Legislature(2021 - 2022)ADAMS 519
01/27/2022 01:30 PM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB281 || HB282 | |
| Presentation: Legislative Finance Division Baseline and Governor's 10-year Plan | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 281 | TELECONFERENCED | |
| += | HB 282 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 27, 2022
1:38 p.m.
1:38:09 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:38 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon
Representative Sara Rasmussen (via teleconference)
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Brodie Anderson, Staff, Representative Neal Foster; Connor
Bell, Fiscal Analyst, Legislative Finance Division.
PRESENT VIA TELECONFERENCE
Alexei Painter, Director, Legislative Finance Division
SUMMARY
HB 281 APPROP: OPERATING BUDGET/LOANS/FUNDS
HB 281 was HEARD and HELD in committee for
further consideration.
HB 282 APPROP: MENTAL HEALTH BUDGET
HB 282 was HEARD and HELD in committee for
further consideration.
PRESENTATION: LEGISLATIVE FINANCE DIVISION BASELINE and
GOVERNOR'S 10-YEAR PLAN
1:38:29 PM
Co-Chair Foster reviewed the meeting agenda.
HOUSE BILL NO. 281
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs; capitalizing funds; amending
appropriations; making reappropriations; making
supplemental appropriations; making appropriations
under art. IX, sec. 17(c), Constitution of the State
of Alaska, from the constitutional budget reserve
fund; and providing for an effective date."
HOUSE BILL NO. 282
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program; making capital
appropriations and supplemental appropriations; and
providing for an effective date."
1:39:28 PM
Co-Chair Foster explained that the committee substitute
(CS) represented the governor's proposed budget which
removed the federal American Rescue Plan Act (ARPA) funding
and replaced it with undesignated general funds (UGF). He
detailed the reasoning for the change. It was important to
strive to match recurring expenses with recurring revenue
rather than with one-time revenue. He believed the action
took a more conservative view of the budget to show the
deficit, which would put pressure on the legislature to
refrain from proposing additional expenses within the
budget.
Co-Chair Merrick MOVED to ADOPT the proposed committee
substitute for HB 281, Work Draft 32-GH2686\W (Marx,
1/27/22).
Co-Chair Foster OBJECTED for discussion.
BRODIE ANDERSON, STAFF, REPRESENTATIVE NEAL FOSTER,
explained the CS, which he characterized as more of a
process than a finished product. Alaska had received
billions of dollars in federal aid through programs such as
the Coronavirus Aid, Relief, and Economic Security (CARES)
Act, the Coronavirus Response and Relief Supplemental
Appropriations Act (CRRSAA), ARPA, and eventually would
receive funds through the Infrastructure Investment and
Jobs Act (IIJA). When the governor delivered his FY 23
budget, it was a finished product that reflected both his
priorities and the designation of funds. Mr. Anderson
thought that the legislature should take a similarly
calculated approach. He suggested that the legislature
examine and prioritize spending, then discuss the
utilization of the available federal funds. In order to
take the approach, the budget needed to be rolled back to a
baseline starting point. The CS proposed the replacement of
federal funds with UGF for spending. The changes included
the following: an increase of $522.2 million spending of
regular UGF, a decrease of $82 million of federal funds
that would later become known as IIJA, a decrease of $21
million of CARES funding, a decrease of $560.7 million of
CRRSAA funding, and a decrease of $44.4 million of
Coronavirus State and Local Fiscal Recovery Funds (CSLFRF).
1:44:20 PM
Co-Chair Foster asked if Mr. Anderson was referring to a
particular handout.
Mr. Anderson answered that he was referring to his opening
statements but would be happy to move on to discuss
document 1, "Changes from Gov to House Baselines CS" (copy
on file).
Co-Chair Foster asked if there were more changes that Mr.
Anderson wanted to convey in his opening statements. He
assumed that the changes were outlined in document 1.
Mr. Anderson responded that the remainder of his opening
statements were reflected in document 1.
Co-Chair Foster suggested that Mr. Anderson finish his
opening statements.
Mr. Anderson continued that there was a decrease of $375
million of ARPA funding, which was spent in a similar
manner as UGF. He noted the decrease explained why UGF
funding in document 1 appeared to be so substantial. Also,
a $7 million appropriation was removed for Alaska Seafood
Marketing Institute (ASMI) in cooperation with the Office
of Management and Budget (OMB). Finally, $5 million of UGF
was added for the purpose of rate smoothing to match the
previous year's budget structure. The net result of the
changes was an increase in UGF of $146.8 million and a
decrease of $148.8 million in combined federal funds, which
reflected a $2 million cut from all funds.
Mr. Anderson suggested that he review document 1, which had
been prepared by the Legislative Finance Division (LFD) and
Co-Chair Foster's office.
Co-Chair Foster asked for a summary of the net result of
the changes. He asked for verification that the budget
would reflect a deficit of $300 million if ARPA funds were
not utilized.
