01/24/2017 03:30 PM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| Presentation Alaska's Economy by Dr. Ralph Townsend, Institute of Social & Economic Research | |
| SB1 | |
| SB2 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | SB 1 | TELECONFERENCED | |
| *+ | SB 2 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
January 24, 2017
3:30 p.m.
MEMBERS PRESENT
Senator Mike Dunleavy, Chair
Senator David Wilson
Senator Cathy Giessel
Senator Dennis Egan
MEMBERS ABSENT
Senator John Coghill
COMMITTEE CALENDAR
PRESENTATION: Alaska's Economy by Dr. Ralph Townsend, Institute
of Social & Economic Research
- Heard
SENATE BILL NO. 1
"An Act making a special appropriation from the earnings reserve
account for the payment of permanent fund dividends; and
providing for an effective date."
- Heard and Held
SENATE BILL NO. 2
"An Act increasing the amount of the 2016 permanent fund
dividend and directing the Department of Revenue to pay a
supplemental dividend to eligible individuals; and providing for
an effective date."
- Heard and Held
PREVIOUS COMMITTEE ACTION
BILL: SB 1
SHORT TITLE: APPROP: 2016 PFD SUPPLEMENTAL PAYMENT
SPONSOR(s): SENATOR(s) DUNLEAVY
01/09/17 (S) PREFILE RELEASED 1/9/17
01/18/17 (S) READ THE FIRST TIME - REFERRALS
01/18/17 (S) STA, FIN
BILL: SB 2
SHORT TITLE: 2016 PFD SUPPLEMENTAL PAYMENT
SPONSOR(s): SENATOR(s) DUNLEAVY
01/09/17 (S) PREFILE RELEASED 1/9/17
01/18/17 (S) READ THE FIRST TIME - REFERRALS
01/18/17 (S) STA, FIN
WITNESS REGISTER
DR. RALPH TOWNSEND, Director and Professor of Economics
Institute of Social and Economic Research (ISER)
University of Alaska-Anchorage
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of Alaska's economy.
GINA RITACCO, Staff
Senator Mike Dunleavy
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided an overview of SB 1 and SB 2.
ACTION NARRATIVE
3:30:38 PM
CHAIR MIKE DUNLEAVY called the Senate State Affairs Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Wilson, Giessel, Egan, and Chair Dunleavy.
^PRESENTATION ALASKA'S ECONOMY BY DR. RALPH TOWNSEND, INSTITUTE
OF SOCIAL & ECONOMIC RESEARCH
PRESENTATION: ALASKA'S ECONOMY BY DR. RALPH TOWNSEND, INSTITUTE
OF SOCIAL & ECONOMIC RESEARCH
3:31:41 PM
CHAIR DUNLEAVY announced the presentation on Alaska's economy by
Dr. Townsend.
3:32:25 PM
DR. RALPH TOWNSEND, Director and Professor of Economics,
Institute of Social and Economic Research (ISER), University of
Alaska-Anchorage, Anchorage, Alaska, revealed that he has been
in public education for 30 years. He asserted that one of the
great features of public higher education's mission is providing
research and public outreach that also serves the broader
community. He set forth that ISER performs its role in
conducting and getting research out for the benefit of Alaskans.
He thanked President Johnson and Chancellor Chace for their
roles in supporting ISER's work on Alaska's economy and budget.
DR. TOWNSEND addressed an exclaimer that his presentation does
not represent the university's policy or any institution at the
university. He added that he has only been in Alaska for five
months and admitted that he does not have the breadth of Alaskan
experience that his predecessor, Gunnar Knapp, had with his 20
years at ISER. He asserted that he does have a long record of
participating in public policy originally in the state of Maine
where he served for 25 years as well as 3 years with the
government of New Zealand.
3:35:15 PM
He explained that the intent of his presentation is to provide a
very high level context on taxation issues due to budget cuts.
He added that he would touch quickly on a variety of issues that
arise, particularly with taxation as well as decisions on public
spending levels. He explained that his intent is to set a
context of understanding that addresses the business community's
and civic organizations' requests for a long-term plan about the
state's budget.
He reviewed page 2 of his ISER presentation, "Alaska's Budget
Context" as follows:
· FY2017 budget gap: $3.0 billion.
· Approximate maximum sustainable flow from
permanent fund (including the earnings reserve
(ER) and the constitutional budget reserve
(CBR)): (4.5 percent x $60 billion = $2.7 billion
generated/$300 million gap.)
Long-run gap:
· $1000 permanent fund dividend (PFD): $300 million
+ $700 million = $1 billion gap.
· $2000 PFD: $300 million + $1.4 billion + $1.7
billion gap.
