Legislature(2015 - 2016)HOUSE FINANCE 519
01/23/2015 01:30 PM House FINANCE
| Audio | Topic |
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| Start | |
| Fy 16 Governor's Budget Overview: Office of Management and Budget | |
| 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 23, 2015
1:32 p.m.
1:32:44 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:32 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
Representative Scott Kawasaki
ALSO PRESENT
Pat Pitney, Director, Office of Management and Budget,
Office of the Governor; Representative Andy Josephson;
Representative Sam Kito III.
SUMMARY
^FY 16 GOVERNOR'S BUDGET OVERVIEW: OFFICE OF MANAGEMENT AND
BUDGET
1:33:36 PM
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, commented about the previous
administration's work-in-progress budget put forward as a
place holder to meet the statutory deadline. She indicated
that the budget that she was reviewing with the committee
at present was Governor Walker's endorsed budget.
Ms. Pitney introduced the PowerPoint presentation "FY2016
Budget Overview (copy on file)." She first turned to slide
3: "Budget Priorities":
· Opportunity for Alaskans
· Stable Economy
· Education
· Resource Development
· Affordable Energy
· Supporting Alaskan Families
Ms. Pitney remarked that the administration wanted to
gradually decrease the state budget to avoid drastically
upsetting Alaska's economy. She emphasized the importance
of providing quality education, encouraging resource
development, working towards affordable energy, and
supporting Alaska and Alaskan families.
Ms. Pitney advanced to slide 4: "Budget Guidance: Limit
Spending." She stated that the direction given to the
commissioners was to avoid overarching and to limit
spending. The departments' immediate instructions were to
look for reductions of 5 percent to 6 percent in addition
to the cuts in the FY 16 work-in-progress budget. She
emphasized that every agency was asked to be part of the
reductions due to the state's large budget gap and stressed
that no department was immune from participation. She
reported that the departments were asked to focus, first,
on administrative structures, limiting administration
without compromising the level of service. She also
encouraged agencies to look at ways to do business
differently in terms of privatization and partnerships with
both non-profit local governments and tribal entities. She
directed departments to examine which of the state's
programs were not required by law. She called for an
investigation of the costs associated with statutes passed
in the previous five to ten years. The departments were
also asked to look at older statutes costing the state
money that were either no longer necessary or no longer a
priority. The analysis of the statutes would not be
available until later in the session or the following year.
The last piece was to involve Alaskans. The choices the
state was facing would be difficult. In evaluating
potential reductions she concluded that it would be
essential for the state to keep everything as transparent
as possible and to understand how Alaskans would be
impacted.
1:38:51 PM
Co-Chair Neuman commented that he had asked departments to
look at a multi-year approach to the budget, out three to
five years. He mentioned that the governor had talked about
a four-year plan. He stressed that major restructuring of
services within the departments was necessary in order to
address budget shortfalls. He indicated the finance
committee would be working throughout the year to do so,
alongside the administration. He believed private
partnerships would be key in reorganization efforts and in
creating jobs for Alaskans. He reported that he would be
working with Representative Wilson and the Department of
Labor and Workforce Development (DOL) on outreach efforts
to private industry regarding training programs,
particularly vocational programs. He recognized municipal
representatives in the audience whom the legislature would
be reaching out to for their input and assistance. He
encouraged a collaborative effort with all Alaskans when
addressing Alaska's budget and its future.
1:41:18 PM
Ms. Pitney pointed to the chart on slide 5: "FY2016 Budget
by All Funds Sources." She explained that the chart showed
the overall budget and all of the state's funding sources
including federal funds, other state funds, designated
funds, unrestricted general funds (UGF), and the Permanent
Fund. She relayed that the state's budget for FY 16 totaled
$13 billion. She commented that the FY 16 budget was
remarkably close to the FY 15 budget but the size of the
pie pieces in the chart were different. The major
difference was a reduction of $550 million in the UGF, an
addition of $100 million in the Permanent Fund, and an
increase of $450 million in federal funds. Another
difference was the $3.3 billion taken from the state's
reserves. The state's actual revenue was $2.2 billion. The
state would be using more reserves than revenues to fund
the FY 16 budget very similar to FY 15. She reported that
the FY 15 estimate was $3.5 billion or $3.6 billion in use
of reserves. The FY 15 estimate dropped the reserves down
slightly. She continued to report that the UGF was expected
to go down from the current year's projection.
Ms. Pitney explained that slide 6: "FY2016 Budget by All
Funds Sources," was of value in better understanding the
pieces of the budget that come from federal funding
sources. She reported that the Department of Transportation
and Public Facilities (DOT) benefited as well as Medicaid.
The "All Other" category encompassed university research,
Pell grants for students, and funding for the Department of
Environmental Conservation (DEC) and the DOL. She continued
with the Permanent Fund slice pointing out two main
components; the dividend and inflation-proofing. She also
mentioned that there was a small slice for operations.
