Legislature(2013 - 2014)HOUSE FINANCE 519
02/10/2014 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview: Fy 15 10-year Plan | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 10, 2014
1:32 p.m.
1:32:26 PM
CALL TO ORDER
Co-Chair Austerman called the House Finance Committee
meeting to order at 1:32 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
Karen Rehfeld, Director, Office of Management and Budget,
Office of the Governor; John Boucher, Senior Economist,
Office of Management and Budget, Office of the Governor.
SUMMARY
^OVERVIEW: FY 15 10-YEAR PLAN
1:32:35 PM
KAREN REHFELD, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, presented the PowerPoint
presentation: "FY 2015 Ten-Year Plan Overview" (copy on
file). She described the ten year plan as a tool to utilize
when crafting the annual budget and place in context of the
long term view. Adjustments would be necessary as
conditions and circumstances change.
JOHN BOUCHER, SENIOR ECONOMIST, OFFICE OF MANAGEMENT AND
BUDGET, OFFICE OF THE GOVERNOR, began with began with slide
2: "Brief History."
· Enacted in 2008 (HB 125)
· Initial statewide plan in winter 2008
· First agency plans in January 2009
· Fiscal planning module automated and part of the
Alaska Budget System (ABS) 2010/2011
· First ABS generated plan in January 2012
Mr. Barnhill stated that the FY 15 plan represented the
sixth year of the ten-year plan. The Office of Management
and Budget strove to continually improve the plan's process
and product.
Ms. Rehfeld discussed slide 3: "Purpose of the Plan."
A tool to keep a dialogue about Alaska's future in the
forefront.
· Creates annual dialogue about the future fiscal health
of Alaska
· Provides context for budget decisions within the
overall revenue picture
· Informs decision making given a range of scenarios
Ms. Rehfeld related that over the next decade Alaska must
transition from a predominantly oil revenue base to an oil
and natural gas revenue base and develop other resource
industries. Natural gas development would provide economic
opportunity and a stable and clean energy source for
Alaskans. She offered that the plan was produced annually
and was based on Department of Revenue's (DOR) Fall
Forecast. Alaska needed to enforce budget discipline in
order to sustain itself through 2024. The state expected to
slow the decline in oil production while natural gas
production expanded into a larger role in the state's
economy.
Ms. Rehfeld assumed that the combined balances of the
state's two primary reserve accounts; the Statutory Budget
Reserve (SBR) and the Constitutional Budget Reserve (CBR)
would remain positive over the next decade through
conservative spending scenarios. The level of state
spending played a critical role in the revenue versus
expenditure equation. The plan was designed to "inform"
through a range of scenarios. Reserve funds, spending
reductions, and "other fiscal tools" would be employed to
manage the budget over the next ten-year period.
Mr. Boucher continued with slide 4: "Plan Requirements."
Objectives of the 10-year plan
· AS 37.07.020 (b) (2) says the annual plan must:
o Balance the budget between sources and uses of
funds
o Provide for essential state services
o Protect Alaska's economic stability
Mr. Boucher added that the plan must also project balances
for the reserve accounts and describe the major assumptions
of the plan. He indicated that the "foundation" of the plan
was DOR's Fall Revenue Forecast. He listed other
assumptions of the plan: a 2.5 percent inflation rate and
population growth projected at slightly over 1 percent
annually.
Mr. Boucher continued with slide 5: "Annual Plan Release
Scheduled."
Executive Summary and Agency plans
· Statewide Executive Summary released in December
· Individual agency plans released in January
· Statewide and agency plans provide different levels of
detail and information
Mr. Boucher explained that OMB granted the agencies leeway
when developing its spending projections but also provided
the following guidance from the instruction memo. He read:
"The process of making ten-year projections is not an
opportunity to ask for every program or everything
that every program has ever wanted rather the
projections should be the result of a rational
objective process within the department that would
withstand the scrutiny of the governor, the
legislature, and the public."
