Legislature(2013 - 2014)HOUSE FINANCE 519

01/18/2013 01:30 PM FINANCE

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01:30:55 PM Start
01:31:03 PM Overview of the Governor's Fy 2014 Budget: Legislative Finance Division
02:12:42 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Governor's FY14 Budget Proposal TELECONFERENCED
by David Teal, Director, Legislative Finance
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 18, 2013                                                                                           
                         1:30 p.m.                                                                                              
1:30:55 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Austerman called the House Finance Committee                                                                           
meeting to order at 1:30 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 Lindsey Holmes                                                                                                   
Representative Scott Kawasaki, Alternate                                                                                        
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative David Guttenberg                                                                                                 
ALSO PRESENT                                                                                                                  
David Teal, Director, Legislative Finance Division                                                                              
OVERVIEW OF THE GOVERNOR'S FY 2014 BUDGET:                                                                                      
     LEGISLATIVE FINANCE DIVISION                                                                                               
^OVERVIEW OF THE GOVERNOR'S FY 2014 BUDGET: LEGISLATIVE                                                                       
FINANCE DIVISION                                                                                                              
1:31:03 PM                                                                                                                    
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
explained that  the Legislative  Finance Division  (LFD) was                                                                    
statutorily  charged  with  budgetary review.  The  division                                                                    
published the "Legislative Fiscal  Analyst's Overview of the                                                                    
Governor's Request" (copy on  file) annually. The division's                                                                    
role in the  budget process was primarily  technical, but he                                                                    
and his analysts also tracked  the process insuring that the                                                                    
appropriation  bills accomplished  their intended  purposes.                                                                    
The division  reviewed fiscal  policy to  identify important                                                                    
budget  items.  He  explained  that  the  division  did  not                                                                    
support or  oppose policy choices, but  instead provided the                                                                    
information   necessary  to   make  decisions.   The  fiscal                                                                    
summaries of the  Office of Management and  Budget (OMB) and                                                                    
LFD agreed "to the dollar."                                                                                                     
1:34:32 PM                                                                                                                    
Mr.  Teal referred  to the  FY 14  Fiscal Overview  (copy on                                                                    
file).  He discussed  revenue  projections  for the  current                                                                    
fiscal  year, which  were critical  because of  the changing                                                                    
fiscal situation. He  pointed out that the  past eight years                                                                    
saw  revenue  from  high oil  prices  exceed  spending.  The                                                                    
fiscal summary  showed a $490  million surplus at  the close                                                                    
of last  session. Since April  of 2012, production  was more                                                                    
than 8  percent less than that  of FY 12. The  reduction for                                                                    
FY 10 was 7.2  percent, FY 11 was 6.4 percent  and FY 12 was                                                                    
4.1 percent.                                                                                                                    
1:37:12 PM                                                                                                                    
Mr.  Teal  noted that  the  legislature  must withdraw  from                                                                    
savings to  fill the  FY 13 budget  gap instead  of debating                                                                    
how much  surplus to  save or  spend. The  deficit situation                                                                    
provided a  new experience for legislators  elected after FY                                                                    
05.  He pointed  out the  fiscal summary  on page  8 of  the                                                                    
Overview.  He  referred to  line  51  and the  $410  million                                                                    
deficit. He  did not recommend  trusting the  figure because                                                                    
of  the  $250  million  deposit into  the  Statutory  Budget                                                                    
Reserve  (SBR)  seen on  line  45.  He suggested  that  $160                                                                    
million might provide a more  accurate deficit estimate. The                                                                    
difference  was  the result  of  action  taken by  the  last                                                                    
legislature to  actively save money  by making a  deposit of                                                                    
$250  million.   The  surplus  was   predicted  by   a  poor                                                                    
Mr.  Teal spoke  to  the volatility  of  oil production  and                                                                    
price, which  lead to large  impacts on revenue.  One dollar                                                                    
change  in the  price of  oil could  impact revenue  by $135                                                                    
million.  Accurate  revenue  projections were  difficult  to                                                                    
obtain.   He    mentioned   the    governor's   supplemental                                                                    
placeholder  of   $40  million.  The   average  supplemental                                                                    
operating budget for  the past three years  was $85 million.                                                                    
Surplus FY  13 funds were unlikely.  Reserves were available                                                                    
if spending  exceeded cash  flow. Reduction  of expenditures                                                                    
to sustainable levels provided another solution.                                                                                
1:41:12 PM                                                                                                                    
Mr. Teal  discussed the profound  effects of the  deficit on                                                                    
