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Proceedings and conclusions of Commonwealth North’s 1999 budget conference. Issues discussed included: fiscal gap, spending regulation, reserves, taxation, Permanent Fund and economic development.
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COMMONWEALTH NORTH BUDGET CONFERENCE
CLOSING THE GAP
October 20 - 21, 1993 Anchorage, Alaska
February 1994 Dear Conference participant and Commonwealth North member:
1 am pleased to present this summary of the proceedings and conclusions of the Commonwealth North Budget Conference held in October, 1993. Over 125 members and guests participated in the Conference. The findings and conclusions are the product of five work groups involving nearly 60 citizens. I commend the work groups for their interest and time in seeking solutions to one of the most critical issues facing Alaska.
On behalf of Commonwealth North, I want to thank Governor Walter Hickel, former Governors Jay Hammond and Bill Sheffield, the state officials, state legislators and other presenters who shared their views and valuable information with us. We are also indebted to the facilitators, resource people and recorders who worked with each discussion group.
Recent court rulings and falling oil prices have further heightened our awareness of the seriousness of our budget problems. But, these short-term crises and their short-term fixes should not deflect our view from the fundamental long-term “budget gap” and the need for hard choices in the future.
I recommend this budget conference summary to you as a thoughtful set of considerations and recommendations on how Alaska could confront and manage the serious fiscal problems associated with long-term declines in oi] production.
Founding Co-Chairmen Governor Walter J. Hickel and the late Governor William A. Egan
935 West Third Avenue « Anchorage, Alaska 99501 * 907-276-1414 ° FAX 907-276-6350
Introduction
Commonwealth North was founded with the goal of bringing together Alaska’s business and civic leaders to learn about, discuss and make recommendations on major public policy issues facing our state. Perhaps no issue affecting the economic and social fabric of Alaska looms larger than the inexorable decline in production from the North Slope oil fields. Taxes and royalties from these fields account for nearly 85% of current revenues to state government.
It is clear that major public policy decisions must be made over the next 10 years to bridge “the gap” expected between current revenue sources and spending levels. UAA’s Institute of Social and Economic Research (ISER) laid out five approaches to address this gap: 1) Budget reductions; 2) Use of reserves; 3) Implementatation of new taxes; 4) Use of Permanent Fund earnings; and 5) Increased economic development. Each and all of these involve tough fiscal, economic and political choices.
In November of 1992 Governor Hickel hosted an Economic Summit which brought together leaders from all over the state to review state revenue and spending projections, discuss the ISER fiscal tools and to make recommendations for future actions. Some things have changed since then, but the critical problem created by declining revenues still lies largely unaddressed.
This conference was designed to follow the format of the Governor’s Economic Summit. Participants were asked to review and discuss the Summit recommendations, the ISER strategy and events following the Summit. Commonwealth North members and invited guests were asked to develop recommendations for actions needed over the next 10 years. It is believed that the views and recommendations of concerned citizens and civic leaders can influence our public policy makers and shape Alaska’s future.
Proceedings
Over 125 members of Commonwealth North and invited guests participated in at least part of the two-day conference held October 20 and 21, 1993. Approximately 60 people participated in one of the five small discussion groups which formulated recommendations (see Appendix I for a list of group participants).
The conference began on October 20 with a two-hour budget and revenue briefing by Shelby Stastny, Director of the Office of Management and Budget, and Chuck Logsdon, Petroleum Economist for the Department of Revenue. A view of future revenues by Tom Williams of BP Exploration (Alaska) and legislative perspectives by Rep. Mark Hanley and Rep. Kay Brown were also presented.
The following morning, October 21, a breakfast briefing was held with Governors Hickel, Sheffield and Hammond who gave their experiences and views on needed budget actions. Following the Governors, the following presentations were made:
After the presentations people broke into five discussion groups. Members were preassigned groups in an effort to create diverse group memberships. Each group had 11-13 members including a facilitator, a recorder and at least one resource person having budget expertise.
