Legislature(2009 - 2010)HOUSE FINANCE 519

01/26/2009 01:30 PM House FINANCE


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01:31:57 PM Start
01:33:47 PM Office of Management and Budget – Budget Overview
03:29:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Budget Overview: TELECONFERENCED
Office of Management and Budget
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 26, 2009                                                                                           
                         1:31 p.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Hawker called the House Finance Committee meeting                                                                      
to order at 1:31:57 PM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Hawker, Co-Chair                                                                                            
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas, Jr., Vice-Chair                                                                                     
Representative Allan Austerman                                                                                                  
Representative Harry Crawford                                                                                                   
Representative Anna Fairclough                                                                                                  
Representative Richard Foster                                                                                                   
Representative Les Gara                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Woodie Salmon                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Karen Rehfeld, Director, Office of Management and Budget;                                                                       
John Boucher, Senior Economist, Office of Management and                                                                        
Budget, Office of the Governor                                                                                                  
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^OFFICE OF MANAGEMENT AND BUDGET - BUDGET OVERVIEW                                                                              
                                                                                                                                
Co-Chair Hawker reviewed the purpose of the meeting, which                                                                      
is to begin the public part of the budgeting process                                                                            
beginning with the Office of Management and Budget.                                                                             
                                                                                                                                
1:33:47 PM                                                                                                                    
                                                                                                                                
KAREN REHFELD,  DIRECTOR, OFFICE  OF MANAGEMENT  AND BUDGET,                                                                    
introduced the staff of the  Office of Management and Budget                                                                    
(OMB):   Jack Kreinheder, Jo Ellen  Hanrahan, Diane Burnham,                                                                    
Steve  Hildebrand, Mike  Crabb, Mary  Sutton, Lena  Simmons,                                                                    
Kym  Mauseth, Karen  Elliott, Barbara  Towne, John  Boucher,                                                                    
and Joan Brown.[ltc1]                                                                                                           
                                                                                                                                
1:38:29 PM                                                                                                                    
                                                                                                                                
Ms.  Rehfeld   referred  to  four   handouts  used   in  the                                                                    
presentation. She began with the  handout entitled "FY 09/FY                                                                    
10 Budget Overview"  (copy on file.)  She  listed the budget                                                                    
guidelines  as  found on  page  2.  The budget  starts  with                                                                    
clearly  established goals  communicated to  state agencies,                                                                    
the legislature,  and the public. She  emphasized that every                                                                    
correspondence with  individuals and  communities requesting                                                                    
budget information or assistance contains these guidelines.                                                                     
                                                                                                                                
Ms. Rehfeld  reviewed the  budget timelines  on page  3. She                                                                    
pointed out that  the budget is a continuing  process and is                                                                    
a planning  tool. He outlined the  year-long budget process.                                                                    
The fiscal year begins July 1  and goes to June 30. Planning                                                                    
starts  almost   immediately  with  the  new   fiscal  year.                                                                    
Detailed  instructions are  sent to  the departments  around                                                                    
the first of August. Discussions  begin in September and the                                                                    
budget is refined  and delivered to the  legislature and the                                                                    
public on December 15, as required by statute.                                                                                  
                                                                                                                                
1:41:52 PM                                                                                                                    
                                                                                                                                
Ms. Rehfeld  described the budget direction  and fundamental                                                                    
building blocks  on page 4.  These building blocks  are used                                                                    
to frame  the discussion  with agencies:  What are  the core                                                                    
services;  what   efficiencies  can  be  found   in  service                                                                    
deliveries;  and  can  savings   be  identified  within  the                                                                    
department or  can existing resource  be redirected  to hire                                                                    
priority  items. She  clarified  that the  goal  is to  look                                                                    
critically  at  programs  and  services  in  order  to  find                                                                    
savings  and  efficiencies,  while  still  providing  needed                                                                    
services.                                                                                                                       
                                                                                                                                
Representative  Fairclough  asked  if all  departments  were                                                                    
given these  budget directions.  Ms. Rehfeld  explained that                                                                    
the   same  detailed   instruction   is   provided  to   all                                                                    
departments. She offered to provide that information.                                                                           
                                                                                                                                
Representative   Fairclough   requested   a  copy   of   the                                                                    
instructions given to  the departments in order  to meet the                                                                    
administration's goals.                                                                                                         
                                                                                                                                
1:43:14 PM                                                                                                                    
                                                                                                                                
Ms.  Rehfeld turned  to budget  preparation -  page 5.   She                                                                    
described the fundamentals,  which include accountability, a                                                                    
framework that  has been  embraced by  some and  resisted by                                                                    
others.  Part  of  the  effort   this  year  was  to  engage                                                                    
departments   in   revisiting  performance   measures.   She                                                                    
maintained  that  there  are positive  things  happening  in                                                                    
performance management, but it still has a ways to go.                                                                          
                                                                                                                                