the FY 14 budget cycle.  The legislature could either reduce                                                                    
expenditures  or access  savings  in the  face of  declining                                                                    
revenue. He pointed out the  surplus of $508 million seen on                                                                    
line 51 in  the FY 14 governor's request.  The Department of                                                                    
Revenue  (DOR) predicted  that FY  14  oil production  would                                                                    
decline by  2.7 percent from FY  13 with an increase  in oil                                                                    
prices by  $1 per  barrel. Projected revenue  for FY  14 was                                                                    
calculated  at $510  million below  the expectations  for FY                                                                    
13.  If the  budget for  FY 14  equaled that  of FY  13, the                                                                    
state would  see a  deficit of $510  million in  addition to                                                                    
the deficit seen in FY 13.                                                                                                      
Mr. Teal observed that the  budget was reduced substantially                                                                    
by  the governor  because  of the  decline  in revenue.  The                                                                    
total reduction  in general funds  from FY  13 to FY  14 was                                                                    
shown  on  line 37  as  $1.17  billion.  He noted  that  the                                                                    
majority  of the  reduction  was in  the  capital budget  as                                                                    
shown  on  line 28.  He  opined  that the  proposed  capital                                                                    
budget,  at $870  million was  sizable. The  average capital                                                                    
budget for  the last ten  years was $875  million (including                                                                    
legislative  increases). The  FY 14  governor's request  was                                                                    
approximately $100  million below that  of FY 13,  making it                                                                    
the  second  largest  governor's  request in  the  last  ten                                                                    
1:44:38 PM                                                                                                                    
Mr.  Teal  discussed  page  3  of  the  presentation,  which                                                                    
detailed  the  governor's request  as  a  percentage of  the                                                                    
adopted budget. The  average for the period  was 49 percent,                                                                    
or twice as large as that  requested by the governor. If the                                                                    
"historic share" was  added by the legislature to  the FY 14                                                                    
governor's request,  the state would encounter  a deficit of                                                                    
$654 million. Essentially, the  legislature could safely add                                                                    
$263 to  the governor's capital budget  without dipping into                                                                    
Representative  Gara   referred  to   the  page  3   of  the                                                                    
presentation  and  noted  that   the  governor  presented  a                                                                    
capital  budget  addressing  the   needs  of  agencies.  The                                                                    
legislature would then  add the needs of  the communities to                                                                    
the  budget during  the legislative  process.  He wished  to                                                                    
clarify the process and stressed  that the governor expected                                                                    
the legislature  to add  to his  capital budget  request the                                                                    
needs of the various Alaskan communities.                                                                                       
Mr.   Teal  agreed   that  the   expectation  was   for  the                                                                    
legislature  to add  to the  budget.  He noted  that if  the                                                                    
legislature added  more than $263  million, a  transfer from                                                                    
savings would be required.                                                                                                      
Co-Chair Austerman  recalled a  reduction of  the governor's                                                                    
proposed  capital   budget  by  the  legislature   in  years                                                                    
preceding 2005. Mr. Teal concurred.                                                                                             
Mr. Teal explained  the fiscal summary (pages 2  and 3). The                                                                    
summary exhibited  a surplus of $508  million by subtracting                                                                    
a $120 million withdrawal from  savings as shown on line 46.                                                                    
He added  that OMB  had erroneously  omitted a  $125 million                                                                    
deposit  to the  Alaska  Industrial  Development and  Export                                                                    
Authority, (AIDEA)  energy fund, which  led to a  surplus of                                                                    
$263 million. If  the legislature added $263  million to the                                                                    
capital  budget,   no  withdrawal  from  savings   would  be                                                                    
necessary.   He  pointed   out   that  the   surplus/deficit                                                                    
calculation included operating items as well as capital.                                                                        
1:51:31 PM                                                                                                                    
Mr. Teal  noted that  the ability to  spend $263  million on                                                                    
the   capital  budget   assumed  that   the  operating   and                                                                    
supplemental budget remained at  the governor's request. The                                                                    
governor's  request  was less  than  1  percent increase  on                                                                    
operating  expenditures.  The  average growth  rate  in  the                                                                    
operating   budget  was   approximately  6.5   percent.  The                                                                    
potential to avoid a deficit  existed for the next few years                                                                    
if the  legislature could restrain spending  to the proposed                                                                    
1 percent increase.                                                                                                             
Mr.  Teal addressed  assumptions  on statewide  expenditures                                                                    
shown on  slide 4.  The capital budget  remained flat  at an                                                                    