Mr. Boucher reported that each agency plan contained two
types of projections. One projected the "current level of
service;" the cost of providing the current level of
service for 10 years. An important rule was not to assume
that general funds (GF) could be used to backfill
anticipated lost revenue from other fund sources. The other
type of projections made in the plan was "initiatives." He
explained that "the projection was designed to highlight
projected costs associated with expanding or contracting a
service capacity of the agency from its FY 14 level or if
new GF would be required to replace non-GF fund sources."
Agencies were required to produce spending projections for
the operating, capital, and for formula programs. He noted
that some budget items, i.e., wage and benefit increases,
state assistance payments to employee retirement systems,
annual debt service, and fund capitalizations were
projected as statewide appropriations. The budget office
was responsible for coordinating or producing the statewide
projections.
1:45:28 PM
Ms. Rehfeld continued with slide 6: "Guiding Principles of
the FY2015 Plan."
Foundation framework and strategies
· Develop Alaska's Natural Resources
· Restrain Spending
· Save for Future Generations
Mr. Boucher detailed slide 7: "Develop Alaska's Natural
Resources."
Prosperity hinges on responsible development of abundant
natural resources
· Strategy - Increase Oil Production
· Strategy - Gas for Alaskans and Markets Beyond
· Strategy - Strategic Minerals Development
· Strategy - Affordable Power
Mr. Boucher announced that 90 percent of the state's
unrestricted general fund revenue was created from oil
production. The administration's highest economic priority
was the development of the state's natural resources. The
state's long-term plan included slowing the decline in oil
production. The vast natural gas potential was an important
piece of the long term health of Alaska's economy. He noted
that Alaska had an important role in developing a domestic
supply of strategic minerals. The state had an ambitious
goal to generate 50 percent of the state's electricity
through renewable resources by 2025 and continue to invest
in energy conservation. Developing the state's other
natural resources played a significant part in Alaskan's
future.
Ms. Rehfeld continued with slide 8: "Restrain Spending."
Smaller, more efficient government delivering
essential services
• Strategy - Spending Targets
• Strategy - Results Based Budgeting
• Strategy - Long-Term Investment Initiatives
Ms. Rehfeld noted that spending reductions had been
achieved in the past two years years due to the significant
effort by the governor and legislature to stay within
defined spending targets. The administration also employed
"performance based budgeting;" focused on the outcomes from
agency mission and core services. The administration
coordinated among the agencies in an effort to eliminate
waste and duplication. She mentioned that the
administration encouraged agencies to discover innovative
ways to deliver services. She added that long-term
investments included legacy projects, roads to resources,
transportation infrastructure, and energy and were key to
the long-term economic health of the state.
Mr. Boucher continued with slide 9: "Save for Future
Generations."
Maintain Alaska's economic stability
• Strategy - Preserve and grow Alaska's
Permanent Fund
• Strategy - Build Reserves/Prudent Use
of Reserves
• Strategy - Forward Fund
• Strategy - Focus on essential services
Mr. Boucher announced that the savings portion of the plan
was the foundation for "protecting" Alaska's economic
stability. Savings extended Alaska's economic stability
beyond the life of the revenue resource. He informed the
committee that two critical elements grew the permanent
fund; mineral royalty revenue and inflation-proofing
appropriations. The December [2013] Permanent Fund Report
showed that out of the $44 billion balance over $22 billion
had been appropriated through the legislature. The state's
dedicated oil revenue contributed $14.5 billion to the
fund. Inflation proofing and dedicated revenue were
projected to contribute $19.8 billion to the fund by 2024
when the balance could be $78 billion.
Mr. Boucher communicated that the plan advised that any
surplus GF should be set aside in reserve accounts. He
noted that from the inception of the CBR through 2005 more
than $5.2 billion was borrowed from the fund to balance the
budget. Surpluses beginning in FY 2007 replenished the CBR
and the balance had grown to $12 billion. The current
balance of the SBR was $4.7 billion. The plan predicted
that draws on the reserve fund would be necessary to
balance the budget in the near future. The plan employed
the strategy of forward funding for endowing programs to
provide fiscal stability.