1:44:30 PM                                                                                                                    
                                                                                                                                
Ms.  Rehfeld  described  the   past  year  as  unprecedented                                                                    
volatility in  revenue.   She walked through  page 6,  FY 09                                                                    
revenues and expenditures. In December  of 2007 a budget was                                                                    
proposed based on  a forecasted revenue price  of $66.32 per                                                                    
barrel with about  $5.3 billion in revenue.  At  that time a                                                                    
surplus  was  projected.  She  spoke   of  the  revised  oil                                                                    
forecast as  it progressed  from December 15,  2007, through                                                                    
the spring  of 2008. The price  per barrel was up  to $83.04                                                                    
with  a  potential  for  $7.5  billion  in  revenue.  Budget                                                                    
appropriations were  about $5 billion and  savings increased                                                                    
to  over $1  billion. After  the legislature  adjourned, the                                                                    
price  per   barrel  increased  to  over   $100  per  barrel                                                                    
increasing revenue expectations. At  the same time, Alaskans                                                                    
were  hit by  high fuel  costs. During  the special  session                                                                    
additional  appropriations  were  made.  From  September  to                                                                    
December 15,  2008, the price  of oil rapidly  declined. The                                                                    
budget in  December was based  on the 2008 fall  forecast, a                                                                    
price per  barrel of  $77.66, and  a shortfall  of $400,000.                                                                    
The last  column on page  6 shows a possible  interim update                                                                    
and  is  not an  official  forecast,  but  there will  be  a                                                                    
revenue shortfall and there will be options to address it.                                                                      
                                                                                                                                
1:48:50 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker asked  why the term "shortfall"  was used in                                                                    
FY 09 and  "shortfall" is being used for FY  10. Ms. Rehfeld                                                                    
explained  that money  was  put into  savings  and with  the                                                                    
shortfall, not  as much money  will continue to be  put into                                                                    
savings.  If the  revenue shortfall  exceeds  the amount  in                                                                    
savings,  then expenditures  would  need to  be reduced  and                                                                    
reserves tapped  in order to  address the deficit.  She said                                                                    
authorization would be needed to access reserve accounts.                                                                       
                                                                                                                                
Co-Chair Hawker emphasized that  the discussion is referring                                                                    
to the  current fiscal year  - FY 09. Ms.  Rehfeld clarified                                                                    
that the current fiscal year ends June 30, 2009.                                                                                
                                                                                                                                
1:51:21 PM                                                                                                                    
                                                                                                                                
Representative Gara  questioned if  the price per  barrel is                                                                    
the projected  average price of  oil for FY 09.  Ms. Rehfeld                                                                    
said it was.  He asked for clarification of  how the average                                                                    
price  was  attained.  Ms.  Rehfeld  explained  that  it  is                                                                    
estimated to  be in the  $60's. Representative  Gara thought                                                                    
it averaged $90 per barrel for  the first seven months of FY                                                                    
09. Ms. Rehfeld thought it was about that.                                                                                      
                                                                                                                                
Representative Gara did  not consider there to  be a deficit                                                                    
this fiscal year.  He described a scenario  that included $5                                                                    
billion  in savings.  He wondered  how  the savings  account                                                                    
works.                                                                                                                          
                                                                                                                                
1:53:17 PM                                                                                                                    
                                                                                                                                
Ms.  Rehfeld  explained that  of  the  $5 billion  put  into                                                                    
savings over  two fiscal years,  about $4 billion  went into                                                                    
the Constitutional Budget Reserve  (CBR) and $1 billion went                                                                    
into the Statutory Budget Reserve  (SBR). One billion of the                                                                    
deposit  to  the  CBR  was  made in  FY  09;  the  rest  was                                                                    
deposited in FY 08.                                                                                                             
                                                                                                                                
Co-Chair Hawker  added that  a large amount  - $3  billion -                                                                    
was  put  into  the  supplemental  budget  during  the  last                                                                    
session, but which deal with the FY 08 budget.                                                                                  
                                                                                                                                
Representative   Gara  noted   that   another  billion   was                                                                    
committed to savings  for this year. He  wondered what would                                                                    
happen if  that money  was not  available. Ms.  Rehfeld said                                                                    
that  the  $1  billion  deposit   to  the  CBR  has  already                                                                    
occurred.   Ms.  Rehfeld   said   that   it  would   require                                                                    
legislative authorization to access any reserve accounts.                                                                       
                                                                                                                                
Co-Chair Hawker  summarized that  "you cannot  spend without                                                                    
the authority of the legislature".                                                                                              
                                                                                                                                
1:55:23 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Thomas asked  how many  votes it  would take  to                                                                    
access the $1  billion. Ms. Rehfeld said that  it required a                                                                    
three-quarters vote to access the CBR.                                                                                          
                                                                                                                                
Co-Chair Hawker  pointed out that there  were other reserves                                                                    
to consider  when making up for  a shortfall, if there  is a                                                                    
shortfall.                                                                                                                      
                                                                                                                                
1:56:39 PM                                                                                                                    
                                                                                                                                
Ms.  Rehfeld addressed  the  steps taken  and  the steps  in                                                                    
process  to address  a revenue  shortfall on  page 7  of the                                                                    
handout.  She  noted that  the  governor  was interested  in                                                                    
departmental  savings  in  May  2008  when  she  signed  the                                                                    
appropriation bills.                                                                                                            
                                                                                                                                
Ms.  Rehfeld explained  that there  is  typically a  general                                                                    
fund  lapse at  the end  of  the fiscal  year. The  governor                                                                    
encouraged  the  departments  to seek  efficiencies  at  the                                                                    
beginning  of the  year in  order to  produce savings.   The                                                                    
Departments  of  Public  Safety and  Corrections  were  held                                                                    
harmless from  the savings  target plan.  About half  of the                                                                    
$20  million target  was identified  as being  from personal                                                                    
services.  The departments  were to  report back  quarterly.                                                                    
Ms. Rehfeld thought  the FY 09 supplemental  bill would have                                                                    
reductions in current year expenditures.                                                                                        
                                                                                                                                
Co-Chair Hawker wished to discuss  the $20 million reduction                                                                    
during the supplemental proposal process.                                                                                       
                                                                                                                                