Mr. Anderson replied that LFD would be better suited to
answer the question. He noted that LFD's fiscal summary
indicated there would be a deficit of just over $350
million.
1:47:15 PM
Co-Chair Foster stated that the overall picture would show
two numbers: $375 million as revenue replacement for ARPA
and a little over $500 million to cover the other functions
of ARPA funds. He relayed that the subtleties would be
explained later in the meeting. He reiterated that ARPA
funds had to be used, and he did not want to give the
impression that ARPA funds were being replaced with UGF.
The intent was to emphasize that ARPA was a one-time
funding source and should not be factored into the budget
as a reliable funding source. The funds should encourage
the legislature to be fiscally conservative.
Mr. Anderson returned to document 1. He explained that the
first column referred to the item numbers, the following
six columns referred to the fund source codes, the next
column referred to the net impact, and the final column
showed the location of the item within the bill. The first
item was revenue replacement which involved an increase of
$375.4 million in UGF. The second item was ASMI, which
experienced a $7 million decrease due to overextended
spending. The next item was the Department of Correction's
(DOC) DNA collection, which had previously been funded
through CSLFRF and had been shifted back to UGF. The
following item, the Department of Labor and Workforce
Development's (DLWD) workforce training, was also moved
from CSLFRF to UGF. Following that, the Department of
Public Safety's (DPS) Victims of Crimes Act (VOCA) had also
been moved from CSLFRF to UGF. He rolled the following
three University of Alaska items together: $10 million for
drones, $5 million for heavy oil, and $7.8 million for
minerals switched from CSLFRF to UGF.
Mr. Anderson continued to address the next item, which
reflected an addition of $5 million in UGF for rate
smoothing to allow for rate changes and charges. The
following two items were the Alaska Marine Highway System's
(AMHS) funds for calendar year (CY) 22 and the actual AMHS
increase. Both were currently funded through federal funds
but would potentially qualify for IIJA funds designated for
ferry systems. Both of the AMHS items had been switched to
UGF. Finally, the Department of Transportation and Public
Facilities (DOT) and other COVID-19 fund source items were
moved to UGF, totaling $21.8 million in actual COVID relief
and $560,000 in federal highway and CRRSAA funds. The
handout concluded that there was an increase of $522.2
million in UGF that had been added to the budget to
establish the true baseline. At a later date, the committee
would have a conversation about the redistribution of
CRRSAA and ARPA funds that had become available through
switching items to UGF.
1:53:41 PM
Mr. Anderson reviewed the net result of the changes in the
summary at the bottom of document 1. He noted that there
was an increase of $146.8 million of UGF, a federal
decrease of $148.8 million, and an actual reduction of $2
million in all funds in the governor's budget.
Co-Chair Foster emphasized that the governor had already
made his decision as to how he would like to spend the
federal ARPA and CSLFRF dollars. He suggested that the
committee would also determine how it would like to spend
the funds.
Vice-Chair Ortiz asked for more details on the rate
smoothing process.
Mr. Anderson answered that OMB and the Department of
Administration (DOA) worked with other departments to
standardize rates and charges. Through the process, there
could be fluctuations that were not been accounted for, and
rate smoothing held both harmless and the process was
worked through. Rate smoothing had been approved in 2021
and the process was continuing on in 2022.
Vice-Chair Ortiz stated his understanding that rate
smoothing allowed for an amount of money to be set aside
and made available to address any potential shortfalls.
Mr. Anderson responded in the affirmative.
1:56:01 PM
Representative Edgmon supported the process of switching
out the federal funds and building the budget back up from
the baseline. He understood that some of the funds would
not been available to the state until federal guidelines
were received.
Mr. Anderson answered that Mr. Alexei Painter from LFD
would likely have a better explanation. He clarified that
the second column on document 1 detailed the IIJA
investment. He was not sure what the federal guidelines
would be.
Representative Edgmon suggested that the state might not
receive the federal funds and would need to account for the
funds in another way.
Representative Carpenter commented that it was always
exciting to see how the legislature rolled out the budget
because it was never the same. He asked if there was a way
to explain the fund codes at the top of the handout to make
the conversation more accessible to the public.
Mr. Anderson answered that most of the time, the budget
spending was referred to as general funds, federal funds,
other, and designated general funds (DGF). At a more minute
level, the four fund categories each fell into specific
fund sources. For example, federal funds were provided by
federal departments and would be designated a fund source
code. He suggested that representatives from LFD could
offer a more detailed explanation.
Co-Chair Foster asked if Mr. Anderson knew the breakdown
within the columns on the handout.
2:00:08 PM
Mr. Anderson clarified that the first column with the fund
source code 1004 relating to UGF was the main designated
fund. He added that 1002 was the general federal fund code
at the moment because an IIJA fund source code had not yet
been established. He explained that the 1265 federal code
related to CARES funding and 1270 represented federal
funding through CRRSAA. He continued that 1269 and 1271
were applicable to ARPA and CSLFRF, and 1271 was revenue
replacement specifically attached to authorization given by
ARPA to replace lost revenue due to the pandemic.
