GENERAL SUBJECT(S): BALANCED BUDGET PRESENTATIONS: Senator TIM KELLY, ALASKA MUNICIPAL LEAGUE, Senator ROBIN TAYLOR, ROGER CREMO The following overview was taken in log note format. Tapes and handouts will be on file with the Senate Finance Committee through the 21st Legislative Session, contact 465-2618. After the 21st Legislative session they will be available through the Legislative Library at 465-3808. Time Meeting Convened: 9:15 a.m. Tape(s): SFC-99 #72, Sides A and B PRESENT: X Senator Parnell X Senator Adams X Senator Torgerson X Senator P. Kelly X Senator Donley X Senator Green X Senator Leman X Senator Phillips X Senator Wilken ALSO PRESENT: SENATOR TIM KELLY; SENATOR ROBIN TAYLOR; MAYOR MIKE NAVARRE, representing the Alaska Municipal League; ROGER CREMO; and aides to committee members and other members of the legislature. LOG SPEAKER DISCUSSION 000 Co-chair Parnell Reconvened the committee at approximately 9:12 a.m. Advised that he was taking up the Balanced Budget portion of the daily agenda. Senator Tim Kelly Was invited to join the committee and presented his plan for the balanced budget. Feels the Legislature should work closely with the Governor to present a balanced budget. The permanent fund should be limited for use in education. He referred to Senate Bill 75. It is simple and understandable. Urged that if the Governor and Legislature not able to settle the fiscal gap by July that they pass out SB 75. Limit the use of permanent fund earnings to education. Public would support this kind of use of the permanent fund. His priorities are health, public safety and education. Senator Leman Felt they should reduce scrutiny on whatever is protected funding. That is his concern with the education endowment. Should fight against that. Second, an even greater concern, that this would take something from everyone and direct it solely to education. What about those children who's parents home school? This would create an unfairness. Felt that we are not addressing all the options. Senator T. Kelly Would not hurt the endowment but there is not enough money available and it would have to be subsidized. Would also have to continue budget pressure on the education proponent. Legislation will have to take care of this matter. Nothing to limit permanent fund earnings to go to private education. They could be used in the area of home school also, for instance. Senator P. Kelly Asked to explain the first choice. Senator T. Kelly First choice is for the Governor and the Legislature to get together and solve the budget plan together. Believes the long- range plan will have to include using permanent fund earnings. Upon return from the Easter break there should be enough information for everyone to agree and get together. Senator Phillips Reads from SB 75 into the record. Can deal with this later. Just wanted to get it in the record. Co-chair Parnell No one present from the Alaska Municipal League. Senator Taylor Was invited to join the committee. Referred to handout being distributed. Applauded the prioritization that was indicated as he would also look for education assistance. He referred to resource development. Alaska was last in the nation as far as new jobs and the economy. Income taxes, direct taxes and a corpus on the permanent fund have been indicated by the Administration. Believes that his program "CPR" a good plan. Over 4,000 families lost resources in Southeast. Over 6,000 in oil industry and related jobs. Suggested to cut the side of State government. Cut duplication of services already in existence. Provide for resource development; oil is not our only resource. Our forefathers selected 103 million acres of land in Alaska upon which the State's economy was to be based. However, "once oil was developed we put all our economic eggs in one basket." All paid lip service to diversification but the bureaucracy put a stop to it. He used for example AJ Mine in Juneau and Tulsequah across the Canadian border. Biggest factor we have turned our backs on was the Alaskans desire to own property. If land could be owned by individual Alaskans there would not be the forests of dead trees. Those property owners who had bug infested trees cut them down and reseeded. Their future generations will have a forested land as compared to land that has been controlled by the government. Not going to advocate stealing people's money to support the State government. Time for CPR. People will appreciate it and be excited. Put some energy back into our State. Will not be able to support any plan that does this. Senator P. Kelly "What will happen to the average sale price of the land?" Senator Taylor "No one knows at this point." Senator P. Kelly "What about the private sector?" Senator Taylor There is a very small privately owned land base. It was only being suggested that some percentage be put out for sale. "If we think we don't