Mr. Boucher listed the important funds that were endowed
through forward funding; the public education fund,
Community Revenue Sharing Fund, the Power Cost Equalization
Fund (PCE), and the Alaska Higher Education Investment
Fund. From a spending prospective, the plan prioritized
spending according to essential services; resources and
energy, education, public safety, transportation
infrastructure, and Alaska's military.
1:56:07 PM
Ms. Rehfeld discussed slide 10: "Plan Scenarios."
Alternate scenarios provide reasons for optimism and
caution
· Optimism
o Alaska's current financial outlook is positive
o Strong reserves
o Triple A bond rating
o Fiscal discipline
· Caution
• Oil price and production levels quickly change the
fiscal outlook
• Conservative revenue picture tempers long term outlook
Ms. Rehfeld continued with slide 11: "Three Alternate
Statewide Scenarios."
Revenue outlook requires reduced spending and use of
reserves
• Lower oil price and production result in
decreased revenue
• Require fiscal discipline and prudent use of
reserve funds in the near term to provide essential
services
• Focus on priorities and strategic investments to
grow the economy
Mr. Boucher continued with slide 12: "Three Alternate
Statewide Scenarios."
Illustrate possibilities given different price and
production assumptions
Scenario 1 - Fall 2013 forecast with flat general
fund spending beginning in FY2015
Scenario 2 - Fall 2013 forecast for price with
enhanced production and flat general fund spending
beginning in FY201
Scenario 3 - $100 price per barrel with flat general
fund spending beginning in FY2015
Mr. Boucher discussed slide 13: "Disclaimer."
Expect the plan to change
• The statewide scenarios are used as a planning tool
• Assumptions of revenue and expenditures are intended
to inform and provide context to budget
deliberations
• Revenue shortfalls will need to be managed through a
combination of budget reductions and use of reserve
funds in the near term.
• All three principles of the ten-year plan need to
move in concert - develop our natural resources,
restrain spending, and save for the future.
• The plan will change as conditions warrant.
Mr. Boucher continued with slide 14: "Fall 2013 forecast,
General Fund spending capped at $5.6 billion through
FY2024." He detailed that the chart depicted the price and
production forecast from the fall revenue forecast on the
top two lines, the third line contained the expected GF
revenue, the fourth line showed the GF expenses, the fifth
line displayed revenue surplus or shortfalls. The blue line
depicted the balance of the CBR and the green line
disclosed the SBR balance. He explained that the model used
to generate the information did not anticipate rational
behavior. The order in which the reserves were drained in
the plan was SBR, CBR main account, and the CBR sub
accounts. Scenario 1 predicted budget deficits through 2024
and steady draws form the SBR and the CBR. The total
reserve balance would be $7.9 billion by the end of 2024.
Mr. Boucher continued with slide 15: "Mid-High Case oil
Production, Fall 2013 price, $5.6 Billion GF Spending." He
explained that scenario 2 assumed that oil production fell
half way between DOR's 2013 forecast and the "un-risked"
technical assessment that was provided to the department.
With the scenario, the state had a deficit of nearly $2
billion in 2014 and a short term decline, due to a $3
billion deposit in the retirement accounts, in the total
reserves through 2015. As oil production and prices raised
the reserve deficit was reversed by 2016. Annual draws were
anticipated in order to balance the budget but the CBR
balance would continue to increase to $12 billion through
2023 when the budget deficits start to increase.
Mr. Boucher continued with slide 16: "Revenue at $100 oil
beginning FY 2015, $5.6 Billion GF Spending through FY
2024." He relayed that in scenario 3 annual spending growth
was held at $5.6 billion. The scenario illustrated the
potential deficits under lower than forecasted oil prices.
He stated that if the scenario actually happened spending
would most likely not be sustained at FY 15 levels but he
wanted to demonstrate the length or the strength of
Alaska's reserve position. Under the scenario budget
deficits would grow to $3 billion through 2014. The reserve
balances would be exhausted by 2022.
Ms. Rehfeld concluded with slide 17: "Wrap Up."
