Legislature(2021 - 2022)ADAMS 519
01/08/2021 11:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Governor's Budget Assessment by Larry Persily | |
| Overview: Fy22 Governor's Budget by the Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
INTERIM
January 8, 2021
11:01 a.m.
11:01:32 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 11:01 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Jennifer Johnston, Co-Chair (via
teleconference)
Representative Ben Carpenter (via teleconference)
Representative Dan Ortiz, Vice-Chair (via teleconference)
Representative Andy Josephson (via teleconference)
VACANT
Representative Bart LeBon (via teleconference)
Representative Kelly Merrick (via teleconference)
Representative Colleen Sullivan-Leonard(via teleconference)
Representative Cathy Tilton (via teleconference)
Representative Adam Wool (via teleconference)
MEMBERS ABSENT
None
ALSO PRESENT
Representative Delena Johnson; Representative-Elect James
Kaufman.
PRESENT VIA TELECONFERENCE
Larry Persily, Former Department of Revenue Commissioner;
Alexei Painter, Director, Legislative Finance Division;
Representative Harriett Drummond; Representative Matt
Claman; Speaker Bryce Edgmon; Representative Sharon
Jackson.
SUMMARY
PRESENTATION: GOVERNOR'S BUDGET ASSESSMENT BY LARRY PERSILY
OVERVIEW: FY22 GOVERNOR'S BUDGET BY THE LEGISLATIVE FINANCE
DIVISION
Co-Chair Foster reviewed the meeting agenda.
^PRESENTATION: GOVERNOR'S BUDGET ASSESSMENT BY LARRY
PERSILY
11:04:57 AM
LARRY PERSILY, FORMER DEPARTMENT OF REVENUE COMMISSIONER
(via teleconference), introduced himself. He provided a
PowerPoint presentation titled "Time and Money," dated
January 6, 2021 (copy on file). He would be providing some
context around the governor's proposed budget for FY 22. As
he reviewed the budget, he concluded legislators would be
faced with two questions around time and money. The first
question was whether the state would have enough time to
wait for enough money to come in to ensure a sustainable
balanced fiscal plan. The second question was whether the
state had enough money until additional monies became
available. His presentation was designed to explain, in
realistic terms, where Alaska stood. He suspected it would
be a tough year for legislators.
Co-Chair Foster noted Co-Chair Jennifer Johnston, House
Speaker Bryce Edgmon, and Representative Matt Claman had
joined the meeting via teleconference.
Mr. Persily turned to slide 2: "Time is short for Alaska,
as is money." He indicated that the balance of the
Permanent Fund (PF) earnings reserve account (ERA) as of
November 30, 2020 was $9.45 billion. The funds were
described as uncommitted and available in the ERA. He
asserted that of the $9.45 billion about $7.1 Billion were
realized gains (actually in the bank). The other $2.3
billion were unrealized gains (profits on the books as of
November 30, 2020). The unrealized gains would turn into
realized gains when the investments were sold. The
uncommitted $9.45 billion balance in the ERA accounted for
the percent of market value (POMV) draw for the current
fiscal year [FY 21] and the anticipated 5 percent POMV draw
for FY 22 in the amount of $3.069 billion.
Mr. Persily continued that in the FY 22 budget the governor
was proposing a $1.2 billion draw from the ERA in the
spring of 2021 to pay an additional dividend to Alaskans of
about $1,900. He was also proposing a $2 billion draw in
FY 22 to pay a full $3,000 dividend in the fall of 2021
which would require legislative approval. In summary, the
governor was looking for an additional $3.2 billion in the
calendar year spread over a couple of fiscal years to
payout an additional $5000 in dividends. The governor had
been talking with Alaskans about how the PF had gained more
than $10 billion from April 1, 2020 through November 30,
2020. However, there was more to the story. He elaborated
that $7 billion was lost in the first three months of 2020.
The Permanent Fund's net balance was up by the end of 2020
but not by $10 billion. The numbers provided on the balance
sheet were as of the date of the balance sheet and could be
different on the following day.
11:11:17 AM
Co-Chair Foster recognized Representative Sharon Jackson on
the line.
Mr. Persily turned to slide 3 and considered whether the
savings would last. He indicated the governor was proposing
POMV 5 percent draws for FY 21 and FY 22 and two additional
draws for spring and fall dividends which totaled more than
$9 million or 13 percent of the total balance of the PF on
November 30, 2020. He noted that the principle of the fund
could not be spent.
Mr. Persily continued that over the years the board of
trustees of the Alaska Permanent Fund Corporation (APFC)
had consistently talked about maintaining a solid balance
in the ERA because the funds were being used to pay for
public services and dividends. The board recommended that,
if the legislature were to continue taking a POMV draw of 5
percent, the amount remaining in the ERA should be about 4
times the amount of the draw or $12 billion to guard
against any future losses. He provided context by referring
to the economic meltdown in FY 09 in which the PF lost
about $6 billion. He thought there was reason to be
concerned about the potential of overdrawing the fund,
experiencing a poor investment return period, and leaving
the state without much of a cushion. Alaska had been using
fund earnings through the POMV since FY 19. Prior to that
for more than half of the 30 years since it was created,
the constitutional budget reserve (CBR) had been used to
assist in balancing spending.