Co-Chair Foster clarified that IIJA was the federal
infrastructure funds that were forthcoming to the state. He
understood that CRRSAA funds were mainly applicable to the
transportation sector.
Mr. Anderson nodded in agreement.
Co-Chair Foster added that CSLFRF referred to discretionary
money.
Representative Carpenter asked why more details were not
yet known about IIJA. He wondered if it was because the
federal agency had not yet given the information to the
state or if the federal agency itself did not know the
information.
Mr. Anderson answered that he was working with OMB to craft
a presentation that would specifically explain IIJA and
other COVID relief funds. He relayed that the IIJA bill had
been passed and signed, but the federal agencies were still
working through guidelines and regulations.
2:03:08 PM
Representative Josephson shared that he had been a student
of the governor's vetoes and had authored an op-ed on the
subject. He thought it was a great exercise in showcasing
the difference between recurring need and recurring
revenue. He was concerned about the three UA items: drones,
heavy oil, and minerals. He expected that the items would
be vetoed by the governor if they remained funded by UGF,
based on past practices.
Co-Chair Foster thought that it was possible that the
committee would fund the three items the same way the
governor funded the items. He thought it required a mindset
shift to refrain from adding any significant expenses to
the budget if it appeared there was a small surplus.
Representative Thompson thanked Mr. Anderson for explaining
some of the fund codes so that members of the public could
understand. He thought it would be helpful to list the
definitions of the codes in the documents themselves
because it could be confusing considering the vast number
of COVID related federal funds.
Mr. Anderson replied that he would work with LFD to
accommodate the request.
Representative Wool referred to the revenue replacement
line item in the far left column on document 1 and
understood that it referred to leftover ARPA money. He
thought that the $375 million UGF revenue replacement was
specifically intended for the operating budget, and it was
a misnomer to use UGF for revenue replacement. He thought
the UGF total of $146 million in the summary at the bottom
of the document made sense if the $375 million fund was not
included.
Mr. Anderson agreed that the revenue replacement was part
of ARPA and noted that in 2021, there had been a
conversation about splitting the amount into $500 million
for FY 22 and $500 million for FY 23. After the spending
that occurred in FY 22, $504 million was left on the table.
The governor's budget had exhausted the usage of the $504
million, which included $375 million in revenue
replacement. By excluding the $375 million, there could be
a full conversation on how much of the monies to use in
revenue replacement.
2:08:38 PM
Representative Wool asked for clarification on whether the
funds would expire if not used by a certain date.
Mr. Anderson believed the funds would be available through
FY 24.
Representative Wool understood there was $5 million
allocation for rate smoothing and a $7 million cut to ASMI.
He asked for verification that ASMI would not receive the
funding.
Mr. Anderson confirmed that the ASMI funding was intended
to be a one-time item that was a residual holdover.
Representative Johnson asked if it was fair to say that the
governor's hybrid budget followed the legislature's lead
from the previous year.
Mr. Anderson agreed that the governor followed the same
revenue replacement strategy that the legislature had
proposed.
Representative Johnson was concerned that the numbers for
the FY 22 management plan were not accurate unless the
COVID money was removed.
Mr. Anderson deferred to LFD.
Co-Chair Foster referred to document 2 (copy on file)
showing the FY 22 management plan. He asked if
Representative Johnson was referring to column 1 of the
handout which showed a deficit of $392 million.
Representative Johnson responded in the affirmative. She
understood that any figures in column 1 would need COVID
related funds to be removed to be accurate.
Co-Chair Foster believed the federal ARPA funds had already
been backed out of the numbers.
Mr. Anderson clarified that document 2 was a comparison of
all funds and document 3 (copy on file) was a comparison of
UGF only. The only real change of all funds in document 2
was a $2 million decrement at the bottom of the first page
and in the middle of the second page. He explained that
document 3 showed the UGF comparison and showed an increase
of $146.8 million. The reason for the increase was because
the revenue replacement fund source code had been labeled
as UGF. He suggested that Mr. Alexei Painter from LFD offer
more detail.
2:13:17 PM
Co-Chair Foster corrected himself and thought he might have
been confusing FY 22 and FY 23. He deferred to Mr. Painter.
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION (via
teleconference), answered that because the changes were UGF
to UGF, the year to year budgets were comparable because
all of the revenue replacement was still UGF. The totals
would not change; the only change would be the deficit
number.
Representative Johnson asked for verification that the FY
22 and FY 23 management plans would compare directly. She
asked if the plan would need to have the federal money
backed out to be comparable.
Mr. Painter answered that the revenue replacement items
would all show as UGF to avoid year to year distortions in
the budget and would be comparable from year to year. He
relayed that it was a deliberate strategy crafted by LFD
and OMB. There was also a tracking code for OMB to report
the revenue replacement use to the federal government and
many multiyear items in the previous year's supplemental.