average of  $875 million for  the past ten years.  He stated                                                                    
that  the revenue  declined and  deficits were  projected in                                                                    
the near  future. The six  percent growth rate could  not be                                                                    
maintained if the revenue forecast was accurate.                                                                                
Mr. Teal explained that DOR  expected oil production to fall                                                                    
by  5.5  percent  annually.  Oil  might  increase  in  price                                                                    
offsetting declining oil production  and leading to a fairly                                                                    
flat revenue curve. He spoke  about the drop in revenue, but                                                                    
the revenue curve exhibited in  slide 4 followed the current                                                                    
tax  regime.  He  noted  that  LFD  did  not  analyze  DOR's                                                                    
forecast, but focused on expenditures instead.                                                                                  
Mr. Teal furthered that the  legislature would not spend the                                                                    
full $263  million projected surplus  in the  capital budget                                                                    
without a  withdrawal from savings because  of the potential                                                                    
difficulty of  holding the operating budget  at the proposed                                                                    
$52 million increase.  He noted that the budget  was lean in                                                                    
comparison to those of the past.                                                                                                
Mr.  Teal cautioned  that bargaining  units for  three major                                                                    
state unions  were not included  in the  governor's proposed                                                                    
budget.  The  $40  million supplemental  budget  placeholder                                                                    
might  also prove  questionable. Pressure  to increase  K-12                                                                    
school funding was anticipated.  Many unknown expenses might                                                                    
make  the  proposed  1  percent  growth  rate  difficult  to                                                                    
Co-Chair Austerman  asked if slide  4 exhibited a  1 percent                                                                    
growth rate.                                                                                                                    
Mr.  Teal  concurred. He  added  that  LFD's projection  was                                                                    
viewed as  "gloomy," but he  countered that the  picture was                                                                    
positive  when  compared  to other  states  facing  cuts  in                                                                    
operating  budgets in  addition to  furloughs and  lay-offs.                                                                    
Alaska  could  afford  a  sizable  capital  budget  of  $875                                                                    
million and was  not forced to reduce  the operating budget.                                                                    
In  addition,  Alaska  had  the   luxury  of  large  reserve                                                                    
balances.  The  major  change  might  be  the  inability  to                                                                    
contribute  large  deposits  to  savings.  He  reminded  the                                                                    
committee  that  the  LFD   overview  contained  the  fiscal                                                                    
summaries  along   with  recommendations  for   capital  and                                                                    
operating budget  language. Copies  of the  publication were                                                                    
available in  the documents room  on the fifth floor  of the                                                                    
Capitol and on the LFD website.                                                                                                 
1:58:19 PM                                                                                                                    
Vice-Chair Neuman  commented that the legislature  could not                                                                    
typically  maintain  the  operating  budget  recommendations                                                                    
proposed  by  the  governor. He  asked  about  the  specific                                                                    
savings  employed  to  address  a deficit.  He  asked  about                                                                    
potential  reserves in  years past  2022. He  asked how  the                                                                    
reserve balance  affected the state's rating  on Wall Street                                                                    
regarding bonding abilities.                                                                                                    
Mr. Teal  responded that  Alaska's bond  rating was  due, in                                                                    
part  to  the  state's   massive  reserves.  The  state  had                                                                    
approximately $16  billion in  reserves and  a budget  of $5                                                                    
billion. If the  pipeline ceased activity and  the state was                                                                    
left  without revenue,  the state  could  "coast" for  three                                                                    
years. Budget reserves in other  states were often less than                                                                    
5 percent  of their budget.  He argued that reserves  were a                                                                    
necessity  because  of  the  volatile  revenue  stream.  The                                                                    
legislature was not  obligated to spend $875  million in the                                                                    
capital budget. He presented a  chart including years 1975 -                                                                    
2012, which  illustrated that  when the  state did  not have                                                                    
money, spending was curtailed, creating  flat budgets for 20                                                                    
years.  The  past  proved  that   the  legislature  was  not                                                                    
required to increase  budgets by 6.5 percent  per year. Bond                                                                    
raters   observed  reserves   in  addition   to  responsible                                                                    
spending  and action  on  the part  of  the legislature.  He                                                                    
opined that Alaska deserved its AAA bond reserve rating.                                                                        
2:02:26 PM                                                                                                                    
Vice-Chair  Neuman  believed  that  the  reductions  in  the                                                                    
reserves would  affect the state's bond  rating. The back-up                                                                    
was necessary.                                                                                                                  
Mr.  Teal agreed  that dipping  heavily into  reserves would                                                                    