1:43:44 PM
Ms. Pitney scrolled to slide 7: "FY2016 Budget by Category
All Funds." She reported that the slide showed where the
funds were allocated by category. She relayed that agency
nonformula made up a large portion of the budget. She
detailed that funds for the capital budget were $1.4
billion, a much smaller amount than prior years. The
statewide appropriations category consisted of tax credits,
debt service, and retirement funding. The "Other Formula"
category was primarily for health programs. In addition,
there was the K-12 formula category.
Co-Chair Neuman recognized Representative Kito's presence
in the room.
Representative Wilson referred to the tax credits in slide
7. She wondered if the administration thought about the
possibility of spreading out the $700 million in tax
credits rather than paying the sum in one year because of
the state's current lack of revenue. Ms. Pitney relayed
that the law did not provide such an opportunity.
Representative Wilson clarified that the tax credits had to
be paid in one year. Ms. Pitney responded affirmatively.
Ms. Pitney continued with slide 8: "FY2016 Budget by
Category All Funds." She indicated that the solid pieces of
the pie showed the state funding for each component. Agency
nonformula consisted of roughly half UGF and half other
funds. She relayed that the K-12 formula was mostly UGF.
The health formulas were comprised of two-thirds federal
and one-third state funding. Statewide appropriations (tax
credits and retirement) were almost entirely UGF. She
referred to the Permanent fund. She also relayed that the
capital budget was composed of a very small slice of UGF
and the rest was primarily federal funds. The solid pieces
reflected the distribution of the state's UGF.
1:46:30 PM
Ms. Pitney scrolled to slide 9: "FY2016 UGF Budget by
Category." She explained that the statewide piece accounted
for approximately 21 percent of the state's UGF. The FY 16
capital budget was very small relative to previous years at
3 percent of UGF. The remainder of the UGF were divided
equally between formula programs at 38 percent and agency
budgets at 39 percent. The state's UGF budget for FY 16
totaled $5.5 billion.
Ms. Pitney advanced to slide 10: "FY2016 UGF Budget by
Category." She relayed that K-12 accounted for more than
half of the formula programs budget. The balance of the
formula programs consisted of Medicaid, other health
programs, and a few other smaller items.
Ms. Pitney continued to slide 11: "FY2016 UGF Spend: $5.55
Billion." She indicated that the graph compared overall
numbers for UGF spending from FY 13 through FY 16. She
reported that in FY 13 spending was at $8 billion, down to
$7.1 billion in FY 14, and down to $6.1 billion in FY 15.
She explained that the orange bar in FY 15 was the $3
billion transferred into the retirement program.
Representative Gara commented that there was likely a
larger reduction than reflected in the slide in FY 16 than
in FY 15. He continued that the state took $3 billion from
the Constitutional Budget Reserve (CBR) to pay for some of
the Public Employees' Retirement System (PERS)/ Teachers'
Retirement System (TRS) debt which included approximately
$700 million that would have otherwise come out of UGF; it
would have been a larger budget in FY 15 had the state not
paid it with CBR monies. He wanted to know if the PERS/TRS
debt payment was accounted for in the FY 15 box.
Ms. Pitney responded in the negative and explained that the
chart reflected the budget sheet. She pointed out that the
CBR contribution to the retirement program made it possible
for the FY 16 budget to have $262 million versus what would
have been $700 million in retirement payments. She observed
that it was a reasonable decision to have transferred the
$3 billion into the retirement fund and would be of more
value in the future to bring the fund up-to-date. She
indicated that it was difficult to get below the work-in-
progress budget because it used pension obligation bonds, a
move the current administration was not willing to make.
The work-in-progress budget was $250 million lower because
the department did not agree with using a pension
obligation bond mechanism. The endorsed budget included a
cash payment for the retirement system.
Representative Gara surmised that the budget was likely cut
more than shown in the graph due to millions of dollars
that normally came out of the general fund alternatively
being paid out of the CBR.
1:50:38 PM
Ms. Pitney reviewed the graph on slide 12: "UGF/CBR/SBR
spending by category FY2013-FY2016." She elaborated on the
various components over the time frame. She pointed out
that the bottom two blue bars were the agency nonformula
and formula programs and reported they were relatively
stable components of the budget. The lightest blue bar
represented capital based on available funding. The other
statewide category mainly consisted of debt. The remaining
bars represented the retirement system and tax credit
pieces of the budget.
Co-Chair Neuman noted a reduction in capital expenditures
in the current year's budget. He asked if the department
had looked at the potential loss of federally matched funds
for infrastructure projects around the state, projects that
created jobs.
Ms. Pitney responded that when the department looked at the
first stripped-down version of the capital budget submitted
on December 15, 2014 it focused on identifying anything
that leveraged significant other funds. The items that were
identified and remained in the budget equaled $106 million.
She relayed a conversation she had with the governor about
the fact that the base capital budget was only $100
million. In the second assessment of the budget the few
items that had federal funding or other match possibilities
that had been removed from the budget were restored. The
second round concentrated on maximizing the leverage
capacity in the capital budget. She offered that there was
an insignificant amount the state would lose in federal
matches.