The ten-year plan is a tool to guide budget
development and decisions
Optimism
• Alaska's current financial outlook is positive
• Strong reserves
• Triple A bond rating
• Fiscal discipline
Caution
• Oil price and production levels quickly change the
fiscal outlook
• Conservative revenue picture tempers long term
outlook
Ms. Rehfeld cautioned that while the future pointed to
"relative fiscal stability for the state if oil prices hold
above $100 per barrel," the state must take a cautious
approach to its finances to ensure essential services in
the future. The challenge was to find a balance between
current and future Alaskans. She thought that due to the
diligent budget work done by the administration and
legislature, the state was in a position to be optimistic
while exercising strength and caution.
Co-Chair Austerman understood that the ten-year plan was
authorized in statute, but oil prices were highly
unpredictable and production models were variable. He
wondered whether the Ten-Year Plan provided value to the
state.
2:09:03 PM
Ms. Rehfeld perceived that the exercise had value on two
levels. One level was the global perspective the plan
provided in the budget development. On a departmental level
it allowed the agencies to examine how its mission or core
services were delivered and what future challenges they
were facing. She noted that the global perspective allowed
OMB to identify where the department budget "pressures"
were. The information was useful to identify the priorities
and necessary reductions for the current and future fiscal
years. She thought that the ten-year plan was not precise
but the exercise provided value to the budget process.
Mr. Boucher added that the value was in the education and
"self-examination" the process allowed. He provided an
example about a previous year's budget based on higher oil
prices which then dropped. The situation initiated
discussions about the plan's model and how price
fluctuations affect GF revenue in the current year. The
department's managers understood how the price of oil
influenced overall state revenue and the impact decisions
made at the department level had on the budget. He stated
that the ten-year plan was a tool available to the agencies
to emphasize the state's dependence on oil revenue and
fluctuations in price. The plan was also a valuable tool in
employee contract negotiations.
Co-Chair Austerman identified that the GF expenses in the
three models were held at $5.6 billion each year. He added
that the spending in Medicaid was predicted to increase to
$1.3 billion over the same time period, PERS and TRS would
increase by $500 million next year, the governor's increase
for education in FY 15 was $51 million, the Department of
Environmental Conservation (DEC) was expected to have
spending increases in the range of $6 million to $16
million. He wondered how the administration could project
FY 15 budget figures with all of the impending expenses and
how the governor planned to keep the budget at that
spending level. He reiterated his doubt regarding the value
of the ten-year plan.
Ms. Rehfeld replied that the executive summary in December
designated $5.6 billion as a target level for GF expenses.
She noted much discussion regarding capping state spending
at that level. The plan was not designed to consider all of
the individual components that comprise GF expenditures.
Difficult budget choices would be necessary in future
budget deliberations. She thought that the value of the
plan kept the "pressure on the overall spending number in
our planning process."
Co-Chair Austerman stated that the projections for next
year were available and the plan's projections were not
accurate. He did not wish to release the plan's projections
to the public with the knowledge that anticipated expenses
were much higher.
Mr. Boucher acknowledged the plan's shortcoming. He stated
that the LFD projection utilized similar numbers based on
$100 oil. He noted that it was challenging to decide what
the costs would look like in the next five years. He
believed that the plan kept the budget discussions focused
on spending.
Co-Chair Austerman declared that the state would never be
able to cut its way to prosperity. A flat budget would not
grow the state's economy enough to establish a sustainable
tax base.
2:20:25 PM
Representative Thompson expressed the same concerns about
flat funding. He stressed that aside from the increases
that Co-Chair Austerman mentioned the largest portion of
the budget was expended on personnel. The step increases
and contractual obligations made the spending target
unattainable. He thought that it was unrealistic to use the
FY 15 level as a target unless entire programs were cut
from the budget.
Ms. Rehfeld replied that the administration was actively
involved in educating the agencies about the fiscal
outlook, which tempered expectations. She stated that some
negotiated contracts were lean. She knew that the state
would not be able to conduct business as usual and meet the
spending targets. The necessity to cut some positions and
reevaluate current merit and step schedules would be
warranted.
Representative Munoz cited slide 14, which depicted the FY
15 $5.6 billion general fund expenses. She understood that
the PERS and TRS actuarial payment of $600 million was not
included in the figure and was expected to be deducted from
the CBR. The subsequent $500 million PERS and TRS payments
proposed by the governor were also not included in the
model. She asked for clarification.