affect the  bond rating. The  expectation was to  respond to                                                                    
the  declining revenue,  by avoiding  the rapid  spending of                                                                    
Representative Wilson asked for  the annual percent increase                                                                    
in the formula programs.                                                                                                        
Mr. Teal responded that Medicaid  growth was approximately 8                                                                    
percent for the  past several years. The FY  14 proposal was                                                                    
a  $10  million  increase  in Medicaid,  which  lowered  the                                                                    
growth rate to  1.4 percent. He added that  the K-12 program                                                                    
included  funding increases,  changes  to  the formula,  and                                                                    
annual appropriations  making the  growth rate  difficult to                                                                    
Representative Wilson asked about  the K-12 formula increase                                                                    
percentage minus an increase to  the Base Student Allocation                                                                    
Mr. Teal responded that the  proposed increase for education                                                                    
was  $14 million  plus the  governor's $25  million one-time                                                                    
appropriation.  The  governor's  intent was  to  retain  the                                                                    
current  BSA  and  provide the  additional  funding  to  the                                                                    
Department of Education and Early  Development (DEED) of $14                                                                    
million. The  funding would be  targeted to  school district                                                                    
2:06:34 PM                                                                                                                    
Representative  Thompson  asked  about  the  projected  $2.9                                                                    
billion in federal  funds. He asked about the  effect on the                                                                    
budget if the federal funds were not received.                                                                                  
Mr.  Teal  replied  that Trinity  Tomsic,  Deputy  Executive                                                                    
Director  for Federal  Funds  would  provide a  presentation                                                                    
about federal  funding issues to  both the Senate  and House                                                                    
finance  committees. He  stated that  sequestration affected                                                                    
certain  grants for  education.  Federal  cuts might  affect                                                                    
some programs.  He stated that  legislators might  decide to                                                                    
reduce program funding or replace it with general funds.                                                                        
Representative Gara asked if  Medicaid growth was documented                                                                    
at 1 percent.                                                                                                                   
Mr. Teal  replied that Medicaid  growth was documented  at 8                                                                    
percent. He noted that the  governor's increase for Medicaid                                                                    
in FY 14 was 1.4 percent.                                                                                                       
Representative Gara  referred to  the graph  on page  4 that                                                                    
depicted government spending with a surplus through 2022.                                                                       
Mr.  Teal  stated that  the  same  revenue projections  were                                                                    
used.  The difference  was that  the  price and  production,                                                                    
which determined the graph's revenue curve.                                                                                     
2:10:18 PM                                                                                                                    
Representative Gara asked about  2022 and projected price of                                                                    
oil. He  wondered if the  graph's bar was influenced  by the                                                                    
price of oil.                                                                                                                   
Mr. Teal  explained that the  green background in  the graph                                                                    
depicted the revenue curve, which  was affected by the price                                                                    
of oil.                                                                                                                         
Representative Gara commented that  the fall 2011 and spring                                                                    
2012 Revenue  Source Books  exhibited revenue  declines. The                                                                    
most recent Revenue Source Book  illustrated an even greater                                                                    
decline in oil production.  He expressed curiosity about the                                                                    
potential surplus  or debt based on  the production forecast                                                                    
provided by DOR.                                                                                                                
Mr.  Teal   responded  that  DOR  would   provide  testimony                                                                    
regarding  the  difference  between   the  spring  and  fall                                                                    
2:12:42 PM                                                                                                                    
Representative  Munoz  complimented   the  division  on  the                                                                    
budget   publications.  She   asked  about   the  percentage                                                                    
increase  in negotiated  pay costs  by bargaining  unit from                                                                    
2005 forward.                                                                                                                   
Mr.  Teal  replied  that the  bargaining  agreements  had  a                                                                    
series of 2 and 3  percent increases during the past several                                                                    
years.  He believed  that the  Department of  Administration                                                                    
(DOA)  could  best  respond to  the  question  during  their                                                                    
scheduled  testimony  on  January  29, 2013  for  the  House                                                                    
Finance Committee.                                                                                                              
Co-Chair Austerman disused the agenda for next week.                                                                            
The meeting was adjourned at 2:14 p.m.                                                                                          

Document Name Date/Time Subjects
LFC Overview 1-18-13.pdf HFIN 1/18/2013 1:30:00 PM
LFD Overview