1:53:40 PM
Co-Chair Neuman surmised that as operating expenditures
decreased so would the number of state jobs resulting in
less money to support the economy and more unemployment. He
furthered that the economy would be greatly affected. He
emphasized making sure projects were in play that would
provide jobs and help fuel the economy well into the
future. He posed the question, "How do we reduce this
budget without collapsing our economy. Our economy is
jobs?" He wanted to see what type of plan the
administration had going forward. He asked Ms. Pitney for
her comments.
Ms. Pitney acknowledged Co-Chair Neuman's comments and
would provide the committee with the plan.
Representative Wilson asked if the governor would be
looking at any other project that might be reinserted that
did not have a federal match. If so, she inquired about the
criteria.
Ms. Pitney responded that within the $150 million there
were a few projects that were reinserted that did not have
federal matches, but had significant returns on investment.
She commented that the projects were mainly energy and
weatherization related as well as a few in the priority
areas for teacher housing and other rural housing loan
programs. Also, there were projects partially completed
through the engineering phase that needed finishing and,
there were deferred maintenance projects. She reported a
much smaller investment was needed in deferred maintenance
than in prior years. She suggested moving forward with it
to avoid greater costs in the future.
Representative Gara mentioned that the legislature had
passed a renewable energy fund bill with a non-binding
commitment of $50 million per year that would be deposited
into the fund. The money would be used for building
renewable energy projects across the state. He commented
that Governor Parnell recognized that the state had a
fiscal problem and reduced the fund from $50 million to $17
million in his place-holder operating budget. He asked if
the funds remained in the budget or if the state was ending
the renewable energy fund.
Ms. Pitney responded that there was $15 million in the
budget for the renewable energy fund.
Representative Gara asked if the funds were in the
operating budget or the capital budget. Ms. Pitney stated
that the funds were capitalized in the operating budget and
spent in the capital budget. She responded, "both."
Representative Gara commented that he did not think the
committee had ever heard such an answer before.
1:57:33 PM
Ms. Pitney revealed slide 13: "All Agencies Contributing."
She described the funding reductions for each agency
between the FY 15 management plan and the endorsed budget.
She reported that Judiciary [Alaska Court System] was
virtually unchanged with the exception of a reduction level
in the work-in-progress version of almost 3 percent. She
continued that the governor's 30 percent decrement on the
slide included the reductions of the one-time items for
elections. It also included a reduction in domestic
violence funding from $3 million to $1.5 million. The $11
million reduction that Governor Walker previously spoke
about had to do with his immediate office; operating
expenditures for the Office of the Governor had been
reduced by 11 percent.
Co-Chair Neuman clarified that it did not include the cost
of elections. Ms. Pitney responded that the Division of
Elections was in a separate office. The election's amount
in FY 15 was inflated because it had been an election year.
The governor's 30 percent reflected the election cost
reductions.
Co-Chair Neuman restated that the reduction of 30 percent
in the governor's agency budget was due to the fact that in
FY 16 there would not be an election. Ms. Pitney responded
affirmatively.
Representative Wilson stated that the governor had talked
about removing $25 million in education funding. She
mentioned that she was the chair of the University of
Alaska Finance Subcommittee. She stated that the reduction
percentage of the university's budget was not equal to that
of the education budget. She opined that it did not appear
that the percentage was taken out of the University of
Alaska budget. She wanted to know why the state would take
out more for education than for the university. She
wondered if the governor intended to take out additional
monies.
Ms. Pitney replied that there were three criteria. The
first criteria had to do with how much an agency's budget
had already been increased or decreased in previous years.
The university took a $16 million reduction in the prior
year. The second criteria had to do with the elimination of
the fuel trigger mechanism. The DOT and the University of
Alaska were most affected by the change. The third criteria
had to do with the areas the state most depended on for
revenue. The Department of Natural Resources (DNR) was most
likely to bring in revenue to the state helping to
alleviate the state's fiscal crisis.
Representative Wilson wanted to better understand the third
criteria. She emphasized that the development of Alaska's
children should be the most important criteria. She was
clear about the importance of developing the state's
resources though DNR. However, she returned to education in
comparison to the University of Alaska. Education could not
raise the same kinds of funds as the university. She asked
Ms. Pitney to speak to her concerns.
Ms. Pitney suggested that there were two components of
education: the nonformula component and the formula
component. The nonformula component was comprised of
funding for the Department of Education and Early
Development's (DEED) administration, the small grant
programs, and Mount Edgecombe. The nonformula component had
gone up significantly. The reductions reflected in the slide
were the DEED programs outside of the K-12 formula.
Representative Wilson reported that the previous night the
$25 million was formula money, not nonformula money. She
clarified that her question was about the $25 million in
the formula affecting direct education. She posed the
question about what funding was more important; the
university's budget or the formula funding for education.
She was mostly concerned that the $25 million came from the
formula.
Ms. Pitney replied that the formula reduction was a 2.5
percent reduction in spending; it was not represented in
the chart on slide 13. She emphasized the chart reflected
only nonformula components. The 2.5 percent would fall
between the DNR and the Department of Public Safety (DPS)
if the formula had been represented on the chart.
