Legislature(2017 - 2018)HOUSE FINANCE 519
11/07/2017 01:00 PM House FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Fiscal Overview Budget Gap Analysis and Fund Source Balances by the Office of Management and Budget | |
| 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
FOURTH SPECIAL SESSION
November 7, 2017
1:03 p.m.
1:03:41 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:03 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Pat Pitney, Director, Office of Management and Budget,
Office of the Governor; Representative Bryce Edgmon;
Representative Dave Talerico; Representative Dan Saddler;
Representative Louise Stutes; Representative Gary Knopp;
Representative Jonathan Kreiss-Tomkins; Representative Sam
Kito; Representative Geran Tarr.
SUMMARY
PRESENTATION: FISCAL OVERVIEW BUDGET GAP ANALYSIS AND FUND
SOURCE BALANCES BY THE OFFICE OF MANAGEMENT AND BUDGET
Co-Chair Seaton reviewed the agenda for the day. He
acknowledged Representatives Bryce Edgmon, Dave Talerico,
and Dan Saddler in the audience.
^PRESENTATION: FISCAL OVERVIEW BUDGET GAP ANALYSIS AND FUND
SOURCE BALANCES BY THE OFFICE OF MANAGEMENT AND BUDGET
1:05:20 PM
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, introduced the PowerPoint
Presentation: "Fiscal Overview Budget Gap Analysis and Fund
Source Balances" dated November 7, 2017 (copy on file). She
relayed that she intended to demonstrate the current status
of known issues regarding the budget.
1:06:12 PM
Ms. Pitney began with slide 2: "Spending: State Budget
Overview." She reported the total state budget was $10.2
billion, half of which was made up of UGF [unrestricted
general fund], and of that, education was the largest
expenditure, followed by PFD [Permanent Fund Dividend],
Medicaid, other health programs, public safety and debt
services.
· The total state budget is $10.2 billion, and
comprises:
o Federally funded programs
o Service generated revenue
o State funded programs and service
· Only 50 percent of the budget impacts the deficit, the
unrestricted general fund portion.
1:06:58 PM
Ms. Pitney moved to the pie chart on slide 3: "Spending:
State Budget Overview." The chart showed the breakdown of
the $5.1 billion in UGF spending:
· Capital, $0.1
· Fish and Game, Natural Resources, $0.1
· University, AVTEC, $0.3
· Education, $1.3
· Medicaid, $0.6
· PFD, $0.8
· Other Health Programs, $0.5
· Public Safety and Justice[DP1],
· Statewide Items, $0.5
1:07:28 PM
Ms. Pitney detailed slide 4: "Spending: State Budget
Overview":
More than 50 percent of the state-funded share of the
budget is sent as direct payments to communities,
providers, oil companies, and individuals. Payments are
for items such as:
· Medicaid payments to providers (on behalf of
enrollees)
· K-12 Schools
· Retirement payments (on behalf of communities and
schools)
· School debt reimbursement
· Senior benefits
· Public assistance
· Foster care
· Oil and gas tax credits
· Permanent fund dividends
Less than 50 percent of state funded budget is spent on
government services like troopers, road maintenance,
ferries, airports, prisons, the legislature, Pioneer
Homes, the courts, the governor's office, fish and game,
etc.
1:08:49 PM
Ms. Pitney turned to slide 5: "Spending: State Budget
Overview: Unrestricted General Fund Spending Trend." She
indicated that the slide showed the total operating budget
had gone down by 23 percent and the total budget was down
28 percent. She highlighted that the University budget was
down 8 percent. Other executive departments were down 43
percent in UGF. The[DP2] debt service budget was down 52
percent.
1:10:40 PM
Representative Wilson asked about federal funds and knowing
whether they had decreased.
Ms. Pitney responded that although the federal numbers were
not on the slide, the information was available, specifying
that federal funds had increased over the same period.
Representative Wilson reported that there might be other
things that were included in the calculations that she was
not aware of. There was a difference in numbers for
education of about $100 million. She asked for more
details.
Ms. Pitney stated the information could be passed on.
Co-Chair Seaton indicated that those numbers could be
provided via the co-chairs' offices. Co-Chair Seaton
acknowledged that the meeting had been joined by
Representatives Louise Stutes and Gary Knopp.
Ms. Pitney reviewed slide 7: "Budget Gap: State Budget
Overview Known Increases FY 2018 to FY 2018." She pointed
to Medicaid at the top of the list and suggested an
increase of $75 million. She detailed that the Legislative
Finance Division (LFD) had originally proposed a figure of
$32 million, but the administration had determined the need
was closer to $75 million for FY 18.
1:13:30 PM
Ms. Pitney continued to the Alaska Marine Highway System
(AMHS) funding. The Legislative Finance Division had
communicated a $40 million (a supplemental put into the
AMHS Fund from prior year funds and a larger draw of the
AMHS funds). There was also an additional $4 million draw
for a total of $44 million for a status quo service level.
She addressed the fire suppression increment of $15
million, which had not been included in the
administration's budget forecast. She estimated the figure
would be closer to $7.5 million, given a balance from the
last year. She did not believe salary and benefits would be
the full $15 million listed on the slide, but they did not
yet have exact figures. She did not anticipate an increase
for the employer contribution for AlaskaCare; there were a
couple of union contracts that would require an increase to
employer health benefits, but it would be much lower than
$15 million. She estimated the figure would be closer to $5
million.
Co-Chair Seaton asked if Ms. Pitney was not anticipating a
healthcare cost increase to AlaskaCare in the coming year.
Ms. Pitney responded that OMB expected the current
AlaskaCare employer contribution of $1,555 to extend
through FY 19. There would be increases in the employee
contribution to the premium. She continued that there was
improved performance of steerage. She detailed there were
several initiatives to help reduce employee healthcare
costs, which were starting to bend the curve in the desired
way. She noted there would be an increase in employee
contributions.
Co-Chair Seaton expressed a desire to have Ms. Pitney
return when the committee heard more about the issue in
days to come.
1:16:56 PM
Ms. Pitney replied that the cost changes were short-term
only. She agreed with Mark Foster's [financial analyst]
assessment of 7 percent employee healthcare increases over
the last ten years. She believed the Medicaid increase was
slightly under 5 percent for the same period. She clarified
she was speaking about state funding; including both
brought the figure up to 7 percent.
Vice-Chair Gara referenced salary and benefits and noted
that when the state started running out of money there had
been negotiations with employee unions; the unions had
agreed to two years without cost of living increases. He
asked if there would be no cost of living increases in FY
18.
Ms. Pitney replied that it depended on the contract. She
explained that several of the contracts would see no cost
of living increase, while the PSEA [Public Safety
Employee's Association] had just been finalized and did
include an increase. The Alaska Correctional Officers
Association (ACOA) had received an increase in the current
fiscal year.
Vice-Chair Gara asked about other unions. Ms. Pitney
answered that most union contracts did not include cost of
living increases. She would follow up with a list.
Vice-Chair Gara asked for verification that FY 18 was the
last year without a cost of living increase. Ms. Pitney
answered in the affirmative.