Mr. Persily indicated that the deficit was not new. The
balance of the CBR would be about $600 million at the end
of the fiscal year and would not be a fund source the state
could count on. The state would be relying on the ERA and
the PF.
11:14:28 AM
Co-Chair Foster recognized Representative Tilton on the
line.
Mr. Persily moved to slide 4 titled "Longer-term
solutions." He noted that the state had run through the CBR
and had not paid the full statutory Permanent Fund Dividend
(PFD) since 2015 because of a lack of funding. Previous
legislatures and governors had looked at the available
funds and the needs of the state to arrive at an affordable
PFD amount. If the PFD was calculated based on the formula
from 1982, it would be greater than $3000. The governor had
proposed a special election in the spring on an advisory
question to Alaskans regarding a 50/50 split for dividends
and government services. He thought there was a risk of the
public rejecting the 50/50 split. He speculated that if the
legislature did not have to debate the dividend annually,
sessions would be shorter.
Mr. Persily also reported that the governor was proposing
three constitutional amendments. By law they could only
appear on a general election ballot, the next of which was
set for November 2022. The first proposal would turn the PF
into a true endowment, something the trustees had
previously recommended. There would no longer be a line
between the principle and the earnings of the fund. The
whole kitty would be treated as an endowment with a maximum
withdraw amount (5 percent in current statute). The fund
was expected to earn 6.75 percent in the long-term. The
fund would continue to grow after drawing the 5 percent. In
some years, the earnings might be less than 6.75 percent,
while in other years, they might be greater.
Mr. Persily relayed that the governor was proposing a
constitutional amendment that would set a spending limit
and another that would instate a prohibition on any new
taxes without the vote of the public potentially posing
calendar challenges.
11:17:57 AM
Mr. Persily turned to slide 5 titled: "Matching spending
with revenues." The governor was proposing $450 million or
more in budget cuts in FY 22 through FY 24. The governor's
10-year budget plan counted on other revenue sources of
$1.2 billion in FY 23 and about $1 billion each year
thereafter. He suggested new revenue sources would need to
be addressed soon in preparation for the FY 23 budget. He
remarked that any new broad-based tax would take
significant time to implement, and the revenue numbers were
speculative. He thought it ironic that after Alaskans had
voted not to change oil taxes in November 2020, the most
immediate way for the state to generate revenue would be to
raise oil taxes. He was not advocating for the idea, but
noted the state had boxed itself in.
Mr. Persily advanced to slide 6: "Repair and rebuild Alaska
economy." He reviewed the items that had negatively
impacted Alaska's economy including COVID-19, low fishing
prices, low oil prices, and the outmigration of residents.
The governor was proposing a state-wide general obligation
bond package ($300 million - $350 million) which would have
to be voted on by the public. The bonds would be used for
shovel-ready projects. The governor did not provide any
specifics but mentioned roads to resources, renewable
energy projects, ports, harbors, and runways. The vote
would occur in the spring in order for Alaskans to get to
work on the projects. He was unsure if the people of Alaska
would be willing to take on any additional debt.
11:22:05 AM
Mr. Persily moved to a calendar on slide 7: "Is this a
realistic calendar?". He suggested that the legislature
would have to determine whether the state would have a
special election in the spring to decide the bond issue and
to determine whether to exceed the 5 percent POMV draw to
pay for public services or dividends. He suggested that any
dividend payment would require the legislature to spend
beyond the 5 percent draw. In the following year, the
legislature would be building the FY 23 budget with a hole
to fill of $1.2 billion. He stressed that if new revenues
were desired for FY 23 it would be necessary to implement
something in FY 21.
Mr. Persily turned to slide 8 titled "Support for
constitutional amendment." The Permanent Fund Board of
Trustees had adopted resolutions three times in support of
a constitutionally protected endowment that would eliminate
the distinction between the principal and earnings of the
fund. The principal and the ERA were being managed the
same. However, the accessibility of each account was
different. The Board had not weighed in on the dividend
formula. He wondered whether the dividend should be placed
in the constitution if the constitution was amended to make
the PF a true endowment fund. He reiterated that if the
legislature limited its draw to 5 percent per year, the
APFC was confident $80 billion would reside in the fund by
the end of FY 30 based on its forecast.
Mr. Persily advanced to slide 9 titled "Permanent Fund
grows." He stated that APFC projected $80 billion at the
end of FY 30 assuming that the fund earned 6.75 percent and
the annual draw was maintained at 5 percent. He suggested
that if the legislature paid out a $5,000 dividend in
FY 21, in FY 30 there would be less of a POMV draw in the
future.