Representative Wilson commented that education was being
hit twice with two different types of cuts. She was still
trying to understand.
Representative Munoz referred to the budget summaries in
which there was a $1.35 billion FY 15 Management Plan. It
showed a $91 million or a 6.8 percent reduction. She asked
Ms. Pitney to explain the decrease.
Ms. Pitney recalled that she talked about the $15 million
energy fund monies being capitalized in one budget
[operating] and landing in another budget [capital]. She
indicated that the 6.8 percent had to do with the forward
funding of education. The governor talked about a 10
percent reduction in the forward funding. She referred back
to the FY 15 management plan. She explained that the $1.3
billion included the $90 million one-time funding.
Representative Munoz maintained that the one-time funding
was approximately $40 million for a period of three years
Ms. Pitney clarified that the one-time funding of $90
million all in the FY 15 budget included $40 million for FY
15, $32 million for FY 16, and $19 million for FY 17.
2:05:32 PM
Representative Munoz asked if two of the three years of
one-time funding had been removed.
Ms. Pitney confirmed that two of the three years were taken
out of the budget. She also explained that additionally the
difference between forward funding education at 90 percent
and 100 percent was removed.
Representative Munoz summarized that two years of one-time
funding plus 10 percent of money that was already
appropriated for forward funding was being removed from the
budget.
Ms. Pitney corrected Representative Munoz's interpretation
by clarifying that the state was taking the two years of
forward funding outside the formula funding and then only
forward funding 90 percent. She added that some options
would be to forward fund at 100 percent, 50 percent, or not
at all. If the state did not forward fund in the current
year then the entire amount would have to be paid in the
following year. The administration wanted to act prudently
by forward funding most of the funds.
Representative Munoz asked if the state was taking 10
percent of the money away from what was forward funded for
the current year.
Ms. Pitney responded that the state was forward funding
again for the next year. She explained that forward funding
for FY 16 adjusted for student numbers was left in the
budget. The state was forward funding again for FY 17 at 90
percent.
Co-Chair Neuman interjected that normally the state forward
funded education so that the education community knew its
level of funding for the following year. The legislature
allocated $1.2 billion into the education fund. He
recollected that the policy was implemented through
legislation introduced by former Representative John
Harris. He clarified that the governor wanted to fund at 90
percent which he estimated to be $100 million to $120
million less than at 100 percent.
Representative Munoz asked if the state was taking 10
percent less in FY 18.
Co-Chair Neuman indicated that the state would be forward
funding 10 percent less in FY 17 than was funded in FY 16.
Representative Pruitt stated that by forward funding
education at only 90 percent the state was placing a burden
on itself in the following year. He stressed his concern
with the state posing additional pressure on itself by
slowly scaling back on forward funding education. He
wondered about reductions to the percentage of funding into
the future. He reemphasized his concern.
Ms. Pitney explained that the 90 percent forward funding
was the amount being deposited into the bank for a year or
two. Co-Chair Neuman asked if the state made interest on
the money.
Ms. Pitney responded that the money was in the short-term
investment strategies.
Co-Chair Neuman commented that some of the 10 percent was
made up in interest.
Ms. Pitney anticipated that there would be some interest
earnings depending on the investment strategies. Her
understanding was that the forward funding dollars would be
placed into short-term investments. The legislature would
determine at what level education for FY 17 should be
funded once it received a report, anticipated in the summer
of 2015, regarding the K-12 formula studies. She conveyed
that the 90 percent funding monies were being placed in a
separate account similar to a savings account. The state
had the CBR, statutory budget reserves (SBR), and the
education fund. Where the formula funding dollars were
deposited did not dictate the education funding for FY 17.
Simply put, it determined how much money would be placed in
one bank account versus another.
Representative Pruitt opined that assumptions were being
made about the formula and about how much the state
intended to spend on education in the future. He thought
the state was being presumptuous due to the fact that the
legislature had not had the opportunity to discuss the
formula and the next step. He reiterated his concern and
hesitation about making assumptions about education and its
funding.
2:11:58 PM
Representative Gara observed that the state had done a
three-year education plan with nonformula funding of
approximately $42.9 million in FY 15, $32.2 million in FY
16, and reduced by another $12 million in FY 17. He asked
if any of the $32.2 million outside the base student
allocation (BSA) monies designated for the FY 16 school
year were going to be cut.
Ms. Pitney confirmed that all of the funding outside of the
BSA was cut from the budget for FY 16.
Co-Chair Neuman clarified that all nonformula funding
outside the BSA for year two and three would be reduced.
Ms. Pitney responded affirmatively.
2:13:34 PM
Ms. Pitney turned to slide 14: "FY2016 Capital Budget." She
explained that the slide summarized all of the funding in
the capital budget. She reported that the majority of
federal match and leverage capacity funds were primarily
for the DOT and a small portion was for the DEC. She
reported that after reappropriations for energy,
weatherization, and housing projects $15 million was left
in UGF which would be used for the renewable energy fund.