He pointed out that even though the state's FY2017 budget gap
that was covered by the CBR was nearly $3 billion, Alaska is
fortunate in having a large savings account in the form of the
permanent fund plus associated funds including the ER and CBR;
that total is nearly $60 billion. He said if the question is
asked as to how much money could be used from the $60 billion on
a sustainable basis, money managers have indicated that the
state could afford to take out 4 to 5 percent that would leave
the principle in real terms untouched. He specified the he has
chosen 4.5 percent that equates to generating $2.7 billion,
leaving a gap of $300 million not covered. He noted that the
permanent fund and ER are also used to pay the PFD; that is also
a demand on the state's budget. A $1,000 PFD costs $700 million,
bringing the total gap to $1 billion; a $2,000 PFD would add
another $700 million, bringing the gap to $1.7 billion.
3:38:50 PM
DR. TOWNSEND addressed page 3, "Alaska's Budget Context, Plus"
as follows:
· Oil and gas tax credits.
· Capital plan.
· Health care cost uncertainty.
· Unfunded liabilities.
He detailed that there are demands in the budget beyond
what is represented in the 2017 budget: the outstanding
liabilities in future oil and gas tax credits; a long run
capital budget of $100 million is probably not sufficient
to sustain the state's infrastructure; strong inflationary
pressures in health care costs; and unfunded liabilities
with respect to pensions. He summarized that the numbers he
shared on page 2 were a little on the optimistic side.
He addressed page 4, "The economic context: wage and salary
employment." He noted that the 2016 and 2017 projections
are based on analysis from three economists: Dan Robinson,
Chief of Research and Analysis, Alaska Department of Labor
and Workforce Development; Jonathan King, Vice President
and Senior Economist, Northern Economics; and Mouhcine
Guettabi, Assistant Professor of Economics, ISER. He
detailed as follows:
· 2016: Alaska lost 7500 jobs.
· 2017 ISER forecast: lose another 7500 jobs.
· 2018: With no further changes to state budget, further
2500 jobs lost.
· 2019 and after: return to 2010 job levels and stay
flat with no economic drivers to recover lost jobs.
DR. TOWNSEND explained that the three economists where
unanimous that Alaska will be down approximately 7,500 jobs
in 2016; the job losses are wage and salary employment,
adding self-employment increases the forecast. He added
that all three economists forecasted that the state will
lose another 7,500 in 2017.
He detailed that ISER forecasted 2,500 jobs lost in FY2018.
He summarized that 2019 and after will stay flat because
there is nothing outside that is going to drive the economy
to recover the lost jobs for the peak the state had in 2010
and 2011. He said the national economy is recovering and
the state is benefiting, most notably from tourism;
however, the exterior drivers from the recovering economy
are not enough to help Alaska lift itself back. He
summarized that there is no clear path in the state's
future for a strong recovery.
3:42:28 PM
He addressed page 5, "ISER estimates of effects per $100
million change" on three types of changes as follows:
· Taxes: 450 to 800 jobs lost.
· Dividend cut: 550 to 900 jobs lost.
· Budget cut: 1000 to 1250 jobs lost.
He detailed that a $100 million tax increase would cause a
loss to the state's economy of 450 to 800 jobs because $100
million in spending would be removed from the economy, less
would be spent and fewer jobs would be generated across the
economy. A dividend cut would result in slightly more job
losses because tax increases would impact wealthier people
who do not spend all of their income; however, dividend
cuts come directly from spending. He asserted that a budget
cut is largely to reduce jobs directly through the
reduction in state employment.
3:45:06 PM
CHAIR DUNLEAVY asked Dr. Townsend to elaborate on the
projected job cuts from a $100 million change associated
with taxes, dividend cut and budget cut.
DR. TOWNSEND specified that if the state is to close the
budget gap on the order of $1 billion, the result will
cause job losses in the order of 5,000 to 12,500. He
summarized that the forecasted job losses means that the
downturn would continue for at least two more years. He set
forth that the risk is a prolonged downturn could cause
other negative consequences such as the impact on the
housing markets.
3:47:09 PM
SENATOR EGAN asked Dr. Townsend to verify that his
forecasts combine both public and private sector jobs. He
inquired how Dr. Townsend calculated salaries.
DR. TOWNSEND explained that the forecasts were expressed in
the terms of job losses and not income losses.
SENATOR EGAN asked that Dr. Townsend address projected
income loss.
DR. TOWNSEND explained that state-level data is different
from national data. He specified that economists tend to
focus on the Department of Labor's jobs data. He conceded
that a job in the construction industry is not the same as
a job in the retail sector. He explained that the reduction
in Alaska's jobs is tied to demographic trends where
migration out of the state occurs with job losses. He said
projections indicate that the state will see some net out-
migration if job losses continue.
CHAIR DUNLEAVY noted that Dr. Townsend expressed his
concern that losing 1,000 to 1,250 jobs over the next year
or two could be problematic. He asked what would occur if
the job losses were spread out over the next five years.
3:49:35 PM
DR. TOWNSEND replied that Alaska does have some choices and
noted page 6, "Why a multi-year plan? 1. Both risk and
opportunity." as follows:
· Being forced into a large one or two-year adjustment
will seriously harm the economy. The business
community has talked about a multi-year plan rather
than a one or two-year plan that could exasperate
Alaska's current recession.