need the money, sell less land." Fair market competition will establish what the values are going to be. Senator P. Kelly Fair market value doesn't effect the sale of the land? Senator Taylor Would be surprised at the demand for land. Everyone purchasing land has a dream; and their dream is to do something with that land. Thousands of jobs would be created by releasing just a small portion of the land. That was a very healthy thing to be doing. Senator P. Kelly Economic and resource development has been figured into a way to get money into State coffers. By increasing jobs are you assuming an income tax? Without an income tax resource development is pretty difficult. Senator Taylor Said he opposed an income tax. It was not included in his plan. Ketchikan, Wrangell and Sitka tax bases have shrunk considerably. If one's town is expanding and land is being improved there is a substantial tax base increase. "We can't just insulate state employees and the legislature. Private citizens must be taken care of also." As the tax base of communities expand and they are taxed at the same level for education they will not need as much State money. Indirectly it does come back. Senator P. Kelly "How much will we save?" Senator Taylor Explained savings as compared to other states using this program. Some experience that the savings could be high or low. Example: The Department of Corrections has been significantly privatized. It costs less to house prisoners in private prisons than our own local state prisons. Another example: British Columbia has privatized their road maintenance. He has suggested the Department of Transportation here do the same. Nothing working in a vacuum will solve the problem. However, working all together will solve them. Significant duplications going on, for instance, the Department of Administration and Community and Regional Affairs. The Department of Environmental Conservation and the Department of Fish and Game. There were definitely portions of government that could be consolidated. Senator P. Kelly Estimate of the savings with this consolidation? Senator Taylor He did not have an estimate, but knows there are savings there. Senator P. Kelly Consolidation may or may not have savings? Senator Taylor There will be savings and they will have an impact. Senator P. Kelly But they have not been identified yet. Senator Leman Said that even if land sales were cut back to one-fifth or even 40,000 acres put on the market each year it would be a step and get us going. However, not all of the 104 million acres may be useful. Referred to a constituent who can't get property in Tok to do his enterprise. He was also concerned that Alaska not be opened to land speculators from other states. "Is there any way we can keep that from happening?" People in Alaska should have the opportunity to buy the land rather than other entrepreneurs. Senator Taylor Alaskans have to be given the first opportunity to purchase the land. Concerned that most of the land was made available for logging by our forefathers. He cited the Province of Alberta; they went from less than 22,000 jobs to 43,000 jobs in their timber. For every tree harvested two are planted. "We all need a little injection of hope and energy." Senator Leman "What do you say to people that this would create an expectation of an increase in State services?" Senator Taylor Does not believe that anyone would take advantage of this system. Felt individuals take pride in doing things themselves rather than depending on it being done for them. He referred to "homestead opportunities". There will be some demands. However, if there is money they will be able to put in their own roads, local school, et cetera. "Growth is good." Concluded his presentation. Co-chair Parnell Welcomed Mayor Mike Navarre. Mike Navarre Mayor, Kenai Peninsula Borough was invited to join the committee. He spoke on behalf of the Alaska Municipal League. Recognized that a plan must be developed and how difficult the task of developing this plan is. They are ready to help out as much as they can. Has gone out and spoken to every community in the area he represents. Tried to lay out the situation as it is today and asked what tools were available to help out. He spoke briefly about the permanent fund. Nearly a billion dollars was injected last year. The permanent fund has diversified Alaska's economy. As he explained, there has been impact on migration into the State, particularly as the dividend has grown. Also there has been impact on out migration during down turns. He referred to hand held graphs. 1. Permanent Fund Net Income_and State Oil Revenues; 2. Source of principal. Indicated oil revenue. 3. North Slope and Prudhoe Bay Oil. He said this was an old plan put into effect by the Legislature and Alaskans. Has been an identified plan for a long time. "We haven't done it all wrong in Alaska." 