The only ongoing item between FY 22 and FY 23 using COVID
related funds was DOC's DNA collections piece. Other than
that, the items were one-time uses year to year.
Representative Johnson thought she would need further
clarification offline.
Representative Josephson stated that part of the revenue
replacement from the previous year had to be defensible as
replacement for lost local revenue. He asked if the
circumstance was the same in the current year.
Mr. Anderson deferred to Mr. Painter.
Mr. Painter replied that the revenue replacement
calculation executed by the Department of Revenue (DOR) had
been performed in accordance with federal guidance. He
elaborated that substantial lost revenue was demonstrated
in FY 20 and FY 21. The monies could be implemented as
revenue replacement during the qualifying period which was
through the end of CY 24.
Representative Josephson asked for verification that it
would not be necessary to prove up the lost revenue for
each category. For example, oil prices were currently up
but the prices had been down as a result of the original
shock of the pandemic.
Mr. Painter responded in the affirmative. The state would
be permitted to use the entire available amount of the
COVID related relief funds for revenue replacement because
there was significant lost revenue in 2020 and 2021. The
revenue replacement funds were not required to be used in
the same year in which the revenue was lost.
2:18:50 PM
Representative Thompson referenced the three UA items in
document 1: drones, heavy oil, and minerals. He asked if
the items would be better suited for the capital budget.
Mr. Painter replied that Representative Thompson had a
great point. He agreed that the three items were more
traditionally considered capital items. The fund source of
CSLFRF was only available through December of 2024 and it
was a multiyear item that would expire around that time.
However, he agreed it should really be a capital budget
item, especially if it became an item funded by UGF. He
relayed that LFD would encourage moving the UA items to the
capital budget.
Co-Chair Foster asked if Mr. Anderson had completed his
presentation.
Mr. Anderson responded that he was finished.
2:20:17 PM
AT EASE
2:23:03 PM
RECONVENED
Co-Chair Foster asked if Representative Rasmussen was
online. It was unclear whether she still was online. He
reminded members that there had been a motion to adopt the
CS.
Co-Chair Foster WITHDREW his OBJECTION to the adoption of
the CS.
Representative Carpenter OBJECTED in order to get a
statement on the record. He thought that jumping from one
budget method to another method from year to year was
confusing. He would have to spend a good amount of time
learning about the process and thought the change would
require additional explanation to the public.
Co-Chair Foster thought Representative Carpenter had a good
point. The budget process had always been an ongoing debate
and change added another wrinkle to the process.
Vice-Chair Ortiz commented that the fluctuation was due to
the changes in federal funds. He stated that until
recently, the legislature had not had to deal with dramatic
changes due to the pandemic. He thought that procedural
changes were a result of the current circumstances. He did
not believe the fluctuations would continue after the
federal funds expired and there would be more
predictability.
Co-Chair Foster agreed. He stated that his goal was to put
downward pressure on spending, which he believed would be
accomplished by the CS.
There being NO further OBJECTION, CSHB 218, Work Draft 32-
GH2686\W (Marx, 1/27/22) was ADOPTED.
^PRESENTATION: LEGISLATIVE FINANCE DIVISION BASELINE and
GOVERNOR'S 10-YEAR PLAN
2:28:05 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION (via
teleconference), provided a PowerPoint presentation titled
"Comparison of Governor's 10-Year Plan to LFD Baseline,"
dated January 27, 2022 (copy on file). He began on slide 2
and provided an outline of his presentation. He turned to
slide 3 and offered a review of LFD's modeling baseline as
follows:
• Legislative Finance's fiscal model is designed to show
policy makers the longer-term impact of fiscal policy
decisions.
• The baseline assumptions are essentially that current
budget levels are maintained, adjusted for inflation.
Policy changes are then applied against that baseline.
• Our default is to assume that statutory formulas will
be followed.
Mr. Painter turned to slide 4 and reviewed LFD's revenue
assumptions as follows:
• LFD's baseline revenue assumptions are the
Department of Revenue's Fall Revenue Forecast.
- This assumes $71 oil in FY23, following futures
market thereafter.
• DNR oil production forecast projects that Alaska
North Slope production will increase from 500.2
thousand barrels per day in FY23 to 586.2 thousand
barrels per day in FY31.
• For the Permanent Fund, we use Callan's return
assumption of 5.86% total return in FY22 and 6.20%
thereafter.
Mr. Painter moved to slide 5 and reviewed LFD spending
assumptions as follows:
• For agency operations, these scenarios assume the
Governor's FY23 budget grows with inflation (2.0%).
• For statewide items, the baseline assumes that all
items are funded to their statutory levels beyond
FY23.
- This includes School Debt Reimbursement, the REAA
Fund, Community Assistance, oil and gas tax credits.
• For the capital budget, we assume the Governor's FY23
capital budget grows with inflation (2.0%)
• For supplementals we assume $50.0 million per year.