· Change is inevitable, but Alaska's savings allow a
multi-year adjustment. Alaska is fortunate due to its
large savings accounts that provide choices that other
states in the Lower 48 did not have in 2007 and 2008.
Some states had "rainy day" funds at 10 percent of
their budgets, Alaska's "rainy day" fund is 3 years.
Alaska's CBR has one year left for the 2016 budget,
but the savings do allow a multi-year adjustment and
that is why the business community is saying the state
needs to have a plan that sees a multi-year path with
respect for spending and revenues.
CHAIR DUNLEAVY asked that Dr. Townsend address the short
term, mid-term and long-term effects of the three types of
possible changes: taxes, dividend cut, and budget cut.
3:51:45 PM
DR. TOWNSEND replied by addressing page 7, "Why a multi-
year plan? 2. Business impacts are inevitable and will not
be uniform." as follows:
· Both further spending cuts and additional revenues
seem unavoidable, the numbers are just too high to
close with any one strategy.
· Different cuts and taxes will affect businesses
differently.
He addressed page 8, "Examples of business effects." as
follows:
· Sales tax impact from internet competition. Businesses
that face severe internet competition will be
disproportionally concerned about a sales tax.
· PFD cut and impact on the rural cash economy.
· Businesses that rely on PFD spending are going to be
concerned.
· Higher property taxes from education cost shift to
local government: capital investments face higher
taxes/lower returns. Businesses considering large
infrastructure investment in a community may be
concerned about return on investment due to higher
property taxes.
· No capital budget: professional services. Businesses
with a whole range of services that may have to
downsize due to no capital budget, such as: design
services, and environmental assessment.
· Health care cuts: substantial cuts to the health-care
sector would have a strong impact on the only part of
the economy that has really been growing over the past
several years.
He asserted that he is not arguing for any of the possible
changes; however, whatever changes the Legislature makes
are likely to have disproportionally impacts on some
business sectors. He said businesses want to figure out
what the impacts are, particularly when people are making
10 or 20-year investments. He said businesses may hold off
on investing until the impact from the effects are known.
3:54:27 PM
CHAIR DUNLEAVY remarked that the analysis addresses the
evaporation of billions of dollars of wealth. Alaska in
trying to adjust to the new reality can either downsize to
whatever degree or bring in new revenue.
SENATOR GIESSEL questioned the sales tax impact on non-
internet businesses by noting that she has been charged a
sales tax when shopping online. She pointed out that job
losses will result in families moving, ergo less students
should decrease the cost of education. She remarked that
Dr. Townsend's premise is based on government being the
sole factor that affects the economy. She noted that as oil
prices have fallen, so have support services for that
industry, making it more economic in some cases to make
developments go forward.
DR. TOWNSEND replied that his analysis does not say that
the public sector is the only determinant. He noted that
there have been very large shifts in both the oil and gas
industry, but also in state government; that has caused a
moderate recession that is not as serious as what the Lower
48 faced. He asserted that government is not the only
driver, but government is an important driver in some
sectors, particularly in health care. He set forth that
business planning decisions depend on knowing what is going
on in the broader environment for firms that are directly
and less directly dependent on the government. He
reiterated that the business community has called for a
multi-year plan due to its planning decision process.
3:56:57 PM
He addressed page 9, "Tax policy 101, Broad and low." He
noted that Chair Dunleavy requested a broad overview on the
impact of various taxes that results from: changes of
taxes, introduction of new taxes, changes in how taxes are
levied, and changes in spending. He set forth that ideally,
one uses broad-based taxes at low rates; for example, a
broad-based sales tax at 2 percent will have less
distortion on the economy than a 4-percent tax on a much
narrower base that raises the same amount of money.
DR. TOWNSEND pointed out that an unfortunate example of a
non-broad-based tax is the federal income tax. He explained
that the marginal federal income tax is 33 percent, but the
high tax level is needed due to a large percentage of both
the capital earnings and salary earnings being exempt from
taxation because of various ways the tax code has been
structured. He noted that there have been calls to
substantially broaden the federal income tax and reduce the
tax rate at the same time. He reiterated that broad-and-low
is a strongly preferable tax policy.
3:58:39 PM
He addressed page 10, "Economic consequences of taxes" and
explained that taxes effect the economy in other ways. He
set forth that the cost of a tax to an economy is more than
the amount of money that goes to the government. He noted
three issues and added that issue-two and issue-three are
the most significant:
· 1. Administrative and compliance costs; for example,
cost of running a tax agency, business cost for
collecting taxes, and compliance cost.
· 2. People will spend money to avoid taxes.
· 3. People shift their economic activities based on
taxes; for example, the preferable treatment of real
estate both on favorable depreciation rules with
respect to rental properties, and the deductibility of
home interest and property taxes. If somebody is
investing in real estate because it is profitable to
accept a 3 percent return when 6 percent could have
been earned someplace else, that 3 percent is a loss
to the economy. People shift their economic activity
by shifting more productive to less productive uses.