11:27:25 AM
Mr. Persily turned to the last slide titled: "Almost forgot
- what about oil." Mr. Persily opined that Alaska was no
longer an oil state in terms of revenue. The state received
its revenues from the federal government and investment
earnings of the Permanent Fund. He reported the projected
oil revenues for FY 22 were $800 million versus the POMV
draw of over $3 billion. All other revenues generated from
taxes and fees for unrestricted general funds (UGF) would
be less than $400 million. The Fall 2020 Revenue Sources
Book projected oil at $48 per barrel in FY 22. The Alaska
North Slope crude closed earlier in the week a few dollars
higher. He stated that if North Slope oil averaged $60 per
barrel in FY 22, the state would earn about $270 million in
additional revenue for the general fund (GF). He noted that
the budget gap would likely be closed for FY 22, but it
would not include a PFD payout.
11:30:01 AM
Co-Chair Foster thanked Mr. Persily for the high-level look
at the primary issues facing the state.
Co-Chair Johnston referenced a contract Mr. Persily had
been a party to with the Alaska Municipal League (AML)
regarding sales tax and internet sales. She asked if he had
done any modeling of a statewide sales tax. She wondered if
he had any revenue figures.
Mr. Persily answered that he had a contract with AML in the
previous year to help with setting up the organization's
online sales tax administration and collection program. He
had not done any modeling for AML regarding a statewide
tax. However, he had done modeling for the Department of
Revenue (DOR) over the previous 20 years. He had also done
some modeling when he worked for the Municipality of
Anchorage and as a legislative aide. He addressed a state
sales tax. He indicated that every percentage point had the
potential to generate between $100 million to $200 million
in revenue. The question came down to exemptions and caps.
Mr. Persily continued that the Kenai Peninsula Borough had
a 3 percent tax with a cap of $500. A person could purchase
a $50,000 truck but only pay a sales tax of $500. In North
Dakota if a person were to purchase a $50,000 truck, they
would pay sales tax on the full $50,000. Having a cap made
a huge difference in collections as well as what was taxed.
He brought up the notion of the end user paying the tax for
goods. A person buying a book at Barnes and Noble would pay
a sales tax. He wondered if an oil company buying oil pipe
should pay a sales tax. Currently, municipalities
considered the oil companies activities as manufacturing
and did not collect sales tax on materials. He suggested
that in order to spread out the oil tax base it was
necessary to pull back on exemptions and have a lower tax
rate with a broader base.
Co-Chair Johnston mentioned a value-added tax which was low
and broad. She had been looking at the 10-year fiscal plan,
2023, other revenues, and the 50/50 split. She was
concerned with the ERA. She recalled a low dividend in 2008
due to a market drop. She thought the legislature would be
taking the majority of the ERA and noted that the look-back
was only for 5 years at 5 percent. She wondered what would
happen and asked Mr. Persily to comment.
Mr. Persily replied that there was always the risk of the
market declining resulting in declined earnings of the PF.
He stressed that the market had been up and down during the
current week. He listed various unknowns that could impact
the market including the incoming administration and
COVID-19.
11:35:15 AM
Co-Chair Johnston asked for verification that it would
require a vote of the people to use funds from the
principal of the Permanent Fund.
Mr. Persily replied affirmatively. He elaborated that
currently in the constitution there was a principle that
could not be used, and the earnings from the fund went into
the GF just like motor fuel taxes. He relayed that
eliminating the line between the principle and the earnings
of the fund and putting a constitutional direction around
the entire fund as an endowment would require a vote of the
people. It would take a two-thirds vote in both the House
and the Senate and a vote in the next general election
scheduled in November 2022.
Co-Chair Johnston was concerned with the value of the U.S.
dollar. It was her understanding that 35 percent of the
money in existence had been printed since March. She noted
the uncertainty of the value of the dollar in the coming
year or two.
11:37:07 AM
Representative LeBon thanked the presenter. He asked if Mr.
Persily had an opinion on the revenue level that could be
raised through a state income tax. He indicated that a
typical model would be a percentage of the federal income
tax. He asked what percentage would be needed to raise a
meaningful amount of money for the state given how many
Alaskans paid a federal income tax.
Mr. Persily replied that a percentage of federal taxes paid
would be the easiest and simplest state income tax
structure. However, the state would be at the mercy of the
federal government's tax policies rather than setting its
own. A recent statistic showed that 40 percent of American
households did not pay an income tax even though some paid
withholding and Social Security. He viewed an Alaska state
income tax as a financial, economic, and political problem.
Mr. Persily elaborated that over the course of working for
the legislature, he had heard from legislators that they
did not like the idea of a state income tax because only a
portion of people would pay any tax at all. He suggested
the issue could be dealt with by incorporating a minimum
tax. He was uncertain how much of an income tax Alaskans
could afford. He thought generating $1.2 billion in income
taxes would be a heavy lift with economic consequences. He
suggested collecting $300 million to $500 million in either
an income tax or a sales tax in conjunction with other
revenue sources. He believed the state would have to
overdraw the ERA at greater than 5 percent to balance the
books in the coming year. He would try to find the
percentage rate needed for an income tax based on federal
income taxes paid by Alaskans.
