Legislature(2013 - 2014)HOUSE FINANCE 519
01/24/2014 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Fy 15 Governor's Budget Overview: Division of Legislative Finance | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 24, 2014
1:34 p.m.
1:34:14 PM
CALL TO ORDER
Co-Chair Austerman called the House Finance Committee
meeting to order at 1:34 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division
SUMMARY
FY 15 GOVERNOR'S BUDGET OVERVIEWS:
Legislative Finance Division
^FY 15 GOVERNOR'S BUDGET OVERVIEW: DIVISION OF LEGISLATIVE
FINANCE
1:34:24 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced the PowerPoint presentation: "FY 15 Budget
Overview (copy on file)." He explained that the Legislative
Finance Division (LFD) was statutorily charged with
reviewing the governor's budget. He informed the committee
that copies of the "Legislative Fiscal Analyst's Overview
of the Governor's Request" were available to legislators
and staff. He stated that Alaska was facing a deficit. He
added perspective to the deficit with the first slide in
his presentation: "Figure 1. December 2013 Revenue Forecast
with Projected Expenditures ($ millions)." He explained
that the pre-FY 14 deficit transfer was $2.2 billion with
$5 billion in revenue and approximately $7 billion of
spending. He pointed out that overspending occurred by
approximately 45 percent. He added that both price and
production of oil had increased slightly. He expected
greater revenue than was projected in the forecast.
Mr. Teal furthered that the state would use approximately
one-third of the Statutory Budget Reserve (SBR) balance to
fill the deficit. He noted that FY 15 showed a deficit of
approximately $1 billion, prior to any capital spending
added by the legislature.
1:38:25 PM
Mr. Teal stated that the deficit included $700 million of
retirement assistance that the governor proposed pulling
from the Constitutional Budget Reserve (CBR) rather than
general funds, the more traditional source. If the
governor's proposal was not accepted for state retirement
system contributions, a budget deficit of $2 billion was
projected. He stated that slide 1 depicted annual $2
billion deficits through 2024.
Mr. Teal stated that the data on slide 1 assumed zero
growth in the agency operating budget. A flat $800 million
capital budget was assumed annually. The budget displayed
showed no growth other than state assistance to retirement.
He explained that significant deficits could occur without
an increasing budget. He acknowledged the difficulty in
adopting a no-growth budget. Expenditure growth and agency
operations were greater than 7 percent annually for longer
than 8 years. The FY 15 governor's budget presented zero
growth in agency operations.
1:41:15 PM
Mr. Teal discussed slide 2: "Figure 2. Budget Reserves (CBR
and SBR) under the December 2013 Revenue Forecast and
indicated Expenditure Assumptions ($ millions)." With
annual deficits, reserves would diminish by 2014. He noted
that the standard options were to cut approximately $2.5
billion in one year, taxing Alaskans or eliminating or
capping the Permanent Fund Dividend (PFD). Reducing the
capital budget was another potential solution.
Mr. Teal noted that the $2 billion deficit would not be
repaired by elimination of the $800 million capital budget.
He mentioned the difficult decision of potentially
eliminating some of the large capital projects. He
suggested funding the capital budgets or pulling the plug
on the projects. He acknowledged that the choices were
difficult.
1:44:21 PM
Mr. Teal revealed the option of reviewing agency budgets.
He stated that 60 percent of revenues went toward Medicaid,
education and retirement assistance and was expected to
grow to 99 percent of spending. He mentioned the
subcommittee processes and commended the legislators on
their efforts. He pointed out that modification of state
contributions to the retirement systems offered promise. He
cited the future deficits that would be reduced with the
retirement plan.
Mr. Teal acknowledged that the committee was aware of the
budget deficit. He understood the difficulty cutting
education and Medicaid as formula and entitlement programs.
He stated that opportunities to reduce expenses existed in
retirement payments. The governor submitted a proposal that
would reduce state assistance by $200 million to $500
million annually. He stated that the governor's plan would
reduce future deficits, but also reduce state reserves
upfront.
1:47:09 PM
Mr. Teal discussed the "Fiscal Outlook Model" spreadsheet.
