LEGISLATIVE RESEARCH SERVICES Alaska State Legislature (907) 465‐3991 phone Division of Legal and Research Services (907) 465‐3908 fax State Capitol, Juneau, AK 99801 [email protected] July 6, 2010 Memorandum TO: Representative Anna Fairclough FROM: Chuck Burnham, Legislative Analyst RE: Summary of Selected Fiscal Policy Planning Efforts in Alaska LRS Report 10.283 You asked about previous efforts to develop long‐range fiscal policy for Alaska. Specifically, you wanted summaries of the organization, processes, planning efforts, and associated reports published by the following groups: Long Range Financial Planning Commission (1995‐1996); State of the Economy Forum (1999); Fiscal Policy Caucus (2001‐2002); and Conference of Alaskans (2004). Long Range Financial Planning Commission—March 1995 to January 1996 Appointing Authority Legislative Resolve 6 (HCR 1, Attachment A1), which directed the following composition: Nine members of the public, not to include members of the legislative, executive, or judicial branches; the Speaker of the House of Representatives, the President of the Senate, and the Governor shall each appoint three of these members; Two members of the House of Representatives appointed by the Speaker of the House; one member shall be a member of the majority and one a member of the minority; Two members of the Senate appointed by the President of the Senate; one member shall be a member of the majority and one a member of the minority; and Two members of the executive branch appointed by the Governor. Chair(s) The Honorable Brian Rogers, Chair; Judy Brady, Vice‐Chair Participants Lee Gorsuch, Sen. Georgianna Lincoln (D), Robert W. Loescher, Bruce Ludwig, Annalee McConnell, the Honorable Hugh Motley, Rep. Mike Navarre (D), Mary Nordale, Mike O’Connor, Rep. Sean Parnell (R), the Honorable Pat Pourchot, Sen. Steve Rieger (R), and Marie Westfall. In addition, the Commission took testimony and counsel from the public and private sectors. Public members served without compensation save for per diem and travel expenses. LEGISLATIVE RESEARCH SERVICES JULY 6, 2010 — PAGE 1 Political Composition of Government Governor: Tony Knowles (D) Senate President: Drue Pearce (R) House Speaker: Gail Phillips (R) House of Representatives: 22 Republicans, 17 Democrats, 1 Independent. Four Democrats caucused with the Republicans, bringing the majority coalition to 26 members. Senate: 12 Republicans, 8 Democrats Process An estimated 300 hours of preliminary research, meetings, public testimony, and work sessions were held throughout the summer and fall of 1995. A preliminary report, "Alaska's Growing Fiscal Gap," (Attachment A2) detailing the state's financial challenges was published in August. Regional public meetings and intensive work sessions in Anchorage were conducted throughout September. The Commission's Final Report and long range plan (Attachment A3) was published in October. Hundreds of pages of minutes from five meetings in late September are available on BASIS, the Legislature's online public information database. Audio recordings of at least ten earlier meetings are available in the Legislative Library. Motivation / Objective The term “fiscal gap” first appeared in Alaska Newspapers in 1989 and quickly became the economic catch phrase to describe the state’s onrushing financial challenges. Put simply, the “gap” was the revenue deficit caused by a combination of increased government spending and falling oil revenues as the Prudhoe Bay field went into decline. Economists such as Dr. Scott Goldsmith of the University of Alaska’s Institute of Social and Economic Research estimated that, barring dramatic changes in Alaska’s budget and finances, the roughly $500 million budget shortfall of fiscal year (FY) 1995 would grow to a deficit of over $1.3 billion in FY 2005. Although opinions of the severity of the problem varied among economists and policymakers, there was general consensus that the fiscal gap was a real and challenging problem. Legislative leadership and the Governor agreed that a commission should be formed to address the issue. Leg. Resolve 6 outlined numerous fiscal challenges faced by the state including spending outstripping revenue, declining revenue streams, and problematic budgeting processes. The measure established the Commission and directed it to "develop and recommend to the Governor and the Legislature a long range financial plan for the state." Specific directives from the Legislature included the following: (1) Review and evaluate state fiscal policy and strategy recommendations and assumptions from reports and publications from similar efforts in the past made by the executive branch, the legislative branch, the University of Alaska, nonprofit organizations, and private