Vice-Chair Gara thought that someone would have to take the
lead on healthcare costs. The committee had seen studies by
Mark Foster regarding combining healthcare plans and other.
He wondered if OMB was going to take the lead on healthcare
cost reduction.
Ms. Pitney replied that OMB was meeting with Department of
Health and Social Services (DHSS), Department of
Administration (DOA) and Department of Commerce, Community
and Economic Development (DCCED) internally. All three
departments were working in separate areas, while OMB was
taking an umbrella view as to how to move together to
address healthcare costs as a unit. She reported about $1.2
billion state funding went to Medicaid, employee
healthcare, and retiree on-behalf payments, as well as
retirement contributions. She factored in healthcare for
corrections, juvenile justice, and associated with a recent
federal waiver in the private insurance market. She
elaborated that if the figure continued to grow at 5
percent versus an inflation-only forecast, it would be a
$200 million difference in the budget in several years. The
numbers represented initial overview cost pieces.
1:21:41 PM
Vice-Chair Gara asked if the administration would be
introducing an initiative about healthcare cost containment
in January [2018].
Ms. Pitney indicated that the administration would be
continuing to focus on initiatives to reduce cost. She was
not prepared to say a major proposal would be introduced.
She stated it was a big enough issue that there would be
numerous ideas. Healthcare costs were the biggest cost
driver in the budget, but the solutions were not simple,
and any solution would affect everyone. The administration
would continue to focus on healthcare costs and what could
be done.
Co-Chair Seaton recognized Representatives Johnathan
Kreiss-Tomkins and Sam Kito in the audience.
1:23:31 PM
Representative Ortiz pointed to the $44 million for AMHS on
slide 7. He asked for verification the amount represented
the total draw down from the AMHS operating fund.
Ms. Pitney replied that it was from the AMHS Fund
(generated by fare revenue).
Representative Ortiz asked how much was in the fund after
the $44 million draw down.
Ms. Pitney responded that the operating budget compromise
the past session, a deposit had intended to be $30 million
in the FY 17 budget. However, due to the Constitutional
Budget Reserve (CBR) cap and higher than expected
supplemental items, the figure had only been $23 million.
She explained that the governor intended to replace the
funds; however, if the $23 million was not replaced via a
supplemental, the fund would be exhausted in as early as
April [2018].
Representative Ortiz asked Ms. Pitney how the funds had
been used by AMHS. He wondered if it had operated as a
buffer fund.
Ms. Pitney answered that the fund had been used for
operations, but it only funded partial service. She
specified that roughly 35 percent to 40 percent of money
for AMHS was generated through fares; the remaining portion
was funded with general funds. Both fund sources were used
to operate AMHS. Funds from the fares had provided cash
flow certainty and a buffer. She elaborated that the
legislature could choose to appropriate additional money
when necessary. Under the proposed scenario, "there's not
the cash that exists."
1:26:51 PM
Representative Ortiz referred to slide 6. He wondered how
much the Department of Transportation and Public Facilities
(DOT) budget had been reduced from 2015 to 2018 and what
portion of the reduction impacted AMHS.
Ms. Pitney answered that DOT had significant reductions.
She did not have the detail on hand.
Representative Ortiz asked if had also had AMHS significant
reductions.
Ms. Pitney confirmed that both [DOT and AMHS] had
experienced significant reductions.
Ms. Pitney reported that as part of the Medicaid reform
effort, there had been an expectation of lower inmate
healthcare costs. Medicaid had picked up a significant part
of inmate healthcare costs, but the reduction had not been
as significant as expected due to increases in healthcare
costs. She detailed there had been a supplemental request
for $10 million the preceding year. An additional $10
million would be needed for FY 18 to cover healthcare costs
(it had not been a part of the FY 18 base).
1:28:51 PM
Representative Wilson believed a few inmates had gone to
the Lower 48 because of more affordable health costs. She
detailed that there had been up to $500,000 in savings for
one person. She wondered why the Department of Corrections
(DOC) was not using things such as electronic monitoring
and halfway houses to reduce the costs. She understood that
Medicaid expansion would pick up the healthcare costs, but
not while a person was in a [correctional] institution.
Ms. Pitney replied there was a case-by-case review of every
option that considered public safety and cost.
1:29:43 PM
Representative Wilson recalled the legislature had received
information about what the illnesses were. Remarked on the
idea of turning a halfway house into medical facility in
order to utilize Medicaid expansion and private insurance.
She asked if the option had ever been considered.
Ms. Pitney was unsure about whether the administration had
looked at an inmate healthcare facility separate from a
prison.
Co-Chair Seaton thought it would be appropriate to ask DOC.
Representative Wilson stated the committee had received
information on Medicaid expansion pertaining to halfway
houses and electronic monitoring. She hoped the idea could
be added to the conversation. She hoped it could be added
and remarked that the decision pertaining to Medicaid
expansion had only been in place for a year. She speculated
that a person being treated with dialysis would not run
off. She reasoned that it was the time to rewrite contracts
pertaining to mental health issues and other medical
issues. She believed it was better than sending patients
out of state. She wondered if there was another avenue to
take, while maintaining savings.
Co-Chair Seaton relayed that the committee would be talking
about healthcare later in the week.
1:31:44 PM
Ms. Pitney continued to address slide 7 titled "Budget Gap:
State Budget Overview." She detailed that Mt. Edgecumbe
facility funding had been changed to the Public School
Trust Fund. She detailed that LFD showed it as an increase
in UGF; the fund source was also available in future years.
The administration anticipated debt service would be
reduced by $4 million. At the end of the last session $8
million had been appropriated as a one-time increment to
the Community Assistance Program on top of funding from the
Community Assistance Fund.
Ms. Pitney explained that due to a change in the oil price
and production forecast, the oil and gas tax credits were
expected to increase by $118 million over the prior year.
The Public Education Fund had been used for a one-time
reappropriation from the [indecipherable] road district;
the $17 million would most likely need to be replaced with
ongoing revenue. She highlighted the actuarial increase of
$107 million in state assistance to retirement. The total
operating increase anticipated by OMB was $360 million
compared to the LFD estimate of $347 million.
Ms. Pitney addressed the capital budget line on slide 7 and
relayed that $93 million represented reappropriations made
in the capital budget the last year. She elaborated that
reappropriations were the prior year's dollars and did not
add to the bottom line total. If the state had the same
capital budget as the prior year, it would be necessary to
add $93 million. Fiscal notes, program sunsets, and other
one-time items had a relief of $65 million - some would
materialize, and some would not. She added that some of the
items pertained to justice reform. In order to fund
services at the same level of the prior year the total
increase was $388 million.
1:34:48 PM
Vice-Chair Gara understood there was an austerity capital
budget of $93 million. He believed the average prior to the
state's fiscal crisis was around $500 million to $600
million per year. He was concerned that a capital budget of
$93 million would perpetuate deferred maintenance and the
slide in construction jobs. He wondered if the governor
would consider proposing the capital budget that would meet
the needs with the understanding he would need to veto it
if the legislature failed to devise a fiscal plan.