Representative  Austerman asked  where  the  $20 million  in                                                                    
savings would  come from.  Ms. Rehfeld  said it  targets the                                                                    
current year's budget.                                                                                                          
                                                                                                                                
1:59:49 PM                                                                                                                    
                                                                                                                                
Ms. Rehfeld spoke of a  recent hiring freeze proposed by the                                                                    
governor.   Also  included   is  a   ban  on   non-essential                                                                    
purchases.                                                                                                                      
                                                                                                                                
Co-Chair Hawker questioned  what "non-essential" items were.                                                                    
He suggested  never funding those  items. He  questioned how                                                                    
much  state  spending  is really  not  needed.  Ms.  Rehfeld                                                                    
thought it  would be  up to  the commissioners  to determine                                                                    
non-essential items.                                                                                                            
                                                                                                                                
2:01:34 PM                                                                                                                    
                                                                                                                                
Representative  Crawford wondered  how many  positions would                                                                    
be affected by the hiring  freeze and what the savings might                                                                    
be.                                                                                                                             
                                                                                                                                
Ms. Rehfeld  said that as  of December 31, 2008,  there were                                                                    
approximately  1,500 vacant  full-time positions,  which, if                                                                    
left open,  could result  in $12  million worth  of savings.                                                                    
Some of the  positions might already be involved  in the $20                                                                    
million savings attempt.  Some  might be exempt.  They would                                                                    
need to be  addressed case by case. She  opined that general                                                                    
fund  savings would  be reduced  by  a hiring  freeze.   She                                                                    
termed it a management tool.                                                                                                    
                                                                                                                                
Representative   Crawford   questioned  further   how   many                                                                    
positions  might  not  be  filled.  Ms.  Rehfeld  could  not                                                                    
provide that number.                                                                                                            
                                                                                                                                
2:04:55 PM                                                                                                                    
                                                                                                                                
Co-Chair   Hawker  commented   on  how   the  agencies   are                                                                    
struggling to  hire competent  workers in  needed positions.                                                                    
He mentioned an  example of a petroleum  economist who would                                                                    
soon  need  to be  replaced.  He  maintained that  a  hiring                                                                    
freeze was not  a spending freeze because  agencies are free                                                                    
to reallocate the  dollars saved by not  filling a position.                                                                    
He requested  information on hiring freeze  constraints that                                                                    
might result in a true savings plan.                                                                                            
                                                                                                                                
Ms.  Rehfeld agreed  that agencies  are  having a  difficult                                                                    
time recruiting  and retaining  positions. She  assumed many                                                                    
of  those  types  of  positions would  be  exempt  from  the                                                                    
freeze.  She thought  a further  conversation was  needed on                                                                    
recruitment.   She  emphasized   that   under  the   current                                                                    
financial  situation,  departments  do need  to  reduce  the                                                                    
general fund by  limiting hiring. She spoke  of transfers in                                                                    
and out of  personal services and a  heightened awareness by                                                                    
OMB   of  managing   the  cost   of  positions   across  all                                                                    
departments.                                                                                                                    
                                                                                                                                
Co-Chair  Hawker   thought  there  were   internal  controls                                                                    
regarding  line-item  transfers  in personal  services  that                                                                    
were working well.                                                                                                              
                                                                                                                                
2:10:27 PM                                                                                                                    
                                                                                                                                
Representative  Fairclough   wondered  about  the   list  of                                                                    
vacancy  factors and  the aging  of how  long the  positions                                                                    
have been  held open. Co-Chair Hawker  said that information                                                                    
is agency  specific and available. He  referred to reference                                                                    
books  about   budgeting  vacancy   factors.  Representative                                                                    
Fairclough requested  information specifically on  the aging                                                                    
of  particular positions.  Co-Chair Hawker  suggested asking                                                                    
the agencies for that information.                                                                                              
                                                                                                                                
Representative  Fairclough  asked  about  the  impact  of  a                                                                    
hiring  freeze on  small  businesses  and unemployment.  She                                                                    
agreed with  the statement, "We can't  cut our way out  of a                                                                    
$1 billion problem."  Ms.  Rehfeld reported that there was a                                                                    
conversation about that. The goal  is to minimize the impact                                                                    
to the  economy. She  pointed out  that state  funds provide                                                                    
resources to stabilize all communities.                                                                                         
                                                                                                                                
Co-Chair Stoltze thought there  were built-in safety valves.                                                                    
He opined  that state employees  are for carrying  out state                                                                    
functions,  not  just  in  order   to  provide  an  economic                                                                    
stimulus in the state.                                                                                                          
                                                                                                                                
2:16:49 PM                                                                                                                    
                                                                                                                                
Representative  Gara   questioned  the  hiring   freeze  and                                                                    
thought  that   commissioners  were  not  included   in  the                                                                    
decision.  Ms. Rehfeld  explained the  process used  to find                                                                    
solutions  to   the  budget   shortfall.  The   decision  to                                                                    
implement the  hiring freeze  was made  by the  Governor but                                                                    
previously discussed with  the commissioners. Representative                                                                    
Gara said it  had not been communicated  to the departments.                                                                    
Ms. Rehfeld reiterated that the  commissioners were aware of                                                                    
it.                                                                                                                             
                                                                                                                                
Representative Gara inquired  if other budget-saving options                                                                    
were discussed. Ms. Rehfeld reported  that many options were                                                                    
discussed.  She termed  the hiring  freeze  as a  management                                                                    
tool in order to reduce the general fund spending.                                                                              
                                                                                                                                