4. Impact of Budget Cuts. Budget cuts were an important component but not the primary component to deal with Alaska's fiscal situation. If so, it would have been done long before. All sections of the State have different needs. Alaska is very diverse. (Tape #72 switched from side A to side B at log #591.) Mayor Navarre What should be the responsibility of State government and what should responsibility of local governments? He said that shifting to local government may be the best way to deliver services to the public. However, it should be kept in mind that Alaska is not the same as other States. Our forefathers did things differently. Alaska is the largest state in the union and has the smallest population. The economy in Alaska is much different than in other states. Bottom line was that local governments want to be partners. They want to be linked in delivering services to the public they represent. Made sense to put a plan into effect. The process must be simplified. It should be considered how much was spent on the budget, not how much is being spent. He noted that any plan put in place would be tinkered with by the Legislature. Cuts in the budget were fine, but a number should be set. Dollars could be realized in other ways. Not opposed to timber sales. AHFC and AIDEA dividends should also have a number put on them. In a final analysis, taxes were the same thing. Motor fuel taxes and marine fuel taxes would be acceptable but he would like to see them shared back into the communities. If the State did not want to do these taxes, perhaps the local governments should have the authority. Want to help develop and sell the plan and tell the public why tough changes have to be made. There will be political consequences at the State level and at the local level. Senator Wilken Asked what the Alaska Municipal League and conference of mayors was doing to assist in unorganized areas? Mayor Navarre Had left it up to them individually. Unorganized areas have councils or assemblies and it is difficult to convince them to become organized. Felt it was the duty of the Legislature. Reminded them that municipal land entitlements allow areas to set up and pay for themselves. Hard to advocate to get services when many are being taken away at this point. Senator P. Kelly Some services may be good and some may not. Some negotiation between municipalities and the Legislature. Encouraged the Alaska Municipal League to consider ways to take on responsibilities and safeguard themselves from others. Mayor Navarre Appreciated the advice. He said he knows that there are no simple solutions however he was prepared to engage in meaningful dialogue. Will try to identify what they feel does not make sense in their areas. Co-chair Parnell Thanked Mayor Navarre. Introduced Roger Cremo. (The committee took a brief at ease.) The committee was reconvened at approximately 10:19 a.m. Roger Cremo Private citizen was invited to join the committee. He asked, "Why can't we sustain spending? That is the real heart of it." He said that money from the sale of oil on the North Slope is a State asset; the State's capital. It was unlike monies that other states have. They have true revenue. All states have a system for spending and he explained this system. Senator Phillips Asked him to explain more specifically the reports he referred to from the Department of Labor. Mr. Cremo Spring and summer reports put out by the Department of Labor regarding petroleum money. Ten or fifteen percent of that money goes into the Permanent Fund. Royalty money contributed about 25 percent. Mr. Cremo continued referring to his chart, "Present System of State Spending". Alaska does not tax things much. What can be done to make spending sustainable? He explained "endowment" even though it is not really an endowment other than a portion of the Permanent Fund. It could be formalized, which he suggested. Then the principles of endowment could be observed, which would convert the monies from capital into a sustainable revenue. He explained that this could be combined with other sustainable revenue from the people. First, all accumulated oil money would go to the endowment, along with money that was in the Permanent Fund, Earnings Reserve Account and the Budget Reserve Fund. Second, all of the oil money yet to come would be included. He noted that there was oil in ANWR and that it would be opened up by a Republican President. The third feature that was very essential was the take-out arrangement. He complimented Mr. Okeson and his presentation of a few days ago before the committee and noted that the same "take- out" he referred to was the same also as Mr. Jim Lynch. This was much more sophisticated and was being done both by universities and foundations, i.e. the Ford Foundation. The last feature of the endowment was that it must be systemic. Had no suggestions as to where