This is based on the average amount of supplemental
appropriations minus lapsing funds each year
2:31:40 PM
Mr. Painter highlighted the LFD modeling baseline on slide
6. He explained the modeling showed a deficit of $1.4
billion in FY 23, which would quickly go through the
Constitutional Budget Reserve (CBR). The deficit would
require additional draws from the Earnings Reserve Account
(ERA) in order to reach budget levels based on the
statutory dividend.
Mr. Painter moved to slide 7 and addressed the policy
changes in the governor's 10-year plan as follows:
• PFD is 50% of POMV, including an FY22 supplemental;
• Agency operations are held flat in FY24, then grow at
1.5% for all items except Medicaid, which grows at
1.0%;
• Beginning in FY24, School Debt Reimbursement is funded
at 50%, and the REAA Fund Cap is reduced to a flat
$17.5 million;
• PERS and TRS health care contributions are not funded;
• The capital budget is held flat with no inflationary
growth, but a General Obligation Bond issued in FY23
increases debt service by $22.8 million in FY24 and
beyond;
• Supplementals and lapse are assumed to cancel out; and
• Governor uses $375.4 million of ARPA revenue
replacement in FY23.
2:34:37 PM
Representative Josephson shared that he was the author of
HB 55 in its original form, which was a defined benefits
bill that informed future tiers that special health
insurance would not be provided due to its costliness. He
did not understand the governor's thought process because
it seemed to indicate that retirees would not need
additional health care funding for the next decade. He
asked if he was understanding the fourth bullet on slide 7
correctly.
Mr. Painter answered that when unfunded liability was first
opened up, there were two funds: a pension fund and a
health care fund. The additional state contribution
implemented in FY 14 was distributed to both funds based on
the fund ratio at the time. Since then, AlaskaCare had held
its costs significantly below the actuarial expectations
from FY 14. There was an increase to the AlaskaCare rate in
the current year for the first time in recent history
through a number of cost saving measures. The actuarial
analysis found that the health care contribution fund was
funded at greater than a 100 percent ratio even if
additional state contributions were not provided. Part of
the reason for cautionary action by the Alaska Retirement
Management Board (ARMB) was that the situation could
change, and the board wanted to take it a year at a time.
The system was fully funded and there was no need to
continue funding the healthcare portion. He noted that the
pension side was still underfunded, but the fourth bullet
related specifically to the health care fund.
Representative Josephson relayed that he had confidence in
Mr. Painter and did not doubt to his statement. However, he
thought the choice to not fund health care was
counterintuitive considering there had been so many
conversations about the rising costs of health care.
Representative Carpenter stated that maybe the adequate
funding of heath care was evidence that the arguments in
the past were not accurate.
Mr. Painter advanced to slide 8 and provided a comparison
of the LFD model to the governor's model as follows:
• Other than policy choices, there is only one
substantive difference in assumptions:
- LFD adopted an assumption from the Fiscal Plan
Working Group that School Bond Debt Reimbursement will
begin to add new debt after the current moratorium
expires. This slightly increases the baseline for both
School Debt and the REAA Fund.
• Other differences are due to rounding and presentation
differences (for example, OMB includes fund transfers
with statewide items, LFD separates them).
• We also have slightly different CBR starting balances
LFD will not update last year's estimates until
audited numbers are available, OMB has slightly higher
estimates based on pre-audit actuals.
2:40:14 PM
Representative Carpenter suggested that it was important to
keep in mind all the assumptions that came from the fiscal
policy working group. He did not think it was the intention
of the legislature to cherry pick from the working group's
recommendations, but to instead look at the comprehensive
plan.
Mr. Painter continued to slide 9, which showed a comparison
of the governor's 10-year plan to the LFD baseline. The
main difference in FY 23 was the supplemental assumption.
There was about a $200 billion difference in FY 24 due to
the flat budget proposed by the governor that did not
include inflationary growth. In the following years, the
amount compounded and there was a slower growth rate. By FY
31, the policy changes proposed by the governor resulted in
a budget that was about $400 billion less than LFD's
baseline. He highlighted that in LFD's baseline, there was
a drop in the budget between FY 25 and FY 26 due to oil and
gas tax credits being paid off in FY 26 and resulted in a
significant decrease in the budget.
Mr. Painter moved to slide 10 and discussed the difference
in agency operations between the governor's 10-year plan
and the LFD baseline. He noted that although the
differences between the two seemed small, the amounts
compounded quickly over time. For example, the $80 million
difference in FY 24 became a $270 million difference by FY
31. It was surprisingly powerful over time.
Mr. Painter moved to slide 11 which compared the statewide
items to the governor's 10-year plan and the LFD baseline.
He pointed out that there was a slight difference in debt
service reflected by the school debt amount and a
significant difference in retirement due to the assumption
that health care would not be funded. He summarized that
the difference between the governor's 10-year plan and the
LFD baseline in terms of statewide items was in the realm
of $40 million to $70 million per year.