2:22:28 PM                                                                                                                    
                                                                                                                                
Representative  Austerman  said  it  was unusual  to  see  a                                                                    
request  by the  governor  to  cut $20  million  out of  the                                                                    
current budget. He asked if  those cuts would be highlighted                                                                    
in the supplemental budget.                                                                                                     
                                                                                                                                
Ms. Rehfeld  spoke of the  supplemental bill's goal  to look                                                                    
at operating and capital reductions  in the current year, in                                                                    
addition  to their  savings plan.  She  provided a  scenario                                                                    
with   supplemental   requests   reduced  due   to   savings                                                                    
mechanisms in place.                                                                                                            
                                                                                                                                
2:25:11 PM                                                                                                                    
                                                                                                                                
Representative Austerman  wished to  see the $20  million in                                                                    
cuts depicted  in the budget.  Ms. Rehfeld said  an approach                                                                    
to include a savings target  amount in the supplemental bill                                                                    
was considered.  Instead, requests  should be offset  by the                                                                    
amount of savings from cuts.                                                                                                    
                                                                                                                                
Co-Chair Hawker  pointed out that the  supplemental approach                                                                    
is  still being  developed.  He  agreed with  Representative                                                                    
Austerman's  request  to  see evidence  of  savings  in  the                                                                    
supplemental budget.                                                                                                            
                                                                                                                                
2:26:38 PM                                                                                                                    
                                                                                                                                
Vice-Chair Thomas spoke  of the Department of  Fish and Game                                                                    
and Office  of Public Defender budgets,  which are federally                                                                    
mandated. He wondered  if they would be  exempt. Ms. Rehfeld                                                                    
addressed  the Public  Defender  budget  and how  safeguards                                                                    
were  built in,  in  order to  deliver  the services  needed                                                                    
without  the  need for  a  large  supplemental request.  She                                                                    
maintained  that even  mandated budgets  could be  looked at                                                                    
for reductions.                                                                                                                 
                                                                                                                                
Vice-Chair  Thomas thought  the hiring  freeze would  impact                                                                    
necessary   positions  in   Fish   and  Game   and  in   the                                                                    
Administration.  Ms.   Rehfeld  said  exemptions   would  be                                                                    
considered  on  a case  by  case  basis. Given  the  current                                                                    
situation, the  hiring freeze is an  appropriated management                                                                    
tool.                                                                                                                           
                                                                                                                                
Co-Chair   Hawker   mentioned  departments   with   seasonal                                                                    
employees.  He  wondered  if the  freeze  would  accommodate                                                                    
those needs. Ms.  Rehfeld said OMB would  be discussing that                                                                    
with the departments.                                                                                                           
                                                                                                                                
2:31:38 PM                                                                                                                    
                                                                                                                                
Representative Gara said it was  difficult to provide a list                                                                    
of   unnecessary   services.   Ms.  Rehfeld   thought   that                                                                    
conversation  should be  broader  than just  a  list by  the                                                                    
governor. Co-Chair  Hawker hoped  that the  discussion would                                                                    
be a part of a public forum.                                                                                                    
                                                                                                                                
Representative  Gara  asked  about exemptions  on  employees                                                                    
that save the state money.  Ms. Rehfeld said there were some                                                                    
specific exemptions and others that would require a waiver.                                                                     
                                                                                                                                
2:33:58 PM                                                                                                                    
                                                                                                                                
Ms. Rehfeld turned to page  8, the estimated balances in the                                                                    
reserves  as  of December  31,  2008.  There is  about  $6.8                                                                    
billion in  the CBR, split  between the main fund  with $3.2                                                                    
billion and the sub fund at $3.6 billion                                                                                        
                                                                                                                                
Co-Chair Hawker asked  if it was market  value adjusted. Ms.                                                                    
Rehfeld said she would have to find out.                                                                                        
                                                                                                                                
Ms. Rehfeld listed the amount  of funds in various reserves:                                                                    
the  Statutory  Budget  Reserve -  $1  billion;  the  Public                                                                    
Education Fund - $1 billion;  and the Alaska Housing Capital                                                                    
Fund - $342.3 million.                                                                                                          
                                                                                                                                
Representative Austerman asked what the  sub fund in the CBR                                                                    
was. Ms. Rehfeld  explained that it is the fund  that can be                                                                    
more  aggressively  invested  yielding   a  higher  rate  of                                                                    
return.   Co-Chair   Hawker   called  it   "longer   horizon                                                                    
investments".                                                                                                                   
                                                                                                                                
2:36:13 PM                                                                                                                    
                                                                                                                                
Ms.  Rehfeld  explained  the  FY  09  supplemental  bill  as                                                                    
described on  page 9.  The supplemental bill  is due  to the                                                                    
legislature on February 3, 2009,  and will be accompanied by                                                                    
an interim  FY 09 forecast.  Reductions in the  current year                                                                    
operating  and capital  budgets  are expected.  OMB will  be                                                                    
seeking  authorization to  access reserve  funds to  balance                                                                    
the budget.                                                                                                                     
                                                                                                                                
Ms.  Rehfeld  brought  attention   to  the  FY  09  Economic                                                                    
Stimulus  Bill, page  10,  which is  moving  quickly at  the                                                                    
federal level.  It is expected  to be done  by mid-February.                                                                    
OMB is  working closely  with the  Alaska delegation  on the                                                                    
components  of  the bill.  The  bill  is formula  and  grant                                                                    
driven  and would  require a  request  for authorization  to                                                                    
receive and spend federal stimulus dollars.                                                                                     
                                                                                                                                
