Legislature(2019 - 2020)ADAMS ROOM 519
05/03/2019 01:30 PM House FINANCE
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Audio | Topic |
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Start | |
HB96 | |
HB102 | |
HB131 | |
Presentation: Appropriation Limit by Office of Management and Budget | |
Recessed to the Call of the Chair: the Meeting Reconvened on Saturday, May 4, 2019 at 12:00 P.m. | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
+ | HB 102 | TELECONFERENCED | |
+= | HB 49 | TELECONFERENCED | |
+= | HB 145 | TELECONFERENCED | |
+ | TELECONFERENCED | ||
+= | HB 96 | TELECONFERENCED | |
+= | HB 131 | TELECONFERENCED | |
+ | TELECONFERENCED | ||
HOUSE BILL NO. 131 "An Act relating to an appropriation limit; relating to the budget responsibilities of the governor; and providing for an effective date." 2:56:14 PM ^PRESENTATION: APPROPRIATION LIMIT BY OFFICE OF MANAGEMENT AND BUDGET Co-Chair Wilson had asked for a comparison of spending. She had been working with Vice-Chair Ortiz and his staff. 2:56:50 PM ED KING, CHIEF ECONOMIST, OFFICE OF MANAGEMENT AND BUDGET, introduced the PowerPoint presentation: " Comparison of Various Appropriation Limit Proposals." He asked if the committee wanted him to skip some of the introductory slides if necessary. Co-Chair Wilson remarked that the finance committee had nowhere else to be. Mr. King began with the graph on slide 2: "UGF Spending History." The slide showed an illustration of the history of spending and why a spending limit was important to the governor. In 1977, when oil started flowing on the North Slope, the revenues of the state increased dramatically as did spending which generated a desire by the public to introduce a spending limit within the constitution. In 1982, after a 264 percent increase in government spending the people voted to limit the spending. Over the following 25 years spending was kept relatively in-check. The state had 20 years where spending barely moved other than the volatility in some of the revenues generated. The state had fairly flat spending for 2 decades until 2005 when oil prices started to escalate at a meteoric rate. The state saw the 264+ percent increase in undesignated general funds (UGF) spending reminiscent of what was seen in the 80s. It brought to mind the question of whether the spending limit was actually being effective. In both instances where there was an increase in spending, there was a decrease in spending. However, it was much quicker to increase spending than to cut it back. In the current fiscal environment, spending was far above what it was before the increase in revenue was experienced. Mr. King reviewed slide 3: "UGF Spending History and Different Limits." He reported that the spending limit that was currently in the constitution, the $2.5 billion that grew with population and inflation represented by the dotted black line, grew overtime regardless of whether the government was actually growing or not. The limit continued to grow based on the previous year's limit, not based on the previous year's spending or revenues. It continued to grow regardless of any circumstances occurring. He noted the blue area represented agency operations, the red area represented statewide items such as debt service and oil tax credits, and the grey area represented the capital budget. All three classifications of government spending had increased over the period on the chart. He also included a couple of other representations. The dotted line in the middle represented what would have happened if the one-half of inflation and population that was contemplated in House Joint Resolution (HJR) 7 were to have been put into place rather than the full consideration of population and inflation. The rate of increase was about half as much. The black dashed line below tracked actual spending which was adjusting every year. It was the language that was in the current constitutional amendment before both bodies. He suggested that because the limit was adjusting to actual spending, it never detached from what actual spending was. When revenues increased, it would not have allowed the increase to occur. Otherwise, it just tracked what actual spending was, and when an increase occurred it stayed flat. It showed what the spending would have looked like had the provision already been in the constitution. It was consistent with what it was in 2004 adjusted for inflation. Mr. King also presented one other idea. He reported that the red dashed line was representative of what the current limit would have been if, instead of pegging the spending to the high level of spending in the 80s, the base was pegged to the level of spending before the increase in revenues in 1982 and using the same language that was in the constitution. He added that the 1975 spending adjusted for full inflation and population would be right around what agency operations were the previous year. It was about $500 million or $600 million below the total budget because of the other items. The way the limit was structured had meaningful impacts on how the limit grew over time. 3:01:45 PM Mr. King addressed slide 4: "Sources of UGF Spending Growth." He explained that when he showed the graph of escalated spending, much of the time the question arose about how the state spent its money. The chart showed a breakout of the different ways the state increased its spending from 2005 to 2013 and where the cuts occurred in the years that followed. He highlighted that a significant amount of capital budget spending occurred and was