individuals and organizations; (2) Identify and evaluate all current state income sources and assets, including recurring revenue, reserves, physical resources, and investments; (3) Identify and prioritize systemic changes to stabilize the state’s revenue; (4) Identify and prioritize major reductions in state expenditures, to include formula and nonformula programs, and to include proposed consolidation, transfer, or elimination of governmental services or programs; the reductions identified and prioritized under this paragraph must at least equal the current fiscal gap between recurring revenue and recurring expenditures; (5) Evaluate forward funding of the budget; (6) Identify and prioritize new sources of revenue; LEGISLATIVE RESEARCH SERVICES, LRS 10.283 JULY 6, 2010 — PAGE 2 SUMMARY OF SELECTED FISCAL POLICY PLANNING EFFORTS IN ALASKA (7) Project a sustainable long‐range financial plan for the next three years, five years, and 10 years, based on a stable revenue stream; (8) Evaluate constitutional, statutory, and regulatory language relating to the budget process and recommend changes; (9) Consider the division of responsibility for providing services and raising revenue between the state and local governments and evaluate the effect of the long‐range financial plan on local governments; (10) Submit a preliminary report to the Governor and the Legislature by July 15, 1995; (11) Disseminate information and solicit public comment; and (12) Submit a final report to the Governor and the Legislature by October 1, 1995, recommending a long‐ range financial plan for the state, including specific actions and legislation needed to implement and monitor the plan. Recommendations The Commission’s plan—dubbed “An Endowment for Alaska’s Future”—proposed sweeping changes to the state’s fiscal systems and institutions. According to its Executive Summary, implementing the plan would accomplish the following: Make the Permanent Fund the cornerstone of Alaska’s fiscal future; Close the fiscal gap in five years; Ensure growth of the Permanent Fund to offset declining oil and gas revenues; Stabilize and diversify revenues; Control state general fund spending; Maintain a reserve to dampen the effect of oil price swings; and Decrease dependence on volatile oil revenues. The plan, as directed by Leg. Resolve 6, contained recommendations for action over three, five, and ten years; however, only the three‐year plan provided specific, detailed recommendations. Foreseeing significant changes due to the impact of implementing its own three‐year recommendations, and the potential of developing oil in the Arctic National Wildlife Refuge and a gas pipeline from the North Slope, the Commission recommended that a follow‐up review be completed in early 1999 to determine how best to then proceed. The Commission did, however, recommend imposition of a personal income tax to take effect in 2002. The key elements of the three‐year plan included the following: Cut general fund spending by $100 million over the next three fiscal years and reduce per capita spending from $4,020 to $3,692 over four years; Increase revenues by $144 million per annum through increased tobacco, alcohol, motor fuel, vehicle licensing, tourism, and fisheries taxes and fees; Convert the Permanent Fund to an endowment model that makes available for general fund spending up to four percent of the Fund’s five‐year average market value. Include a long‐term inflation protection mechanism in the endowment model; Increase Permanent Fund earning power by making additional annual and special deposits, transferring $600 million from the Constitutional Budget Reserve Fund (CBRF) in FY 1996 and the entirety of the Permanent Fund Earnings Reserve (approx. $1.2 billion), and increasing to 50 percent the minimum contribution to the Permanent Fund from certain oil, gas, and mineral leases; LEGISLATIVE RESEARCH SERVICES, LRS 10.283 JULY 6, 2010 — PAGE 3 SUMMARY OF SELECTED FISCAL POLICY PLANNING EFFORTS IN ALASKA Cap Permanent Fund dividends by reducing the total amount allocated by $50 million in each of the following three years; Maintain the CBRF at $1.5 billion and clarify its use and repayment through a constitutional amendment; and Reform the budget process by scrutinizing all spending rather than just general funds, annual progress reports to the public, and focusing on necessary, effective, and cost‐effective programs (i.e., “performance‐based budgeting”). Recommended Legislation1 The Commission recommended the following legislation and budget actions for the three fiscal years following the publication of its plan: Year 1: Recommended Legislation and Corresponding Introduced Measures with (Session Law) Resolution approving Commission’s financial plan HCR 23 and