Legislature(2011 - 2012)HOUSE FINANCE 519
01/19/2012 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview of the Governor's Fy 2013 Budget: Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 19, 2012
1:35 p.m.
1:35:32 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:35 p.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division;
Representative Alan Austerman.
SUMMARY
OVERVIEW OF THE GOVERNOR'S FY 2013 BUDGET:
Legislative Finance Division
Co-Chair Thomas introduced constituents from Skagway and
welcomed them to the committee room.
^OVERVIEW OF THE GOVERNOR'S FY 2013 BUDGET: LEGISLATIVE
FINANCE DIVISION
1:38:20 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION (LFD),
agreed with comments made by Office of Management and
Budget (OMB) Director Karen Rehfeld who had discussed the
governor's FY 13 operating budget the prior day. He
explained that LFD agreed with the governor's presentation
of the budget; the OMB fiscal summaries matched on a fund
group and dollar basis.
Mr. Teal began a PowerPoint presentation titled
"Legislative Fiscal Analyst's Overview of the Governor's FY
13 Budget" and relayed his intent to look at the budget in
the context of Alaska's future. He informed the committee
that the LFD Legislative Fiscal Analyst's Overview of the
Governor's Request for the FY 13 budget was available on
the LFD website (copy on file). The book included capital
and operating budget fiscal summaries and agency operating
budget details.
Mr. Teal believed the LFD report contained a significant
amount of good news. There was a $3.7 billion surplus that
consisted of $1.9 billion from FY 12 and $1.8 billion from
FY 13. He relayed that the current surplus was "huge"
compared to budget surpluses in past years. He elaborated
that in the prior year the total FY 11/FY 12 surplus had
initially been $25 million. The FY 12 surplus had grown
above $400 million and high oil prices had increased it to
$1.9 billion. He expounded that the available $3.7 billion
surplus was over 25 percent of the $14 billion that had
been set aside beginning in 2005.
Mr. Teal shared that it was good news that the governor's
operating budget growth rate was 3.2 percent and not the
7.8 percent rate that had been in place since 2005.
1:41:54 PM
Mr. Teal pointed to slide 1 titled "Unrestricted General
Fund Revenue/Budget." The chart illustrated what would
happen if agency operating budgets continued to grow at 7.8
percent, capital budgets were $882 million beginning in FY
13, and costs stayed flat statewide (with the exception of
retirement). He discussed that under the scenario, deficits
would occur beginning in 2015 and would ultimately reach
approximately $3 billion; financial reserves would be
exhausted by 2025. He communicated that the 3.2 percent
growth rate would result in a substantial drop in reserve
declines and would come close to balancing the budget. He
explained that the capital budget would not remain at $882
million during a deficit. He provided a hypothetical
scenario in which the capital budget was reduced to $500
million, which would have helped to balance the budget.
1:43:34 PM
Mr. Teal continued on slide 2: "Projected Reserve
Balances." The chart illustrated how reserve balances would
be impacted by a growth rate of 7.8 percent versus a growth
rate of 3.2 percent. With a 7.8 percent growth rate,
reserves were rapidly depleted and would be gone by 2025;
however, with a growth rate of 3.2 percent, reserves
remained at approximately $20 billion. He stressed that a
growth rate of 7.8 percent was not sustainable. He
communicated that the governor's budget made a strong
effort to reign in the operating growth.
Mr. Teal addressed slide 3 titled "Projected Direct State
Contributions to PERS and TRS," and relayed that retirement
contributions also had an impact on the future budget. He
referred to the state's decision to cap the Teachers'
Public Retirement System (TRS) and the Public Employees'
Retirement System (PERS) at 12.56 percent and 22 percent
respectively. He discussed that the state had initially
believed the costs would be approximately $200 million,
that they would decline rapidly, and that it would be out
of the business of state assistance by 2020 or so; however,
poor investment returns beginning in 2008 had resulted in
lost revenue. The losses led to revised future earnings and
actuarial assumptions and an increased unfunded retirement
liability of $450 million or more in FY 12 and over $600
million in FY 13. He elaborated that the liability would
reach approximately $800 million by FY 16 and would grow to
approximately $1.2 billion per year in subsequent years. He
emphasized the large size of the numbers and noted that
current K-12 education funding was approximately $1.2
million.