CHAIR DUNLEAVY asked if Alaska's geographic isolation acts as a
modifier to the three tax issues previously noted; for example,
Alaska does not have neighboring states that impact crossing
state lines for employment or shopping.
4:02:30 PM
DR. TOWNSEND replied that some of the distortions in the Lower
48 differ in Alaska. He pointed out that residents of New
Hampshire cross the state line to buy cheaper alcohol. He said
there are advantages to being a single entity. He noted that
Alaska can take steps that encourages people to invest in one
type of investment versus another; for example, an income tax.
CHAIR DUNLEAVY asked to address how Alaska's situation may
modify behaviors related to cutting and the PFD.
DR. TOWNSEND agreed and said consideration must be given to the
details of individual taxes, spending, and where the state was
at.
4:04:22 PM
He addressed page 11, "Tax Policy 102: Equity and efficiency are
often in conflict in tax policy." He said there are inherent
conflicts between the goal of having an equitable tax system
that has people pay who can most afford to pay and the
efficiency consequences. He reiterated that broader tax bases
are desirable with respect to avoiding distortions on the
economy; however, broader tax bases often mean there is less
ability to effect who it is that actually pays the tax.
He addressed page 12, "Regressive vs. Progressive" regarding
equity as follows:
· Regressive: percent of income paid in tax falls as income
increases. Note, total tax paid may still increase as
income increases. A lower-income person may pay a higher
percentage of their income on a sales tax than a person
that earns more money due to the ability to save money and
buy things that are not subject to the sales tax. A higher
income person pays more sales tax, but regressive taxation
is measured by percentage.
· Progressive: percent of income paid in tax increases as
income increases.
4:06:22 PM
CHAIR DUNLEAVY asked Dr. Townsend to address how behavior will
differ in Alaska regarding income tax, sales tax, and property
tax.
DR. TOWNSEND addressed page 13, "Alaska's current taxes-I"
versus other states as follows:
· Corporate income tax: 9.4 percent maximum; among the 4
highest in the country, but 10 states are at 8.5 percent to
10 percent.
· Local property taxes: 10-12 average "mill rate;" slightly
above middle of the pack.
· No vehicle property tax; like 25 other states.
· Fuel tax $0.1225/gallon; lowest in the country.
· No personal income tax; like six other states, two tax
dividends and interest, not wages and salaries.
4:08:07 PM
CHAIR DUNLEAVY asked if Alaska's land ownership impacts property
tax mill rates; for example, lands held in trust, lands held by
the federal government, etc.
DR. TOWNSEND answered that Alaska's land ownership impacts how
much money is collected by the local property tax. He summarized
that Alaska is slightly above average in terms of its
collections.
He addressed page 14, "Alaska's current taxes-II," sales-and-use
taxes as follows:
· No state sales tax; like four other states, all four states
collect lodging tax and most a meals tax. All states do
impose a broad sales-and-use tax.
· Local sales taxes to 7.5 percent. Local rooms tax to 12
percent; 38 states have local sales taxes.
· Alaska imposes a 10-percent car rental tax; second highest
with 5 other states.
CHAIR DUNLEAVY asked to clarify that Alaska is in the upper
quarter of corporate taxes.
DR. TOWNSEND replied that Alaska is in the upper 20 percent.
CHAIR DUNLEAVY asked to confirm that Alaska is on the upper end
for car-rental tax.
DR. TOWNSEND answered yes.
CHAIR DUNLEAVY asked to verify that Alaska is in the upper end
of property tax.
DR. TOWNSEND answered no. He specified that Alaska is a little
above average, between the 50 to 65-percent range. He noted that
New Hampshire is on the high range at 20 to 40 mills.
4:11:56 PM
He addressed page 15, "Sales Tax Effects" as follows:
· Competition from internet sales. People are able to go
online and buy from out-of-state and not pay a sales tax.
· Moderately regressive.
· Exemptions, especially food, reduce "regressivity" at the
cost of collecting less revenue.
· Federal income deductibility for itemizers; however, most
people paying a sales tax do not itemize.
DR. TOWNSEND summarized that Alaska's sales taxes are paid in
part by visitors. He added that Alaska has the unique problem of
introducing a sales tax when the state already has local sales
taxes in place.
CHAIR DUNLEAVY noted that other states have local and state
sales taxes.
DR. TOWNSEND answered correct, but pointed out that states
typically introduce statewide-sales taxes prior to local taxes.
4:14:01 PM
SENATOR EGAN pointed out that since Alaska's statehood, the
prerogative has always been that sales taxes are left to
municipalities and that is why there is no state-sales tax.
DR. TOWNSEND agreed with Senator Egan and noted that
municipalities that do not have a local sales tax will probably
have higher property taxes.
He addressed page 16, "Income Tax effects" as follows:
· Rates can be progressive.
· Differential treatment of different income can be quite
distortionary; example, capital gains.
· Deductions and credits can be quite distortionary; example,
home interest. Cumulative of the substantial effects can
destroy the economy and affect the long-run performance of
the economy.