11:41:01 AM
Representative Wool commented on the previous question
related to an income tax. He suggested using a line of the
federal income tax form such as the adjusted gross income
line. A percentage could be applied to the adjusted gross
income rather than the federal income tax paid. If the
state were to overdraw the ERA by $3 billion in the coming
year, by FY 30 the 5 percent draw would be reduced by $200
million and would decrease every year between now and then.
He asked what the cumulative reduction in the draw would be
in the same period.
Mr. Persily replied that he had not done any calculations.
In the early years there would be a smaller hit to the
annual draw and a greater hit in the out years. He reminded
members that the POMV draw was based on a 5-year average.
There would be a reduced balance in the first year, but it
would grow over time.
Representative Wool thanked Mr. Persily for the
clarification. He reiterated that over time the reduction
would increase, especially if it was spread over 5 years.
Vice-Chair Ortiz thanked Mr. Persily for his presentation.
He referred to slide 5. His understanding was that the
governor was proposing an annual reduction in the budget of
10 percent (approximately $450 million per year) for FY 22,
FY 23, and FY 24. He suggested that such reductions would
likely come out of the budgets for education and health and
social services, as several cuts had already been applied
to other departments. He asked if his assumption was
accurate.
Mr. Persily clarified that the proposed reductions to the
state budget totaled $450 million by FY 24 - about
10 percent of the current GF budget. He responded to
Representative Ortiz's question about areas of the budget
that would likely be affected. The largest areas of
spending in the budget were K-12 education, Medicaid, and
PFDs. He opined that it would be difficult to come up with
$450 million in cuts over three years that did not affect
the big-ticket items.
Co-Chair Foster thanked Mr. Persily for his presentation.
^OVERVIEW: FY22 GOVERNOR'S BUDGET BY THE LEGISLATIVE
FINANCE DIVISION
11:47:15 AM
Co-Chair Foster noted Mr. Painter would be doing a more
detailed analysis of the governor's budget at a later date.
The current day's presentation would provide a high-level
perspective. Legislators would have the opportunity to ask
questions allowing the Legislative Finance Division (LFD)
time to respond at a future hearing.
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION (via
teleconference), provided a PowerPoint presentation titled
"Preliminary Overview of the Governor's FY22 Budget," dated
January 6, 2021 (copy on file). He was happy to take
questions following the items in the outline:
• Alaska's Structural Budget Deficit
• LFDs FY22 Budget Baselines
• Governor's FY22 Proposal and FY21 Supplementals
• Governor's 10-Year Plan
Mr. Painter began on slide 3 titled "Note of Caution." He
qualified that the numbers in the presentation were drafts
and might change prior to session. He reported that LFD
would publish its overview of the governor's budget on the
first day of session with a detailed analysis. It was his
understanding that some of the items in the governor's
budget might shift, as he had sent out clarifying questions
prior to the holidays. He anticipated responses to the
questions within the week.
Mr. Painter moved to slide 4 titled "Alaska's Structural
Budget Deficit." He reported that FY 21 marked the ninth
straight year of budget deficits for the State of Alaska.
The budget deficit began in FY 13 when the price of oil
reached $100 per barrel. Therefore, the budget deficit was
not just a function of oil prices, even though the state
was currently in a significantly low period of oil revenue.
Mr. Painter continued that the projection in FY 22 was
anticipated to be lower than in FY 21. It was projected to
be the lowest amount of oil revenue the state had brought
in since FY 78 in nominal terms (not adjusted for
inflation). If adjusted for inflation, the amount would be
the least amount of petroleum revenue the state had
received since the pipeline's construction began in FY 75.
He opined that the state was at a historical point, as oil
would no longer be the foundation of the budget because of
the decline in revenue. The state had reduced its budget
substantially over the prior decade. The state's largest
budget totaled $7.8 billion UGF in FY 13. By FY 21 the
budget had been reduced to $4.5 billion UGF, a 43 percent
decrease. However, 9 straight years of deficits had taken a
toll on state reserves. The reserve balances dropped from
over $16 billion in FY 13 to about $900 million in FY 21.
11:50:38 AM
Mr. Painter moved to slide 5 titled "Alaska's Structural
Budget Deficit (Cont.)" The slide showed UGF revenue
excluding anything from the Permanent Fund. Only
traditional revenue was reflected over the previous decade.
The state's revenue peaked in FY 12. Petroleum was nearly
$9 billion declining thereafter. It declined in FY 16 and
FY 17 and started increasing again in FY 18 and FY 19.
Revenue dropped again with the COVID-19 pandemic starting
in FY 20. He noted that the state had deficits in FY 18 and
FY 19 based on petroleum revenue that was over twice what
was expected in the current year. He suggested that even a
recovery in oil prices would not bring the state to a
structurally balanced budget.