Mr. Painter advanced to slide 12 and discussed the LFD
modeling baseline chart, which modeled the switch from the
statutory dividend to the 50 percent of market value (POMV)
draw. The proposed switch would result in a $400 million
deficit in FY 23 if there were no other policy changes. The
deficit would grow to about $484 million in FY 24 and would
shrink down to $312 million in FY 31 and would be
persistent if the governor's other policy changes were not
also implemented. The dividend change alone was not enough
to close the deficit in the model.
2:45:44 PM
Mr. Painter addressed the governor's 10-year plan in the
LFD model on slide 13. He relayed that the numbers were
close to what was shown by the governor's plan itself.
There were significant deficits from FY 23 through FY 25,
but the deficit began to shrink in FY 26. He relayed that
LFD agreed with the governor's analysis that the deficit
would be closed if all of the proposed policy changes were
implemented.
Representative Josephson asked if Mr. Painter could
reiterate what all of the policy changes were.
Mr. Painter responded that the changes were the items
listed on slide 7. The most material components were the
proposed year of no budget growth and the partial funding
of numerous statewide items.
Representative Josephson stated that in a recent House Ways
and Means Committee meeting, the Alaska State Hospital and
Nursing Home Association (ASHNHA) shared that it did not
agree that a one percent growth rate for Medicaid was
sustainable. In the same meeting, school board
organizations reported that the base student allocation
(BSA) real spending was down significantly, and every
department was experiencing massive turnover. He thought it
was important to keep the information in mind.
Representative Edgmon stated he had the same concern as
Representative Josephson. He thought the actual budget
process was complex and the proposed policy changes were
not inclusive of the complexities. He argued that there
were other perspectives that should be considered. He
understood the intent was to compare a 50/50 permanent fund
dividend (PFD) with a full PFD, but he thought the real
world would likely intervene in the plan and it would not
play out as projected. There were many variables that had
not been considered, and costs for things like Medicaid and
education could increase dramatically.
2:50:17 PM
Representative Carpenter appreciated the first bullet point
on slide 7 and argued that a 50 percent of POMV draw was
outlined in statute. The real question was how the income
should be determined. He thought that using a 50 percent of
POMV draw and using 21 percent of net earnings were equally
legitimate strategies according to the law.
Representative LeBon pointed out that 50 percent of POMV
was not current law.
Representative Carpenter understood that the projections in
the graph on slide 13 were following the projections for
growth of the Permanent Fund and its earnings as well as
the fall forecast for oil and gas revenue.
Mr. Painter responded in the affirmative.
Mr. Painter advanced to slide 14 and addressed whether the
baseline should be higher:
• Several ongoing items in the Governor's budget are
funded with short-term federal funds:
- DOC's DNA Tracking program: $1.1 million CSLFRF
(need to be replaced in FY24)
AMHS: ~$82.0 million in place of UGF from federal
infrastructure bill (need to be replaced in FY27)
DOTPF: $22.4 million of FHWA and FAA funds (need to
be replaced in FY24/25)
• In addition, the ARM Board decision not to fund
retiree health care is backed out in LFD's baseline
only for the statewide item. It would also have about
a $15.9 million UGF impact on agency budgets.
Mr. Painter moved to slide 15 to discuss some additional
items that should be considered, such as raising the
baseline. The modeling showed what might happen when one-
time federal funds were replaced with UGF. Altogether, the
effected items would cause an increase of $39 million in
the next couple of years and a $120 million increase in the
long-term. If growth rate was accounted for, the difference
between the governor's budget and the baseline would be
increased. There was a minor difference in the first few
years, but by FY 31 there was an over $500 million
difference between the governor's budget and the LFD
baseline. If the legislature felt the growth rate of
inflation was insufficient, he suggested that members might
support a policy change in the opposite direction of the
governor's proposal.
Representative Josephson asked for verification that the
assumption did not address any fiscal notes of legislation
that had not yet passed, such as the Alaska Reads Act.
Mr. Painter responded that the governor's 10-year plan did
not account for legislation that had not yet passed.
Representative Josephson acknowledged that although most
bills did not pass, there were hundreds of bills. It was
impossible to know which bills would pass in the current
year, and it was even less possible to know which bills
would pass in future years.
Mr. Painter responded in the affirmative and stated that it
would be based on policy changes. He relayed that the
governor had incorporated policy changes into his baseline
in past years, but he had not in the current year. He
encouraged the legislature to include any desired policy
changes into its projections going forward.
Representative Josephson thought the suggestion was fair.
2:56:30 PM
Vice-Chair Ortiz asked about the origin of the $82 million
Alaska Marine Highway System (AMHS) funding. He wondered
what would happen to the funding once the federal money had
been implemented.
Mr. Painter replied that the $82 million figure represented
two other figures combined. In FY 22, the UGF amount that
was distributed to AMHS only represented one year even
though it actually funded one and a half years. The funding
amount included 18-months' worth of other changes totaling
$59.4 million. The governor was also proposing a service
increase that would grow the budget by $22.6 million, which
brought the number to $82 million. The $82 million figure
represented the service level proposed in the governor's
budget and not the current service level, which was
slightly lower.