1:46:25 PM
Mr. Teal informed the committee that there was some good
news related state retirement costs. He explained that
Alaska's system had unique characteristics that made the
standard actuarial analysis obsolete. He furthered that
Buck Consultants, the state's actuary, had modeled an
alternative concept showing that a single $2 billion
contribution to PERS would be sufficient to fund all future
benefits without additional state contributions. He
communicated that the $2 billion payment to PERS would
result in a savings of approximately $400 million per year.
The state would see its $2 billion investment returned in
five years and by 2025 the savings would be above $4.8
billion. He stressed that the total operating budget
reduction would be over $7 billion by the time the unfunded
PERS liability had been paid off. Under the Buck scenario,
the state would spend $2 billion upfront, but it would have
more reserves in 2025 than it would if it continued to make
annual contributions.
1:48:09 PM
Vice-chair Fairclough wondered whether "frontloading" the
PERS/TRS obligations would improve the state's credit
rating.
Mr. Teal did not know whether the state would be rewarded
with an improved credit rating if it paid the liability
off; however, he did not believe the payment would hurt its
current AAA rating. He relayed that credit agencies
factored multiple items into ratings including future
revenue streams; the $2 billion payment would make an
impact, but it would not be as sizable as one may hope. He
opined that credit based on a retirement system should be
rated equally, but that was not the case. He expounded that
unlike most states, Alaska currently funded its health care
liabilities and stated its liability more honestly;
however, states were all ranked the same.
Representative Gara asked whether the $2 billion payment
would sufficiently fund the current and future unfunded
retirement liability.
Mr. Teal responded that the actuarial model required a one-
time payment of $2 billion, which would eliminate the need
for future contributions. The municipalities and the state
would continue to pay their 22 percent portion on payroll.
He clarified that the current annual payments of $300
million to $466 million (above the 22 percent rate) would
stop.
Representative Gara asked when the retirement liability
would be paid down if the state made the $2 billion payment
combined with the annual 22 percent contributions. Mr. Teal
asked for clarification on the question. Representative
Gara wondered what would occur in the last year projected
on slide 3 [FY 33].
Mr. Teal replied that the state would save approximately $5
billion in what would have been annual contributions to the
retirement fund. Without the $2 billion payment the
liability would not be fully funded in the future. He
explained that money would be transferred from a reserve
account to make the benefit payments if necessary. The
retirement model did not completely eliminate the unfunded
liability by 2029, but it did eliminate the need for
additional payments above the 22 percent.
1:52:16 PM
Representative Doogan asked whether the model funded the
liability for both PERS and TRS.
Mr. Teal replied in the negative. The TRS system was
significantly worse off and had a separate model; a payment
of $4 billion would be required to fix the system. He
elaborated that the $4 billion would save approximately the
same amount that would have been saved in the PERS system.
The state would initially be down $6 billion in reserves,
but reserves would continue to grow and would take time to
recover.
Co-Chair Thomas informed the committee that there would be
a more in-depth discussion on the issue at a later time.
Co-Chair Stoltze remarked that there was a much broader
concern about the system that was not reflected in the
government point of view. He referenced constituent
concerns related to dependence on a declining industry.
Mr. Teal agreed that there was an expenditure side and
revenue side of a budget problem. The revenue side required
a discussion about oil production taxes, which was almost
independent from the expenditure side of the budget. He
acknowledged that the revenue side was equally as
important, but he was focused on the expenditure aspects.
He emphasized that the unfunded retirement liability was a
large driver of the budget and would become a significant
problem in the future; however, he believed there was a
solution.