The groups were to review the information presented by the speakers, the results of the Governor’s Economic Summit and subsequent legislative actions. Each participant was given a notebook with written materials tracking the presentations on spending, revenues, taxation, the Permanent Fund, economic development and the ISER strategy. The groups had approximately four and one-half hours to discuss the issues and make recommendations as to actions needed to meet the projected budget “gap.” Each group presented a summary of its recommendations to all the reassembled groups at the end of the day.
Appendices II and III illustrate the projected “gap” and major fiscal tools suggested in the ISER strategy. See Appendix IV for summaries and comparisons of the Governor's and other economic summits.
Budget Conference Summary
There remain questions on the mechanics of the proposal, particularly the method and length of the phase-in until the “pay-out” from the Fund would reach a constant percentage of the principal.
The “budget gap” is real and it will grow substantially over the next 10 years. A target “gap” of $2.3 billion was utilized by the year 2005.
Spending
An initial budget cut of $300 million or roughly 10% should be made. Then, the budget should be reduced annually by holding it constant or not letting it rise with inflation. Real dollar reductions of $900 million would be targeted for 2005.
Reserves
The group assumed reserves of $2-4 billion from litigation and tax settlements over the next 10 years, and that most would be needed to balance the budget. Approximately $300 million would be needed annually on average.
Taxes
“Like it or not” the group felt increased taxes were required in the next 10 years. Most of the estimated $500 million needed from new taxes would come from reimposition of an income tax. One advantage of such a tax would be the capturing of non-residents who utilize state resources and employment. Other taxes mentioned were increased fish taxes and a school tax.
The principal and inflation-proofing should not be spent or altered. However, monies from the Earnings Reserve Account and current dividends would be needed. By 2005, $200 million would be expended annually from the earnings reserve and $200 million from monies that would otherwise go to the dividends (currently about $530 million goes to dividends).
Revenues from new or increased economic development were not substantially relied upon to fill the “gap.” New revenues of $20 million each year would result in $200 million in revenues in 2005.
Facilitator:
Jane Angvik
Participants:
Julius Brecht Dick Green Mark Holland
Resource:
Scott Goldsmith
Alice Galvin
Group 1
Alaska Native Heritage Park
Alyeska Pipeline Service Company
Port of Anchorage
Exxon Company USA
Alaska Children’s Services Marenco/Anchorage School Board
UAA Small Business Development Center
University of Alaska Anchorage/ISER
Anchorage Telephone Utility
The Budget Gap
The “budget gap” is real and it will grow substantially over the next 10 years.
Spending
While no target numbers were used, it was generally felt that some type of “Gramm- Rudman” approach to the budget was necessary to force cuts and let the system “sort out” and look for efficiencies and priorities. A target of 1-2% real cuts annually was discussed. A review of programs is needed to institute needs-based standards, including student loans and pioneer homes. Institute a mechanism to reward efficiencies, especially in the school foundation program.
Reserves
No specific recommendations were made, although there was considerable interest in a proposal advocated by Roger Cremo wherein all reserves and natural resource revenues would be placed in the Permanent Fund. A fixed amount of earnings would be earmarked annually for expenditure.
Taxes
While most felt reimposition of an income tax would be needed in the next 10 years, there was considerable debate on the timing of enactment. A point of agreement was that the framework of an income tax should be established in the near future at a zero rate which could be increased later as needed. One advantage of such a tax would be the capturing of non-residents who utilize state resources and employment. Other taxes mentioned were increased taxes on fisheries and tourism.
No specifics were recommended, however, as mentioned above, there was considerable interest in the Cremo proposal. Under this plan the Permanent Fund dividend would be paid out of the same annual earnings allocation forcing competition with all other budget items.
NORTH
There should be efforts to “Alaskanize” our industries such as fishing and tourism to increase employment and revenue opportunities. There appears little beyond a good business climate that will significantly alter decisions to develop new resources.
Group 2
Facilitator:
Tim Bradner Alaska Economic Report Alaska Journal of Commerce
Participants:
Dick Decker United We Stand
Gene Dusek Municipality of Anchorage
Harold Heinze
Joe Henri Southcentral Timber/UA Regent
Carol Heyman Anchorage Chamber of Commerce
Gary Light ARCO, Alaska
David Roderick
Resource:
Kay Brown Alaska State Representative
The “budget gap” is real, is here now, is getting bigger and needs to be addressed.
