Legislature(2007 - 2008)BELTZ 211
01/25/2007 09:00 AM STATE AFFAIRS
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* first hearing in first committee of referral
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SB 25-STATE PLANNING AND BUDGET CHAIR MCGUIRE announced the consideration of SB 25. SENATOR FRED DYSON, Alaska State Legislature, introduced Lucky Shultz. He said all of the members have discussed what to do regarding a state financial plan, and SB 25 is largely Mr. Shultz's work. This bill asks that the administration reveal a 25-year plan for Alaska's financial affairs. 9:50:43 AM LUCKY SHULTZ, staff to Senator Dyson, said SB 25 does not make a plan but asks the governor to create a 25-year plan. He said that across the nation more people want to know what our government is doing "and how we're going to take care of issues." He noted that he has helped corporations put together strategic plans, and many times those plans were not successful "because we didn't know what we were doing and what we were looking for in the future." For the past couple of years he has heard many Alaskans ask what the state's long range plan is. "And my response has to be, either we're not very good at communicating what our long range plan is or we don't have a long range plan." This bill would require the governor to report the key elements of a long range plan, including costs and revenues. He quoted the retired publisher of the Ketchikan Daily News, saying Alaskans need a plan. He said Medicaid costs are rising, and there will be huge shortfalls in retirement benefits nationwide. He said the retirement/health care plans alone will cost a trillion dollars across the country. He said that half of the 500 biggest companies will lose half of their senior managers in five years. Civil service will have trouble finding people to run the government, he noted. 9:53:45 AM MR. SHULTZ said the European commission has an energy efficiency action plan to reduce energy consumption by 20 percent. Brazil has an 80-year plan, Bp has a 50-year plan, and many Japanese companies have 100-year plans. He showed a chart called the gully chart of Alaska's declining oil and gas revenue. A gas pipeline will likely take 10 years before providing revenue. The Alaska Department of Natural Resources (DNR) provided a chart showing a decline in oil production and revenue. He spoke of Medicaid costs by the year 2015, "all of a sudden seniors start escalating." He said, in 2018, seniors "surpass spending of any other age group in Alaska." The population is aging. He noted that, "for the first time in recent history," elderly people are moving to Alaska. He said they are doing so for different reasons including: to be with their children; because Alaska has better road infrastructure now; and "partly because of the hospitals and partly because of entertainment." Costs of Medicaid are going up, he noted. Alaska's share of Medicaid is going to go from $350 million to over $2 billion by 2025 because of the growing number of seniors, the fact that seniors have higher costs for Medicaid, Medicaid costs are going up, and the federal government is reducing their share of Medicaid. 9:57:23 AM MR. SHULTZ said the state needs to look ahead. By 2025 the fy08 budget allocation for health takes up almost half of all allocations, he said, and if money for education is added, all the other departments are squeezed even more. "How are we going to balance our budget when education and health are consuming so much of the budget?" he asked. He estimated there will be $10 billion needed for unfunded liabilities of Alaska's retirement systems. He said Alaska now has $950 million in deferred maintenance, and the University of Alaska is asking for $67 million per year for the next several years to address deferred maintenance, "so, again, the question is, how are we going to handle it?" SB 25 asks the governor for the projected revenues by source and expenditures for the next 25 years and how the budget will be balanced. He said Medicaid is just one little element. Mr. Shultz asked what happens when expenditures are projected to exceed revenues. He noted that the gas line is at least ten years away, and the chart shows that Alaska already has a problem. What happens if the revenue, like the petroleum tax, is forestalled a year? He told the committee that Venezuela and Brazil are planning a 7,700-mile natural gas pipeline across South America, more than twice the size of Alaska's potential pipeline. A shortage of steel and welders could be a problem for Alaska. The bill asks for a debt analysis; growing debt is serviced out of the general fund. "What is [the governor's] plan for managing that debt? What's the strategy? Unfunded liabilities-how much per year? Are we going to do several hundred million dollar contributions every year? Don't know." 10:01:23 AM MR. SHULTZ asked what actions the legislature should take, and by when, to make the governor's plan work. The bill will become effective on July 1, so the information will be required next January. "It will take at least that long, and perhaps longer…to get the information that I'm looking for in this bill." He said that the legislature is facing unprecedented fiscal pressures as legislatures do everywhere, and "the time for action is now." 10:02:03 AM SENATOR BUNDE said the Department of Labor has a chart of Alaska demographics showing the smallest cohort will be 30 to 50-year- old workers. He asked the chart to be incorporated as it indicates another salient factor in the need to plan ahead. 10:02:45 AM SENATOR FRENCH said the bill is a great idea that deserves thought, but he asked how the governor can realistically project beyond his or her administration. "How do you get a report that's…worth the paper it's printed on when the political landscape changes every four years?" Income can be projected but expenditures are politically driven, he stated. MR. SHULTZ said no one can know costs and revenue in 25 years. His hope is to institutionalize a presentation to the legislature every January. If a new governor plans to change everything, "part of this bill says your going tell us the assumptions that you're basing these projections on." The legislature can challenge those assumptions or not, he said. The state can't just look at next year and hope for the best after that. Currently the governor is required to give the legislature a budget for one year, "and when we're looking at things like a gas pipeline and [petroleum production tax] that impacts the state for 20, 30, or 50 years into the future, we need to have the full picture…to make informed decisions." If an incoming administration changes things, the legislature can disagree during the January briefing sessions, he stated. 