represented in grey. Other changes occurred including changes to agency operations, the retirement system, and oil tax credits which all contributed to the increase in spending. He pointed to the black bars that represented actual agency operations spending in 2005 continued over time and adjusted for inflation. The red bar showed agency operations that had grown more than inflation. It represented real growth in operations. In 2013, the real operations growth was $1.3 billion above what it would have been in 2005. Since then, about half had been pulled back out of the budget. The state was currently about $750 million above what inflation would have allowed. Representative Josephson wondered why, relative to Mr. King's previous comment about the $750 million above what inflation would have allowed, he did not see anything so large on the chart. He asked about the numbers. Mr. King responded that the numbers were provided by the Legislative Finance Division. He took the 2005 operations and inflated it with actual inflation. The actual spending was $750 million above that level. Representative Josephson relayed that in oil tax credits alone, Mr. King had $100 million and other statewide growth. Public Employees' Retirement System (PERS) and Teachers' Retirement System (TRS) were more substantial. He asked how the numbers were backed out in deriving the $750 million difference. Mr. King responded affirmatively. They were separated. The $750 million was in addition to the PERS and TRS and the oil tax credit contributions. The total increase in spending was just over $1.2 billion above what an inflation adjustment would have allowed. Co-Chair Wilson asked committee members to hold their questions until Mr. King finished his presentation. Mr. King detailed the bar graph on slide 5: "UGF Revenue and Expenditure History." He relayed that another question that occurred had to do with revenue and response to revenue. It was accurate that the legislature responded to changes in revenues. On the chart he plotted the 5-year average revenue against actual spending. He thought it correlated well. It was a fact that the legislature was responding to changes in revenues which was one of the reasons the interest in a spending limit was so high. If there was another increase in revenues in the future, the governor did not want to see a substantial increase in spending. Co-Chair Wilson wondered if the legislature did not reduce the budget by $750 million whether it would change the spending cap proposed by the governor. She was trying to determine the starting point and how it would change if the legislature was not at the specified amount. Mr. King explained that the governor's proposed constitutional amendment took the previous 3 years of budgets (actual appropriations) and reset the spending limit for the following year. If the legislature spent below the limit, the following year the limit would go down. Co-Chair Wilson asked for the reset amount for the first year. Mr. King responded that if the spending limit went into effect in the following year, the spending limit would be slightly more than $5.3 billion which was more than the body was contemplating spending. Therefore, the year after that the limit would go down because the average would go down. He would point out the transition period later in his presentation. Co-Chair Wilson asked if the average would continue to decrease each year the state spent less. Mr. King replied, "That's correct. The limit adjusts to the actual needs of the government." 3:06:53 PM Mr. King discussed the table on slide 6: "Limit Rules Comparison." The chart showed a side-by-side comparison of the different versions of the spending limit. It compared the House and Senate versions of the statutory spending limit as well as the House and Senate versions of the constitutional spending limit put forward by the governor. The current constitution spending limit rules were also included. He broke out a few spending categories to show how they were similar and how there were different. In all the proposals federal funds and things that were not included in the general fund were all excluded from the cap. Mr. King relayed another item excluded from the cap was disaster relief and things that were part of the budget but not considered spending. For example, transferring money from one account to another without spending it or duplicated funds, like interagency receipts or reappropriations, were not considered spending. Mr. King mentioned that general debt obligation service was also excluded. Things that were included in the cap were agency operations and capital projects. The bottom 5 categories listed on the chart were where the differences could be seen in the version comparisons. Revenue bond debt services was excluded in all the versions except for in the current constitution. Other designated general funds were excluded in the constitution and in both constitutional amendments. However, it was excluded in the statutory versions. In both HB 131 [Legislation introduced in 2019 regarding an appropriation limit] and its companion bill, SB 104, the designated general funds lived outside the cap which meant they could grow without limit. Whereas, in House Joint Resolution (HJR) 7 [Legislation introduced in 2019 - Short Title: Const. Am: Approp. Limit; Reserve Fund] and its companion bill, Senate Joint Resolution (SJR) 6, they were included in the cap and part of the limitation. School debt reimbursement was excluded in HB 131 because the language indicated all