There was a small amount in maintenance and project
completions. She reported that there were two
reappropriations as part of the capital budget. The first
reappropriation was $22 million from Aerospace and the
second was from the Mount Spurr geothermal project, a
project that has ceased moving forward.
Co-Chair Neuman asked how much money was left in the
account [for the Mount Spur Geothermal Project]. Ms. Pitney
estimated $12.5 million but indicated it could be more. Co-
Chair Neuman asked if it was out of $40 million or $42
million.
Ms. Pitney commented that she thought it was out of $25
million. She agreed to provide the committee with the
correct figures. She continued to the category of safe
communities in which two programs were funded through felon
funds. Lastly, there was a small amount of funding for the
U.S. chairmanship in Arctic Policy.
Representative Munoz asked about the $15 million
reappropriated to the renewable energy fund. She wanted to
know if the reappropriation affected any projects currently
underway or if the funds were excess monies from projects
already completed.
Ms. Pitney responded that the only reappropriation from
energy monies came from the Mount Spurr geothermal project.
2:15:48 PM
Ms. Pitney advanced to slide 15: "UGF Revenue Scenarios: FY
14 to FY 19 (return to $100 oil)." She indicated that she
was going to provide three scenarios, the first of which
was the most optimistic. In reviewing the graph she
explained that the vertical bars depicted the UGF spending
over the previous three years. The black line represented
the state's tax revenue based on the current forecast from
the Department of Revenue (DOR) that reflected a return to
an oil price of $100 per barrel. She proposed that even if
oil prices returned to such a level the state would need to
continue to size down.
Ms. Pitney scrolled to slide 16: "Reserves Projection at
Forecast." She suggested that the state's savings would
last through FY 22. In FY 22 there would be close to $1
billion in the bank. The chart did not adjust for coming
down 25 percent.
Ms. Pitney reviewed the next case scenario in slide 17:
"UGF Revenue Scenarios: FY 14 to FY 19 (return to $85
oil)." She indicated that the second example was more
moderate. If the price of oil returned to $85 per barrel it
would satisfy 65 percent of the state's current spending.
Ms. Pitney turned to slide 18: "Reserves Projection at $85
oil." She reported that at $85 per barrel of oil the
state's savings would last through the end of FY 18.
Ms. Pitney advanced to slide 19: "UGF Revenue Scenarios: FY
14 to FY 19 ($50 oil)." She stated that the current oil
price of $50 per barrel was less than 40 percent of the
state's spending level.
Ms. Pitney revealed slide 20: "Reserves Projection at $50
oil." She reported that at the end of FY 17 the state would
only have $2 billion in reserves which would provide some
bridging into FY 18.
Co-Chair Neuman observed that to be prudent the state would
need to look more towards the conservative side of the
price of oil. If the price of oil per barrel went up above
$50 that would be beneficial for state government. However,
he was more concerned about the level of spending at which
the state could afford to provide programs and services. He
noted meeting state mandates, the state's current savings
amount, and current oil projections. He opined that the
governor was clear that everything would be on the table
when looking at the presentation. If the state did not
expect to have a gas project online before FY 22 or FY 24,
serious budget restraints would have to be imposed. He
proposed that the state look to private industry where it
could. Governor Walker talked about speaking with educators
and doing the very best with the resources the state had.
2:19:47 PM
Vice-Chair Saddler asked if the governor had a floor for
draws on reserves under any price scenario.
Ms. Pitney reported that a floor had not been set. The
administration wanted to see the forecast hold true and
have five years. However, she informed the committee that
the state had to have a contingency in place in the event
that the price of oil stayed at $50 per barrel. The reality
was that the price of oil was not very well correlated with
the cost of services in Alaska. She offered that the state
had to switch from a conversation about what price of oil
supported the state's budget to what size government was
right for Alaska. She alluded that the next slide in her
presentation would address the question.
Co-Chair Neuman mentioned that early in the day he received
news of a company new to Alaska investing up to $1.2
billion to produce a considerable amount of additional oil
into the Trans-Alaska pipeline. The price of oil was
decreasing while more oil would be coming into the
pipeline. He hoped to receive the best outlook on what the
state had as far as investments. He also mentioned having a
discussion on credits to see if they were working.
2:21:51 PM
Representative Edgmon pointed out that after hearing
presentations from the Legislative Finance Division and
from the Office of Management and Budget it was necessary
to not only apply restraint on state spending, but to also
apply limitations on cutting. He used the revenue sharing
program as an example. He suggested that if revenue sharing
was cut by 100 percent in one year the state would
potentially incur more costs and problems than anticipated.
He indicated he was not directly advocating for one
particular program. He wondered if the Walker
Administration had had the opportunity to talk to any of
the bond rating agencies about balancing cuts and
preserving programs that would continue the health of
communities. He opined that it may help the state to better
transition to the point where the state had additional
revenues or the state could downsize its spending at a more
even decent.