Ms. Rehfeld replied that the CBR main account balance
showed the $3 billion FY 15 draw into the trust fund. In
the out years, the annual retirement payment would be
capped at $500 million and would have to be included in the
$5.6 billion cap.
Representative Munoz emphasized that her exact point was
that it was not included in the FY 15 plan.
Ms. Rehfeld stated that current year's target was not
established and the $5.6 billion was a discussion point.
Representative Wilson asked whether priorities were
established by agencies. She remarked that she had never
seen priorities listed for the Department of Education and
Early Development (DEED) or Department of Labor and
Workforce Development (DOL). She understood the difference
between governmental priorities and obligations. She
expressed concern that the bills that contained additional
GF expenses were governor's bills and he did not include
the expenditures in the model. She asked how much of the
budget expenses would be shifted to the municipalities if
the state could not cover the bills. She believed that
additional budget pressures would overwhelm the Interior.
Ms. Rehfeld answered that agencies were instructed to
allocate its resources to statutorily driven core services.
She offered that non-core services were a lower priority
especially in low funding environments. The agencies budget
should focus on statutorily driven core services in budget
subcommittee. She added that cost shifting to municipal
governments would happen through the decisions made in
budget deliberations. She noted that the December budget
preceded the governor's legislation and would be included
in the amended fiscal summary due the thirtieth legislative
day.
Representative Wilson wondered why the information was not
utilized in the presentation.
Mr. Boucher stated that the numbers in the plan could be
changed.
Representative Wilson revealed that a commissioner had told
her he was unable to share a list of priorities. She
reiterated that she had never seen a list of priorities
based on agencies mission.
Representative Gara asked about slide 14. He asked whether
the proposal was to flat fund agencies to the FY 15 level
through FY 24.
Ms. Rehfeld responded in the affirmative. She stated that
for the purposes of the executive summary, the model was
designed to show the impacts of flat funding.
2:30:56 PM
Representative Gara asserted that the FY 15 budget was not
really a $5.6 billion budget because more PERS/TRS and
capital expenses amounting to a $6.7 billion were proposed
by the governor. The CBR would have a budget deficient by
2024 with a $6.7 billion budget. He wondered whether the
governor wanted the legislature to cut $1.5 billion between
FY 15 and FY 16.
Ms. Rehfeld replied that the decision of what would
ultimately be funded would be made during the legislative
process.
Representative Gara asserted that in order attain the $5.6
billion goal in FY 16 the legislature would need to cut $1
billion.
Representative Gara referenced that the state adopted a new
methodology to forecast oil production. He stated that he
did not remember projections of 285,000 barrels per day by
FY 24 under SB 21. He wanted proof from the administration
that the figures were disclosed during SB 21 hearings.
Ms. Rehfeld stated she would follow up with Department of
Revenue.
Representative Gara stated that the state could not
continue to cut its way to prosperity. He discussed the
proposed cuts of $1 billion for the following fiscal year
and more cuts in subsequent years to sustain a flat budget.
He pointed to the Department of Health and Social Services
(DHSS) and other agencies that could not identify any
additional wasteful spending. He stressed that the
administration needed to identify wasteful spending in
order for the legislature to know how to develop a "proper
budget." He wanted answers from the agencies.
Ms. Rehfeld did not disagree. She communicated that the
governor's office had the exact discussions with
departments on an annual basis. She stated that the "hard
work" to locate inefficiencies would continue. She believed
a conversation was necessary to determine a reasonable
level of spending in the current environment.
Representative Guttenberg was concerned about the general
fund expenses line on slide 14 regarding the "reality and
lack of vision for the future." He concurred with the plan
requirements and the importance of economic stability. He
anticipated major projects on the horizon listed on slide
7. He contended that the projects were expensive but could
be planned and costs could be estimated. He wanted "the
vision of the state built into a dialog" around the costs
and benefits of the mega projects for the state and wanted
the governor to take the lead. He wondered how the
different initiatives would affect the next ten years. He
emphasized that the costs were quantifiable now. He felt
that the plan did not include any possibilities for growth
through investments in the state and lack vision. The plan
could be a place to begin the dialog but needed "help and
guidance" from the administration.