debt service. Mr. King elaborated that in the working draft version K of SB 104 there was a provision that specifically included school debt reimbursement. In HJR 7 and SJR 6 they were included in the cap by necessity. The Public Employees' Retirement System (PERS) and TRS contributions were included because they were not considered to be actual debt of the state even though they were an obligation of the state. He pointed out that there was some ambiguity in the current version of HB 131 that came up because in SB 104 language was included to specifically exclude PERS and TRS contributions which raised the question whether it was otherwise included. Lastly, in the constitutional provisions Permanent Fund Dividends were excluded from the cap. In the statutory proposals the Permanent Fund Dividends were under the cap. 3:10:28 PM Mr. King continued to slide 7: "Limit Rules Comparison." The 3 moving pieces of the bills included the base limit. The current version of the bill had a $5 billion limit. The senate version increased the limit to $6 billion. The governor's proposed constitutional limit in both bodies used an adjusting average every year and reset to a 3-year average. The current constitution had a $2.5 billion base and was based on 1982. The others were based on 2020. Mr. King relayed that in terms of how the limit changed over time, the version in front of the committee had a 5-year average inflation adjustment. He pointed out that the language indicated that the amount did not grow over time -the last 5 years of inflation was pegged to the $5 billion. In the Senate's committee substitute the language was changed to the 5-year average since 2020. The average was adjusting based on the 5-year average of inflation allowing the rate to grow at the rate of inflation. In the governor's original proposal, the escalation rule was one-half of the prior year's inflation and population growth, but it was capped at 2 percent. If there was high inflation or population in a year, it would not be able to grow more than 2 percent. Mr. King continued that in the Senate's version of the bill currently in the Senate Finance Committee it was changed to the average of the previous 5 years of inflation and was tied to the average of the 3 previous years of appropriations. The current constitution allowed a full rate of inflation and population growth year-after-year. It allowed the rate to grow based on inflation. The exception applicable to the capital budget was that the limit could be broken for capital projects. In the version before the committee there was no exception. In the Senate's version and committee substitute included a 5 percent kicker above the limit. He indicated that in the governor's proposal there was no exception. However, in the Senate's substitute a 10 percent deviation was allowed if funds were available. The current constitution stated that although there was a limit, it could be broken with a super majority of the legislature. Co-Chair Wilson asked for clarity about capital projects and exceptions to the capital budget cap. Mr. King relayed that in the current version the term "Capital Improvement" which was interpreted as brick and mortar. The provisions in the Senate's version of the constitutional amendment contained the same language. From a statutory perspective it was difficult to interpret because the legislature had the authority to appropriate and could include anything it wanted to. He noted that for the constitution it would depend on how the court interpreted the phrase, "Capital improvement." He asserted that just because it was in the capital budget did not mean it qualified. Mr. King talked about the spending trend reflected on slide 8: "UGF Spending Trend." The slide showed the growth rate of the budget since 2000. From 2004 to 2013 the budget grew about 14 percent per year. The 15-year average rate of growth of the budget was 4.6 percent, much higher than the rate of inflation. He conveyed that when looking forward on how the limit was changing and how government spending could be expected to change, there was some historical context that might be reasonable to assume. 3:15:03 PM Mr. King turned to the graph on slide 9: "Revenues, Target Budget (4 percent growth), and HB 131 Spending Limit ($5 billion plus inflation)." The slide showed the target budget at a 4 percent growth rate which was represented by the black bars. The red dashed line showed the spending limit in HB 131 of $5 billion. If the budget target exceeded the budget limit, it would not allow it to grow. Mr. King continued that with a budget growth of 4 percent and a spending limit of less than 4 percent, they would eventually converge. The stacked bar showed how items were paid. The bottom portion of the bars (shown in black) represented UGF revenues, mostly oil revenues. The remainder of the stack (denoted in green, green hashes, and purple combined) represented the percent of market value (POMV). The green portion of the bar was what was left over after deducting the statutory PFD. The top area [including the purple and green hashed portions of the bar] represented the PFD calculation. The green hashed bar represented what should have been given to the people as part of their PFD but was diverted for government spending. He reported that the limit could be distributed to the people only above what the government was spending and below because the limit included the PFD. In other words, any amount more than the PFD could not be distributed. Even if there were enough revenues