Ms. Pitney would not presume what the governor would choose
to do on the capital budget, which would be released in
December. She explained that the $93 million had been added
to the $132 million capital budget through
reappropriations. She noted it did not count the Juneau
Access Road reappropriation. The total capital budget had
been $225 million.
Co-Chair Seaton surmised that the number was indicating
one-time funding of $93 million. He surmised that the $93
million would have to come from another funding source in
the future.
1:37:22 PM
Ms. Pitney moved to slide 8. The budget change of $388
million on slide 7 was added to the FY 18 budget of $4.3
billion, which resulted in $4.7 billion FY 19 base budget
without the Permanent Fund Dividend. The new revenue
forecast projected slightly over $2 billion, which left a
deficit of $2.7 billion. She pointed to the Senate's
Permanent Fund plan with a 75 percent government/25 percent
dividend split, which would result in a gap of $638
million. Whereas, the House Permanent Fund plan with a 67
percent government/33 percent dividend split would result
in a gap of $863 million. The slide included projections
for FY 19, FY 20, and FY 21; the differences on spending
were due to known increases for retirement and debt,
credits, and inflation.
Representative Kawasaki pointed to an LFD (20-year
lookback) agency summary capital budget handout he had
distributed (copy on file). He asked if maintaining flat
service levels included the general funds going towards the
capital budget.
Ms. Pitney believed it reflected a $225 million capital
budget with inflation.
Representative Kawasaki asked if it was $225 million going
forward to an unknown time. Ms. Pitney agreed.
1:40:05 PM
AT EASE
1:40:41 PM
RECONVENED
Representative Kawasaki asked for verification that the UGF
and designated general funds (DGF) for the capital budget
would be $225 [million] going forward.
Ms. Pitney responded in the affirmative.
Representative Kawasaki observed that the numbers [in the
LFD capital budget lookback] showed that the capital budget
was smaller than it had ever been in twenty years. He
stated his concern that the $2.7 billion budget gap was
understated. He remarked that the Associated General
Contractors were meeting the following day to discuss the
capital budget. He asked about unanticipated costs that
would be reflected in future budgets if the state had an
austere $225 million [capital] budget going forward.
Ms. Pitney asked Representative Kawasaki to elaborate on
his question.
Representative Kawasaki remarked on the $1 billion in
deferred maintenance for the University of Alaska's
statewide system. Additionally, there was another $1
billion in state infrastructure deferred maintenance. He
added the figures did not include local communities with
their own schools and boroughs. He asked about the risk of
having a capital budget fixed at $225 million for 10 years.
Ms. Pitney responded that capital budget [of $225 million]
would cover federal match and minimum deferred maintenance;
it would not cover any new facilities. The forecast on
slide 8 was a representation of the FY 18 service level.
The slide did not represent the governor's intention or a
plan going forward.
Representative Kawasaki asked for verification that the
figure did not include any deferred maintenance and only
included capturing what the federal match may be.
Ms. Pitney clarified it was federal match and minimum
deferred maintenance. She detailed that federal match was
just over $120 million. Additionally, there were other
capital programs traditionally funded through the capital
budget. It left a very small amount for deferred
maintenance overall.
1:44:02 PM
Representative Kawasaki believed the state's budget deficit
was larger than $2.7 billion. He observed that capital
budgets in the past 20 years had been substantially larger.
He elaborated that there was $2 billion in deferred
maintenance at present, meaning the state had not kept up
with its deferred maintenance needs for several years. He
believed it was an understated scenario when looking at the
current deficit and what the future deficit would look
like. He hoped the administration and legislators
recognized the issue.
Representative Wilson asked if House and Senate Permanent
Fund plans anticipated at 6.5 percent annual return (as
shown in another handout received by the committee).
Ms. Pitney answered that the base scenario shown on slide 8
was built on a 6.95 percent return. She expounded that the
6.5 percent return was information received shortly after
the presentation had been compiled. The 6.5 percent return
meant a revenue shortfall in both plans of about $100
million four to five years out. She explained that the
change in return did not make a substantial difference in
the FY 19 to FY 21 timeframe due to the lagging five-year
average.
Representative Wilson wondered about available data
lowering the rate from 6.95 to 6.5 percent annual return.
Ms. Pitney answered that the scenario spreadsheets she
planned to address later on used the 6.5 percent annual
return.
1:46:26 PM
Representative Wilson wondered why the return had been 6.95
percent. She assumed data had projected the return and she
was trying to determine what changed. She asked why the
annual return had been changed to 6.5 percent.
Ms. Pitney responded that the Alaska Permanent Fund
Corporation's (APFC) advisor Callan Associates had reduced
its ten-year outlook from 6.95 percent to 6.5 percent. She
added the advice had recently been given at an APFC board
meeting.
1:47:20 PM
Representative Wilson requested a copy of the back-up
showing the reason Callan had recommended changing the 6.95
percent to 6.5 percent. She considered that 6.5 percent was
also too high. She did not want to make mistakes when
looking at possibly utilizing any of the money to fund
government.
Co-Chair Seaton added that the director of APFC would be
meeting with the committee soon and could share the
information from Callan Associates. He did not believe the
data fell under OMB's purview.
Representative Wilson was fine with APFC providing the
information. She would appreciate the information prior to
the meeting so she could review the material and be
prepared with questions.
Co-Chair Seaton would look into what information APFC was
able to share. He thought there may be some confidentiality
pertaining to the work product provided by Callan to APFC.
Representative Wilson requested a higher view of the
factors that went into Callan's recommendation.
Co-Chair Seaton replied that he would submit the request.
1:49:44 PM
Vice-Chair Gara spoke to the difference in the House
Permanent Fund plan and the Senate's plan. He noted that
the Senate's plan included dividends of approximately
$1,000 and the House's plan included dividends of
approximately $1,250. He stated that the $250 difference
had always appeared as $170 million to $180 million. He
observed that the presentation showed a difference of $230
million. He asked for detail.
Ms. Pitney replied that as the Permanent Fund value
increased, the amount from the 5 percent or 5.25 percent
lagging interest increased. As that took place, the spread
between a 25 percent dividend and a 33 percent dividend
widened.
Vice-Chair Gara stated that the Permanent Fund Earnings
Reserve Account (ERA) contained much more than it had the
preceding year. He surmised that under those formulas it
would lead to a larger dividend and a larger difference.
Ms. Pitney responded in the negative. She explained that
the dividend was based on the draw of 5.25 percent over a
prior five-year average. Over time the actual net
difference in cost of the dividend would grow from $150
million to $225 million to $250 million because of the 25
percent versus 33 percent calculation. The percentage drawn
would be the same.
1:51:50 PM
Representative Guttenberg spoke to the "no federal cost
shifts" bullet point on slide 8. He wondered if OMB had
determined that the state had done all it could do make
additional shifts. He wondered if there were any areas or
scenarios that were shifting that would allow for
additional shifts.