Mr. Painter moved to a chart on slide 6 showing the UGF
budget from FY 12 to FY 22. He reemphasized that the budget
had decreased. The state's peak budget was in FY 13 at over
$8 billion UGF. The state saw its largest capital budget in
the same year reaching $2 billion UGF. The state's largest
operating budget was in FY 14. The capital budget was
reduced at the time due to the budget deficit. However,
statewide items and agency operations were still
significantly high. He reported that FY 15 was the high
year for agency operations but noted a reduction to
statewide items due to refinancing the retirement system.
The state began budget reductions to the operating budget
in agency operations in FY 16 and FY 17. Since then, agency
operations had remained flat with upward pressure in FY 19
and FY 20 which was reversed in FY 21 and FY 22.
Mr. Painter advanced to slide 7 with a chart combining both
pictures of the UGF budget and revenue for FY 12 through FY
22. He relayed that the bars showed the budgets for the
years and the area in the background represented revenue.
The last time the state had a balanced budget was in FY 12.
The state had a significant amount of surplus at the time
and transferred money to the state's savings accounts. The
deficits began in FY 13. He highlighted that as revenue
declined, the deficits peaked in FY 15. Adopting the POMV
draw, beginning in FY 19, had substantially reduced the
state's budget deficits. They had been over $2 billion per
year beforehand. In FY 19 the deficit dropped to $300
million, but the state was paying less than the statutory
dividend. The governor's budget in the current year paid
the statutory dividend bringing the state back to a deficit
of about $2 billion.
Mr. Painter moved to the graph on slide 8 showing the
state's budget reserve balances for the CBR and the
statutory budget reserve (SBR) from FY 12 to FY 22. The
years of deficits had taken their toll on the balances. He
elaborated that from a peak of $16 billion the state had
spent down the SBR completely and the CBR would have a
balance of about $900 million at the end of FY 21. The
governor's budget would not draw much from the CBR leaving
a balance of about $900 million at the end of FY 22.
Mr. Painter reported that in October 2020, he had stated
that the CBR balance would likely be larger than the $600
million he had projected at the end of session. He had
increased the projection to $900 million which was a rough
figure. He had not yet received the Comprehensive Annual
Financial Report (CAFR) of the state which was currently
being audited by the Legislative Audit Division. The
auditor might make adjustments and provide a different
understanding of the reserve balances. The current estimate
was agreed on by LFD and the Office of Management and
Budget (OMB). He reiterated that the number remained
preliminary.
11:55:00 AM
Mr. Painter advanced to slide 9: Alaska's Structural Budget
Deficit (con't)." He noted an error on the slide where it
stated "Overall UGF Reduction." He explained that the
reduction was made to the FY 21 authorized budget. The
management plan included some carry forward funding. The
overall UGF reduction to agency operations should be $515
million or 11 percent, not $625 million or 13.8 percent.
The slide showed that while the state reduced the budget
substantially since the peak of agency operations spending
in FY 15, the reductions had not been felt equally across
state agencies. The state's public protection agencies
including the Department of Corrections (DOC), the
Department of Public Safety (DPS), the Department of Law,
and the Judiciary had seen increased budgets of 6 percent
above where they were in FY 15. Generally, the trend was
downward for other agencies.
Mr. Painter reported that the Department of Education and
Early Childhood Development (DEED) had been slightly
reduced. Most of the education funding went out to school
districts and the K-12 formula and had been reduced by
about 2 percent. The reduction was mostly due to one-time
money outside the formula that districts received in FY 15
and had not received in FY 21. Education had been
relatively flat over the period. The Department of Health
and Social Services (DHSS) had been down 6 percent.
However, he thought the true reduction to DHSS was
understated. He explained that in FY 21 the state had $90
million of one-time money for COVID-19 relief. The true
reduction to the department was larger, but a straight-line
comparison showed a 6 percent decrease. The twelve other
agencies were down by $441 million or by more than one-
third. He surmised that while the large formula-driven
agencies had seen relatively small reductions to their
budgets, the other agencies had seen much larger GF
reductions.
11:57:46 AM
Mr. Painter turned to slide 10 titled "LFD's Budget
Baselines." His division had developed budget baselines as
a point of comparison for the governor's budget. He
explained that, rather than viewing the governor's budget
in isolation, LFD wanted to have baselines to understand
the governor's budget more clearly. The division used two
different baselines: current policy and current law. He
elaborated that the difference between the two baselines
was that in current policy there was an assumption that
statutes overfunded or underfunded in FY 21 would continue
into FY 22. The current law baseline assumed that
regardless of how the items were treated in FY 21, the
legislature would return to the statute in FY 22.
Mr. Painter continued that for agency operations, both of
the baselines used an adjusted base which removed one-time
items from agency budgets and added in automatic changes
such as salary adjustments. A slightly modified version of
the FY 22 adjusted base was used to incorporate changes to
the K-12 formula due to projected student count changes. He
did not think it was fair to blame or credit the governor
for a change in projection outside of his control which was
why LFD incorporated it into its baseline. He relayed that
the largest difference was the PFD. The current policy
assumed that the state would pay a dividend costing $680
million which equated to about $1,000 per person. The
current law assumption was that the state would pay a
statutory dividend which was slightly over $2 billion - a
payout of approximately $3,000 per person.