Ms. Pitney addressed Representative Edgmon's bond rating
question. She reported that the bond raters were concerned
with the state's structural deficit of having only one
source of revenue. They were also concerned with the sheer
magnitude of the difference between the state's revenue
stream and its expenditures. She indicated that they would
be looking for a balance in the state's choices and actions
regarding revenue and spending. In response to
Representative Edgmon's comments regarding municipal
revenue sharing she reported that it was a forward funding
item similar to education. It ran on a three-year average
of what was capitalized in the fund. All things being equal
without capitalizing the fund in the current year $57
million was available for the community revenue sharing
program in FY 16. She estimated that in FY 17 the three-
year average would be about $38 million. The administration
wanted to see revenue sharing funding at a higher level of
$50 million in FY 17. She was not sure if the state would
have to change the three-year average stipulation or would
have to add additional monies to the $38 million figure.
She mentioned that if the revenue sharing portion for FY 17
was $38 million there would still be $78 million in the
revenue sharing fund going into the following year. The
question about revenue sharing was advanced forward several
years sooner than anticipated. She stressed that the
governor and the administration were very supportive of
local government and did not want to put municipalities at
risk. She reiterated the numbers; $57 million in FY 16, $50
million in FY 17, with $78 million remaining in the fund
[Note: $12 million added from capital to bring FY 17 up to
$50 million from $38 million]. She hoped the circumstances
would change after FY 17 such that oil prices would recover
and enable the state to catch up financially. She was
hoping the situation would change in time.
Representative Edgmon appreciated Ms. Pitney's explanation
and the longer term vision she presented. If,
hypothetically, the state reduced the municipal revenue
sharing down to zero within a one-year period of time,
villages in his district such as Koliganek or New Stuyahok
would not have anyone in the city offices. He made it clear
that it would be counter-productive.
2:27:21 PM
Ms. Pitney asserted the importance of preserving strong
communities around the state. She maintained that it would
take the state making conscious choices on how to manage
its budget to avoid negatively impacting the smaller
communities.
Co-Chair Neuman indicated that his office has had
discussions with several departments about how important
schools were to their community. He furthered that
community activities ranging from funerals to basketball
games took place in schools. He wanted to make sure schools
continued to be central to their communities. He has had
discussions across the board with multiple departments to
ensure protecting Alaska's communities in the best way
possible.
Ms. Pitney advanced to slide 21: "What's in an Alaska
Budget?" She commented that there was a vast disconnect in
valuing government based on oil prices. She admitted that
although she knew a lot about the university, there were
many things the state did that she was not aware of prior
to being in her position. She relayed that there were 128
thousand students in K-12 schools, 500 schools, and 53
school districts around the state. She remarked that the
breadth of what the state did and what the state depended
on government to do was vast. She observed that Alaska had
the largest airport system and the largest marine highway
system in the world. She had considered how to rationally
approach determining how much the state should spend on
government. She stated that she would introduce two
different approaches.
Co-Chair Neuman recognized Representative Andy Josephson in
the audience.
Ms. Pitney scrolled to slide 22: "Average Total State
Expenditures." She suggested that if the state looked at
its population and it's spending relative to all of the
other states in the country, the expected spending for
Alaska would equal about $5.3 billion. If the states with
the largest expenditures (California, Florida, Texas, and
New York) were removed from the calculation of the national
average, then Alaska's projected spending would be about
$4.8 billion. She elaborated that the numbers did not
account for Alaska having the largest airport system or the
largest marine highway system. Nor did it account for any
cost of living adjustments or geographic adjustments. She
reiterated that the predicted spending for Alaska based on
the national average fell between $4.8 billion to $5.3
billion. She opined that the numbers differed drastically
from the state's $2.2 billion revenue stream on $50 per
barrel oil. She provided the information on the slide to
give context.
Co-Chair Neuman interjected that the Legislative Finance
Division provided information the previous year that
reported the state was down to about $7,200 per person.
Ms. Pitney added that the number included the Permanent
Fund that she assumed the $5.3 billion did not count the
Permanent Fund.
2:32:08 PM
Ms. Pitney turned to slide 23: "Inflation and Population
Adjustment Approach." She stated that there was another
approach to determining the size of government in Alaska.
She reported that in comparing the current operating budget
adjusted for both inflation and population to those in the
1980s not much had changed. In looking at agency operations
in 1998 at a time when Alaska's government operation costs
were the leanest, the state's budget figures would be about
$3.2 billion if adjusted only for inflation. The figure
would jump to $4 billion if a population adjustment was
added. The state's current proposed budget was $4.26
billion, not remarkably far from the comparison and with a
revenue stream of about $2 billion at $50 per barrel oil
prices.
Co-Chair Neuman commented that in 1998 oil production was
at 2 million barrels of oil per day.
Ms. Pitney concurred. She suggested that the question was
not how Alaska's government should size into $50 per barrel
oil. Rather, the question should be what size government
should Alaska have and then manage revenue accordingly. She
maintained that the administration planned to attain
additional revenues through resource development.