· Can influence retirement decisions on the state level.
· Federal tax deduction for itemizers. Most people who pay a
federal income tax itemize.
· States do tax the in-state earnings of nonresidents.
4:16:15 PM
He addressed page 17, "Coordinating with Federal Tax" to pay
state income tax. He said there is no question that using the
federal tax definitions reduces a state's administrative costs.
He detailed as follows:
· Only one state uses Federal taxes paid as base.
· Different income/tax bases from Federal income:
- Total income, line 22 of Form 1040.
- Adjusted gross income, line 37.
- Adjusted gross income with further adjustments.
- Taxable income, line 43.
- Tax/alternative minimum tax, lines 44/45.
- Tax after credits, line 56.
DR. TOWNSEND noted that frequent proposals in Alaska would
express the taxes paid in the state as a percentage of federal
taxes. He remarked that using a percentage of federal taxes was
great in the past, but most states have come up with their own
processes for adjustments, deductions, and the tax rates.
He detailed that there are several different figures that the
state could take from the Form 1040 as the basis for calculating
the state tax. He specified that line 22 of Form 1040 is the sum
of one's income and line 37 is adjusted gross income. He noted
that most states use adjusted gross income, but further
adjustments are made. He informed that income after deductions
is indicated on line 43 in the Form 1040, lines 44 and 45 show
the alternate rate calculation, and line 56 shows the tax after
credits. He pointed out that credits have become very
significant for the average taxpayer with child credits and
tuition credits.
4:19:11 PM
He set forth that if the goal of the state is to start from a
system at some percentage of the federal tax base, writing that
into statute would not be difficult. He pointed out that the
reason why states have moved to using their own definitions of
deduction adjustments and the rates are twofold: complications
with part-year residents and changes to the federal policy. He
noted an example of a change to the federal policy occurred 20
years ago where the federal government declared a 10-percent tax
credit, a state using the federal definition of taxes would see
its revenues go down by 10 percent and a state that simply used
the federal definition of taxable income would have been left
intact. Sudden changes in the federal-tax code have a
destabilizing effect on state budgets and that has led to only
one state using the federal taxes paid as the place to start.
DR. TOWNSEND addressed page 18, "Property Tax effects" as
follows:
· Arguments over progressive/regressive because half of the
property taxes are paid by industrial and business
customers; who actually pays those taxes matters.
· Differentially affects those on fixed income.
· "Circuit breaker" provision reduces regressivity on income
or age-based residents.
· Can create "tax competition" for industry.
· Federal tax deductibility for itemizers.
4:21:56 PM
He detailed that property taxes historically in the U.S. have
been the primary funding source for local education; that has
changed so that most states contribute substantial equalization
amounts to fund local K-12 education because the variation in
property-tax bases to support education vary widely.
He addressed page 19, "Permanent Fund Dividend cuts" as follows:
· PFD is a very progressive program where lower-income
families receive a higher-income percentage from the
subsidy.
· Cutting the PFD has a strongly regressive effect.
4:23:54 PM
CHAIR DUNLEAVY remarked that some Alaskans do not consider the
PFD a subsidy.
DR. TOWNSEND recanted "subsidy" for "payment." He exclaimed that
he did not intentionally use "subsidy" to describe the PFD
payment.
CHAIR DUNLEAVY specified that individuals receive a "dividend."
DR. TOWNSEND continued that the PFD is taxable so the dividend
results in the federal government paying part of it through
itemizers. He noted that there is a complicated issue that
because state taxes are only deductible by itemizers, whether
the income tax and the dividend is linked through a credit in
some way would make a difference for non-itemizers.
He addressed page 20, "Spending cut effects" as follows:
· Impacts depend upon what you cut.
· Details matter, such as impact on programs such as
Medicaid, what the state spends and the amount the federal
government is providing. Details can be complicated where
in the short run there is a small effect, but in the longer
run there is a cumulative effect.
· Education cuts will almost certainly increase local taxes.
· Other cuts will shift costs; example, universities.
· Long run goal is to fund services whose value to Alaskans
exceeds their cost, e.g., court system, criminal justice
system, child protection services, etc.
DR. TOWNSEND summarized that Alaskans ultimately must decide
what values they get from their services and what services
should be funded. He specified that in the long run, services
provide things that make Alaska a better place to live. He
asserted that the short run matters and noted that Alaskans need
to be worried about the effects spending cuts will have on the
state's economy because no one wants a serious recession;
however, in the long run the goal is to make decisions on
services from state and local government when spending cuts are
considered.
4:25:45 PM
CHAIR DUNLEAVY asked why Dr. Townsend said education cuts "will"
raise property taxes rather than "could" raise property taxes.
DR. TOWNSEND specified that he said "almost certainly" because
of what happened in the Lower 48 during the most recent
recession. He noted that a number of legislatures cut education
support and the result shifted costs onto local taxpayers and
students.