Mr. Teal discussed reasons LFD analysts were pessimistic
about the future on slide 4 titled "FY 12/13 General Fund -
Fiscal Sensitivity Overlay." He explained that the revenue
curve was dependent on price of oil; however, each year as
production declined the revenue curve shifted downward. The
curve was approximately $900 million less in FY 13 than it
had been in FY 12 under any given price of oil; with oil at
$95 per barrel revenue was approximately $7 billion in FY
12, but it was under $6 billion in FY 13. Production
decline would lead profit loss due to lower tax revenue
combined with higher capital and operating costs. The
revenue curve would shift downward and the breakeven price
of oil would continue to increase; the breakeven rate had
been $94 per barrel in FY 12 and would be approximately
$100 per barrel in FY 13. He added that the revenue curve
shown on slide 1 took the declining production into
account. The decline was partially offset by the increased
price of oil.
1:58:27 PM
Mr. Teal relayed that the second issue was related to the
governor's proposed 3.2 percent agency operations growth
rate, which would be difficult to achieve. He expressed
skepticism about the plausibility of the proposed $882
million capital budget. He believed it would be hard to
stay at the proposed level because there were several items
missing from the budget. Education funding for K-12 was
flat from the prior year's budget and typically every $100
increase in the Base Student Allocation (BSA) cost $25
million; school boards had discussed a $300 increase in
BSA, which equated to approximately $75 million. The Alaska
Gasline Inducement Act (AGIA) had been short funded by
approximately $100 million. He communicated that the fuel
trigger was at the same level as the prior year and stopped
at $100; however, the projected price of oil was $109 per
barrel. Extending the fuel trigger up to the projected
price of oil would cost approximately $9 million.
Additionally, the proposed budget did not include $3.5
million in actuarially required Judicial Retirement System
(JRS) contributions.
Mr. Teal discussed that a number of funds spent more than
they brought in including, fish and game, oil and
hazardous, worker's safety, Alaska Marine Highway System,
the Department of Natural Resources land disposal, and
others. He discussed that agencies typically had to request
additional general funds when their normal fund source was
depleted. A solution to the structural problem could take
up to $20 million for a one-time fix and significantly more
for a longer term solution. Unlike other states, Alaska did
not have sales and income taxes to fix the bulk of its
revenue problems. Alaska currently depended on oil revenue;
however, the resource-generated revenue only lasted as long
as the resource itself. He communicated that without
additional oil production the state would be forced into
watching its revenue decline. He compared the state to an
individual near retirement who would have to rely on
savings.
2:03:03 PM
Mr. Teal emphasized that increased current savings improved
the likelihood that the state could avoid income and sales
taxes and losing the Permanent Fund Dividend in the future.
He did not believe the FY 13 budget process would involve
dissecting the governor's increments because there were not
many increments on a department-by-department level. He
thought the budget process would focus on the decision to
spend versus the decision to build reserves. He believed
that the combined importance of the revenue and expenditure
decisions made the FY 13 budget cycle critical to Alaska's
future.
Representative Gara pointed to the chart on slide 4. He
referenced discussion that the breakeven point would be $97
per barrel in the FY 13 budget. He believed there was an
$80 million difference between the FY 12 and FY 13 budgets
and wondered whether the breakeven point would be $103 per
barrel if the legislature added $80 million to the FY 13
budget.
Mr. Teal responded that point A on slide 4 reflected the FY
12 revenue curve and level of spending. He relayed that the
governor's FY 13 budget was $385 million lower than the FY
12 budget; although, the governor had reported it was $800
million less. He explained that the budget was $800 million
less if money was not put into savings, but he believed
that it was necessary to look at what was spent and not at
the savings or transfers. At the FY 12 revenue curve the
breakeven point was $90 per barrel, but point C reflected
the amount under the proposed FY 13 budget. He explained
that point D showed what would happen if the FY 13 budget
was increased to the FY 12 level; the level would move
beyond point D if the FY 13 budget was increased above FY
12 spending. He added that the breakeven point would be
$103 per barrel if an additional $100 million was added to
the budget.
2:06:45 PM
Representative Gara asked whether the chart on slide 4
showed an $800 million or a $300 million difference between
FY 12 and FY 13. Mr. Teal answered that the FY 13 curve was
$385 million less than the FY 12 curve.
Representative Gara wondered whether the breakeven point
would be approximately $103 per barrel if an additional
$385 million were added to the budget.