spending might be cut or how to increase revenue. Nor how to move money from one pigeon hole to another. Did suggest that the people of Alaska impose a system of finance and spending on the Legislature. The people function at the formative level of government. It is for the people to make the system and the Legislature to operate within that system. People should be allowed to change the system. He further suggested that the Legislature put its other hat on, its' sponsoring one, and sponsor changes within the system. Even the Governor cannot veto what they might decide. The Legislature should present to the people a proposed system of spending. The system does not tell the Legislature how to spend the money, but merely smooths the flow out. The Legislature elected whether to have a dividend and how much it should be. Next he referred to his chart of "Proposed System of State Spending". The Federal government would continue to make its contribution. He referred to the "Endowment" as the "Alaska Fund". Now there would be sustainable spending in the State. Sustainable amount defined around the nation at about five percent. What would come out of this fund would be regular. He advised the committee that a transition would be necessary. He concluded his presentation. Hoped for questions and criticism and asked for a chance to respond. Senator Adams Proposal he has looked at natural resources as the main flow of funds. What happened in the year 2015 when the oil export would be lower; perhaps fishing and timber, also. Where else would the funding source come from other than natural resources? Mr. Cremo Responded that when these resources ran out the fund is still in place. Taking out five percent and investing at nine percent. This would provide a continuing source of money, even though the natural resource screen would end. Senator Adams Questioned sustainable spending. What is being looked for in a stable economy in the State of Alaska with less cuts to the operation of government to get to this sustainable spending? Mr. Cremo Described sustainable spending. This was a spending that did not change negatively from year to year. "X" amount of dollars would be spent each year and cut backs do not have to be faced. Senator Leman Said his reaction to a plan like this that encouraged savings and investing was inherently good. The downside that he saw, however, instead of having a permanent fund for the people, was that it was a permanent fund for the government. His plan would have been better if implemented about six years ago. On the withdrawal percentage, was that selected arbitrarily? Mr. Cremo Not selected arbitrarily. The ten percent just happened. In his opinion it was a place to start on the transition. The first year this system could be functional, approximately the year 2002, the fund would produce a certain amount of money. That added to what the system would produce at ten percent by the year 2001 or 2002; a reduction of about $120 million would be preferable and the ten percent figure would fit. Senator Phillips Saw marketing problem. "What would you recommend in selling this to the Legislature? Once one starts 'tinkering' with the Permanent Fund it is like yelling 'fire' in the theatre when there is no fire." Mr. Cremo Said that the Legislature has to have the respect of the people. People look to the Legislature to vote for dividends. Nothing structurally would change. Senator Phillips Commented briefly about asking people to trust their government and Legislature. Mr. Cremo Felt that was what we were doing in a representative form of government. Senator Phillips American form of government was based on mistrust and that was why there were so many checks and balances. Co-chair Parnell The current system required more trust and a more blind trust, at that. He explained his understanding that Mr. Cremo was proposing is this trust and understanding. (Tape change to #73, Side A at log 000.) Senator Phillips May be the best plan, but felt it would be very difficult to convince and market to the Alaska people. Co-chair Parnell Constitutional amendment portion. That was a shock absorber. Was there a way to keep a budget reserve fund for catastrophes and still have sustainable revenue? Mr. Cremo Had not thought about this. As far as natural disaster, the State could need funds. Alaska has a provision whereby the Legislature can borrow on credit to meet the needs in case of natural disaster. Never had to employ this, but do have this option. He thought it foolish to keep expendable capital but they could do this if they wished. Co-chair Parnell Thanked Mr. Cremo. Asked how members or the public could reach him. Mr. Cremo Alaskafund.com is his web site. He is also in the phone book. Co-chair Parnell Adjourned the committee at approximately 11:05 a.m. SENATE FINANCE COMMITTEE LOG NOTES 03/30/99 SFC-99 Page 1 3/30/99