Spending
There needs to be a new way of dealing with spending cuts to avoid political traps and to maintain a long-range view. It was recommended that a new Commission be established similar to the Federal Base Realignment and Closing Commission. This Commission would review all programs from a bottom-up, zero-base budgeting standpoint. It would look at alternative delivery systems. Recommendations would have to be accepted or rejected in toto by the Legislature and the Administration. If rejected, the recommendations would go to the voters.
Reserves
All reserves should be deposited in the Permanent Fund pursuant to a plan similar to that proposed by Roger Cremo. They would then be part of the principal from which earnings would then be allocated annually for the expenses of government.
Taxes
The income tax should be reimposed immediately and proceeds placed in the Permanent Fund. Earnings would then be used under a “Cremo-type” plan. A severance tax on our fisheries should be investigated.
No use of the principal or inflation-proofing except as transition funding. In accord with the “Cremo-type plan” dividends would be paid out of the annual earnings allocation along with all other budget items.
Large block economic leasing should be undertaken. Actions taken for development must be related to market-driven programs. An in-depth review of the existing regulatory environment should identify regulations inhibiting economic development. Ensure a stable tax policy to foster a stable business environment.
COMMONWEALTH
A plan similar to that advocated by Roger Cremo should be adopted. Under this plan all reserves and all natural resource revenues would be deposited in the Permanent Fund. Each year a certain percentage of the Fund would be allocated for budget expenditures, including the dividend program. The Fund would build to have a constant earnings stream to fund most functions of government, perhaps in conjunction with non-natural resource revenues. The goal is to “smooth” annual revenues and expenditures fostering a more predictable and stable economy.
There should be term limits for the Governor and legislators. But, longer lengths of terms are needed to ensure expertise and a longer-view. One six-year term for Governor is recommended. House terms should be extended from two to three years. Senate terms would remain at four years. Service would be limited to two consecutive terms in each body.
Group 3
Facilitator:
Joe Griffith Chugach Electric Association, Inc.
Participants:
Jerry Anderson Municipality of Anchorage
Milton Byrd Charter College
C. Joe DiMatteo Alaska Council for the Prevention of Drug and Alcohol Abuse
Walt Furnace Alaska Support Alliance
Norman Levesque Alaska Municipal Bond Bank Authority
Loren Lounsbury International Management Group
Sharon Macklin Sharon Macklin - Government Relations
Sayoko Mimoto Anchorage School District
Tom Williams BP Exploration (Alaska)
Resource:
Cheryl Frasca Office of Management and Budget
Cindy Pieper Commonwealth North
The “budget gap” is real, it is big and getting bigger. Spending There was a recognition that the need and demand for state services and programs were growing, and that some spending increase was inevitable with inflation and population growth over time. When looking for cuts, look where most of the money is going—education, social services, corrections. Growth in spending should be controlled through re-prioritization of resources, less-costly preventative strategies, looking at life cycle costs of capital expenditures and requiring local matches and personal contributions to programs.
Reserves
We need to get reserves off the table to allocate them more judiciously. Half of all liquid reserves and future settlements should go into the Permanent Fund. The other half should be placed in the Constitutional Budget Reserve, but the rules changed to require access only by 2/3 vote (rather than current 3/4, or 51% escape clause).
Taxes
The income tax should be reimposed as preferable to other kinds of taxes. Income taxes have the advantage of capturing non-residents who benefit from Alaskan employment, resources and services. Increased taxation on our fisheries is justified.
Instituting an income tax and capping the Permanent Fund dividend are not mutually exclusive. It was recommended that the PFD be capped at $500 and that the balance of dividend monies be deposited in the Permanent Fund. Extra earnings would yield approximately $500 million to the General Fund in 2005.
Stable taxation is critical to economic development. New development must pay its own way. The method of paying for jadded government services needs to be identified and planned for up-front of any developments. An income tax seems a preferable “capture” mechanism.
‘COMMONWEALTH
NORTH
Facilitator: Clay McDowell
Participants:
Bruce Carr
Resource:
Group 4
Anch. Assembly Policy and Budget Office
Alaska Railroad Corporation Senator Drue Pearce’s Office
Gazaway and Associates Exxon Company USA
Northern Forum/Green Connection, Inc. Common Sense for Alaska
Alaska Permanent Fund Corporation
Alaska State Representative
ARCO Alaska, Inc.
