Legislature(2007 - 2008)BELTZ 211

01/25/2007 09:00 AM STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
<Above Bill Hearing Canceled>
Moved CSSB 25(STA) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
Scheduled But Not Heard
                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.                                                                 

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