to pay a larger PFD, the legislature was prohibited to do so because the law did not allow it. Mr. King continued to explain that in all the cases he was presenting, there was revenue exceeding the limit, which meant there was money available to pay a greater PFD. However, the legislature was prohibited to do so. The only way to pay a PFD (if the PFD was under the limit) would be to decrease government spending. Even with more revenues from additional taxes, the limit would not change. Therefore, a larger dividend could not be paid even if a tax was raised. The difficulty of including the PFD under the limit was that it inserted conflict with the PFD and government spending with no other options of revenue. Revenues more than what the legislature was allowed to spend were above the line. Therefore, the money stayed in the bank rather than being distributed. Representative Josephson thought he heard Mr. King saying that under the new proposed bill, the legislature would be hemming in its capacity to pay a larger dividend because the state could raise revenue above the red line but not spend it on a dividend. He wondered if he understood correctly. Mr. King responded that he was correct. The legislature could not spend the excess money on anything under the cap including larger government or larger PFDs. The limit was not actually limiting government growth, it was only limiting the legislature's ability to pay the PFD. Representative Josephson was struck by some irony because the administration also hemmed in expenditures by not allowing any real discussion of other revenue. Mr. King responded that the governor's proposed spending limit did not include the PFD. Therefore, the PFD was unlimited. It would prevent the government from growing, which the limit was intended to do. By implication, it meant the state could raise more revenues but could not spend them. He did not follow the representative's question. Co-Chair Wilson suggested that in HB 131, by including the dividend in the cap with the intention of keeping spending down, it might have the opposite effect. The dividend might get squished rather than reducing spending. She supposed that the government could increase its revenues, but the legislature would still be limited to how much it could spend with a spending limit in place based on the average spending for the previous 3 years and inflation. In other words, it was not about how much revenue was generated, it was about the limit in spending. Mr. King added that if the legislature wanted to raise government spending by raising new revenues, it could be done under the limit. However, to do so, a tax would have to be implemented, and because the PFD was under the limit, it crowded out the PFD. As a result, people would end up getting both a tax and a cut to their PFD because of the PFD being under the limit. Co-Chair Wilson asked about what should be inside the cap and what should be outside the cap. She wondered whether there would be more pressure on how much the legislature was spending if the PFD was outside of the cap. Mr. King responded that if the PFD was outside of the cap, the cap would only apply to spending. The limit would only be controlling government spending - it was not controlling the PFD and how much was being distributed. It would be up to the legislature to decide or the people to decide if they wanted to put it in the constitution. 3:22:25 PM Mr. King continued to slide 10: "Revenues, Target Budget (4 percent growth), and HB 131 Spending Limit ($6 billion plus inflation)." He relayed that in the Senate's committee substitute version of the bill the spending limit was increased to $6 billion which was reflected on the slide. Because there was room under the limit, the legislature could raise more revenues and grow government without cutting the PFD further. He pointed out that the spending limit was not limiting anything. It was hovering above the spending limits. If the intent was to limit government spending, it was not working the way it was intended. Co-Chair Wilson did not think the charts reflected where the state wanted to go. She thought perhaps the PFD should be kept outside of the spending cap. Mr. King responded that she was correct in that the consequence of putting the PFD inside the cap was that it competed for the other budget. He pointed out that the statutory calculation for the PFD was represented in purple and the hashed portion. The hash was the portion of what should be the PFD that was being diverted to government to get to the spending target. Vice-Chair Johnston asked if the chart reflected the current POMV. Mr. King replied that the green, hashed, and purple bars added together was the POMV. The green was left over after removing the statutory PFD. Vice-Chair Johnston clarified that the green, hashed, and purple equaled the POMV. Mr. King responded, "That is correct." Co-Chair Wilson noted the chart was very helpful. Mr. King highlighted that the chart showed the distribution of money from the POMV that was going in each direction. The green was about a third of the total bar. Therefore, two-thirds was the calculated POMV and one-third was what was left over from the POMV after the PFD payment. If the calculation were to change to 50 percent of the POMV, it would not change the numbers, just the colors of the bar. The green would go higher, and the hash would turn green. It did not change anything. The same amount of PFD would be paid. Co-Chair Wilson referred to the governor's proposed budget. She asked for clarification