Vice-Chair Ortiz thought that AMHS had been funded at about
$140 million in FY 15.
Mr. Painter did not know the numbers off hand.
Vice-Chair Ortiz emphasized that although it was a service
increase as compared to recent years, the service was much
lower than it had been in FY 15 and the years prior.
Mr. Painter turned to slide 16 and noted that the committee
had heard a presentation from Callan Associates earlier in
the week. He recalled that Callan had done some
probabilistic modeling of the Permanent Fund for the Alaska
Permanent Fund Corporation (APFC). He explained that DOR
used to run similar modeling, and he wanted LFD to have a
similar tool. The next portion of the presentation would
offer a few scenarios to demonstrate the capabilities of
the modeling.
CONNOR BELL, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION,
spoke to slide 16. He explained that Callan had a more
elaborate model than LFD, but LFD's model was more
comprehensive. He paraphrased the slide as follows:
• LFD developed a probabilistic model to enhance our
modeling capability. Unlike the Callan model, it is a
complete fiscal model with the budget and revenue as
well as the Permanent Fund.
Results for Permanent Fund scenarios are similar to
what Callan's model produces.
• Runs 2,000 scenarios with varying assumptions for
Permanent Fund earnings, oil prices, and oil
production.
• Assumes LFD baseline budget, with only PFD amount
changing by scenario.
• APFC 6.2% average return with 13.2% annualized
standard deviation.
• Average oil price equals DOR's fall forecast. Applies
standard deviation equal to 34% of a given year's
average price.
• LFD can run additional scenarios as requested by
legislators and staff.
Mr. Bell added that LFD's modeling held inflation constant.
The LFD model differed in some ways from Callan, such as
assuming that there would be no inflation proofing until FY
25. He explained that LFD would be happy to run any
scenarios under the models and provide the results to
legislators.
3:02:29 PM
Mr. Bell advanced to slide 17 and discussed a chart showing
a stress test for a statutory PFD. The vertical black bar
ranged from the tenth percentile to the ninetieth
percentile of the expected outcomes. He highlighted that
the difference between a $20 oil price and $30 oil price
did not reflect a similar difference in overall revenue,
while the difference between an $80 oil price and $90 oil
price had a significant impact on revenue. Under the
statutory PFD, the median deficit was about $1 billion to
$1.5 billion per year. However, deficits of $2.5 billion or
surpluses up to $5 billion were also possible. The
likelihood of the deficit being above $2.5 billion in FY 23
was about 10 percent.
Representative Carpenter clarified that the statutory PFD
referred to 21 percent of net earnings and 50 percent of
the determination of the dollar figure of the dividend.
Mr. Bell answered in the affirmative.
Mr. Bell moved to slide 18 and explained that the chart on
the slide was the same as the one on slide 17, but with a
PFD equal to 50 percent of POMV. The chart represented the
governor's budget proposal. The median deficit was around
$300 million to $500 million, and surpluses ranged from $4
billion to $6 billion.
Mr. Bell advanced to slide 19, which was similar to the
previous two charts but with a $1,100 per person PFD. The
chart showed a $500 million to $1 billion surplus and up to
$700 million in deficits. There were a huge range of
outcomes, many of which were particularly dependent upon
the price of oil and production. There could be substantial
payouts or small payouts of the dividend.
Mr. Bell reviewed slide 20 and discussed the probability of
an ERA shortfall by PFD scenario. Between FY 23 and FY 25,
an ERA shortfall would not be possible in any modeled
scenario. Currently, there was a healthy balance of
unrealized gains in ERA that would be realized in the next
few years and increase ERA. The possibility of shortfalls
increased in FY 26, and by FY 31 there was almost a 30
percent chance of overdraw under the statutory PFD
scenario, a 23 percent chance under the 50/50 PFD scenario,
and an 18 percent chance under the $1,100 per person
scenario.
3:08:09 PM
Representative Josephson asked Mr. Bell if an ERA shortfall
meant depletion of ERA in full.
Mr. Bell responded in the affirmative. He clarified that a
shortfall would mean the ERA balance was zero and all of
the money in the Permanent Fund was in the principal.
Representative Carpenter noted that gross domestic product
(GDP) might be a measure of the health of an economy. He
asked what sort of growth was assumed under the listed
scenarios.
Mr. Bell responded that GDP was not accounted for in the
specific modeling. The most significant factor was oil
prices.
Representative Carpenter commented that most Alaskans did
not work in the oil industry. He asked what would happen if
there was a two percent increase in GDP in the next decade
that reflected an increase in state spending.
Mr. Bell responded that LFD would be happy to provide an
analysis that assumed that budgets grew at a higher rate
than anticipated.
Representative Carpenter thought the analysis was key to
the legislature's discussions. He did not think there was
enough discussion on how to grow the economy. He thought
there should be discussions particularly on strategies to
grow the private sector.