Mr. Teal explained that the lower line on the chart (slide
4) was $385 million less than the $7 billion level in FY
12. He clarified that the level would be at point D on the
chart if the budget was equal to the FY 12 level. The point
would reach $103 per barrel if an additional $385 million
was added to the FY 13 budget.
Representative Doogan asked why the governor's budget was
$385 million less than the prior year.
Mr. Teal referred to page 8 of the FY 13 LFD budget book.
The operating costs were $253 million more than the prior
year; however, capital expenditures were $638 million
lower. The agency operating budgets had been increased
between $150 million to $160 million; a significant portion
was due to non-formula increases. Medicaid was up
approximately $45 million, but K-12 education would require
approximately $17 million less in FY 13 due to falling
enrollment numbers.
Representative Doogan deduced that the actual budget was
higher; however, the capital budget level included by the
governor was less than it had been for the past couple of
years. Mr. Teal responded in the affirmative.
2:09:59 PM
Representative Doogan asked whether the LFD analysis
included assumptions for necessary additional spending that
had been excluded from the governor's budget.
Mr. Teal replied that additional expenditures had not been
built in to the analysis. He believed that the items
"missing" from the budget made it difficult for the
legislature to achieve the governor's proposed 3.2 percent
budget growth. He did not know which additional
expenditures the legislature would include. He provided an
example and explained the legislature may or may not decide
to increase the fuel trigger because the increase had not
been requested by the governor. He did not know why items
such as $3.5 million for JRS had not been included; the
legislature could decide to pay off the $50 million
unfunded JRS liability. There was a wide range of
additional money that could be spent, which totaled
approximately $200 million to $250 million; however, he
surmised that the amount was much less than $3.7 billion.
Representative Doogan asked whether the governor had not
included sufficient funds in the FY 13 budget.
Mr. Teal replied that the question was difficult to answer.
He believed the governor had done an excellent job reigning
in agency operating money. He noted that items such as AGIA
may have received "low-ball" funding; however, it was
possible that the governor had a supplemental funding
request plan. Traditional low-balling that sometimes
happened on items such as Medicaid had not occurred, and an
FY 13 supplemental request for the item was not expected.
Items that had been left out of the budget were optional
fixes for the legislature.
Co-Chair Thomas noted that the governor had an opportunity
to amend the budget and could include items that had been
left out.
2:13:48 PM
Representative Costello pointed to a loss of 280 positions
reflected in the governor's budget in addition to an
increase of $66 million for salaries and benefits. She had
learned that departments had carried unfilled positions in
order to fund other positions and wondered whether the
items were related.
Mr. Teal replied that many of the governor's deleted
positions had been vacant. The purpose of the deletions was
to get rid of long-term, unfunded, vacant positions. The
division had worked on the issue with OMB in the past, but
vacancy factors were complicated. He did not believe it
made sense to leave a vacant position in an agency budget
to fund another position; however, it was currently set up
that way. Additional positions had been included for the
operation of the Goose Creek Correctional Center, but he
did not know the net change in the positions. He explained
that the $66 million in salary increases was primarily due
to contractual increases and the 3 percent cost of living
allowance that were not of the agencies' choosing. There
had also been a substantial increase in health benefits. He
opined that $66 million was an accurate number.
2:16:44 PM
Representative Costello asked whether the $66 million would
have been in the budget if the positions had not been
deleted. Mr. Teal responded in the affirmative. He
explained that the deleted positions had no impact on the
$66 million that had been included.
Representative Gara surmised that agencies had spent money
designated for vacant positions on other items and without
the vacant positions they would be unable to continue to
fund the items.
Mr. Teal responded that the scenario represented one result
that could occur. He pointed to detail about positions and
vacancies in the LFD budget analysis. He detailed that when
the legislature removed unfunded vacant positions and also
deleted funding, agencies did not have enough money to
continue funding other items or positions.
2:19:27 PM
Representative Gara surmised that agencies may have to lay
off other employees if unfilled positions and funding were
deleted. Mr. Teal responded in the negative. He
communicated that the items had been factored into the FY
13 budget.
ADJOURNMENT
The meeting was adjourned at 2:20 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD Overview HFC 01192012.pdf |
HFIN 1/19/2012 1:30:00 PM |