Co-Chair  Hawker  emphasized  that   much  of  past  federal                                                                    
spending was in earmarks.   He understood that this would no                                                                    
longer hold true.  The stimulus package would  be looking at                                                                    
formulaic funding  to existing programs which  need approval                                                                    
by the legislature.  Ms. Rehfeld noted that a  large part of                                                                    
the package  would be from the  Department of Transportation                                                                    
and Public Facilities.                                                                                                          
                                                                                                                                
2:39:27 PM                                                                                                                    
                                                                                                                                
Ms. Rehfeld addressed  page 11 - the FY  10 budget overview.                                                                    
The  FY  10  budget  proposes to  spend  less  general  fund                                                                    
dollars  that the  current year,  $4.9  billion compared  to                                                                    
$5.2  billion in  the current  year, excluding  the resource                                                                    
rebate.  Co-Chair Hawker argued  that it should be included.                                                                    
Ms Rehfeld agreed  that it needed to be included  as a FY 09                                                                    
expenditure.                                                                                                                    
                                                                                                                                
Ms.  Rehfeld pointed  out that  the administration  budgeted                                                                    
$389  million  below  the fall  revenue  forecast  of  $5.27                                                                    
billion. An  interim forecast will  be provided  on February                                                                    
18  along  with  budget  amendments.  The  current  economic                                                                    
circumstances may also impact the amended budget request.                                                                       
                                                                                                                                
2:41:30 PM                                                                                                                    
                                                                                                                                
Ms. Rehfeld highlighted  a pie chart entitled  "FY 10 Budget                                                                    
Proposal Totals  $11.2 Billion". Of the  $11.2 billion, $4.9                                                                    
billion is  general fund dollars. The  Agency and University                                                                    
Operations, Non-Formula, equals $3.7 billion.                                                                                   
                                                                                                                                
Co-Chair   Hawker   interjected   that   there   were   past                                                                    
conversations  about  the   use  of  consistent,  comparable                                                                    
forecast  language   between  the  administration   and  the                                                                    
legislature.  He voiced  appreciation  for  efforts in  that                                                                    
area. Ms.  Rehfeld agreed that  the conversation is  now "on                                                                    
the same page".                                                                                                                 
                                                                                                                                
Ms. Rehfeld noted that the  Agency and University Operations                                                                    
part of the budget is about  33 percent of the total budget.                                                                    
It also  includes supplementals, new  legislation, potential                                                                    
amendments, and fiscal notes.                                                                                                   
                                                                                                                                
Ms.  Rehfeld   reported  that  the  yellow   portion  called                                                                    
"Formula Programs" represents about  13 percent of the total                                                                    
budget. For the most part, that  is the Medicaid area of the                                                                    
budget   and  includes   smaller   formula  programs.   Cost                                                                    
containment  measures  have  been   seen  recently  in  this                                                                    
category, which will appear as  savings in the current year.                                                                    
She noted an increase in  the federal reimbursement rate for                                                                    
Medicaid.  Potentially,  in  the economic  stimulus  package                                                                    
there will be an additional  increase in the federal rate of                                                                    
reimbursement.                                                                                                                  
                                                                                                                                
Ms.  Rehfeld  highlighted  the purple  portion  if  the  pie                                                                    
labeled  "K-12   Education  &  Pupil  Transport"   for  $1.1                                                                    
billion, about 10  percent of the total budget  and about 22                                                                    
percent of  the general  fund budget.   This is  funding for                                                                    
Alaska's  53  school  districts  and  128,357  students.  It                                                                    
incorporates  the second  year of  the three-year  education                                                                    
plan  passed last  year. It  shows an  increase in  the base                                                                    
student   allocation  and   the  adjustment   for  intensive                                                                    
students,  as  well as  an  increase  in the  district  cost                                                                    
factors. It is roughly a  $50 million increase for education                                                                    
this  year. There  is also  a  small increase  in the  pupil                                                                    
transportation program.                                                                                                         
                                                                                                                                
The light  blue area  labeled "Direct Deposit  to Retirement                                                                    
Systems" - $451 million,  the maroon area, "Revenue Sharing"                                                                    
-  $60 million,  the  orange area,  "Oil  Tax Credits"  $300                                                                    
million, and the grey area,  "Debt and Fund Capitalizations"                                                                    
- $334 million, represent 10.2 percent of the total budget.                                                                     
                                                                                                                                
Ms. Rehfeld  explained that  the retirement  system unfunded                                                                    
liability has been  a high priority for  the legislature and                                                                    
the governor  to address. Based  on the valuation,  there is                                                                    
an additional deposit of $160 million  in FY 10, and that is                                                                    
included  in this  analysis. She  predicted that  area would                                                                    
merit future discussion with the legislature.                                                                                   
                                                                                                                                
Ms. Rehfeld  discussed the  oil tax  credits. The  amount of                                                                    
$400 million was  authorized in the current  year budget for                                                                    
payment under  oil tax  credits. The  proposal is  to reduce                                                                    
this  to $300  million in  the FY  10 budget.  She explained                                                                    
that it is an issue of timing.                                                                                                  
                                                                                                                                
Co-Chair Hawker said he has  asked the Department of Natural                                                                    
Resources  for  a  presentation pertaining  to  this  budget                                                                    
item. Ms. Rehfeld agreed that would be helpful.                                                                                 
                                                                                                                                