CHAIR DUNLEAVY pointed out that Alaska has the "Unorganized
Borough" that does not have a tax base where there is no local
contribution that results in 100 percent contribution from the
state, resulting in no ability to impose or increase a tax.
DR. TOWNSEND answered correct and noted that a problem for
communities in the Unorganized Borough versus communities that
can raise taxes and the change will have differential impacts on
the student educational system.
4:29:15 PM
He addressed page 21, "ISER estimates of effects per $100
million change in state budget" and impact in the short run as
follows:
· Taxes: 450 to 800 jobs.
· Dividend cut: 550 to 900 jobs.
· Budget cut: 1000 to 1250 jobs.
DR. TOWNSEND said there are going to be different budget models
and looking at the same numbers going ahead is important.
He remarked that there is increasing recognition that the state
is not going to get out of its situation in a year or two and
consideration for inflation must be taken into account:
· Inflation needs to be treated identically in revenues,
expenditures, and in earnings from the permanent fund for a
realistic picture.
· All can be in "nominal" terms, using the same measures and
expectations about inflation.
· All can be in "real" terms, which is the same as "today's
dollars." Economists typically use "real" calculations. The
same answer results either by using "today's dollars" or by
inflating everything by the same numbers.
He summarized that important questions to ask when dealing with
a budget is how inflation is being dealt with and is it being
done consistently.
4:33:25 PM
He referenced a question from a previous committee where he was
asked if Alaska's current recession could be considered the
"Great Recession." He said the answer that was given by the
economists was, "No, at least not yet." He detailed that the
housing market has been surprisingly stable in Alaska. He opined
that without upsetting people, some might be saying that the
state could be heading into the beginning of Alaska's "Great
Recession" if the wrong things are done; for example, a sudden
decline in the economy causes the housing market to collapse due
to out-migration; that might lead to a cumulative effect that's
greater than spreading the effects out.
He opined that the U.S. economy averted another "Great
Depression" in 2007-2009 due to aggressive monetary and
budgetary response by the federal government. He remarked that
the "Great Recession," [2007-2009], dragged on because agreement
could not be reached about which of the various solutions to
continue the recovery was acceptable; to some extent, the
economy ended up being held hostage due to different ideologies.
He said he urges Alaskans to look for solutions that will get
the state through the challenging times without the kinds of
severe impacts that accompanied the "Great Recession" in the
Lower 48.
4:35:49 PM
CHAIR DUNLEAVY pointed out that Dr. Townsend spoke about the
"Great Recession" in the Lower 48, asserting that $5 trillion to
$10 trillion was put on the backs of future Americans as a
result of the stimulus actions taken. He remarked that Alaska is
currently trying to grapple with how to deal with a state
economy that has lost billions of dollars. He said the state has
historically hoped for an oil price rebound because Alaska had
the production; however, most people now feel that hope is not a
very good strategy while the state goes through its savings.
He asked that Dr. Townsend specifically address the short-term,
mid-term and long-term impacts of the available tools the state
has: reductions, various revenue enhancements, permanent fund
restructuring, and taxes. He noted that there is a belief that
going down the road of taxes would result in taxes not being
repealed again. He inquired if Dr. Townsend's definition of
"short term" is one year or five years. He pointed out that
economic modeling for the impact from a 1200-job cut would vary
if done in one year versus spread over five years.
4:39:02 PM
DR. TOWNSEND replied that Alaska needs to grapple with Chair
Dunleavy's question as it decides a plan. He conceded that
economic models are much better at predicting the short term
than the long term. He remarked that asking the models to make
exact predictions ten years out will provide guidance; however,
none of them are going to give an answer that says, "This is the
right answer." He remarked that there is an element of using
judgement to address what kinds of uncertainty to deal with or
to learn with.
He set forth that the short term is where economists can see
that 2017 is going to look like 2016, 2018 will still see some
job losses from the previous changes; the economy after that
will likely stop losing jobs, unfortunately the model does not
see anything on the outside that's going to pull the state out.
He specified that tourism will not pull the state out because
it's not big enough to replace the impact oil had on Alaska's
economy. He expressed that there will be a lot of things that
change in the future, perhaps in the next few months with the
current administration. He added that there is a lot of
uncertainty with what might happen with health care. He said
people in Alaska are saying that a favorable regulatory
environment will provide opportunities for expanded natural
resource exploitation that could potentially provide a force to
increase the economy. He pointed out that the state budget has
some built-in concerns that tend to pull in the opposite
direction; again, the state is spending nothing on capital,
roads and infrastructure will have to be replaced at some point.
He added that the state has unfunded liabilities and uniquely
Alaskan dynamics with health care.
4:42:16 PM
DR. TOWNSEND asserted that thinking about a five-year plan would
be wise as to how the state wants to distribute the changes. He
conceded that when he talks about a five-year plan, he is
realistically saying that the state needs to be adjusting for
the next decade because cuts may require reconsideration;
example, many states in the Lower 48 reduced support for higher
education that resulted in higher student debt. He explained
that states in the Lower 48 have admitted that they did not
understand why a particular service was important. He set forth
that addressing a need for a service also requires finding a way
to raise or cut revenues elsewhere. He summarized that a five-
year plan is a realistic planning scenario for the state's
overall blueprint with respect to managing: new revenue sources,
the permanent fund and the funds it is capable of generating,
PFD, and spending.