He noted that the adoption of the governor's plan would
reduce the CBR by $3 billion for use in retirement
payments, leaving $500 million for use annually in the
future. The use of reserves would be flattened slightly by
the modification, but the life of the reserves would not be
extended.
Mr. Teal acknowledged different options to reduce future
expenditures for the purpose of extending reserves. He
opined that the options were insufficient. He added that
sustainability could be achieved by lowering the capital
budget while reducing the operating budget by one percent.
A cut of two percent increased sustainability further. He
was unsure about the viability of a two percent decrease in
the state's operating budget.
Mr. Teal opined that decisions for FY 15 must be made with
the future in mind. He noted that the surpluses seen in
Alaska during the last few years would not be available in
the near future. During times of surplus, the legislature
could spend more easily. With the current deficits, the
situation appeared "gloomier" and he encouraged a different
viewpoint of FY 15's budget.
1:50:11 PM
Mr. Teal communicated that he felt optimistic despite the
evidence of budget deficits. He observed the revenue
forecast as conservative, listing inflation-only prices. He
stressed that the division was willing to assist the
legislators during the subcommittee process, with fiscal
planning and evaluation of future state revenues and
expenditures. He noted that the fiscal summary contained
language for both operating and capital budgets along with
detailed agency analysis.
Mr. Teal observed that the budget work was time sensitive.
If the budget process was not altered this session the
state would further deplete its reserves. Speed was of the
essence as options were limited with deteriorating
reserves.
1:52:16 PM
Co-Chair Stoltze asked about the proposed $3 billion
payment. He asked if the payment would stabilize budgets in
terms of payments.
Mr. Teal replied that proposals involving the retirement
system would be discussed further in future committee
meetings. He stated that a lack of action regarding
retirement would lead to payments of approximately $7
billion of state assistance during the next 20 years. He
noted that the governor's proposal, including the $3
billion deposit cut the 20 year cost to approximately $5
billion. He clarified that because the governor took $3
billion from the CBR, the reserves were immediately
reduced. Because the governor's proposal took $3 billion
from the CBR, the reserve balance was immediately lowered.
The offset was less drawn from reserves annually. By 2024,
the reserves would be depleted under the governor's plan.
Co-Chair Stoltze thanked Mr. Teal for the explanation.
1:54:39 PM
Vice-Chair Neuman asked about the use of reserves and the
effect on the state's bond rating. He noted that bond
rating was a tool for future infrastructure related
projects. He stated that infrastructure would likely be the
key to attracting money from private industry in the
future.
Mr. Teal replied that the state's reserves played a large
part in bond ratings. As reserves declined, bond rating
agencies would likely show concern. He noted that the
fiscal future relied on income generated by a future
gasline and ownership of that gasline. The revenue forecast
would change with the introduction of a state gasline. Bond
rating agencies appreciated an effort to maintain the
reserve balance and reduce the deficit.
1:57:13 PM
Vice-Chair Neuman expressed concern that the state's
reserves would be depleted in 10 years unless action was
taken to modify the state budget. He suspected that Alaska
would be viewed differently on Wall Street in the very near
future.
Mr. Teal pointed out that bonds were not free money. Debt
service payments must be made and they may reduce the
surplus or increase the deficit. Completed projects along
with the accompanying jobs were prime advantages of
utilizing bonds. Reserves were not free money either. He
mentioned that ownership of a gasline would improve the
revenue forecast substantially. In five years, the cash may
not be available to buy a gasline. Bonding would force the
state to make future payments.
1:59:26 PM
Vice-Chair Neuman asked about the $16 billion worth of
invested reserves. He asked about investment returns on the
$16 billion.
Mr. Teal replied that the SBR and the main account of the
CBR were invested at 1 or 2 percent. The long-term portion
of the CBR was invested with a longer term horizon and
earned 5 percent.
Representative Wilson observed that the state would not be
able to repay money taken out of savings in the near
future.
Mr. Teal concurred.
Representative Wilson observed that the state had two
options. The state could review the new revenue and compare
past budgets with similar revenues.