The “budget gap” is real, it is getting
bigger but it is unpredictable year to year because of wide revenue swings due to settlements, etc.
Spending
There was a recognition that much of the state budget was composed of programs like education having ever-growing pressures, and that large cuts were not practical. However, “rationalization” of the budget and gaining efficiencies over time was needed and possible. Needs-basing of programs was desirable. A target of 0% real dollar increase in the budget should be established over the next 10 years resulting in $300 million in real savings by 2005 from the ISER figures.
Reserves
We need to allocate reserves more judiciously. There needs to be a better mechanism for capturing and retaining settlements and extraordinary monies as they come in to avoid the temptation of spending them all in a single year. It was recommended that reserve spending be “smoothed” to approximately $200 million annually to help meet the “gap.”
Taxes
It was felt that approximately $500 million would be needed in new taxes by 2005. Of this, most would come from a personal income tax. Other taxes could include increased user fees, fishery taxes, and motor fuel taxes (dedicated). Sales taxes were best left to the province of local governments. It was felt an income tax had the advantage of capturing non-residents method of capturing and paying for ni
working in the state and that it was the best ew development of our non-oil resources.
The dividend program should be capped at current total spending levels. Excess monies in future years should be deposited in a specially enacted Dividend Reserve
Fund in the Permanent Fund. Access corpus of the Fund these monies wou would be possible, though difficult. Unlike the ld be accessible when needed, but would be invested along with other Permanent Fund monies. Unlike the current Constitutional Budget Reserve, access would not provide the current “loophole” (a majority vote of the Legislature when less revenues an in prior year).
The state can help somewhat on economic development through removal of regulatory hurdles and funding through agencies such as AIDEA, but most economic development decisions are outside the control of state. The group assumed that the beginning of a gasline and some additional marginal oil field developments would result in $350 million in increased revenues by 2005 over DOR projections.
The group felt that strategies to meet the “gap” were as much a political problem as an economic or financial one. It was felt considerable leadership and education within our community as well as the Legislature and the Administration was needed to avert short-term crises in the future.
Group 5
Facilitator:
Larry Wiget Anchorage School District Participants:
Larry Crawford Municipality of Anchorage Gordon Glaser ASEA
Jim McElroy Locher Interests
Nancy McHugh
Kristen Nelson Petroleum Information Services Pat Pourchot Commonwealth North
Scott Thorson Network Business Systems Resource:
Participants
Anderson, Jerry Brecht, Julius Byrd, Milton Carr, Bruce Crawford, Larry Green, Dick Heinze, Harold Henri, Joe Heyman, Carol Holland, Mark Light, Gary Lounsbury, Loren Macklin, Sharon Marks, Joe McElroy, Jim McHugh, Nancy Mimoto, Sayoko Roderick, David Williams, Tom
Angvik, Jane Bradner, Tim Griffith, Joe McDowell, Clay Wiget, Larry
Appendix I
Alyeska Pipeline Service Company Municipality of Anchorage
Port/of Anchorage
Charter College
Alaska Railroad Corporation Municipality of Anchorage United We Stand, Inc.
AK Council on Prevention of Alcohol & Drug Abuse Municipality of Anchorage
Office of Senator Drue Pearce Alaska Support Industry Alliance Older Persons Action Group ASEA/AFSCME Local 52
Southcentral Timber Devlpmt/UA Board of Regents Anchorage Chamber of Commerce Exxon Company USA
ARCO Alaska, Inc.