4:44:26 PM
SENATOR GIESSEL questioned an earlier statement by Dr. Townsend
regarding the approximate maximum sustainable flow from the
permanent fund. She pointed out that the Legislature can access
the ER and CBR, but not the permanent fund.
DR. TOWNSEND replied that his statement addresses what the state
can do under the current constitution versus Alaska's economic
realities. He asserted that a university would manage its
endowment differently. He asked if the state is willing to
accept greater budgetary variability and planning difficulty by
continuing with the current mechanism. He set forth that
Alaska's large and valuable savings account can be used to help
the state through the difficult times; however, putting boxes on
how the state can use its savings account will make it harder.
4:47:06 PM
CHAIR DUNLEAVY pointed out that Dr. Townsend continues to
emphasize five years.
DR. TOWNSEND set forth that the elements of long-term planning
necessitates Alaska to figure out what it is going to do with
the permanent fund, the associated funds, and the PFD; that's
going to put a definition on the scope and size of the rest of
the problem. He voiced that Alaska faces a very different
environment than it got used to for the last 30 years and hard
choices need to be made on where to draw the line. He asserted
that saying certain choices cannot be included will make it
harder to find solutions that minimize the real cost for
Alaskans. He remarked:
We don't want Alaskans being unemployed unnecessarily
if there's a way for us to manage this. We don't want
people feeling that they have to leave the state
because of short-run economic downturns, we would like
to have it be successful in the long run.
He specified that his calculations simply specify the amount of
money that the state has and how it can use it in a sustainable
way. He asserted that looking at the variable ER year-to-year is
going to make it harder to plan. He asked that Alaska compare
itself to the typical state of 2007-2008 where typical budget
reserves were 10 to 40 percent of annual spending. He pointed
out that Alaska's budget percentage to annual spending is
several hundred percent with reserves that provide several years
for a "soft landing."
4:49:33 PM
SENATOR GIESSEL addressed Dr. Townsend's "quantitative" data
regarding projected job losses from taxes, dividend cuts or
budget cuts. She remarked that she takes Dr. Townsend's
quantitative data with a grain-of-salt due to "qualitative"
social issues that exist. She asserted that the PFD draws people
to Alaska who utilize a high amount of state services and
government-dependent individuals would not move to Alaska if
there was no PFD; that would affect budget demands for health
and social services.
DR. TOWNSEND replied that he has not seen any research on the
impact of the PFD. He noted that a person must be in the state
for a year to qualify. He revealed that migration data shows
that the number of people moving out of Alaska is approximately
equal to the net increase, births over deaths. He conceded that
a good bit of the migration out is highly skilled and higher-
income individuals who are more mobile.
4:52:33 PM
CHAIR DUNLEAVY pointed out that Dr. Townsend will be invited
back to specifically address "behavioral impact." He opined that
Dr. Townsend has written possible newspaper headlines for the
next two days:
1. Townsend says, "Great Recession unavoidable."
2. Townsend says, "Reducing the size of the budget will cause
catastrophic job loss."
He remarked that having Dr. Townsend return will, most
importantly, allow the committee to talk about the behaviors in
more detail. He pointed out that Dr. Townsend highlighted where
the state is at, but explained that the committee needs
additional engagement; for example, what happens if the PFD is
eliminated. He noted that Senator Giessel addressed the PFD
attracting people to move to the state and pointed out that a
person must reside in the state for a minimum of one year to
qualify for the PFD, but one day to qualify for welfare. He
detailed that a person can be in Alaska for one day and say that
they intend to stay and start to apply for welfare programs
that, many say, are much more expensive to the state in many
respects. He set forth that his previous example shows why it is
difficult to get everyone on the same page, but the committee
needs to dig a little deeper on behaviors.
DR. TOWNSEND jocosely asked if he could disavow his comment on
Alaska's "Great Recession."
CHAIR DUNLEAVY facetiously pointed out that some newspaper will
pick up on Dr. Townsends' statement that a five-year plan might
lessen the impacts.
4:55:06 PM
At ease.
4:56:19 PM
SB 1-APPROP: 2016 PFD SUPPLEMENTAL PAYMENT
SB 2-2016 PFD SUPPLEMENTAL PAYMENT
4:56:20 PM
CHAIR DUNLEAVY called the committee back to order. He announced
the consideration of SB 1 and SB 2. He explained that SB 1 is a
bill that he introduced in the fall of 2016. He detailed that SB
2 is the enabling portion to SB 1.
He noted that the 2016 Legislature passed an appropriation bill
that was to fully fund the entire PFD. He detailed that half of
the PFD was vetoed by the governor, approximately $700 million.
