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Fairbanks fiscal cram session leads to new focus on revenue, spending, services

FAIRBANKS — Gov. Bill Walker and his Cabinet plan to spend Monday heading south on the state-owned Alaska Railroad, hoping to use the 12-hour trip to digest the results of a busy weekend focused on ways to get Alaska's fiscal future on track.

The governor, Lt. Gov. Byron Mallott, 14 Cabinet members and other state leaders met with a cross-section of Alaskans, many from the transition team that first gathered last fall, for two days of cram courses on taxes, state spending and services. The number-heavy discussions dealt with intricate details of state programs, as well as with broader policy questions.

While some participants expressed frustration at the difficulty of making quick decisions about complex topics, others said that in light of declining oil production and low oil prices, the state has to get its finances figured out fast. The debates were usually more educational than political.

The most important thing, said Wasilla teacher Bob Williams, a former Democratic candidate for lieutenant governor, is that the proceedings have given a framework for future conversations in cities and villages across Alaska. Several speakers stressed the need for Alaskans to figure out ways to work together in spite of their differences and regardless of whether they are Republicans, Democrats or independents.

Before the event concluded Sunday afternoon at the University of Alaska Fairbanks, facilitator Brian Rogers, the chancellor of UAF, noted the presence of former Lt. Gov. Jack Coghill, 89, and former Sen. Vic Fischer, 91, two of the authors of the Alaska Constitution in 1955-56, who had slowly made their way to the front row for the final session.

Fischer attended the entire event, while Coghill made a brief appearance, accompanied by his son, Sen. John Coghill, R-Fairbanks.

"If there's a lasting image to come out of this two days, it's of Mr. Republican Jack Coghill and a liberal Democrat, Vic Fischer, coming arm in arm together," Rogers said to sustained applause.

More than 200 people met in small groups earlier in the day, with exchanges that were sometimes intense or lighthearted but almost always respectful.

Further budget cuts

Participants set out Sunday morning on the uncomfortable task of extracting more money to pay for government, with wide-ranging discussions on how to close Alaska's multibillion-dollar budget gap.

The declines in oil production and price have left Alaska with about $2 billion in traditional revenue and a $5 billion annual budget, which may be filled from savings that will likely last no longer than a few years, unless oil prices rebound or state government stops or reduces major services.

Similar meetings Saturday to assign values to programs and propose cuts succeeded in suggestions to shave about $20 million from the budget, leaving the groups with a $3 billion gap to fill with additional budget cuts, taxes and money from the Alaska Permanent Fund.

Various participants recommended further budget cuts, aiming to hit about $4.5 billion, though with few specifics on how to cut $500 million. Trim tax credits, some said. Look for efficiencies in government or privatize services, others said.

Revenue Commissioner Randy Hoffbeck said turning programs over to the private sector makes sense to the extent that private companies are willing to take on services without subsidies. "Paying somebody to do what the government can do often doesn't save very much money," he said.

The Sunday morning conversations in each group, held in the classrooms of the Gruening Building at the university, went in different directions.

Some quickly turned to tinkering with a fiscal model created by the Walker administration to test different taxes and rates. While faced with dozens of options, it soon became clear that most of them added together would never come close to $3 billion.

New revenue sources?

The items with the biggest potential to generate revenue are the usual suspects — income tax, sales tax, business taxes, oil taxes and the earnings of the Permanent Fund. In many groups, participants made it clear they want the state to consider using some of the Permanent Fund earnings to help fill the budget gap, while keeping the dividend program and staying away from the principal, which can't be spent.

"I think the use of the earnings of the Permanent Fund is something that should absolutely be put on the table, but not in isolation," said Reggie Joule, mayor of the Northwest Arctic Borough and a former state lawmaker.

He said that if the state uses Permanent Fund earnings first and later moves to other revenue options, it will lead to fiscal uncertainty with the state constantly in a reaction mode, pitting people or industries against one another.

Some of the groups began with broader discussions. Robin Brena, an Anchorage attorney who has represented some oil companies and battled others in court cases, argued for upping taxes on that industry before taxing the public, or pulling money from the Permanent Fund earnings.