Mr. Painter advanced to slide 11 showing a table of
statewide items detail. He conveyed that the slide compared
the statewide items between the two baselines. The
difference in debt service was due to the municipal project
debt that the governor vetoed in FY 21 equaling about $2.4
million. In FY 21, the governor vetoed all funding for
school bond debt reimbursement. The current policy
assumption would leave the number at zero. The current law
assumption would result in an appropriation of
$54.2 million in UGF along with funding from other sources.
The amount for state retirement was the same, as the
appropriation was fully funded in FY 21. The Regional
Educational Attendance Area (REAA) fund, which provided
funding for school construction and major maintenance in
rural schools, was vetoed in FY 21. The governor vetoed
community assistance funding in FY 21. If the current
policy assumption was applied, the UGF appropriation would
be zero. In current law, he would assume that the UGF
portion (in order to do the statutory $30 million deposit)
would be $17.6 million and would also be funded from the
Power Cost Equalization (PCE) Fund. The legislature did not
fund the oil and gas tax credits in FY 21 even though the
statutory formula called for $60 million in FY 22. The
current law assumption included $60 million. Altogether,
there was about $170 million of differences between the two
assumptions for statewide items.
12:01:37 PM
Mr. Painter moved to slide 12 showing a table of FY 22
current policy and current law scenarios and a full-picture
comparison. The agency operations total was $3.9 billion in
both scenarios. The Legislative Finance Division assumed
that a baseline capital budget was about $150 million based
on the numbers from the previous 6 years. It was not enough
to fully address the state's maintenance needs. Under the
current policy scenario, the state would be looking at a
budget deficit of about $900 million in FY 22. Under the
current law scenario, the deficit would be approximately
$2.4 billion mainly due to the difference in the PFD.
Mr. Painter compared the governor's budget to the baselines
on slide 13. The governor's agency operations were $77.4
million below LFD's baseline. He would detail the
reductions in an upcoming slide. Statewide items were about
$30 million higher than the current policy and $139 million
below the current law, as the governor was not fully
funding several items. The governor's capital budget was
$58.3 million - significantly below currently policy and
current law due to the use of one-time Alaska Housing
Finance Corporation (AHFC) bonding for statewide matching
funds. The statewide match was about $101 million. If the
match was counted as UGF, the governor's capital budget
would be about $160 million - slightly higher than the
baseline. The governor's budget included the statutory
dividend. Altogether, the governor's budget deficit was
about $1.2 billion before fund transfers landing between
current policy and current law baselines. Overall, compared
to the current law scenario, the governor's budget was down
by about $300 million reflecting some reductions. He would
provide additional detail of the reductions further into
the presentation.
12:03:50 PM
Mr. Painter turned to slide 14 and continued to address the
governor's FY 21/22 budget. He pointed to some of the
budget highlights including a supplemental PFD payment for
FY 21 ($1.2 billion from the ERA). The budget took two ERA
draws in FY 22: the regular POMV draw plus another
$2 billion for the dividend which LFD thought of as a
deficit draw beyond the statutory amount. The governor's
budget submission also included a fast-track supplemental
budget, many items of which were not funded in the capital
budget. During the previous session, the legislature did
not pass a stand-alone capital budget. Rather it placed
portions of the typical capital budget into the operating
budget. He noted, however, there were substantial
omissions. The intention had been to return to session.
Many of the same items were found in the fast-track
supplemental budget. Altogether, the FY 22 budget had a
small deficit from the CBR after the ERA draw. He suggested
that even with the additional $2 billion there was an
additional $38 million deficit from the CBR.
12:05:15 PM
Mr. Painter moved to slide 15 and continued to review the
governor's budget. Reductions to agency operations totaled
$77.4 million. The largest reduction was to Medicaid in the
amount of $35 million. However, the governor included
backstop language that reappropriated projected lapsing
Medicaid funds, about $35 million, from FY 21 into the
FY 22 budget. Resultingly, Medicaid would be funded at the
same level as it was in the current fiscal year. The
projected lapse was due to the higher FMAP, the
reimbursement rate from the federal government in the CARES
Act. Therefore, there was really not a reduction to
Medicaid. He thought the numbers reflected the governor's
ambition for FY 23. He continued that despite the numbers
looking like a reduction, it was not a reduction in
service. It was simply a reduction in the funding level. He
noted that looking at the 10-year plan, the governor called
for further agency operations reductions in FY 23 and FY
24. The governor was already setting Medicaid at the level
he hoped to achieve in FY 23 and would most likely not be
suggesting further reductions in FY 23.
Mr. Painter continued that the next largest reduction was
to the University of Alaska. The budget reflected a
$20 million reduction which was part of the governor's
compact agreement with the University. The agreement
reflected a reduction of $70 million to the University's
budget over 3 years. The Department of Transportation and
Facilities Maintenance (DOT) was down by $17.2 million;
$14.1 million due to one-time fund changes to utilize
federal CARES Act money and $3.6 million to the Alaska
Marine Highway System (AMHS). The reductions to DOT brought
the budget down to match the governor's original FY 21
proposal (slightly lower than his post-veto amount). The
fund change of $14.1 million would not be sustainable and
would likely have to be reversed in FY 23. Therefore, while
it made the budget appear smaller in the current year, the
amount would need to be reinstated in the following year.