Ms. Pitney replied that slide 8 represented more negative
consequences. She explained that if oil price and
production forecasts were not met, the revenue figure would
drop and the budget gap would increase. She elaborated that
if agency costs could not be kept at inflation or below,
the budget gap would grow. She explained that the bullet
point "no federal cost shifts" applied if the federal
government did not shift costs back to the state. She
explained that with healthcare uncertainty, it could be a
significant move back. There were other federal programs
that the legislature would have to contemplate whether it
wanted to fund or not. The slide assumed the state would
only get more costs shifted from the federal government to
the state. She addressed K-12 school increases that grew
close to 5 percent for many years. The base scenario on
slide 8 included a 2.25 percent increase with no student
growth built in. All four items would increase the budget
and did not take into account Representative Kawasaki's
concern that there was not enough built in for the capital
budget.
1:54:26 PM
Ms. Pitney turned to slide 9, which she had covered in
response to Representative Guttenberg's question. She
addressed healthcare cost containment efforts and explained
the forecast had been built in at inflation only of 2.25
percent. She detailed that if costs could be maintained at
5 percent instead of the quoted 7 percent, it would be a
difference of approximately $100 million. Keeping the
increase at 3.5 percent instead of slightly over 5 percent
would mean another $100 million. A cost increase of 2.25
percent meant another $100 million. She highlighted
criminal justice initiatives that could increase costs. She
spoke to market correction that could impact Permanent Fund
earnings. She detailed that 6.95 percent and 6.5 percent
increases had been built in. She spoke about the period
between 2007 and 2015 and explained it would be a
difference of almost $500 million at an average 6.5 percent
draw.
Ms. Pitney elucidated that the House and Senate plans had
very structured draws on the Permanent Fund: 5.25 percent
on a lagging five-year average, which would drop to 5
percent over time. She detailed the structure had been
decided on based on what was sustainable for the fund to
grow or maintain its value in real terms. She explained
that if the legislature took $500 million more out of the
fund for a period of five years, the draw would produce
$150 million less annually in perpetuity. She furthered
that taking $500 million more per year for ten years would
mean $400 million less per year in perpetuity. She
explained that an overdraw would take for today what should
be available for generations in the future. She stressed it
was a substantial amount of money. She noted that instead
of doing $500 million in new revenue for five years, it
would mean putting a $650 million new revenue to stay even
because what the state would get from the Permanent Fund
would be $150 million less. Overdrawing the ERA in the
near-term created a larger gap in the long-term.
1:58:17 PM
Co-Chair Seaton asked if the Healthcare cost containment
efforts looked at agencies or included the state's unfunded
liability to Public Employees' Retirement System (PERS) and
Teachers' Retirement System (TRS).
Ms. Pitney answered that the cost containment efforts
looked at all healthcare cost issues including Medicaid,
juvenile justice, corrections, and employee healthcare
costs. The cost included everything that passed through the
state budget and retirement. The state paid 22 percent on
every employee in PERS and 12.5 percent for TRS, which was
part of the healthcare cost. The total healthcare cost was
$1.2 billion.
Co-Chair Seaton asked if a 1.5 percent change [in the
percentage rate] was the equivalent of $100 million. He
asked for clarification.
Ms. Pitney replied that the difference was 1.25 percent.
She detailed that an increase from 2.25 percent to 3.5
percent was $100 million four years out.
Representative Guttenberg shared that he always advised a
new governor or mayor that they did not want to be the
person who got caught short on disaster planning. He was
sure disaster planning and preparedness was a departmental
effort. He wondered if there was sufficient money available
to take care of a disaster without calling the legislature
in [to a special session].
Ms. Pitney responded that if a prudent balance of $2
billion was left in the CBR (the balance was getting low at
present), it would be sufficient to address most natural
disasters in a stable fiscal environment.
2:01:12 PM
Ms. Pitney highlighted slide 10: "Budget Gap: State Budget
Overview: Budget Gap Under Various Assumptions." She
referenced the budget gap of $638 million factoring the
Senate's Permanent Fund plan and the $863 million gap
factoring in the House's Permanent Fund plan (slide 8). She
returned to slide 10 and highlighted the $618 million gap
under the Senate plan compared to the $836 million gap
under the House plan. The gap would be somewhere in the
middle if the legislature had a compromise dividend plan.
She elaborated that if oil prices increased to $65 per
barrel, the gap would be $370 million, while a decrease in
the price of oil to $50 per barrel would mean a $910
million gap. She noted that any of the circumstances shown
on the slide was as valid as the next.
Ms. Pitney continued to a bar chart on slide 11 that showed
the various scenarios over time. The slide also included
the budget gap scenario if a market crash occurred. She
explained that if the experience from 2007 to 2015 repeated
itself, a market crash would result in a budget gap between
$700 million and $900 million. With a compromise dividend
and oil prices at $50 per barrel, the gap would worsen over
time (to over $1 billion in 2025). Under a scenario with a
compromise dividend and revenue, the gap would decrease
over time from FY 19 to FY 25.
Representative Kawasaki thought the explanation on a prior
slide regarding the budget with flat service did not
include the dividend. He spoke about taking the number and
putting it on page 10 with baseline revenues and Permanent
Fund earnings. He noted that the dividend was larger in the
House bill than it had been in the Senate bill.
Ms. Pitney explained that the gap in the Senate plan was
$600 million and the gap in the House plan was $800
million. The gap was larger in the House plan due to the
dividend difference.
Representative Kawasaki looked at the first column titled
"Senate SB26" on slide 10 and observed that the 2019
baseline revenue plus the Permanent Fund earnings minus the
budget resulted in a gap of $618 million. He referenced the
second column titled "House SB26," which had a higher
dividend.
2:04:34 PM
Ms. Pitney clarified it reflected the Permanent Fund
earnings draw that would cover government. The remainder
would go to the dividend. The slide excluded the dividend,
but because the dividend was higher in the House plan the
gap was higher.
Ms. Pitney continued to speak to slide 10. She pointed to
the second bullet point and explained that with revenue and
the CBR the legislature could avoid overdrawing the
Permanent Fund. The Permanent Fund needed to be viewed as
the state's primary revenue stream. She specified $600
million was a prudent target for revenue; currently the
state was looking at $320 million plus proposed taxes (HB
4001, motor fuel tax, and other small fee increases).
Ms. Pitney reviewed the graph on slide 12: "Savings: State
Budget Overview: FY 2010-2018 State Revenue and Expenditure
(Without Dividend)." She noted that fortunately between
2010 to 2012 the state had been building its reserves. She
highlighted the deficit area between revenue and expense in
the past several years; the state had consumed the $14
billion even with a 44 percent decrease in state UGF since
FY 13. Unfortunately, revenues had decreased more
dramatically. The state had spent $14 billion from its
savings over that time period. She added that the state's
constitution required repayment of the CBR back to its peak
in FY 13. The spending of the CBR and the decision to not
sweep the funds required a three-quarter vote [by the
legislature]. She continued that the CBR would be part of
the budget discussions going forward. She surmised that
even under the best circumstances the $14 billion was
unlikely to be repaid in full.
Ms. Pitney continued to slides 13 and 14. She stated that
the state had been fortunate to have the CBR to draw the
gap. The administration believed $2 billion should be
maintained in the CBR to help address volatility facing the
state. She stressed that even if the Permanent Fund plan
and a broad-based revenue were enacted Alaska would still
be more volatile than any other state in the nation.