Ms. Rehfeld  continued to explain  items under the  debt and                                                                    
fund  capitalizations  category. Co-Chair  Hawker  commented                                                                    
that  the  "nuts  and  bolts"  of the  budget  are  in  this                                                                    
category.    Ms.   Rehfeld    praised   Co-Chair    Hawker's                                                                    
"Legislative  Finance  Overview"   document  as  being  very                                                                    
helpful.                                                                                                                        
                                                                                                                                
2:48:47 PM                                                                                                                    
                                                                                                                                
Ms. Rehfeld  spoke of  the red portion  of the  pie entitled                                                                    
"Capital  Expenditures" -  $1.7 billion  - which  represents                                                                    
about  15  percent  of  the total  budget.  There  are  many                                                                    
components  within this  category:   General  Fund -  $307.2                                                                    
million,  Federal  Funds  -  $1,103.9  million,  AK  Housing                                                                    
Capital  Corporation Funds  - $238.4  million,  (an area  of                                                                    
disagreement between the  legislature and the administration                                                                    
in terms of  general fund spending), Cruise Ship  Tax - 39.2                                                                    
million,  (which  is in  section  4  of the  capital  budget                                                                    
bill), AIDEA Dividends  - $22 million, and  AHFC Dividends -                                                                    
62.5  million,  (an area  of  agreement  that it  should  be                                                                    
listed   under   capital   expenditures  instead   of   fund                                                                    
capitalization).                                                                                                                
                                                                                                                                
Co-Chair Hawker  returned to  the Cruise  Ship Tax  item. He                                                                    
noted a future finance meeting  dedicated to this topic. Ms.                                                                    
Rehfeld agreed  that would be  helpful and added  that there                                                                    
were  about  $20  million in  regional  cruise  ship  impact                                                                    
dollars not  yet included  in the  budget. The  gambling tax                                                                    
revenue  is   also  not  included,   which  may   better  be                                                                    
represented in the  general fund column, she  opined. OMB is                                                                    
proposing  that some  of the  gambling tax  be spent  in the                                                                    
capital budget.                                                                                                                 
                                                                                                                                
Ms.  Rehfeld highlighted  the larger  pieces of  the capital                                                                    
budget on  page 12  - federal  highway, aviation,  and water                                                                    
projects, which  total about $887.3 million  including $88.6                                                                    
million  in   matching  general  funds.  There   are  energy                                                                    
projects,  including $50  million for  the Renewable  Energy                                                                    
Grant  Fund, $41  million to  the AK  Energy Authority,  and                                                                    
$7.2 million for the AK  Housing Finance Corporation.  There                                                                    
is also  $79.5 million  for Gasline Projects,  including $20                                                                    
million  for the  AGIA reimbursement  fund.  She noted  that                                                                    
within both  the capital and operating  appropriations was a                                                                    
separate section relating to gasline  projects so they could                                                                    
be easily identified.                                                                                                           
                                                                                                                                
Ms. Rehfeld explained that about  $40.5 million was proposed                                                                    
for major school maintenance projects.                                                                                          
                                                                                                                                
Ms.  Rehfeld related  that the  Permanent Fund  component of                                                                    
the  budget  represents  about 19.5  percent  of  the  total                                                                    
budget.  It   amount  to  the  expense   for  dividends  and                                                                    
inflation  proofing.  She  thought   the  numbers  would  be                                                                    
adjusted in the upcoming budgets.                                                                                               
                                                                                                                                
2:53:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  asked to what degree  the adjustments would                                                                    
be made. Ms. Rehfeld said  the adjustments would be based on                                                                    
the best information available.                                                                                                 
                                                                                                                                
Ms. Rehfeld reiterated that 60  percent of the $11.2 billion                                                                    
total  state  budget  goes  to  communities,  schools,  non-                                                                    
profits,   and  individuals   through  grants   and  capital                                                                    
spending.  She termed  it a  significant  investment in  the                                                                    
state.                                                                                                                          
                                                                                                                                
Ms. Rehfeld turned attention to  the "Fiscal 2010 Governor's                                                                    
Budget   Fiscal  Summary"   (copy  on   file).  She   voiced                                                                    
appreciation for  the organization of the  document with the                                                                    
four  main   categories  of  Agency   Operating,  Statewide,                                                                    
Capital, and  Savings providing consistency over  time.  She                                                                    
noted   only  a   few  areas   of  difference   between  the                                                                    
administration's and the legislature's view of the budget.                                                                      
                                                                                                                                
Ms. Rehfeld  talked about meeting  budget challenges  - page                                                                    
13. She  stated that the state  faces significant challenges                                                                    
for the  FY 09  and FY  10 budgets. The  goal is  to protect                                                                    
Alaska's economy.  She opined that  the state has  the tools                                                                    
and the  fiscal discipline to find  savings and efficiencies                                                                    
and to  reduce the  budget where practical  and sustainable.                                                                    
The  hiring  freeze is  a  management  tool to  help  reduce                                                                    
spending.                                                                                                                       
                                                                                                                                
Ms. Rehfeld  emphasized the prudent  use of reserves  in the                                                                    
short term in order to provide long-term stability.                                                                             
                                                                                                                                
Co-Chair Hawker  summarized that the  state is looking  at a                                                                    
changed fiscal  picture and  the reality  of $40  per barrel                                                                    
oil.                                                                                                                            
                                                                                                                                
Representative  Kelly  referred  to  page 2  and  asked  Ms.                                                                    
Rehfeld how the state was doing  as far as living within its                                                                    
means. Ms. Rehfeld stated the state  has done a good job and                                                                    
has  actually  put some  money  into  savings accounts.  She                                                                    
stressed keeping  fiscal discipline in place  and using some                                                                    
of the  reserves. The things  to look  at in the  long range                                                                    
would  be future  investments, using  the  reserves, and  to                                                                    
consider future revenue from the gasline.                                                                                       
                                                                                                                                