Mr. Boucher replied that mega projects were an optimistic
piece of Alaskans future. He thought that estimating costs
at this point was premature because the dialog with the
legislature needed to occur "at the appropriate time." The
text of the plan acknowledges future competing priorities
that will demand difficult conversations in the near
future. He did not believe that the plan was meant to
provide all of the answers.
Representative Guttenberg stated that the governor's
anticipated work on the pipeline and anticipated future
work on the Susitna Dam were known quantities. He wondered
why the project costs were not included in the plan. He
pointed out that OMB suppressed information to keep the
budget flat in the various scenarios. He felt that the plan
could be more "realistic" if not precise.
2:43:37 PM
Representative Edgmon appreciated the work involved in the
projections. He understood that external circumstances were
difficult to predict. He hoped that the scenarios worked
out as described in the plan, but felt that internal cost
drivers and external forces could dramatically change the
budget. He appreciated that the scenarios were conservative
and included "bare bones" numbers regarding oil revenue. He
understood that it was impossible to control the general
fund revenues and oil production. He wondered when the
revenue curve would begin to rise again and where the state
would be on the revenue curve in four to five years. He
felt that the scenarios were not optimistic.
Ms. Rehfeld acknowledged that the scenarios were very
conservative in terms of revenue.
Mr. Boucher felt that it was "important" to include a
scenario with a "tempered" amount of increased production.
He portrayed a mid-level scenario based on half of the
anticipated increased oil production, which would increase
revenues approximately $4 billion. He deferred to DOR to
ascertain "how conservative the estimate was."
Co-Chair Austerman opined that the budget process should
continue with similar "reality based" conversations. He
thanked OMB for the smaller budget that was $30 million
less than last year and felt that the approach was correct.
He wanted to avoid drastic reductions that would cause the
state's economy to crash. He appreciated the conversations
with the administration over the previous summer.
Co-Chair Stoltze acknowledged the role of OMB in submitting
a "more realistic" and smaller budget than the
commissioners requested. He understood the difficulty
involved in cutting the budget and appreciated the
leadership. He warned against uncontrollable state
spending. He communicated that his constituents had strong
fiscal concerns about budget sustainability.
Co-Chair Stoltze discussed the Susitna Dam and the goal to
produce 50 percent of the state's electricity through
renewable resources. He did not see a "commitment for that
from the administration." He believed that the governor
displayed a commitment to gas for railbelt utilities. He
averred that the public was misled about the state's
commitment to renewable energy based on the "assumptions
that were built into the gasline proposals." He thought
that the price was "far too optimistic." He revealed that
some of the contracts that were made with the Susitna
hydroelectric project were being shifted to the gasline. He
wished that "the state would stop pretending that the
administration had a goal of 50 percent renewable energy."
He stated that every message from the administration
countered that goal. He proposed a "more candid and blunt
discussion about what the real commitment" was. He
acknowledged problems with management of the Susitna Dam
project from "a bunch of exempt employees." He advised
disciplinary action to get the project on track rather than
abandoning the project.
2:55:08 PM
Co-Chair Stoltze spoke to board extensions. He stated that
"larger, overriding issues" existed regarding funding the
boards. He judged that there were "real big holes in the
way that the Department of Commerce, Community and Economic
Development (DCCED) was portioning the cost." He believed
that the issue made it "difficult to pass out" board
extension legislation without some resolution with DCCED.
Representative Costello stated that the department was
concerned about some of the "erratic" board costs. She
stated that Representative Olson introduced legislation to
address some of the "longstanding problems" regarding
licensure and the fees that Alaskans paid.
Co-Chair Stoltze related that he had not heard any
contention about specific board extensions but spoke to the
larger fiscal concerns related to boards.
ADJOURNMENT
2:56:26 PM
The meeting was adjourned at 2:57 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| OMB Ten-Year Plan Overview 02.10.2014.pdf |
HFIN 2/10/2014 1:30:00 PM |
OMB 10 year plan HFC |