as to how the bars would change. Mr. King responded that the specific graphic did not contain the 3-year adjustment. The chart included the statutory provision allowing growth with inflation. He relayed that if the budget was cut further to what the governor proposed, the black line would shift down. It would mean that the hashmark, instead of being diverted to government, would turn purple and would go to the people of Alaska. Co-Chair Wilson suggested that even though the 5-year average was not accounted for in the chart, 202 would be part of the average and the numbers would continue to reset the spending cap down a certain percentage for the following year. Mr. King responded that if the base could readjust to spending like in the constitutional amendment proposal, her statement would be true. House Bill 131 did not adjust for the spending level. Representative Josephson asked for clarity around what the chart would look like if the governor's intensions were achieved. Mr. King responded that the governor intended for the legislature to pay the full PFD and the budget would have to be moved down to the green to do so. Representative Josephson suggested neither body [House or Senate] could come close to what was being proposed. He asked why the bill was a practical path forward. Co-Chair Wilson commented that it was not about how practical the proposal was, rather, it was about what the bills did. The committee was trying to learn what the bills did. She thought that it was an entirely different policy discussion as to why the legislature spent more money than it needed to. She asked Mr. King to continue to the following slide. 3:28:17 PM Mr. King presented scenario 1 on slide 11: "Randomly Generated Scenario 1." He indicated that in looking at spending limits under static conditions where there were nice smooth lines, projections were flat, and everything appeared easy. It was not how reality worked. He thought it was important to look at what circumstances were created when volatility was introduced. The following 2 slides were reflective of the computer randomly generating an oil price, oil production level, investment return level, and inflation level. It looked at what happened under the different provisions when volatility could occur. The slide showed one scenario showing 2 provisions. He could not show the line on the same chart because when there were different impacts on the savings accounts, there were also different impacts on investment returns. He relayed that in the scenario oil prices spiked up and down and up again, as well as investment returns jumping around. Under the $5 billion limit, there were small PFD's that went away over time. There were enough revenues to pay a larger PFD, but the limit would not allow it. On the right the limit was a $6 billion. However, the limit was not limiting anything unless oil prices went up or investment returns went up significantly. When it limited something, it limited the PFD. Unless the body was willing to reduce the black line further, they could pay a larger PFD. However, that was not what the limit was doing. Mr. King moved to the second scenario on slide 12: "Randomly Generated Scenario 2." The slide showed another scenario where the oil prices were different as well as investment returns. He highlighted that the limit was restricting the PFD distributions, although there was revenue to pay for them. On the righthand chart showed the $6 billion which only limited in high revenue years. He pointed out that there was something interesting that happened in a couple of the scenarios where the distribution of the POMV got what was left over after the PFD calculation got very small in some circumstances. He thought it was worth paying attention to. 3:30:57 PM Vice-Chair Johnston needed to know how Mr. King was modeling the scenarios. She wondered if the operational budget was growing in his examples. Mr. King responded that the model was setting the 2020 number at the level the legislature was proposing. It started at the level of proposed spending by the legislature. Each year the budget attempted to grow at a rate of 4 percent - slightly lower than the historic rate. The model indicated to try to grow the government at 4 percent if allowed. Once the budget ran up against the limit, it was not allowed to grow, therefore the limit was controlled. On the left it showed the $5 billion limit and that government growth was limited in 2027. On the right, because of the higher limit, the growth could continue causing smaller investment returns. More outflow of money being taken from the savings accounts lead to smaller returns. Vice-Chair Johnston was concerned with the modeling of the revenue. She wondered how he reached the revenue amounts. Mr. King explained that the model was calculating what the anticipated royalty and tax payments would be from oil companies by allowing the oil price and production levels to be randomly generated within the distribution he defined. It was between $40 to $120 and bounced around. In the production world there were three cases: high, low, and medium. He used them as parameters. There was a distribution the computer could select within the confines of production projections. For investment returns, it figured out what was being spent. If there were excess revenues, the savings rules were followed. The savings accounts received a return on their asset levels based on the defined distribution - the historic performance of a particular fund. The actual POMV beginning in 2022 was 5 percent of the total fund value. The combination of the 4 components made up the entire POMV which was calculated in the way SB 26 [Legislation passed in 2018 regarding an appropriation limit, the Permanent Fund, the Permanent Fund Dividend, and the Permanent Fund Earnings] contemplated. 