Representative Kelly  said he  did not  think the  state was                                                                    
managing its budget very well.  He maintained that the state                                                                    
has  doubled the  budget  since 2005  and  tripled it  since                                                                    
2000. He stressed  that the state should be  more frugal and                                                                    
protect its economy, not the size of government.                                                                                
                                                                                                                                
Ms. Rehfeld summarized what has  happened in the state since                                                                    
2005.   She  mentioned   the  unfunded   liability  of   the                                                                    
retirement  system,  significant investments  in  education,                                                                    
and  investment in  oil exploration.  She agreed  that state                                                                    
government  should look  carefully  state  agencies and  how                                                                    
services are managed and delivered.                                                                                             
                                                                                                                                
3:02:12 PM                                                                                                                    
                                                                                                                                
JOHN  BOUCHER, SENIOR  ECONOMIST, OFFICE  OF MANAGEMENT  AND                                                                    
BUDGET,  OFFICE  OF THE  GOVERNOR,  listed  components of  a                                                                    
presentation  entitled  "FY  2010  10-year  Plan"  (copy  on                                                                    
file.)                                                                                                                          
                                                                                                                                
Co-Chair Hawker  offered that  this is  the first  time this                                                                    
project has taken place. It was  authorized in law as HB 125                                                                    
during the  last legislative session.  He termed it  a "team                                                                    
building year" with  the goal to build consensus  as much as                                                                    
possible.                                                                                                                       
                                                                                                                                
3:04:30 PM                                                                                                                    
                                                                                                                                
Mr. Boucher explained page 2  of the handout, implementation                                                                    
of  schedule,  the  initial  cycle   of  the  ten-year  plan                                                                    
process.  He  said  that  early   on  in  the  process,  the                                                                    
implementation of  the plan would have  to walk hand-in-hand                                                                    
with the  regular budget  process. It  was presented  as the                                                                    
introduction of  a process. A  second iteration of  the plan                                                                    
was  needed because  of the  need to  connect it  to regular                                                                    
budget planning.                                                                                                                
                                                                                                                                
                                                                                                                                
Mr. Boucher addressed  page 3, the purpose of  the plan. Its                                                                    
main purpose is to start  a dialogue about the future fiscal                                                                    
health  of   Alaska.  The  process  must   engage  both  the                                                                    
legislature and Alaskans.                                                                                                       
                                                                                                                                
3:06:26 PM                                                                                                                    
                                                                                                                                
Mr. Boucher  listed the imperatives  of the plan on  page 4.                                                                    
There  are  three  simple directives:  balance  the  budget,                                                                    
provide for  essential state services, and  protect Alaska's                                                                    
economic stability.                                                                                                             
                                                                                                                                
Co-Chair Hawker explained that the  mission statement of the                                                                    
planning  process  is  that every  year  a  10-year  forward                                                                    
projection  of all  the state's  sources and  uses of  funds                                                                    
must  be brought  before the  legislature. It  is a  process                                                                    
that meets the three criteria  and that will reiterate every                                                                    
year. Mr. Boucher agreed.                                                                                                       
                                                                                                                                
Mr. Boucher highlighted  the goal of the FY 10  plan on page                                                                    
5.One of the major challenges  to Alaska is diversifying its                                                                    
revenue base.  The development of  the natural  gas pipeline                                                                    
is the best opportunity to  achieve that goal. The projected                                                                    
date  of  achieving  a  natural  gas  pipeline  is  sometime                                                                    
between  2018 and  2020.  The current  challenge  is how  to                                                                    
bridge the revenue gap until then.                                                                                              
                                                                                                                                
3:08:33 PM                                                                                                                    
                                                                                                                                
Mr.  Boucher  listed the  four  principles  of the  plan  as                                                                    
depicted on page 6.                                                                                                             
                                                                                                                                
Mr. Boucher  explained the plan  guidance provided by  OMB -                                                                    
page 7. Agencies  were provided an instruction  memo in mid-                                                                    
August and  given latitude to  develop projections  based on                                                                    
the stated  goals of  the administration  and the  plan. OMB                                                                    
did  not  provide  a  target  growth rate.  It  was  not  an                                                                    
opportunity to develop a wish list.                                                                                             
                                                                                                                                
Co-Chair Hawker  asked about the  risk of a tendency  to not                                                                    
bring forward  mission critical  infrastructure development.                                                                    
Mr.  Boucher  said  a process  was  encouraged  whereby  the                                                                    
agencies    could    bring   forth    initiatives    without                                                                    
repercussion.                                                                                                                   
                                                                                                                                
3:11:17 PM                                                                                                                    
                                                                                                                                
Mr. Boucher  described the  consistent assumptions  as shown                                                                    
on page  8, as required  by HB 125.  If inflation was  to be                                                                    
included in the  projection, it had to be  documented and an                                                                    
appropriate  annual rate  used. Projections  were not  to be                                                                    
automatically  adjusted  for  general  inflation.  The  most                                                                    
recent  Department of  Labor  population growth  projections                                                                    
needed to  be used, which  averaged about 1 percent  a year.                                                                    
Considering both  the inflation rate and  population growth,                                                                    
the  growth  rate was  about  3.75  percent. If  there  were                                                                    
population   segments  vital   to  specific   programs,  the                                                                    
agencies were encouraged to use related data.                                                                                   
                                                                                                                                