Currently Alaska was three times more volatile than the
next most volatile state, which was either Wyoming or North
Dakota. She advised that maintaining the existing CBR
balance (or very near the existing balance) was prudent.
The state currently used about $1 billion per year from the
CBR for cash flow. If anything unexpected arose, having the
CBR to use (rather than having to go ad hoc to the ERA) was
a much better plan because overdrawing the ERA would cost a
significant annual revenue stream in the future.
2:09:25 PM
Ms. Pitney highlighted other fund balances on slide 15. The
Power Cost Equalization (PCE) Fund had a balance of just
over $1 billion. She detailed the account was responsible
for funding PCE payments of about $40 million. There were
also provisions allowing the account to fund community
assistance and renewable energy. The Higher Education Fund
had a balance of $339 million (the asterisk next to PCE and
the Higher Education Fund indicated they were quasi-
endowments established by the legislature). The Higher
Education Fund provided for scholarships, but over the past
three years it had also funded several programs including
the Washington, Wyoming, Alaska, Montana, and Idaho (WWAMI)
program, the Online With Libraries program, a teacher
mentor program, and other. The programs used the annual
earnings from the quasi-endowment. The Alaska Housing
Capital Corporation Account had a balance of $22 million
derived from the Amerada Hess settlement.
Ms. Pitney continued to address slide 15. She mentioned the
Capital Income Fund. The Community Assistance Fund had a
balance of $60 million; without additional deposits it
would be a $20 million payout in FY 19. The Vessel
Replacement Fund had paid for the recent Tustumena [ferry]
replacement and had a remaining balance of $22 million. She
mentioned a line related to various smaller funds. The
Public School Trust Fund had a balance of $623 million. She
detailed it had an old endowment structure for the payout -
it paid out only earnings from the prior year versus a
percent of market value (POMV) payout. She noted legislation
had been introduced to change the fund to a more modern POMV
payout, which would return more on an annual basis and would
decrease volatility.
2:11:53 PM
Representative Wilson asked why the accounts listed on
slide 15 were DGF and the Permanent Fund was UGF. She
reasoned the dividend had been made for a specific purpose,
but it would be UGF, while the other accounts were DGF.
Ms. Pitney answered that the UGF designation was under the
assumption that the ERA was used by the legislature for
something other than the PFD only. She explained that one
could argue that it was not reclassified yet. The
administration asserted that with the SB 26 framework on
both the House and Senate side, it was a UGF funding
source.
Representative Wilson did not understand the reasoning. She
explained that the funds listed on slide 15 could be used
for whatever the legislature wanted although it chose not
to. For example, the legislature could elect to take the $1
billion from the PCE Fund and put it in the General Fund.
She noted they could do the same with Permanent Fund
earnings. She wondered why there was a designation
difference. She added that fuel tax had also been
determined to be DGF. She thought there had to be some type
of checklist determining which category a fund fell under.
She pointed out that the dividend had not been classified
as UGF until recently.
Ms. Pitney replied that the LFD Swiss Army Knife Handbook
included rules for designation. She explained that if
statute designated the funding to a particular purpose it
was considered designated. She agreed with Representative
Wilson that any of the funds could be used for any purpose
or reverted into the General Fund. She elaborated it was a
choice to have the designation. She saw two distinctly
different pieces of DGF. One that was earned (like ferry
revenues) for a particular direct service. For example, the
purchase of a fishing license, paying for a class at Alaska
Vocational Technical Center (AVTEC) or the University, or
buying a ferry ticket. She explained the items were truly
DGF and would not be earned unless the service was
provided. The second type of DGF included things like
alcohol tax, marijuana tax, the recidivism fund, and other
funds from particular tax revenues that were set aside. How
the items should be classified was a policy discussion. She
added that OMB calculated a net zero shift of approximately
$600 million would go into UGF if the passthrough dollars
were classified as UGF instead of DGF.
2:15:32 PM
Representative Wilson stated there was statute for Higher
Education Fund and most of the other funds on slide 15. She
stated Permanent Fund Dividend was designated in statute.
She remarked that so many of the spreadsheets in the past
did not include the Permanent Fund, but the ones before the
committee did (although no earnings had been used). She
believed it made it harder for the public to do
comparisons. She thought that most would assume the
Permanent Fund would be considered DGF until at some point
the ERA was utilized. She thought it was a policy call and
surmised that they may not need all of the funds. She
believed the funds made things more confusing because
borrowing from DGF made it appear UGF went down, but in
reality they were still spending the same amount of money
if not more.
Co-Chair Seaton explained that the last year all the
reports had been in UGF and all GF for the purposes of
comparison. He asked for verification that if the PCE Fund
generated over a certain amount it would flow over into the
Community Assistance Fund. He asked if money had been
transferred into the Community Assistance Fund.
Ms. Pitney responded that there was a provision that if
there were sufficient earnings an appropriation could be
made to the Community Assistance Fund from PCE as well as
for energy assistance. In FY 17 there were sufficient
earnings, which would require that the legislature
appropriate the funds going forward. She noted as written
it would be expected to be an FY 19 deposit.
Co-Chair Seaton asked about the mechanism was part of the
governor's budget. He asked what the mechanism for the
determination was.
Ms. Pitney answered that the administration had not
included community assistance from UGF when it put forward
its FY 18 budget. She specified it had been the
administration's intent to include the funding as a
supplemental item if a fiscal plan had been adopted. In a
structured way the PCE deposit would be in FY 19.
Co-Chair Seaton asked if the item showed up in the
governor's budget as an appropriation if there were
sufficient earnings in PCE. Alternatively, he wondered if
the legislature had to do it separately.
Ms. Pitney replied that the appropriation could show up in
the governor's budget, but decisions on the upcoming FY 19
budget had not yet been made.
Co-Chair Seaton was trying to determine where the PCE
mechanism would come forward, so everyone would be aware of
its location. He thought the topic would be discussed[DP3]
further.
2:20:01 PM
Representative Guttenberg remarked that slide 15 indicated
that PCE and the Alaska Higher Education Fund were set up
as quasi-endowments. He asked if the earnings of PCE rolled
back into the PCE Fund at the end of the year. He wondered
if there was a separation between the endowment fund and
the earnings.
Ms. Pitney answered there was no distinction other than the
calculation of the balance at the beginning of FY 17 and
the balance at the end of FY 17. She stated it was merely
the earnings, which all remained in the fund until
appropriated.
Representative Guttenberg pointed to the asterisk next to
the Alaska Higher Education Fund [indicating the fund was a
quasi-endowment] and assumed the fund worked the same way.
He wondered if the other funds worked in a similar fashion
where there was no difference between the earnings and the
fund corpus.
Ms. Pitney relayed that the remaining funds on the slide
were not quasi-endowments; an appropriation was made from
those funds. She noted the Capital Income Fund was funded
with earnings from the Amerada Hess settlement. She
explained the fund was the "parking lot" where old
reappropriations went and sat. She noted she had mixed the
funds up earlier when she described them. The Community
Assistance Fund is one-third of the balance. She explained
that the day before the end of the fiscal year one-third of
the balance was available for deposit on the fiscal year.