AK Municipal Bond Bank Authority International Management Group Sharon Macklin - Government Relations Alaska Children’s Services, Inc. Marenco, Inc./Anchorage School Board Locher Interests
Anchorage School District
Petroleum Information Services
Exxon Company USA
UAA Small Business Development Center
Northern Forum/Green Connection, Inc. Common Sense for Alaska
Network Business Systems
Manager, Alaska Native Heritage Park
Editor, Alaska Economic Report
Exeg¢. Mgr. Finance, Chugach Electric Company Director, Anch. Assembly Policy and Budget Office Director, Gov’t Affairs/Anchorage School District
Galvin, Alice Wilson, Tom
Resource Brown, Kay Goldsmith, Scott Gorsuch, Lee
Kelly, Jim Frasca, Cheryl
Coordinator Pourchot, Pat
Presenters
Scott Goldsmith Lee Gorsuch
Governor Jay Hammond Governor Walter J. Hickel Jim Kelly
Governor Bill Sheffield Shelby Stastny
Anchorage Telephone Utility Commonwealth North
ARCO Alaska, Inc. Hughes, Thorsness et al
Alaska State Representative
Professor, University of Alaska Anchorage/ISER
Dean, School of Public Affairs, University of Alaska Anchorage
Director, Legislative Finance Division
Alaska State Representative
Research and Liason Officer, AK Permanent Fund
Deputy Director, Office of Management and Budget
Executive Director, Commonwealth North
Alaska State Legislature, House of Representatives
Commissioner, Department of Commerce and Economic Development
Professor, University of Alaska Anchorage, ISER
Dean, School of Public Affairs, University of Alaska Anchorage
Governor of Alaska (1974 to 1982)
Alaska State Legislature, House of Representatives
Governor of Alaska (1968 to 1970, 1990 to present)
Research and Liason Officer, Alaska Permanent Fund Corp.
Chief Petroleum Economist, Dept. of Revenue
Commissioner, Department of Revenue
Governor of Alaska (1982 to 1986)
Director, Office of Management and Budget
Appendix It
Appendix III
SUMMARIES OF BUDGET CONFERENCES
Governor’s Economic Summit November 29 - December 1, 1992 Common Ground Fiscal Policy Conference March 13-14, 1993
Alaska Credit Union League March 19 and 20, 1993
Kenai Regional Economic Summit April 25-27, 1993 Commonwealth North Budget Conference October 20 and 21, 1993
Governor’s Summit. All groups concurred that there is a significant “gap”, and that all the ISER identified fiscal actions will be needed.
Common Ground. Al! the groups recognized a significant budget “gap” and employed all or most of the ISER actions to meet revenue shortfalls.
Alaska Credit Union League. General agreement that a substantial fiscal “gap” exists and that most or all the ISER actions will be needed in the near future.
Kenai Regional. All groups recognized the existence of a sizeable “gap” and most used all the ISER actions to address it.
Commonwealth North. All the working groups agreed that there was a fiscal “gap” now, that it was growing, that it will be substantial in the near future and that actions need to be taken now. All the groups felt that most, if not all, the actions identified in the ISER budget report must be implemented by 2005.
SPENDING
Governor’s Summit. All identified state budget reductions as the first priority for action. Several “unique” programs were consistently identified for cuts or elimination including the longevity bonus program, power cost equalization and pioneer homes.
Common Ground. Sensible spending cuts should be made with particular emphasis on Alaska’s unique programs. Some programs should be made self-sufficient like the seafood marketing program.
Alaska Credit Union League. Geheral agreement to reduce spending through phasing out or elimination of “unique” programs, formula funding containment, services based on need and freezing of state salaries and benefits to bring to the level of private sector.
Kenai Regional. Most groups suggested substantial budget cuts and use of caps or ceilings for annual spending. The longevity bonus program was consistently targeted for cuts or elimination.
Commonwealth North. Most gro ps recognized the real political and programmatic problems of further large budget cuts. However, various approaches were suggested to find efficiencies, re-prioritize and hold the line on future spending increases. Most assumed that savings in real dollars could accrue over time if programs were not allowed to increase with inflation and population growth. No specific programs were consistently targeted for cuts or reductions.
RESERVES
Governor’s Summit. Most groups proposed the spending of reserves to help smooth the volatility of future revenues. Some suggested depositing reserves in the Permanent Fund, some would consolidate all reserves in a single account with earnings going to the general fund.
Common Ground. Some or all reserves (including future windfalls) should be deposited in either the Permanent Fund or the Constitutional Budget Reserve Fund to bolster future earnings. Some groups would utilize a portion of the reserves directly as transitional funds for general government.