"Permanent Fund last," said Brena, a Walker ally who purchased the governor's law firm last year. "There is greater value coming off the Slope than there ever has been."

He argues that the average value of the oil shipped from Valdez has increased over the long term, despite the decline in production and the price collapse since last fall, which he argues will reverse itself in time because of future growth in India and China.

Another participant, Joseph Davis, offered a different view of the Permanent Fund, which contains $54.5 billion. The state, he said, should tap some of the earnings to invest in areas like infrastructure, broadband and the university system.

"Fifteen billion out of the Permanent Fund right now," said Davis, a member of Walker's transition team who lives off the Glenn Highway near the Matanuska Glacier. "What could we do now while we've still got a little bit of jingle left in our pocket? I'd spend $15 billion tomorrow — maybe later today."

The constitution requires that the principal be invested in income-producing investments, while the earnings can be spent at the discretion of the Legislature.

Ultimately, members of the small group that included Brena stood up from their tables and stuck green and red stickers on posters with rows representing potential sources of revenue. Some lines represented different taxes on oil companies; others were for increased levies on mining, fishing, fuel and corporate income.

Then there were broad-based taxes on income and sales, and ways of drawing money from the Permanent Fund to pay for government, like putting a ceiling on residents' annual dividends.

'You tax ’em at 40 percent, they’ll be involved'

There were lots of green stickers — endorsements — next to an income tax, as well as drawing money from the Permanent Fund's earnings reserve account, which has $7 billion that can be tapped with a majority vote of the Legislature.

There was also support for tweaking tax credits given to oil producers, while statewide sales and property taxes got several red stickers, signifying that participants saw those as "sacred cows" that shouldn't be contemplated.

Another small group in a downstairs classroom, though, quickly came to a consensus over implementing sales and income taxes and turned their discussion to the appropriate rates. Bernie Karl, who owns Chena Hot Springs Resort outside Fairbanks, lobbied for a state income tax rate of 40 percent, to get the public's attention.

"I want people to be involved. You tax 'em at 40 percent, they'll be involved," Karl said. "Go big or go home." Other participants pushed that number downward, however.

Simon Brown of Wasilla said the lack of statewide taxes has limited the degree to which most people have paid attention to government budget decisions. "You just develop some system to get all Alaska involved and a flat tax across the board to everybody will get all Alaskans involved," he said.

Once the groups agreed on considering ways to raise money, facilitators plugged new numbers into the Walker administration's fiscal model. The changes drew together two diverging lines on a graph representing the expected gap between state spending and revenues over the next 15 years.

"We've made some progress, but we're still out of money by 2020," Ken Alper, the Walker administration's tax director, told Karl's group at one point.

Some questioned the assumptions embedded in the model, as in another downstairs room where participants slapped at mosquitoes. Kara Moriarty, the president of the Alaska Oil and Gas Association, asked why the state spending trend line in the model continued on a steady upward path.

Pat Pitney, Walker's budget director, said that Sunday's discussions were designed to identify priorities rather than an attempt to develop a formal proposal. And she noted that the state can't close its budget deficit solely by cutting. "Regardless of what we do on the expenditure side, we still have a gap," Pitney said.

'There’s going to be taxes'

After the morning discussions, members from each group presented their models to all the participants when they reconvened in a ballroom. In general, the groups agreed that the state needs to hold down the budget and use new revenues to stem the reductions in the Constitutional Budget Reserve.

Lt. Gov. Bryon Mallott said Alaskans "have the ability to deal with any challenge before us" and the capacity to build a "strong and energetic future that creates opportunity for every single Alaskan."

Walker, in his final remarks, told the group that the state needs to keep looking for ways to tighten spending. "We heard you loud and clear and we will continue," he said.

He also said that the deficit is not imaginary and while some people have told him not to use the "T" word, he said there are two "T" words that need to be repeated. "One is truth, we're going to tell the truth," he said. "And the other is taxes. There's going to be taxes. We're going to have to do something."

He proposed additional discussions across the state to focus public attention on the fiscal challenge. He concluded by quoting Revenue Commissioner Hoffbeck's words of a day earlier, that this is only a crisis if the state fails to act. "I say the crisis is over," Walker said.

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