Without additional appropriations it would mean $20
million; if there was another appropriation it would be
higher.
2:22:26 PM
Vice-Chair Gara addressed the history of revenue sharing.
He believed it had been $100 million three years back, $60
million, $50 million, and $38 million the past year. He
stated the amount was supposed to be $30 million in the
current fiscal year; the legislature had added $8 million
in the capital budget, bringing the amount back up to $38
million. He asked for verification that the fund balance
would be $20 million for FY 19 if nothing more was added by
the legislature.
Ms. Pitney responded affirmatively.
Ms. Pitney spoke to the line graph on slide 16: "Revenue:
State Budget Overview: Alaska Permanent Fund Earnings."
Permanent Fund earnings was the state's largest source of
annual revenue. She pointed to the red line which reflected
traditional GF revenues. The blue line indicated Permanent
Fund earnings over the past several years. Assuming the
value of the Permanent Fund was protected into the future,
it would probably be the state's most robust annual revenue
source going forward.
Co-Chair Seaton asked if the revenue on slide 16 excluded
oil tax credits owed.
Ms. Pitney responded that the revenue line subtracted
revenue reduction credits, but not the cashable credits
that were $600 million FY 15 and somewhat more in other
years.
Co-Chair Seaton surmised that any per barrel credit and
expenditure like the cash credit written against taxes owed
was already incorporated. Ms. Pitney responded that those
items were factored into the red line [GF revenue].
2:25:09 PM
Ms. Pitney explained the bar chart on slide 17: "Revenue:
State Budget Overview Permanent Fund Earnings Over Draw
Impact." Maintaining the CBR balance at a $2 billion
minimum was prudent for revenue volatility and to address
any issues outside the norm, which was what it had been
designed for (mostly for any type of disaster). The $2
billion level was sensible given the state's size and the
way the fund was used for early cash draws at the beginning
of the year. She explained the scenario represented what
would occur if the state began using the ERA after it
depleted the CBR in FY 20. She elaborated that an
additional $500 million annually taken from the ERA above
the structured draw would reduce the Permanent Fund balance
by $5 billion over the course of ten years compared to a
structured draw with additional revenues. She explained
that the scenario would produce $250 million less annually.
The chart showed how the scenario would erode the value of
the Permanent Fund and how less revenue would be generated,
increasing the need for other revenue sources in the
future.
Vice-Chair Gara mentioned that there had been debate over a
revenue cap feature of the House and Senate Permanent Fund
bill. He stated that the cap resulted in relatively small
failure rates. He addressed whether there would still be
sufficient funds in the ERA depending on stock market
volatility. He stated that the chart did not look so awful,
but if an additional $500 million was withdrawn from the
ERA annually, the chance the ERA would fail was
substantially higher due to stock market fluctuations.
Ms. Pitney responded in the affirmative. The chart assumed
the 6.5 or 6.95 percent increases annually; it did not
factor in any market volatility. She would address
volatility shortly [on the next slide].
2:28:04 PM
Ms. Pitney turned to the next bar chart on slide 18:
"Revenue: State Budget Overview: Market Correction Impact."
She reported that the slide showed the revenue stream using
the 6.95 percent assumption. She noted the difference
between the 6.95 and 6.5 percent assumptions would only be
marginally different in two to three years. The base
scenario showed $2.7 billion in revenue by FY 27. Whereas,
the "2007 to 2015 experience" used actual returns from FY
07 to FY 15 and showed the FY 27 draw would decline nearly
$600 million (split between government and the dividend).
She stated that the scenario was unlikely, but it had
occurred in 2007 to 2015. The scenario would mean being
tight on the ERA; if the state overdrew, it would likely
run into trouble with the ERA.
Co-Chair Seaton recognized Representative Geran Tarr in the
audience.
2:30:15 PM
Ms. Pitney turned to slide 19: "Revenue: State Budget
Overview: Market Correction Impact: Ten Year Forecasts:
Average Return and Market Correction." She addressed
scenarios in a separate handout titled "Office of
Management and Budget Attachment A Scenarios" dated
November 6, 2017 (copy on file). She highlighted a scenario
with a 6.5 percent annual return and the 5.5 percent
dropping to 5 percent lagging average. There would be an
end balance of $76 billion in the Permanent Fund. The
planned draw amount went from $2.7 billion to $3.4 billion
under the House's version of SB 26. The fourth row on page
1 of the handout showed General Fund revenue without the
dividend. Row 5 showed declining deficits ($800 million in
the near-term dropping to $311 million in FY 27). The
information was based on the FY 18 service level forecast.
Ms. Pitney elaborated that with the motor fuels tax and the
SB 26 additional royalty the deficit dropped to $265
million in FY 27. She reported that funding the remaining
deficit with the ERA would mean a 5.6 percent draw in FY 19
instead of a 4.3 percent draw. The 4.3 percent was the
effective draw - it was 5.25 percent of the first five of
the lagging six-year average. She explained it would mean
taking 5.25 percent of a smaller base, meaning the
effective draw on the value would be 4.3 percent. She
continued that if the difference was made up with ERA
funds, it would mean a 5.6 percent draw, which was not
sustainable. She added HB 4001 [the governor's proposed
wage tax legislation] to the scenario [revenue was
projected at $160 million in FY 19 and $320 million
annually going forward] and using the ERA to cover the
difference. The scenario would result in a 5.3 percent
draw, which was not sustainable. She explained that under
the various draws, instead of having [a Permanent Fund
value] a balance of $76 billion at the ten-year timeframe,
with no new revenue the balance would be $69 billion, and
with no use of the CBR the amount would be $72 billion. The
ERA balance would remain strong and the second to the
bottom row showed the dividend calculation over time.
2:34:21 PM
Representative Thompson asked if any of the OMB projections
assumed any budget reductions.
Ms. Pitney responded that the scenario used the steady
state FY 18 and known increases for retirement, tax
credits, and 2.5 percent inflation. She noted that it only
had 2.25 percent, so if healthcare costs were not brought
down there would be no way to meet the 2.5 percent
projection - and if anything was done with schools. The
numbers did not include additional reductions on top of the
44 percent that had been made to date.
Representative Thompson surmised that if there were
additional reductions in the future it would have an impact
on the figures in the scenario.
Ms. Pitney agreed.
Co-Chair Seaton asked if inflation proofing for the
Permanent Fund was included in the data. He noted that the
House plan had included 0.25 percent inflation proofing.
Ms. Pitney believed the 0.25 percent inflation proofing
would add to the ERA balance in the handout scenarios. The
Permanent Fund values were correct, but the ERA balance
would be high.
Co-Chair Seaton asked Ms. Pitney to check on the issue and
follow up. Ms. Pitney agreed.
2:36:34 PM
Ms. Pitney moved to Scenario 2 on page 2 of Attachment A.