Alaska Credit Union League. Recognition that reserves have to be used as last-resort transition funds. One suggestion was to deposit reserves in Permanent Fund and earnings used for general government.
Kenai Regional]. Half the groups would deposit some or all of the reserves in the Permanent Fund while half would utilize as transition funds.
Commonwealth North. All groups recognized the need to use liquid reserves but felt that better mechanisms were needed to capture and husband reserves and nonrecurring revenues for future use, rather than spending them as they become available.
NORTH
TAXES
Governor’s Summit. Most groups recommended reimposition of the personal income tax. Most of the groups supported increased motor fuel and “sin” taxes.
Common Ground. General agreement on reimposition of personal income tax.
Considerable support for increased motor fuels, “sin”, “tourism” and fisheries taxes. Some recommended “schoo!” or payroll tax.
Alaska Credit Union League. General recognition that new taxes will be needed including: personal income, “sin” taxes, taxes on other natural resources and payroll taxes. Taxes which captured non-resident wages were favored.
Kenai Regional. All groups supported reimposition of the personal income tax. Most favored an increase in motor fuel taxes. None favored a state sales tax.
Commonwealth North. All groups recommended new taxes for meeting the “gap”, and all suggested the reimposition of the personal income tax as the preferred form. It was felt that the income tax was the most progressive (least impact on those with lowest income), could capture non-residents’ income earned in Alaska, and was the best method for the state to pay for and benefit from new economic developments.
Governor’s Summit. All groups opposed use of the principal of the Permanent Fund. Most favored capping dividends for use either for state operations or to reinvest excess earnings in the Permanent Fund principal to increase future earnings.
Common Ground. No use of the principal of the PF or any change to full inflation-proofing. Most groups recommended capping the dividends for either deposit to the Permanent Fund principal or for general fund use.
Alaska Credit Union League. Earnings of the PF, including funds now going to PFDs, will be needed to bridge the “gap.”
Kenai Regional. Most groups recommended some plan to use Permanent Fund earnings to support state government. Most supported capping the Dividend and putting saved earnings back into the principal of the Fund.
Commonwealth North. All groups recommended that the Permanent Fund principal and inflation-proofing monies not be used. No group recommended eliminating the dividend. However, a majority recommended that the dividends be capped, and that earnings beyond dividends and inflation-proofing be used for general government or deposited in the Permanent Fund to generate future earnings.
Governor’s Summit. While all expressed the importance of future economic development, many expressed concern not to rely too heavily on speculative projects for future revenues, and that developments produce net revenues to the state above costs. Most supported the development of ANWR, construction of a gasline and lifting the export ban on Alaskan oil. Most identified the need to settle the mental health lands issue. Half the groups recommended streamlining the state’s regulatory and permitting systems.
Common Ground. Most groups assumed that either oil declines would not be as precipitous as projected, or that there would be additional small fields developed. Most also assumed revenues from construction of a gasline after the year 2000.
Alaska Credit Union League. Strong emphasis was placed on economic development. Governmental impediments in regulation and permitting should be removed, and incentives, including tax breaks, subsidies and infrastructure development, employed.
Kenai Regional. Most groups relied on revenues from the completion of a gas pipeline after 2001. Several groups supported aggressive marketing of our natural resources, settlement of the mental health lands issue and repeal of the export ban on Alaskan oil.
Commonwealth North. Most groups felt that any new economic developments would be based largely on market conditions and economic decisions outside the control of the state. However, a stable tax policy and removal of regulatory hurdles by the state would be helpful. No group believed that large-scale economic development would result in revenues substantially reducing the budget “gap” by
Commonwealth North is a non-profit corporation, organized and existing under the laws of the State of Alaska. It addresses state and national public policy issues and involves approximately 400 of Alaska's leaders and concerned citizens representing business, labor, education, public service and the Alaska Native community. It was founded in 1979 on a bipartisan basis by Governor William A. Egan and Governor ~ Walter J. Hickel.
he goals of the organization include: Strengthening the private sector of our economy; Understanding Alaska's role in the larger world; Educating members on major issues affecting our state and nation; Influencing state and national public policy decisions by providing a forum for nationally recognized speakers and conducting studies of critical issues facing the state and the nation.
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