Ms. Pitney continued with slide 24: "UGF Revenue Scenarios
and FY 16 Spend by Category." She explained the vertical
bars on the chart. The orange bar [Titled:-25 percent below
FY 15] reflected a 25 percent reduction from the FY 15
budget in agency operations leaving a very small capital
budget and the statewide components the state is obligated
to pay. The light blue vertical bar [Titled: FY2016 UGF]
indicated the current budget proposed with 6.5 percent
agency reductions. The vertical bar with two colors of blue
[Titled: FY16 Agency Ops] represented agencies, shown in
dark blue, plus formula programs, shown in light blue. She
offered that the difference between the FY2016 UGF bar and
the FY16 Agency Ops bar was capital and statewide
operations. The dark blue vertical bar [Titled: Nonformula]
represented agencies, none of the formula programs. She
proceeded to explain the horizontal bars included in the
chart. The purple bar indicated revenue at the $50 per
barrel of oil price. The green horizontal bar was revenue
at $66 per barrel of oil, the price used for forecasting
for FY 16. The last line, delineated in black, represented
revenue if the price of oil per barrel returned to $100.
She relayed that even with a 25 percent reduction in the
budget the state would be dependent on some level of
savings even if oil reached a price of $100 per barrel. She
maintained that the discussion needed to be about the
desired size of government necessary to serve Alaska.
Ms. Pitney concluded her presentation by referring to the
additional handouts which included a summary of the total
budget, a summary of the capital budget, and the project
detail of the capital budget. She reported that she would
be forwarding department details to the Legislative Finance
Division within two weeks.
2:37:02 PM
Representative Gara expressed his concern about the cuts to
education. He conveyed several reports from school
districts in Mat-Su, Anchorage, Juneau, and Fairbanks about
the impacts they face from the cuts in FY 15. The Mat-Su
expected an approximate $3 million shortfall. The Fairbanks
Parent-Teacher Association estimated a loss of 35 to 70
staff members. Anchorage estimated a loss of 210 to 220
staff. He opined that the proposed reduction of $32 million
for FY 16 would result in even greater cuts. He commented
that with the new administration there probably had not
been time to properly comb through the agencies to find
duplication. He wondered if Ms. Pitney would be willing to
speak with the school districts prior to the amended budget
deadline of February 18, 2015 to try to avoid more cuts to
education.
Ms. Pitney maintained that there were deep cuts everywhere
in the budget. The reductions totaled $140 million or 6.5
percent of the budget. She agreed that education was of
value and a priority. She reported that the education
portion of the budget was reduced to a lesser degree than
in other areas and that she was open to working with the
school districts. She pointed out that the state had to cut
back and that all entities would have to be part of the
downsizing.
Representative Gara reemphasized working with the school
districts.
Vice-Chair Saddler wanted to hear that the administration
planned to retain enough money in reserves for the AKLNG
project. He opined that the state needed to put some money
on the table for the project. He wanted her to make the
assertion that the administration was going to maintain the
ability of the government to pay for the project if and
when the time came to make the investment.
Ms. Pitney reported that the gas pipeline was a very high
priority. She stated that the funding model might be
different from a GF cash model. However, she stressed that
enabling the gasline to move forward was front and center
of the administration's agenda. Resource development was
the way in which the state could depend on a revenue
source. She restated that it was the highest priority and
that the administration would be looking for ways in which
to fund the project outside of just a cash mechanism to
move it forward. The revenue potential should make its
feasibility possible.
Vice-Chair Saddler asked about the governor's number one
priority. Ms. Pitney responded that the gasline project
held the highest potential to increase state revenue. She
furthered that other questions would become less pressing
if the state increased its revenue with gasline
development.
2:42:39 PM
Representative Pruitt asked about tax credits. He asked if
Ms. Pitney could provide information detailing when the
credits would run their course. He wanted to know how much
remained outstanding and if new credits were being added.
He wondered about any outstanding credits under Alaska's
Clear and Equitable Share (ACES).
Ms. Pitney relayed that she did not have any specifics but
suggested over the following few years the projection was
that the credits would come down. There were some sunset
provisions at which time certain credits would drop off
after FY 16. She asserted that Commissioner Hoffbeck would
be speaking to the committee in the following week and
would be able to answer Representative Pruitt's question.
She signified that she would make sure the commissioner was
prepared to answer the question.
Co-Chair Neuman assured the committee the question had
already been forwarded to the commissioner. He added that
the DNR finance subcommittee would be looking further at
tax credits. He would be looking for answers to what drove
the tax credits from 35 percent to 45 percent for two
years.
Representative Munoz asked if the budget included
additional monies for staffing for Medicaid expansion
within the Department of Health and Social Services (DHSS).
Ms. Pitney responded that there would be a reallocation of
staffing. In looking at the proposed budget the DHSS was
downsizing dramatically with program changes. If the
Medicaid expansion passed, staffing would be paid with
federal funds at 100 percent for the first year until
December 2016. The funding would step down to 90 percent
funded over four years. She intimated that it was a shift.
Representative Munoz asked about the number of staff needed
to implement the expansion of the Medicaid program. Ms.
Pitney did not have the immediate number but would provide
it to the committee. She reported that there would be
significant information sessions on Medicaid expansion.