10:05:23 AM SENATOR DYSON said economics is not a dismal science and there are good tools for analyzing. He said that the Department of Revenue has always overestimated oil production and underestimated oil prices. There are patterns to see when looking back. The legislature will be asking the current governor if her budget is sustainable at predicted oil production and prices. He surmised that it is probably not sustainable, so the legislature needs to ask for a plan of what to do until the next sugar daddy shows up. This bill should help get away from the past strategies of hope or hide. He explained the hope strategy as a fairy godmother rescuing the state from its financial irresponsibility. He said "all of us" are getting more cynical about "miraculous deliverances from our own irresponsibilities." The other strategy is to hide the impending problems by spending the money that is political popular and letting the next administration face "the stinky stuff in the closet." He said problems will not be hidden under SB 25, and the legislature and governor have to answer the question of how the state is going to pay for expenditures. 10:08:41 AM SENATOR STEVENS said the information will be enormously valuable, but it seems very costly. MR. SHULTZ said he is not going to come up with the cost, but the departments are looking at it. Some departments will say it is not a big deal. He said he thinks it will take at least another full-time position. "You're making decisions for a pipeline into several years in the future at billions and billions of dollars; I think you need good information to make that decision." 10:10:08 AM SENATOR BUNDE concurs with Senator French that this might be an exercise in smoke and mirrors. There is some value in legislators receiving the information but better value for the public to receive it. He said Alaskans have a variety of opinions but the one thing he has heard consistently is that there is too much state spending. The public has to be part of the solution; the public demands the spending and the pork, he stated. People are pandering to self interest and they have to understand there are long-term consequences. He said it has been an Alaska tradition since the gold rush days, to "come here and make your stake and get out." 10:12:20 AM JACK KREINHEDER, Chief Analyst, Office of Management and Budget, said the Palin administration supports long-term fiscal planning, which ties in with her 2008 budget proposal. Key elements of the budget are to spend less, control government growth, save surpluses, and live within the state's means by keeping the FY08 budget in line with projected revenues. He said a document created from SB 25 needs to be worth the paper it is printed on and not an exercise that sits on the shelf collecting dust. He noted that OMB has been involved in long-term fiscal planning exercises over the years since the mid 1980s when oil prices took a sharp downturn. The work needs to be done, but is it the best use of staff time and expense? he asked. 10:15:33 AM MR. KREINHEDER said the gully chart of long-range spending and revenue through 2020 highlights the fact that Alaska's long- range finances can be captured in one chart. He suggested the state doesn't need a several hundred page report that the legislature may not have time to read. More targeted information may be a better use of everyone's time. A 25-year time frame is better than 100 years, because looking into the future is risky; the one guarantee is that it will be wrong. He said the gully chart looked forward 13 years, which is a more reasonable, and the added value of projecting 25 years may be minimal. CHAIR MCGUIRE asked what time frame he would suggest. 10:18:16 AM MR. KREINHEDER said perhaps 15 years. Once a projection gets beyond 10 or 15 years its value declines, and the line tends to straighten out at that point. The fiscal note recognizes that this is not a trivial amount of work and would require some additional staff. The work involved is tough to project, and that is why Mr. Kreinheder provided an indeterminate note. He said OMB would need at least one new position, but it is difficult to know what other departments will need. The big jobs would be the Medicaid projections for the Department of Health and Social Services, enrollment and educational foundation formula projections for the Department of Educations, and projections for public facilities, which will affect six other departments. He said he has heard some concerns from other departments regarding the work that will be required. His concern is figuring out the most effective use of everyone's time and recognizing that large reports don't get read. 10:21:24 AM MR. KREINHEDER said the gully chart showed the challenge of the next 10 to 15 years until a gas line can be built. The governor is committed to getting it built. The gully chart is still accurate and the gap of declining oil production needs to be bridged until the gas line is operating. He told the legislature that it was important to keep the lid on spending, not spend the state's surplus, and extend the life of the constitutional budget reserve "so that as oil production does drop off those funds would be available to help balance the budget. 10:22:51 AM SENATOR BUNDE spoke of an unsustainable amount of state funding that will put the state in "deficit mode" in two to three years. The state will have to start living off of the savings in the constitutional budget reserve. He said Senator Dyson called the governor's budget transitional, and no one believes it will be as small as the governor has projected. "Most people think that the $150 million in savings will be very difficult to achieve, even if we achieve that, this year's projected budget goes up $600 million over last year." The tail begins to wag the dog if that is the case, he said. If the gully happens, the state will have to live off savings, and "the wisdom of putting money in the corpus of the permanent fund, where it will be unavailable to help bridge this gap, has to come into question." 10:24:37 AM CHAIR MCGUIRE said this bill is more appropriate in the finance committee, and she would like to move it. She asked about reducing the projection to 15 years. SENATOR DYSON said the value and credibility does decrease over time, but it is still valuable. Each year the work will be diminished. He said he is not wedded to 25 years, but 15 years would be the absolute minimum. Senator Green always asks, "Why would you do that?" This kind of information will make "all of us ask the question: why would we do that? Why would we be building expectations that are not sustainable?" he said. He stated that there is good expertise in legislative finance that will challenge all of the legislature's actions. 10:26:50 AM CHAIR MCGUIRE moved Amendment 1. "Wherever the number 25 is, that it be stricken and replaced with the number 15." She said it is a starting point, and she respects OMB's opinion that the value wavers beyond that time frame. SENATOR GREEN said page 4 speaks of a six-year increment, and she asked if that needs to be changed to fifteen. She noted there is an additional six years on page 4, line 4. MR. SHULTZ said no, that is the original six years that is already in statute for where the sources are. 10:28:49 AM Hearing no objections, Amendment 1 carried. SENATOR BUNDE SENATOR moved SB 25, as amended, from committee with individual recommendations and attached fiscal note(s). There being no objection, CSSB 25(STA) passed out of committee.