3:35:07 PM Vice-Chair Johnston asked Mr. King if he was basing the revenue on a consistent forecast derived from based on the most recent revenue forecast other than the POMV. Mr. King indicated that he was using all the current laws and the revenue forecast as the baseline forecast defining the random distribution. The model was a scenario randomly generated within the distributions. The purpose was to show what volatility might do. Vice-Chair Johnston would be interested in doing additional modeling with Mr. King's tool. Co-Chair Wilson mentioned there was an assumed growth rate of 4 percent. She thought it would be interesting to see a model reflecting other growth rates such as 1 percent, 2 percent, or 3 percent. She wondered if the purple was on the bottom and fulfilled first. She thought the modeling showed the PFD getting squished rather than government growth which was not necessarily the intent of the committee. She thought some other modeling would be nice. Mr. King explained that the bars represented revenues rather than expenditures. The chart reflected the statutory calculated PFD, not what the legislature actually paid as the PFD. There was no paying the PFD first. Co-Chair Wilson thought what he was saying was that the amount spent on government was going up 4 percent per year which was why the purple bar ended in 2025. She believed Mr. King was assuming the state's spending would not decrease. She wondered if the graph would change significantly if the state reduced its spending by 2 percent. Mr. King tried to explain that it would not change the graph. The red line would remain the same. The only thing that would be different was the black line. At any point, the legislature could reduce the budget and increase the PFD. Co-Chair Wilson thought the graphs made the legislature appear to be considering the PFD last. She wanted the public to know that the exercise was about deciding whether the PFD should be inside or outside a cap. Based on the graph she did not think the PFD should be inside the cap. She wanted to see the state control its spending. If the legislature could not reduce spending on its own, she wondered how to force the spending. She did not want the dividend to be the looser. She emphasized trying to understand what was included in a spending cap and what was not. She wondered if the administration had considered all factors before coming up with their idea. Mr. King was not suggesting what future legislatures might do. He was showing that if the legislature continued to grow at the rate it had over the previous 15 years, there would be consequences. The consequence was putting the PFD under the limit. It forced the legislature to make the decision. If budget growth could be restricted, a person could get a larger PFD. However, it had not been the tendency. If a certain PFD amount was designated, by necessity the level of spending would be constrained. The current budget was not drafted accordingly. Representative Knopp thought Mr. King had stated that limiting budget growth would determine the size of the PFD. He asked if the statement was accurate that the size of the PFD was determined by rate of return on investments. Mr. King explained that under HB 131 if the PFD was within the limit, there was only so much money to spend. Every dollar that was spent on government was a dollar that could not be spent on the PFD and vice versa. He suggested that by including the PFD under the limit, the PFD would be limited by how much was spent on government. 3:40:58 PM Representative Knopp returned to slides 8 and 9. He noted Mr. King spoke of 15 year averages and showed a growth of 4.6 percent. He asked what rate of growth Mr. King recommended under HB 131. He quoted AS 37.05.540 regarding appropriation limits. He wondered why the existing appropriation limit was not working. Mr. King thought Representative Knopp had referenced the statute relating to the statutory limit associated exclusively with the Alaska Mental Health Trust. The current constitutional spending limit allowed the limit to increase by the rate of inflation and population which was less than the 4.6 percent average growth through the previous 1.5 decades. The proposal by the governor was to cut the rate in half - half of population and half of inflation. The Senate suggested that a 5-year average inflation rate was more appropriate with no consideration of population. It would be up to policy makers to decide what was appropriate. The idea was that some limit must be in place if the legislature wanted to have a limit. Representative Josephson pointed to the lavender bar on the right of slide 12 of the presentation. He asked if the bar represented unfunded Permanent Fund Dividends. Mr. King responded that it was money available for distribution for the PFD but was unable to be distributed because of the limit in place. With $100 oil in the current year, there was were high oil revenues. There were enough revenues to pay a larger PFD, but the limit would not allow it because the PFD was under the limit. Representative Josephson thought under the current random scenario Mr. King was projecting the dividend outlay to be about $4 billion. In other words, people would receive a $6000 check. For a