3:13:34 PM                                                                                                                    
                                                                                                                                
Mr. Boucher  reported on discreet agency  projections - page                                                                    
9.   There were  three: baseline, gasline,  and initiatives.                                                                    
He  explained that  baseline is  also  called a  maintenance                                                                    
budget -  what it  would cost  to continue  current services                                                                    
for   the  next   ten  years.   An  exception   to  baseline                                                                    
projections  is a  program projecting  a non-GF  fund source                                                                    
decrease.                                                                                                                       
                                                                                                                                
Mr.  Boucher discussed  wage and  benefit driven  increases,                                                                    
which  are not  seen in  individual departments,  but rather                                                                    
projected  at a  statewide level.  The projection  is for  a                                                                    
growth rate  of approximately 3.25  percent. An area  of the                                                                    
plan  that needs  improvement is  how to  disaggregate those                                                                    
increases back to the agencies.                                                                                                 
                                                                                                                                
Co-Chair Hawker  noted there was  no commitment on  the part                                                                    
of the  administration or bargaining  units. It  is strictly                                                                    
anticipating presumptive circumstances.                                                                                         
                                                                                                                                
3:16:32 PM                                                                                                                    
                                                                                                                                
Mr.  Boucher  explained  the  projected  scenario  regarding                                                                    
costs   associated  with   a   gasline   project  and   with                                                                    
initiatives - projected costs  associated with expanding the                                                                    
service  capacity of  the agency  beyond the  FY 09  service                                                                    
level.  Co-Chair   Hawker  suggested  having  an   A  and  B                                                                    
category.  An A  category would  be things  to expand  and B                                                                    
would  be  things  to  expire.   Mr.  Boucher  thought  that                                                                    
discussion would take place.                                                                                                    
                                                                                                                                
Mr. Boucher discussed the level  of detail that the agencies                                                                    
would provide - page 11.   Department level projections were                                                                    
provided  in  both  operations and  capital  categories.  If                                                                    
there  were  formula  programs,  detailed  projections  were                                                                    
shown.                                                                                                                          
                                                                                                                                
3:19:00 PM                                                                                                                    
                                                                                                                                
Mr. Boucher shared a sample  projection - page 12.  Co-Chair                                                                    
Hawker  noted  the attempt  to  build  consistency. He  said                                                                    
specimen documents  would be  made available,  as well  as a                                                                    
graphic  summary. Mr.  Boucher agreed  that graphs  would be                                                                    
provided.                                                                                                                       
                                                                                                                                
3:21:07 PM                                                                                                                    
                                                                                                                                
Mr. Boucher  addressed significant  improvements to  the 10-                                                                    
year planning process, yet to  be accomplished - page 13. He                                                                    
emphasized that  these are not budget  documents, but rather                                                                    
projections. Co-Chair Hawker echoed that comment.                                                                               
                                                                                                                                
Mr. Boucher noted  that planning and budgeting  data are not                                                                    
integrated.   Statewide "sum of all  agencies" is calculated                                                                    
separately from the statewide model.  Current models are not                                                                    
holistic.  They  are focused  on  general  funds.   Co-Chair                                                                    
Hawker  summarized  that  the  statewide  total  is  figured                                                                    
separately  by OMB  and  is not  the sum  total  of all  the                                                                    
agencies. He thought the comparison  would be an interesting                                                                    
reconciliation. Mr.  Boucher said he  does not yet  have all                                                                    
the information.                                                                                                                
                                                                                                                                
Mr. Boucher  thought that there could  be public involvement                                                                    
in the  future. Co-Chair  Hawker reported  that he  has been                                                                    
approached on that very topic  and remains interested in the                                                                    
idea of involving the public.                                                                                                   
                                                                                                                                
Mr.  Boucher  emphasized  that the  plan  would  change.  He                                                                    
shared the disclaimer on page 14.                                                                                               
                                                                                                                                
3:26:56 PM                                                                                                                    
                                                                                                                                
Mr.  Boucher  summarized the  10-year  forecast  - page  15.                                                                    
There  would be  healthy growth  of 3  percent through  2019                                                                    
according  to the  fall  2008 forecast.  The  change in  the                                                                    
revenue forecast  will change that picture.  Co-Chair Hawker                                                                    
noted that  price and  production were  important variables.                                                                    
Mr.  Boucher  said  that  the   prices  were  based  on  the                                                                    
department's official forecast.                                                                                                 
                                                                                                                                
3:29:20 PM                                                                                                                    
                                                                                                                                
Mr. Boucher shared the OMB web site for more information.                                                                       
                                                                                                                                
Co-Chair Hawker noted that subcommittees  would focus on the                                                                    
FY  10  budget.  Long-term  planning will  be  part  of  the                                                                    
conversation as agencies come before the committee. He                                                                          
emphasized the need for collaboration in order to move the                                                                      
plan forward.                                                                                                                   
                                                                                                                                
Ms. Rehfeld offered to help out when possible.                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 3:31 PM.                                                                                           

Document Name Date/Time Subjects
FY10All Funds pie chart.pdf.pdf HFIN 1/26/2009 1:30:00 PM
FY2010 Fiscal Summary.pdf.pdf HFIN 1/26/2009 1:30:00 PM
OMB Budget Overview 01.26.pdf HFIN 1/26/2009 1:30:00 PM
OMB Fiscal Plan overview 2009.01.26.pdf HFIN 1/26/2009 1:30:00 PM
OMB 20609 $20 Mill Savings with Enclosures.pdf HFIN 1/26/2009 1:30:00 PM
SFIN 2/4/2009 9:00:00 AM