The scenario used a 29 percent dividend (a split between
the House and Senate plans). The difference between
Scenarios 1 and 2 was the compromise dividend. The scenario
resulted in a lower deficit going forward and a higher
Permanent Fund value. She noted that the compromise
dividend was lower at $1,400 compared to the $1,600
dividend in Scenario 1.
Representative Wilson asked why the ERA balance dropped so
significantly between 2018 and 2019 and remained fairly
stable going forward.
Ms. Pitney responded that the compromise version assumed
the "4 times draw limit." She expounded that if the ERA
exceeded 4 times the draw limit at the end of the year, the
remainder was deposited into the Permanent Fund corpus.
Under the scenario the draw was $2.7 billion. The
implementation of the 4 times draw was the reason for the
drop in the ERA balance from $15 billion to $10 billion
between FY 18 and FY 19.
Representative Wilson asked if the provision would reduce
the money available for dividends and draw. She reasoned
that the funds were protected once deposited into the
[Permanent Fund] corpus.
Ms. Pitney replied that if the ERA was spent as a savings
account versus using a structured draw of 5.5 percent, it
would limit funds available to spend in an ad hoc way. She
elaborated it protected the Permanent Fund and preserved
anything over a necessary buffer of four years of draw; the
funds went back into the corpus.
2:40:03 PM
Co-Chair Seaton surmised the reason for the zero percent
draw in FY 18 was because a structured draw not been taken
from the Permanent Fund. The legislature had used the CBR
to fund the FY 18 budget. He noted that the draw went from
zero to 5.4 percent.
Ms. Pitney agreed. She added that OMB could include the
percent used for the dividend, which would be more. She
reported $760 million had come out.
2:40:53 PM
Representative Ortiz asked if the 29 percent dividend in
Scenario 2 was based on the Senate's plan.
Ms. Pitney reported that it was a compromise between the
House and Senate numbers of 33 percent and 25 percent
respectively.
Ms. Pitney advanced to Scenario 3 on page 3 of Attachment
A. The scenario used the Senate's 25 percent dividend. She
highlighted two different provisions in SB 26. The first
provision in the Senate's plan was an offset dollar-for-
dollar what was drawn from the ERA at $1.2 billion in
petroleum revenue. Whereas, the House plan included $1.4
billion increasing with inflation. She pointed to the
ending deficit of $523 [million] with motor fuels as the
only revenue source. She moved back to Scenario 2 and
explained the same issue occurred because the dividend was
higher; the ending deficit in FY 27 was $682 [million]. She
turned to Scenario 1 on page 1 and pointed to a lesser
deficit under the House plan with a higher dividend because
of the $1.4 billion offset versus the $1.2 billion offset.
She believed the $1.2 billion provision versus the $1.4
billion would be an important piece of the compromise.
Ms. Pitney turned to Scenario 4 on page 4 of Attachment A,
which illustrated what would happen in the event of a
market crash (modeled after FY 07 to FY 15 actual returns).
The remaining deficit would be $1 billion without any
additional revenue and $700 million with revenue. She noted
there were two years of no ERA available [FY 21 and FY 22].
She added that under the scenario having the CBR in place
and available was necessary.
2:44:15 PM
Co-Chair Seaton asked about the ERA and the structured
draw.
Ms. Pitney replied there was some amount of structured
draw; it assumed dividends were paid first. There were some
funds available annually due to earnings, but not enough to
cover both.
Co-Chair Seaton [indecipherable audio].
Representative Wilson looked at Scenario 4 on page 4 and
observed that FY 23 and FY 24 followed two years of an ERA
balance of zero. She noted that the increase in the fund
balance was substantial. She surmised that perhaps it
indicated that government and residents would not be
getting anything. She asked for clarity.
Ms. Pitney responded that the earnings came off of the
Permanent Fund value. The Permanent Fund value dropped
substantially, and the earnings were not sufficient to
cover both pieces. She explained that the ERA was used
entirely. Market gains meant the Permanent Fund value would
increase. She explained the scenario was based on the FY 07
to FY 15 actual returns experience. She clarified it was
the experience using the funds going forward.
Co-Chair Seaton rephrased that in some years there were
fairly large losses and in other years there were fairly
large gains.
Ms. Pitney agreed the swings were offset.
Co-Chair Seaton surmised that Scenario 4 did not result in
a picture where everything was beautiful and 6.5 percent
was the actual income annually. He wanted to ensure people
understood the other scenarios were based on the level 6.5
percent investment earnings annually, whereas Scenario 4
was based on the actual returns for the last ten years
applied against the future years.
Ms. Pitney pointed out that in middle years the [SB 26]
draw was $2.1 million [Scenario 4], whereas the draw in
middle years [Scenario 3] went from $2.1 billion to $2.3
billion, and $2.1 billion growing to $2.2 billion [Scenario
2]. She clarified that less was drawn because the value was
less.
2:47:31 PM
Representative Pruitt remarked that the diversification of
the Permanent Fund was different than it had been in the
past. He wondered if there was a mechanism to understand
when using historical data how to adjust for how the fund
had been invested differently during times of substantial
loss. He asked if it was possible to go back and estimate
what the difference in loss would have been the fund had
been invested more like it was at present.
Ms. Pitney replied that the question should go to APFC.
Representative Pruitt understood the concept of using
historical Permanent Fund data. He wondered if it meant
they should also look at the historical averages or costs
of oil during the timeframe. He reasoned that they were
looking at an estimate provided by DOR for one portion and
historical data for the Permanent Fund. He reasoned if they
used historical data for both the ERA would look terrible,
but there would be other areas that may look different as
well, including the remaining deficit.
Ms. Pitney responded that it was difficult to make many
changes in scenarios, but she believed Representative
Pruitt was saying if oil prices had been $140 per barrel
the ERA would not have been needed because other provisions
would protect it. She agreed and explained it was a stress
test. She furthered that even with a $320 million modest
broad-based tax under a worst-case market condition,
although unlikely, there was risk. The state was not
raising so much revenue that it was eliminating all market
risks. She reiterated that the likelihood of the worst-case
scenario was not high.
2:50:54 PM
Representative Pruitt recognized it was not possible to
ever get enough examples in a stress test. He used Scenario
4 as the worst-case scenario. He wondered if it would be
prudent to have a discussion that if additional revenue was
generated by HB 4001, they were still far from filling the
deficit if a worst-case scenario occurred. He wondered if
cuts or other work related to the size of government should
be done during that timeframe to give a viewpoint on what
to expect if the worst-case scenario came to fruition. He
surmised that the 2 percent growth shown in the scenario
would probably not be sustainable.
Ms. Pitney replied that when OMB had given a similar
presentation to the Senate, they had asked to include a
$200 million reduction in as a scenario. She would provide
the data to the committee.
Co-Chair Seaton clarified that the stress test did not
necessarily produce failure if the system was robust
enough.
2:53:10 PM
Ms. Pitney returned to the PowerPoint presentation. She
reviewed the information on slide 20: "Revenue: State
Budget Overview Tax Proposal." The proposed tax [in HB
4001] was a 1.5 percent tax on wages. The tax would be
capped at $2,200 or twice the PFD, whichever was greater;
the cap began at income of $147,000/year. There was no net
tax burden until a person reached $75,000 per year in
wages. The maximum tax burden after counting the PFD was
$1,100.