family of four they would receive $24,000. Mr. King answered that the randomly generated scenario generated a dividend as large as the representative had suggested. Representative Josephson surmised that under the current formula, the state was on a track to pay a family of four $24,000 in dividends in 10 years. Mr. King responded that he was not showing an actual projection of future events. It showed one possibility of many outcomes. In the particular year there was a 25 percent return which generated the exceedingly high PFD calculation. However, the POMV number had not caught up because of the lag in the averaging. There was a high PFD calculation, even though other scenarios would generate a smaller number because of smaller returns. He was not suggesting what would happen, but it was a possible outcome. Representative Knopp had spoken to the LFD director who affirmed what he thought: AS 37.05 did not refer to the Alaska Mental health Trust appropriation. Section B outlined what was exempt from the cap. It also discussed the level of appropriation. He wanted Mr. King to look at the existing statute. He was wondering why the cap was not working. 3:45:32 PM Mr. King moved to slide 13 and reviewed the House and Senate joint resolutions put forward by the governor and changed by the Senate. In the original provision there was an allowed escalation of one-half of inflation and population with a maximum of 2 percent. The 2 percent limit did not actually kick in in the baseline projections. It was just half of inflation and population. The Senate adjusted it to a 5-year average adjusted for inflation without a consideration of population. It grew slightly more but not excessively. He highlighted that, because of the 3-year averaging, there was a period where the state was spending less than the limit which required the limit to be adjusted downward. In either case, there was a period of transition before the growth trend kicked in. Mr. King looked at slide 14: "Comparison of No Limit to HJR 7 / SJR 6 Limit." He explained that because the PFD was not under the limit there were no hashes. He clarified that he was only looking at revenue. The black line represented the target budget. The dotted line showed what the 4 percent budget growth would look like. He continued that the red dotted line represented what SJR 6 growth would look like without consideration of spending. If the state were to spend to the limit every year, there would be a very small growth rate. The dashed line showed the adjusting rate down to the actual amount. In FY 20 he expected actual spending to be below the calculated spending limit which would trigger a reduction in the limit. It trended down to a level similar to FY 05 and grew at the same rate. The chart showed the baseline projection of revenues projected to the 10-year mark. It was also the Alaska Permanent Fund Corporation's projection of earnings. Mr. King explained that the green and the purple combined equaled the POMV. The purple was the calculated amount for the PFD. He pointed out there was a decrease in revenue in the near term. As new infrastructure was being developed there would be an increase in out years once it came into production. Anything under the black line needed to be funded somehow. He suggested that because there were not enough revenues, there was a shortfall between the black line and the green bar that needed to be addressed. He offered that because the PFD was not under the limit, it could be addressed through taxes, savings draws, budget cuts, or through the PFD. If the state were to use the PFD, everything above the line would be distributed as the PFD. By comparing the different lines, the potential impacts could be seen showing how much of the funds would get diverted from the PFD calculation to government and how much could be distributed. If budget cuts were made, there would be a larger PFD payout. Eventually, without a limit there would not be enough revenues to fund the call for cash. Co-Chair Wilson asked what percentage decrease in the operating/capital budgets would be needed to maintain a full PFD and keep the state under the red line. Mr. King answered that cuts would have to be greater than what was being proposed. He thought an additional $500 million to $600 million would have to be cut from the budget. 3:49:55 PM Co-Chair Wilson asked if they would have to take out $2.1 billion in FY 20. Mr. King replied that the state would have approximately $3.8 billion in revenues to spend on UGF and designated general funds (DGF). It was another several hundred million below what was being proposed. Co-Chair Wilson noted the black dotted line representing the budget growing at 4 percent. She asked if the anticipated growth rate was 2 percent per year in the Administration's proposal for SJR 6. Mr. King replied the anticipated growth rate was just under 1 percent which was what the limit allowed. Co-Chair Wilson noted the state had just signed contracts reflecting a range of zero to over 4 percent plus 7 percent for public safety. The contracts did not include steps. She assumed the number of employees would have to be reduced rather than looking at salary reductions. Mr. King suggested that the legislature would have to find efficiencies or reductions. Co-Chair Wilson rebutted that the legislature was not being discussed. She was talking about the administration. She was trying to figure out how the administration would apply a spending cap based on a 1 percent growth rate when contracts were currently being signed