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