Mr. Painter reported another major reduction in the budget
to the Public Assistance Administration in the amount of
$3.4 million UGF and a reduction in more than 101
positions. The change was due to substantial technology
changes resulting from the pandemic and related workflow
changes. The division would be reducing about one-quarter
of its workforce. He also reported that the K-12 formula
was fully funded in the governor's budget. The Legislative
Finance Division had factored in changes to the baseline.
He reported a projected student count reduction in the
following year below the count used to set the FY 21
budget. The student count projection was sensitive to
changes in how schools would operate - there were massive
differences because of the pandemic. Districts had been all
over the map in their projections for FY 22. It was
difficult to know whether the projected reduction to the
student count would materialize because of not knowing how
the pandemic would proceed over the following year. All
other agency changes netted a reduction of $1.7 million. He
also noted there were small increases in DOC and other
places and smaller reductions in many of the agencies. The
result was a relatively flat budget.
12:09:32 PM
Mr. Painter advanced to slide 16 and continued to review
the governor's proposed budget. Statewide Items in the
governor's budget totaled $464.1 million. The governor
proposed only funding School Debt Reimbursement and the
Regional Education Attendance Area (REAA) Fund
Capitalization at 50 percent of the statutory level - areas
he had vetoed in FY 20. In FY 21 the governor vetoed 100
percent of the two items. The governor proposed funding
Community Assistance solely with PCE funds which were
designated general funds (DGF), and he did not add any of
the allowable UGF. The fund was paid out based on one-third
of the fund balance. If the legislature accepted the
governor's budget, $19.5 million would be paid to
communities in FY 23. The amount was almost the exact
amount needed to pay the community base payments. The base
payments went out first. Any additional funding was
disbursed in per-capita payments according to population.
He continued that the $19.5 million only covered the
community base payments. Therefore, large urban centers
would experience the largest impact not receiving any
funding.
Mr. Painter reported that in the budget the governor
proposed fully funding oil and gas tax credits at the $60
million statutory level. However, the credits were funded
with Alaska Industrial Development and Export Authority
(AIDEA) receipts, "other" fund code, rather than UGF. He
indicated that LFD considered such a change to be a trick
to reduce the budget. If the legislature felt that AIDEA
was over-capitalized there was a number of things that
could be done to reduce the amount in AIDEA's funds such as
increasing the dividend it paid the state. He suggested
that having AIDEA pay directly for statewide items that had
nothing to do with AIDEA's functions made the budget look
smaller but was not consistent with transparent budgeting.
If the legislature felt that AIDEA had an extra $60
million, the transparent action would be to transfer $60
million from AIDEA's reserves into the CBR and fund the tax
credits with UGF. He concluded that while the governor's
number was $464 million, another $60 million would need to
be added to truly reflect the size of the budget.
Mr. Painter conveyed that the governor also had a Public
Employees' Retirement System (PERS) bill. The associated
dollars were not included in the totals but were in the
fiscal summary. There was an estimated savings associated
with the bill of $43.3 million UGF. The bill involved
eliminating the statutory cap a state employer paid.
However, it would not impact non-state entities. Only the
State of Alaska would be impacted. The amount would be paid
with other fund sources, particularly federal funds, to pay
the full costs. The estimate was $43 million, and more
analysis would need to be done by the executive branch to
determine how much of the non-UGF fund sources would be
realizable. Once the bill reached the legislature, fiscal
notes would be necessary to truly understand it.
12:13:21 PM
Mr. Painter advanced to slide 17 and continued to review
the governor's proposed budget. The capital budget totaled
$58.5 million UGF but was bolstered by an AHFC bond package
in the amount of $101.6 million. The true total of the
capital budget would be closer to $160 million taking
advantage of the low interest rate environment to propose
bonding. The bonding would be paid for out of a reduction
to the future AHFC dividend, a UGF revenue source. He
relayed that AHFC would pay the debt service and lower its
dividend to the state. Essentially, the payments would show
up as reduced UGF revenue.
Mr. Painter reported that the governor also planned a
general obligation (GO) bond proposal. However, no
legislation had been submitted to-date, and a list of
projects had not been submitted. There was no shortage of
projects that could be listed. He indicated that the list
of school construction and major maintenance projects
combined to over $400 million. The division was waiting on
details that might be provided once the legislative session
began. He reiterated that the fast-track supplemental
included some unfunded FY 21 capital projects; other
projects were moved to the FY 22 budget; a few other
projects had been funded through the Revised Program
Legislative (RPL) process in FY 21; and some projects were
funded through other means. The division would provide a
full analysis in its overview of the governor's budget.