Ms. Pitney provided information regarding the bar chart on
slide 21: "Revenue: State Budget Overview Tax Proposal:
Per-Capita Broad-Based State Tax Revenues, By State, 2016."
The tax would leave the state at the lowest per capita
broad-based tax burden. The "ones below here" are largely
alcohol and tobacco.
Co-Chair Seaton referred to the bullet point on page 20
indicating that out-of-state residents would pay the
highest rate because they did not receive PFDs. He asked
for verification that the individuals would not pay the
highest rate because it was a flat rate, they would merely
not receive compensation from the state in a PFD. He wanted
to make sure people understood there would not be a
separate higher rate for nonresidents. He hoped in future
presentations OMB would change the wording of the statement
to avoid confusion.
Ms. Pitney agreed.
Representative Guttenberg referred to slide 21. He asked if
a $1,000 PFD was included it would offset taxes paid. He
observed taxes paid in Alaska appeared to be about $1,000.
Ms. Pitney replied in the affirmative.
Representative Guttenberg surmised that without the
proposed tax, residents were in the positive [due to the
PFD].
2:56:13 PM
Representative Wilson referenced OMB Attachment B titled
"Unrestricted General Fund Budget FY2013 to FY2018" dated
November 1, 2017 (copy on file). She wondered why the
spreadsheet used the management plan versus actuals. She
reasoned that a budget reflected the most that could be
spent, not the least. She wondered why actuals would not be
included as much as possible to understand what was being
spent.
Ms. Pitney answered that OMB could provide the information.
The data in Attachment B followed a traditional view. She
detailed they could provide the data through FY 16 and OMB
was in the process of finalizing FY 17 numbers.
Representative Wilson wondered if OMB added supplementals
to the year the funds had been spent. She cited a $10
million supplemental increment for DOC. She explained the
funds had actually been spent the previous year. She
wondered if OMB went back and added the supplemental
increments to the year they had been spent.
Ms. Pitney addressed the DOC example provided by
Representative Wilson. She specified that the $10 million
[supplemental increment] had been a DGF source and would
shown in the DOC budget in FY 17 [the year it was spent].
Representative Wilson asked how often OMB looked at
[department] vacancy rates and updated PCNs that were no
longer filled. She remarked that unfunded positions were a
big issue for the public. She believed the past year the
governor had asked departments to delete positions that had
been vacant for six months.
Ms. Pitney responded that the information was updated in
the budget process at management plan and at the governor's
budget request. Both happened in the fall timeframe. The
management plan represented the FY 18 currently underway
and the governor's addressed plan changes for FY 19.
Representative Wilson asked if the governor intended to do
a six month sweep of any PCNs. She thought there had been a
caveat for positions that were necessary and had
specialized criteria.
Ms. Pitney answered that the administration was looking at
the issue all of the time. She detailed that 2.5 to 3 years
back the administration had done the review annually.
Reviews had been increased to every six months and at
present they occurred every three months. She noted at
three months there were many more factors. The
administration was actively addressing vacancies that
lingered. The scope of the remaining positions had been
narrowed.
3:01:01 PM
Representative Wilson noted that the governor had included
provisions focused on travel and how many positions should
be filled when vacated due to attrition. She noted there
had been a hiring freeze for a while and travel had been
looked at very carefully. She wondered if any of the things
were still in effect.
Ms. Pitney replied in the affirmative; they were restricted
at the commissioner level. She clarified that it was not at
an office or division level.
Representative Wilson requested a list of items asked of
departments to keep costs down. Ms. Pitney agreed.
3:02:15 PM
Representative Ortiz relayed that Department of Revenue,
Tax Division Director Ken Alper had testified a couple of
weeks back that there were 2,500 fewer people working for
the state than there had been a few years earlier. He
clarified he was not speaking about positions, but about
people who were no longer working for the state. He asked
if Ms. Pitney was comfortable with the figure.
Ms. Pitney replied that the figure was very close. She
believed the number was about 2,600, but she had not looked
at an updated figure for the current month.
3:03:18 PM
Vice-Chair Gara understood the governor was trying to build
a compromise that he believed everyone would agree with. He
spoke to an issue that he found concerning. He asked if at
an income level of $150,000 a person paid no tax on
additional income of any amount.
Ms. Pitney replied the income level was $147,000.
Vice-Chair Gara reviewed that the tax would be 1.5 percent
up to $147,000 of income and zero tax on earnings above
that amount. He recalled that Mr. Alper had testified
someone earning $1 million per year would pay one-sixth the
total tax rate paid by a low to middle-income person. He
asked if Ms. Pitney had different numbers.
Ms. Pitney replied that she did not have different numbers.
Vice-Chair Gara remarked that it would not be easy to sell
him on a tax rate that was lower for wealthy people than
for middle and low-income earners. He believed it was also
problematic that the tax would not apply to investment
income. He asked for verification that money earned on
stock market dividends and capital gains was exempt from
the tax.
Ms. Pitney responded in the affirmative.
Co-Chair Seaton relayed that the committee would have a
hearing on HB 4001 the following day.
Vice-Chair Gara recalled a slide presented to the committee
in the past specifying that the state needed to raise about
$600 million if it wanted to substantially address the
budget gap. He noted that the proposed tax would raise
about $325 million. He did not know how he could tell his
constituents that their taxes may be raised again in the
future. He asked what the administration meant when it told
the committee $600 million should be raised.
Ms. Pitney responded that if the legislature wanted to
cover the gap with revenue, $600 million was the prudent
target. Alternatively, if it was the legislature's desire
to stress the budget to find additional savings, something
less than $600 million would be required. The amount would
also provide the ability to maintain the CBR and likely
begin returning funds back to the CBR in six to eight
years; it was an insurance policy against overdrawing the
ERA. Some people may not want to use the $600 million
revenue target, but to reduce spending. The $320 million
was something in the middle. The administration was looking
at a way to provide fiscal certainty and connect the
economy to the state services received. The question of
reduced spending or increased revenue would perpetuate
going forward.
Vice-Chair Gara referred to page 21 of the presentation. He
asked if a scenario where the $600 million in revenue was
raised would mean Alaska would have the second lowest
overall tax burden.
Ms. Pitney confirmed that Alaska's tax burden would be the
second lowest [out of all 50 states].
Co-Chair Seaton thanked Ms. Pitney for her presentation and
reviewed the agenda for the following day.
ADJOURNMENT
3:09:39 PM
The meeting was adjourned at 3:09 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| OMB Special Session House Finance Presentation.pdf |
HFIN 11/7/2017 1:00:00 PM |
HFIN |
| OMB Attachment B UGF DGF trendHFIN.pdf |
HFIN 11/7/2017 1:00:00 PM |
HFIN |
| OMB Attachment A scenariosHFIN.pdf |
HFIN 11/7/2017 1:00:00 PM |
HFIN |
| OMB 110717 HFIN Kawasaki Handout.pdf |
HFIN 11/7/2017 1:00:00 PM |