3:12:03 PM
Representative Rasmussen was curious how LFD derived the 18
percent or 30 percent surety that the ERA would be depleted
by FY 26 or FY 31. She thought there were many variables
that could not be easily predicted.
Mr. Bell answered LFD was modeling a range of oil prices
and PFD returns, and even the ranges used were somewhat
subjective. He relayed that LFD did not intend to report
that the surety percentages were precise, but simply that
the percentages were based on the ranges of different
variables.
Representative Rasmussen attempted to respond, but her
response was inaudible.
Co-Chair Foster noted that Representative Rasmussen's
response was inaudible due to cell phone service.
Representative Edgmon understood that the modeling was
subjective. He asked if the current year was the first year
during which LFD had used the modeling.
Mr. Bell responded in the affirmative.
Representative Edgmon looked forward to the modeling being
developed more in the future and was excited about modeling
additional probabilities.
Representative Carpenter asked for clarification of the
50/50 POMV column on slide 20. He asked if it reflected the
governor's plan.
Mr. Bell answered that it did not include all of the
governor's proposed policy changes or a supplemental PFD.
It strictly modeled paying out a PFD equal to 50 percent of
the POMV draw.
Representative Carpenter believed the governor's plan
rolled the ERA into the corpus of the fund, in which case
there would be no ERA shortfall because there would be no
ERA. He asked if it meant there would not be a payment from
the Permanent Fund and wanted to see the scenario modeled.
Mr. Bell believed Callan's modeling showed the information.
Under the governor's plan, the principal and ERA would be
combined and there would be no possibility of overdraws.
The modeling done by LFD specifically showed how the budget
modeling would play in-to overdraws.
Representative Carpenter wondered if there would be a
payment from the Permanent Fund under a plan where there
was no ERA. He thought the modeling for the scenario should
be examined.
3:18:54 PM
Mr. Bell answered that LFD could run modeling showing the
information. In the modeling on slide 20, ERA served as a
last chance reserve to fill deficits and the Permanent Fund
would be one entity, and due to the size of the fund the
likelihood of overdrawing was negligible. He was certain
there would still be a PFD payout in a scenario where the
principal and ERA were combined.
Representative Carpenter understood that an ERA shortfall
meant an ERA depletion in full. He wanted to know the
probability of a shortfall in the scenario.
Mr. Bell responded that in a scenario where ERA was
combined into the principal, the POMV draw would not
necessarily change but it would simply be paid out of the
fund itself. There would be a constitutional barrier that
prevented drawing any amount in excess of the POMV draw.
Representative Carpenter stated that the concept was
otherwise known as a spending limit.
Mr. Painter added that in the model, the failure point was
the point at which ERA was fully depleted. If the POMV draw
was constitutionalized, the failure point would change to
the point at which CBR was depleted. He emphasized that ERA
draws were often used to fill budget deficits, and
therefore the likelihood that there would be a lack of
funds to fill deficits would increase because ERA draws
would no longer be possible.
3:21:52 PM
Representative Josephson asked if slide 20 assumed LFD's
two percent inflation and did not incorporate fiscal notes.
Mr. Bell responded in the affirmative. The slide assumed a
two percent annual increase in agency operations.
Representative Josephson indicated that a world with no
fiscal notes would eliminate a lot of bills. He asked for
verification that the FY 31 projections would only increase
if fiscal notes were incorporated.
Mr. Bell responded that the projections would increase if
the fiscal notes were revenue negative and led to more
expenditures.
HB 281 was HEARD and HELD in committee for further
consideration.
HB 282 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster reviewed the schedule for the following
day. He shared that Co-Chair Merrick would hold a hearing
on February 2, 2022 to hear for HB 54, HB 90, and HB 111.
The bills had amendment deadlines in the past, but there
would be new amendment deadlines because it was a new year.
Vice-Chair Ortiz asked for clarification on the date of the
meeting.
Co-Chair Foster repeated the information.
ADJOURNMENT
3:25:01 PM
The meeting was adjourned at 3:24 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN LFD 10yr to LFD Baseline Presentation 1-27-22 (002).pdf |
HFIN 1/27/2022 1:30:00 PM |
|
| HB 281 # 3 Baseline Agency Summary UGF.pdf |
HFIN 1/27/2022 1:30:00 PM |
HB 281 |
| HB 281 #1 Changes in House Baseline CS.pdf |
HFIN 1/27/2022 1:30:00 PM |
HB 281 |
| HB 281 #2 Baseline Agency Summary All Funds.pdf |
HFIN 1/27/2022 1:30:00 PM |
HB 281 |
| HB 281 #4 Baseline Transaction Compare All Agencies.pdf |
HFIN 1/27/2022 1:30:00 PM |
HB 281 |
| HB 281 CS FIN v.W Baseline Budget CS 012722.pdf |
HFIN 1/27/2022 1:30:00 PM |
HB 281 |