in user fees, is that a cut? Most people would say you are
taking it out of my pocket, how is that a reduction? Ms.
McConnell indicated that it is a shift from general funds
support to user support. Senator Phillips indicated that it
was the terminology he was questioning. He doesn't view it
as a cut. Despite what is done here it is still a
reduction, not a cut. Ms. McConnell indicated that she
would be happy to call debt service a reduction. Each
person brings their own definition of the word. What is
important is do we tell the public what we are up to. We
told the public that we were doing $35 million in budget
cuts and $5 million in shifting from general funds support
to user support. What I was trying to do was lay out for
the public what it is. We don't know yet how you are
proposing to do your $70 million. I think it would be a lot
easier to have this conversation about what you propose is a
"cut" or "reduction" in your terminology after we see the
proposals.
Senator Phillips indicated that the Administration had a
year to put up their budget, we have been here approximately
sixty days and those details will come out a little later on
so I just want to understand what your terminology is first
before I figure out what you are going to do.
(tape SFC-96 # 32 switched to side 2)
Co-chairman Halford said that as compared to last year he
would congratulate the administration in terms of semantics.
Last year's budget was a cut that spent $160 million more
and hired hundreds of new state employees. This year
instead of having $160 million increase on the table at the
starting point, even if the proposed changes are not really
cuts, they probably would get us down to last year's
starting point. In comparison to the first year we are
ahead by something close to $160 million at the starting
point. That is getting us closer to whether it is your $35
million by your calculation or it is our $70 million by our
calculation, the differences are no where near what people
are talking about and what we were dealing with last year.
Ms. McConnell indicated that one should get away from all
the focus on numbers, not that numbers aren't important, but
in terms of not looking at what's behind it. For instance,
the largest number of increases in employees between 1995
and 1996 was for child support enforcement, which is mostly
federally funded. It is very deceptive to tell the public
we added hundreds of employees. The public should be told
more about what is being accomplished by the dollars that
are being spent. Some progress has been made both within
the administration and between the administration and the
Legislature in trying as much as possible to get towards
using similar or the same numbers, showing things the same
way, showing the supplementals, and we knew that there would
have to be some supplementals for judgments, for fires and
disasters, showing those up front. Co-chairman Halford
indicated that it is not so much what we say to them, but
rather what they believe. They do not believe that we are
cutting the budget if we have more employees and if the
number is higher, and they get confused in general funds
versus all funds and all the other categories. The eventual
result is that if the number at the bottom of it all is
higher, as it is in capital for example, they consider that
as spending increase regardless of the sources. They
simplify all of our insider arguments in a lot of incorrect
terms. Ms. McConnell said that it is our job to try to work
to get away from some of that. It is very unfortunate the
way we show our numbers now, mean that things that are fully
fee supported, if that increases, and the public wants that
increase, that works against us in terms of what happens on
the bottom line. That doesn't make a lot of sense. We have
boards and commissions that say they would like to spend
more money to do X, Y and Z, they are happy to increase
their own fees they assess on themselves to pay for it, and
yet there is this pressure not to do those kinds of
increases because it doesn't show as a budget cut. We do
have a lot of work ahead of us to try and simplify all of
this and recognize that the public certainly doesn't have
any time to sort through all that stuff. One of the
clarifications that would be helpful in terms of looking at
the majority plan is what is the expectation after five
years in terms of whether there would be any allowance for
any growth in either population or acknowledgement of
inflation. There has not necessarily been a determination
of what would be something that would help us in taking a
look at the long term impacts of the various proposals that
are on the table. Senator Frank said it would have been
more appropriate if she would have said that she was making
her assumptions about what the majority plan was rather than
just putting out a piece of paper with majority on it. Ms.
McConnell advised that she incorporated those at the request
of the minority to show the assumptions they noted on their
materials. She asked what other title would have been more
appropriate. Senator Frank said that their plan does not
assume any particular course of action into the future. If
you let the budget grow at an amount that recognizes
inflation or part of inflation or the population, obviously
you will spend more money. We can't really tell what the
public's really going to want in those years until we see
what happens. If we hold the line for a ten year period or
if we let the budget grow by a percentage point or so over
the course of the additional five years, in our plan, you
still wind up with more money then than you have today in
reserves. It is certainly a legitimate question and the
further out you get in your projections the less certainty
there is obviously. The thing that is going to matter the
most is what happens to oil revenues because it will still
be the biggest component of any of our plans and a couple of
dollars price change in oil or any kind of change in the
production rate makes more difference than any of the other
assumptions. Let us get our spending more under control now
in the time period that we do have control over it and set
ourselves up for a better positioning in the future rather
than just sustaining the level of government we have now and
allowing it to grow in the future. Ms. McConnell indicated
that the commission spent quite a bit of time in dealing
with the issue of what would be an appropriate amount to
assume for growth after the period of the initial budget
cuts. Some further modifications of the commission
recommendations makes sense. Not all programs were
population driven and certainly if you double the population
of the State of Alaska you would not necessarily end up with
120 legislators, two governors, or two OMB directors, etc.
On the other hand programs like education and other formula
programs are certainly population driven, as are many other
things that are a little bit more indirect. The commission
chose to use half of population as an assumption for growth,
plus inflation for the future. It would be very helpful to
get some sense of what does the Legislature and the
Administration feel would be appropriate to work with for
the future about assumptions for growth. Not everybody is
necessarily going to agree on all of it, but if at least we
were to come to some conclusion about roughly what
percentage of our state expenditures are population driven
that in itself would be a useful thing to get some consensus
on. Senator Frank said he did not know about the Governor's
plan because it was not on the table but the long range
fiscal plan has the budget growing more in the next decade
than it has in the previous decade. The people of Alaska
are not happy with the fact that we have not done a better
job in reducing expenditures and living within our means.