He specified that the governor said his veto was an effort to
help with the state's fiscal situation. He revealed that the
approximate $700 million from the veto resides in the earnings
reserve and not in the general fund.
CHAIR DUNLEAVY contended that the dividend is a very unique
issue that is not seen in other states or countries. He opined
that Alaskans believe the PFD is a way of receiving a royalty
from the state of Alaska due to the Statehood Act and a
subsequent constitution that has the state owning the resources
in a socialized manner. He explained that the method of paying a
dividend from the permanent fund allows all Alaskans to partake
in the state's mineral rights. He specified that the bill simply
restores the second half of the PFD that was vetoed by the
governor. He asserted that the belief is the PFD is a decades-
old tradition or right.
He stated that he believes restoring the second half of the PFD
is the right thing to do due to the current economy's condition
as well as comments from his constituents who noted that their
dividend was planned to be used for fuel oil, college, medical
bills, vehicles, etc. He opined that there are different ways to
deal with the ongoing fiscal issue and the bill addresses a need
to fix the 2016 PFD and allow the Legislature to move on to
bigger and more important issues in terms of fixing the fiscal
issues.
4:59:13 PM
GINA RITACCO, Staff, Senator Dunleavy, Alaska State Legislature,
Juneau, Alaska, provided an overview of SB 1 and SB 2 as
follows:
There are two bills because one is an appropriation
bill, which is SB 1, SB 2 is the directive bill and
both are required in order to issue check immediately
before the next payout in October. SB 1 gives the
appropriation amount and then SB 2 directs the
Department of Revenue to actually go ahead and make
those checks available.
5:00:02 PM
At ease.
5:00:12 PM
CHAIR DUNLEAVY called the committee back to order. He announced
that there is a committee substitute (CS) for SB 1.
5:00:21 PM
SENATOR GIESSEL moved that the committee adopt the CS for SB 1,
version: 30-LS0042\D.
5:00:36 PM
CHAIR DUNLEAVY objected for discussion purposes.
MS. RITACO provided an overview of the CS as follows:
The sectional change with Section 1 changes the amount
appropriated from $660,350,000, which was just an
estimate at the time that we had the bill drafted, to
reflect the statutory calculated amount vetoed by the
governor which is $683,234,813.
CHAIR DUNLEAVY asked to verify that there were no other changes.
MS. RITACCO replied that there were no other changes.
5:01:19 PM
At ease.
5:01:31 PM
CHAIR DUNLEAVY called the committee back to order. He announced
that he removed his objection to the CS for SB 1. He declared
that the CS for SB 1 is adopted. He asked that Ms. Ritaco
provide a sectional analysis.
5:01:48 PM
MS. RITACO provided a sectional analysis as follows:
SB 1, Section 1: restores approximately $1,032 to
every Alaskan.
SB 1, Section 2: makes SB 1 contingent on SB 2; the
reason for this is that if you don't make that
contingent on each other, you could have the
appropriation pass and it will just sit there until
the next payout goes, which would be in 2017,
therefore it actually would be in addition to 2017's
payment rather than a supplemental to the 2016
payment.
SB 2 is the directive, Section 1: the commissioner of
the Department of Revenue is directed to make the
payment immediately.
SB 2, Section 2: contingent on SB 1 passing, so if SB
1 does not pass, SB 2 does not go into effect.
We put an effective date of May 1, 2017 to give time
for the Department of Revenue to actually make the
checks and send them out with FY2017's funds rather
than FY2018.
MS. RITACO summarized that SB 1 and SB 2 are interconnected and
are contingent on one another.
5:03:11 PM
CHAIR DUNLEAVY announced that [SB 1 and SB 2] are held in
committee. He reminded the committee that public testimony will
be held at an upcoming committee meeting and the intent is to
move the two bills the following week.
5:04:35 PM
There being no further business to come before the committee,
Chair Dunleavy adjourned the Senate State Affairs Committee at
5:04 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 2.PDF |
SSTA 1/24/2017 3:30:00 PM |
SB 2 |
| SB 2 Sectional Analysis.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 2 |
| SB 2 Fiscal Note.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 2 |
| SB 1.PDF |
SSTA 1/24/2017 3:30:00 PM |
SB 1 |
| SB 1 Sectional Analysis.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 |
| SB 1 & 2 Sponsor Statement.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 SB 2 |
| SB 1 & 2 Legal Memo.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 |
| SB 1 & 2 ISER Poverty Study PowerPoint.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 SB 2 |
| SB 1 & 2 ISER How PFDs Reduce Poverty Overview.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 SB 2 |
| SB 1 & 2 ISER How PFDs Reduce Poverty Full Report.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 SB 2 |
| Dr. Ralph Townsend Senate State Affairs 1-24-17.pdf |
SSTA 1/24/2017 3:30:00 PM |
|
| SB 1 Version D Summary of Changes.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 |
| SB 1 CS for STA version D.pdf |
SSTA 1/24/2017 3:30:00 PM |
SB 1 |