and without legislation that would reduce the rate to 1 percent. The governor had offered legislation that would increase the rate to 1.7 percent. The numbers in her head did not work. She wondered how many positions would have to be reduced to stay within the 1 percent growth rate based on the administration's spending limit. Mr. King responded that it was a significant challenge. He did not have the answers. There were no easy answers. Co-Chair Wilson asked who might be able to answer her question. She was not trying to figure out the numbers. She wanted further clarification. Mr. King replied that he would have to get back with the representative with an answer. He offered that presently the governor put forward a proposal and it would go through a process. The administration was willing to have a conversation about what the right numbers should be. Co-Chair Wilson thought it was important to know where the numbers came from and what levers were used. She wanted to understand what had changed to get the numbers right. 3:55:09 PM Vice-Chair Ortiz asked Mr. King if he thought that any constitutional change would require a spending cap. Once things were put in the constitution it became more difficult to adjust. He wondered if things like inflationary rates should be taken into consideration. There had not been significant inflation in the past several years. He noted the employment rate of the nation had dropped below 4 percent. He asked Mr. King if he agreed that lowering unemployment rates was a significant inflation causation. He thought inflation could increase up to 6 percent or 7 percent in a few years. Mr. King responded that the inflation rate was something the Federal Reserve tracked and tried to control. They had done a great job. The expectations for inflation were in the range of 2 percent to 2.5 percent for the next decade or more based on the federal target. Vice-Chair Ortiz was correct that there were things beyond their control, and anything was possible. Vice-Chair Ortiz made the point that if something was going to be placed in the constitution a consideration should be made. Mr. King indicated that if something was to be placed in a document that was rigid, there needed to be a mechanism that would adjust to things like inflation or the rate of spending to allow for flexibility. A fixed number was currently in the constitution and allowed it to be detached for the actual needs of government. Co-Chair Wilson comment, "Rigid but flexible. Those two items go together." Vice-Chair Johnston thought the current federal administration was hoping for 4 percent inflation to come close to preventing the nation's debt from growing. She referred to page 6 regarding what was included and not included. In HJR 7 version A agency operations, capital projects, and PERS and TRS contributions were included. She wondered what modeling was used in contract negotiations. She suggested that if the legislature was going to look at agency operations, it should first look at what modeling was being done. She also noted that when doing the modeling for HJR 7, Mr. King included PERS and TRS contributions. She suggested that he would have to include the ARM Board and the cost of downsizing government. She suggested that as Mr. King was modeling all levers needed to be presented. The cost of downsizing government should also be included, as it would be part of the levers. She did not think the legislature was getting a full picture including cost drivers and levers. Co-Chair Wilson was going to work with Mr. King about the levers. She wanted to move the bill through committee in the current year, if possible. She thanked Mr. King for being in the meeting. Co-Chair Wilson indicated that she would be recessing the meeting in anticipation of receiving the crime bill. ^RECESSED TO THE CALL OF THE CHAIR: THE MEETING RECONVENED ON SATURDAY, MAY 4, 2019 AT 12:00 P.M. 4:01:09 PM
Document Name | Date/Time | Subjects |
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HB 102 Sponsor Statement Version U.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
HB 102. Sectional Version U.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
HB 102.Backup Support Letter Enterprise.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
HB 102 Public Testimony.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
HB 96 Amendment 2 Wilson .pdf |
HFIN 5/3/2019 1:30:00 PM SHSS 2/12/2020 1:30:00 PM |
HB 96 |
HB 96 Amendment 1 Josephson.pdf |
HFIN 5/3/2019 1:30:00 PM SHSS 2/12/2020 1:30:00 PM |
HB 96 |
HB 102 Opposition Letter.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
HB 131 Spending Limit Comparison.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 131 |
HB 49 CS WORKDRAFT FINv.E.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB 49 v.E CS FIN Sectional Summary.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB 102 Opposition Comptia.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
HB 49 HB 49 Public Testimony Pkt 3.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB 49 Public Testimony Pkt 2.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB 49 DRAFT Fiscal Note Packet.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB 49 Public Testimony PKT 4.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB049CS(FIN)-DPS-PT-DRAFT 05-04-19.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB 49 HB 49 Public Testimony Pkt 3.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
HB 96 Amendment 3 Knopp.pdf |
HFIN 5/3/2019 1:30:00 PM SHSS 2/12/2020 1:30:00 PM |
HB 96 |