Not only have we not reduced it since the budget crisis in
the mid 1980's we have actually allowed it to grow, albeit
at a much lesser rate than inflation and our population
increases would indicate. The long range fiscal planning
commission assumes a growth rate in the next decade more
than we have had in the last. Maybe we could come to some
agreement on what rate of growth we should allow or not
allow in the future and that may be a very appropriate
debate and it may not change our need to get our spending
under control in the present, but it certainly would be a
good exercise for long term assumptions. Ms. McConnell
indicated the commission's report does not change the growth
rate in the future, however, the cumulative impact is larger
if the population is increasing at 1.6% Cumulatively it
becomes a larger number of people out in the out years than
at the beginning and the same with inflation but the growth
rate assumption was the same throughout the fifteen year
period. Senator Frank said that it results in more money
being added to the budget in the next decade, more than
we've had in the last decade. Ms. McConnell indicated that
the irony is that the public understands very well the
impacts of growth and inflation in their own budgets. The
public does not think that in their own family budget with
three children can be the same as it was with just two
adults or that the total grocery bill is going to be the
same in 1980 and 1996. Somehow when we move up to the
level of billions of dollars people lose track of that and
there is no longer that kind of gut sense that it makes
sense to recognize and acknowledge the impact of inflation
and population growth. Senator Frank indicated that some
people have had to deal with actual cuts in their pay and
actual reductions in their income. Some people have to
accommodate another child with no increase in their income
and that is the kind of criticism that we are getting. The
public is saying that they have tightened their belt but the
government is spending more today than a decade ago. That
is where we get into a rub with what the people of Alaska
want. The people want us to control the growth of government
and State spending and maybe others don't believe that.
Maybe that is a philosophical debate we will never get past.
Ms. McConnell said that maybe it depends on what one is
talking about. The longevity bonus program, for instance,
has had mail on both sides of that issue, saying the
Governor's proposal did not go far enough because clearly
$60,000 is way more than anybody needs to get $3,000 more.
People have also said they do not like it. In different
program areas there is not going to be consensus in the
public let alone a smaller group of the Legislature. That
is what this whole budget process is going to be about.
Co-chairman Halford said there would be resistance in the
administration if the Legislature proposed that any tax
increase had to be approved by the voters. Ms. McConnell
said that the Governor had already indicated that he
supports the idea of a motor fuel tax which would go to the
voters so that is not a blanket statement that there would
be opposition to all taxes going to the voters. He has
already said he thinks there is one that should to the
voters.
Senator Frank said that he would like to echo the remarks of
Co-chairman Halford with regards to the Governor and his
budget. It is appreciated that it is less this year than it
was last year and there is less money on the table for
spending than the previous year.
Co-chairman Halford voiced concern over the question of some
funding mechanism for major capital projects in education
and corrections. There are rumors but no proposal. What is
the status of those two areas in particular? Ms. McConnell
said it should be out relatively soon, however the proposals
will not be completely finished in a couple of areas. The
board of education is working on the whole capital
construction area, both major maintenance and new
construction. This work is not going to be finished until
in time for next year's session. We are going to put at
least a view of how much money we think at a minimum should
be dedicated toward education facilities over the next years
but the mechanism of how that might be allocated may change
depending on what the board of education works with. This
will still be work in progress. Co-chairman Halford asked
if they had all the pieces of the spending plan that the
administration was going to propose this year at this time?
I've heard some interest in corrections and education. Ms.
McConnell advised that the Governor will be announcing his
corrections plan on Monday so there will be some additional
information that can be used in the process. Co-chairman
Halford asked about education and was there a proposal. Ms.
McConnell said that obviously in the capital budget we have
proposed $7.5 million for major maintenance and school
construction. Six or seven schools for major maintenance
and one for construction.
Senator Zharoff said he was concerned about the jobs and the
potential impact that was going to have. Rough calculations
show that under the $35 million reduction anywhere from 500
- 750 jobs could be affected from the State, private and
other sectors. That is a big question as to whether those
reductions are going to have an impact on the State. As you
go from the $35 million you can kind of go up to $70 million
and then you can double all that and you can go to the $250
million over a five year period, but it would be good to
have some idea of the impact of those jobs and where they
are going to be.
Senator Phillip commented that he felt we were going to have
various views from the economists just like one's view of
the world. Senator Halford and Senator Zharoff concurred,
but Senator Halford said that we also needed to concentrate
on the question and kind of narrow it down because we have
lived for years being able to export our tax burden or
essentially spend our natural resource wealth for all
generations of Alaskans. Those are easy ways to make the
now economy work but if we get down to the point where it is
choosing to tax the private sector to support the public
sector and taking the same dollars out of the private sector
jobs and putting them in public sector jobs maybe we have an
economic negative. That is the bottom line and that
question needs to be asked in pretty specific terms. Ms.
McConnell indicated that there were some things that the
administration was working on very aggressively that would
help in that area and it is not so much budget related, but
working with industry, for instance, to get more of the jobs
Alaskanized and not all of that conversation is dependent on
the budget. Certainly a lot of it is but there are a lot of
other things we are trying to do simultaneously to try and
deal with much of that and get the income back in the State
where it does us more good.
Co-chairman Halford referred to the motor fuel tax. It is
paid for all by Alaskans and if it generates $50 million for
State government in some round number and it takes $50
million out of the private sector pockets of Alaska
citizens, have we increased the economy or have we
reallocated away from areas with high fuel costs, high fuel
use, into government centers. That is the question we need
answered.
ADJOURNMENT
The meeting was adjourned at approximately 11:50 A.M.
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