Mr. Teal replied that the look-back graphs showed precisely
that information. He suggested observing the program level.
He stated that beginning in 2006, the graphs depicted
program spending in each agency. He noted that statewide
graphs could be used to compare FY 15 budgets with those of
past years. In order to reference useful information from
the graphs, they must be evaluated at the program level.
2:02:42 PM
Representative Wilson observed that the legislature must
meet their constitutional mandate regarding the budget. She
opined that government was tasked with addressing life,
safety and education for citizens of the state. She stated
that if a person was out of work, they would purchase only
needs while wants would be secondary. She wondered if the
same application would benefit evaluation of the upcoming
budget.
Mr. Teal quoted Co-Chair Austerman by saying that "across
the board cuts weakens everything." The only way to achieve
basic needs was to cut programs. Constitutional mandates
exist, but without mandated levels of spending.
2:04:47 PM
Representative Gara stated that the committee diligently
scoured the budget for waste. He observed that glaring
instances of massive overspending were difficult to find.
He asked for suggestions regarding the discovery of
ineffective or overfunded programs that could be cut from
the operating budget.
Mr. Teal replied that cutting the budget was incredibly
difficult. The governor made a terrific effort to decrease
agency spending by eliminating vacant positions. He noted
that the governor removed $5 million in addition to other
cuts amounting to $20 million. Cuts forced agencies to make
decisions. Agencies were not allowed to cut one aspect of
their budgets for use elsewhere. The governor took the
broad view, but agencies had limited perspectives. The
difficult piece was the elimination of programs and the
unforeseen impact. He noted that every cut would have some
negative impact, which added to the difficulty.
2:08:58 PM
Representative Edgmon asked about the reported $2 billion
shortfall in revenue. He asked for further details
regarding the individual components of the shortfall. He
asked about the mentioned $300 million increase in revenue
for FY 14.
Mr. Teal discussed the acceleration of the production tax
credits, which led to a difference in expected credits of
$600 million in FY 14, dropping to $450 million in FY 15.
He opined that the reduction of $150 million was not a
great concern as a dollar movement in the price of oil
equaled approximately $150 million. He stated that price
was traditionally forecasted conservatively by the
Department of Revenue, while production had an optimistic
forecast. He pointed out that both price and production for
FY 14 were lower than actuals. He hoped that the forecast
for FY 15 was as conservative that of FY 14. He thought it
was too early to see the production/revenue increases or
decreases resulting from SB 21. Revenue fell because price
and production were lower. Expenditures did not decrease in
response. The governor's agency operating budget was less
by $15 million. He suggested that an additional $30 million
in agency reductions would hardly make a dent in the $2
billion shortfall.
2:12:32 PM
Representative Edgmon clarified that the $2 billion
shortfall was built around projections of price and
production. He asked if the committee could view potential
modifications to the curve using different prices of oil.
Mr. Teal moved to the Fiscal Outlook Model where varying
oil prices could modify outcomes. He offered to provide the
committee information in a month or so.
Representative Edgmon recalled discussion about shale oil
and potential for the price of oil to continue to decline
to $70 per barrel.
Mr. Teal pointed out that drowning in 10 feet of water was
no different than drowning in 100 feet of water.
2:15:03 PM
Representative Munoz asked about the $2 billion shortfall.
She pointed out that $700 million of revenue loss was due
to a reduction in the price of oil, while the $500 million
reduction was due to SB 21's 35 percent credit on new
production. Approximately $400 million of the reductions
resulted from tax credit pay-off for Alaska's Clear and
Equitable Share tax regime. She stressed that the $2
billion difference was not tied to SB 21 and the changes in
Alaska's oil tax regime.
Mr. Teal agreed and stated that Commissioner Rodell would
discuss the issue further during the Department of Revenue
overview.
2:16:38 PM
Co-Chair Austerman discussed next week's schedule and the
conversation about Public Employees' Retirement System
(PERS) and the Teacher's Retirement System (TRS).
ADJOURNMENT
The meeting was adjourned at 2:17 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN - LFD overview 1-24-14.pdf |
HFIN 1/24/2014 1:30:00 PM |
LFD Overview |