Legislature(2013 - 2014)HOUSE FINANCE 519

01/24/2014 01:30 PM FINANCE


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01:34:14 PM Start
01:34:24 PM Fy 15 Governor's Budget Overview: Division of Legislative Finance
02:16:38 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Governor's FY15 Budget Proposal TELECONFERENCED
David Teal, Director, Legislative Finance
Division
                  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