Co-Chair Thompson referenced the governor's speech from the
previous evening and asked about holding small community
members harmless from retirement system penalties. He
stated that currently, termination studies were required if
an employee was terminated. He remarked that the studies
were costly. He asked if the state would incur additional
costs if municipalities were held harmless from the 22
percent requirement to carry a terminated employee. Ms.
Pitney responded that she was working on determining an
answer.
Representative Wilson referred to slide 21 and estimated
that (excluding K-12 students) 1 in 41 Alaskans were in
custody or offenders. She opined that it was a high number.
She gave another example related to state university and K-
12 employees. She also observed that 1 out of 4 Alaskans
were currently Medicaid beneficiaries. She gave additional
examples and concluded that the state's budget was driven
by circumstances that she felt were not being addressed.
She suggested that privatizing the ownership of state land
or developing the land could generate additional revenues.
Co-Chair Neuman responded to Representative Wilson's
comments that he would be looking forward to upcoming
legislation. Representative Wilson confirmed she would look
into his suggestion.
Vice-Chair Saddler asked Ms. Pitney if she had seen
anything seriously alarming about the state's budget or
anything that had encouraged or disheartened her since
taking on her current position. He wanted her to describe
the best and the worst that she had seen.
2:49:38 PM
Ms. Pitney suggested that rather than being alarmed she was
presented with the realization of the interrelationship
between public defenders, the court system, troopers,
corrections, and prosecutors. If a change was made in one
area, there would be a trickle effect, potentially a
dramatic one, in the other areas. For example, a court case
that had to be tried within a certain amount of time
activated so many other things into motion. The interplay
between the agencies, her example in particular, and the
cost drivers in one area and how they affected other areas
contributed to her "ah ha" moments since she started her
new position.
Vice-Chair Saddler asked if it was an, "ah ha!" or an "oh
no!" Ms. Pitney responded, "yes!"
Representative Edgmon commented that from where he sat it
seemed legislators would be back at the table in the
following year making additional reductions and grappling
with the same issues that they were faced with in the
moment. They would be making attempts to keep things viable
in the short-term as well as in the long-term for the State
of Alaska. He inquired if the administration had
contemplated getting statewide feedback. He asked this
because cutting the budget was the hardest thing to do in
the legislature. He continued that it would be difficult
anywhere including within the administration as well as
within the legislature. He opined that to make cuts
properly an understanding of the value of programs was
essential. Understanding what was happening at the
community level, the regional level, and the statewide
level was important. He argued that it was very difficult
to do in a 90-day session as the body that appropriates. He
maintained that it would be challenging for legislators to
dig into the state programs and services and to make
judgments as to the true impacts of the program cuts. He
asked if the governor discussed having some sort of
statewide forum or partnering with other Alaskans to make
the difficult choices.
Ms. Pitney relayed that some of the first phone calls she
made upon starting her position were to entities that she
knew communicated with larger audiences regarding the
state's fiscal situation. She mentioned Commonwealth North
and Common Ground, two social and economic research groups.
The administration's plan was to begin engaging Alaskans
for ideas. There was a website created to engage Alaskans
for ideas. She emphasized that everyone involved in public
policy needed to take the time to educate the broader
public regarding the situation the state was in and the
choices it was faced with. She opined that until the wide
audience understood the sheer magnitude of the state's
fiscal issue, Alaskans would have a difficult time
accepting the cuts or revenue opportunity. Currently, she
was uncertain if the larger public understood the cuts that
were required. The current reduction would be significant
across every entity and every service. She reminded the
committee that this was only the first step, less than a
quarter of a 25 percent targeted reduction. There were
things the state would have to choose not to cut. The
administration's preference was to choose the things that
were of lower value. However, she claimed that everything
that state government did had a value to someone. She said
that the state would have conversations, whether in a forum
or an Alaska summit. She acknowledged that the task would
be hers after session. The governor and lieutenant governor
would be helping. During session she would also be doing
some of it. She indicated that the task could not be up to
just one person. She expressed her appreciation of Cliff
Grove of Common Ground for coming up with an application,
Common Wealth North for providing its fiscal policy
studies, and the transition team for its help communicating
with communities. Educating the state would be a huge
priority and did not rest in one place. However, she
stressed that the administration would play a huge role in
it.
Co-Chair Neuman remarked to Representative Edgmon about
having the discussion previously. He expressed that it was
crucial that all of the finance legislators tell the
state's story to the public about its budget circumstances.
He remarked that Representative Munoz suggested sending
committee members out to communities to relay the budget
process. He commented about partnering with the public in
creating a better understanding of what the state was
facing. He stressed that the bottom line was that the state
could not spend money that it did not have.
Co-Chair Neuman discussed the agenda for the following
meeting.
ADJOURNMENT
2:57:46 PM
The meeting was adjourned at 2:57 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| PP Budget Overview for House Finance Committee FINAL 01.21.2015.pdf |
HFIN 1/23/2015 1:30:00 PM |
OMB FY16 Budget Overview |
| OMB Responses HFIN Overview 1-23-15.pdf |
HFIN 1/23/2015 1:30:00 PM |