12:15:14 PM
Mr. Painter turned to a table on slide 18 showing a short
fiscal summary of the governor's budget (UGF only). The
slide showed the factors he had reviewed. He highlighted
that in FY 21 the governor's budget would have a deficit of
$2.1 billion. The legislature had already authorized CBR
draws to pay for some of the deficit. The governor proposed
to pay for the rest by paying for the supplemental PFD
directly out of the ERA beyond the statutory POMV draw
level. In FY 22 there would be a slightly smaller deficit
but close to $2.1 billion. The governor proposed to pay for
most of the deficit with a draw from the ERA that would go
directly to the dividend fund. The remainder would be paid
with CBR monies. He paused for questions.
Co-Chair Foster referred to slide 18. He clarified that for
FY 22 the governor's budget included a full PFD totaling
about $2 billion. He also clarified that for FY 21, the
supplemental appropriations included a supplemental PFD of
$1.2 billion and other supplemental items. He asked if he
was correct.
Mr. Painter responded, "Mr. Chairman, that's correct." He
noted that the other supplementals equaled $39.8 million,
the largest of which was part of contingency language to
reappropriate money into the disaster relief fund. The
governor was appropriating $30 million into the disaster
fund and the rest was for capital projects.
Co-Chair Johnston asked if LFD would be able to model what
the PF would need to earn to have the funds available in
FY 23 for the governor's budget for the structured draw.
She wondered whether there would be enough funds in the ERA
to balance the budget if the legislature were to pass the
governor's budget and the governor's supplemental, or
whether the account would earn enough to balance the
budget. Mr. Painter could followup with some modeling.
Co-Chair Johnston thanked Mr. Painter for pointing out the
one-time only budget reductions. She was interested in the
unfunded liability of the state's pension funds and how to
pay it. She appreciated the governor's idea regarding
savings. She mentioned the Department of Health and Social
Services positions and wondered how many of them were paid
with both federal and state dollars. She thought federal
dollars would be used to pay for positions related to the
unfunded liability. She queried about a reduction in the
budget.
Mr. Painter replied that it would be a shift of fund
sources. There would be no reduction in the budget in all
funds. He explained that when the additional costs of
retirement were paid, they were paid entirely with UGF
dollars. In the agencies there were matching federal funds
available. Some of the spending could be shifted to federal
fund sources. He would expect that the fiscal notes would
reflect a $95 million reduction to the statewide item of
retirement payments. There would also be a $95 million
increase in agency funding. However, not all of the
$95 million in agency funding would be UGF. He explained
that $43 million was the amount of reduced UGF because of
the switch to other funds sources that OMB estimated
related to the 50/50 positions within DHSS. There was the
potential for significant UGF reductions simply by shifting
the payment of certain positions to the federal government.
12:20:44 PM
Co-Chair Johnston surmised that the amount of the budget
would remain the same. The federal funds would be used for
operations and for paying off the state pension fund
liability. Mr. Painter agreed. The total budget level would
remain the same. However, there would be an increase in
federal funds being used to pay for the liability costs.
Co-Chair Foster acknowledged Representative-Elect James
Kaufman in the audience. He thanked him for joining the
meeting.
Vice-Chair Ortiz returned to slide 9. The slide showed
where the different reductions had been made to the
different agencies. He drew attention to the top of the
slide. Under "all other agencies" there was a 35.6 percent
reduction in funding for all agencies outside of DHSS,
DEED, and DPS. He wondered if it was within the purview of
LFD to conduct assessments related to the impact of
reductions on the effectiveness of agencies to carry out
their constitutional requirements. Conversely, he wondered
whether assessments had been conducted regarding the
impacts of funding increases of agencies and their ability
to do their required work.
Mr. Painter replied that there are a series of missions and
measures reported as part of the governor's budget
submission that were required by statute. The success of
each component within the budget, relative to the applied
metrics, were reported. A person could study and compare
the performance metrics prior to the reductions and
following the reductions. The legislature had not given the
metrics resource much attention in recent years. The
missions and measures process was designed to provide the
information. He indicated that the information could be
found on OMB's website where detailed budget books were
available. He reported that LFD had not perform any
additional analysis.
12:24:41 PM
Representative Wool referred to slide 12 of the
presentation showing current policy and current law
scenarios. He deduced that the pre-transfer deficit would
be $886 million. If the PFD was zero, the deficit would be
$200 million. He asked if he was correct. Mr. Painter
answered that with the other current policy assumptions he
would be correct. He suggested that without funding any
other statewide items the deficit would be about $200
million.
Representative Wool asked about the reduction of 101
positions in the Public Assistance Division and a budget
reduction of $3.4 million. He averaged the cost savings per
position of $34,000. He thought there had to be greater
reductions than $34,000 per position. He wondered if other
areas had experienced a similar reduction in positions due
to the pandemic and people working remotely.
Mr. Painter clarified that the $3.4 million was the UGF
reduction. There was also a reduction in federal funding.
The reduction was about twice the amount in all funds. He
indicated that the Public Assistance Division experienced
the largest reduction of positions clarifying that the
change was essentially a shift in service delivery. There
were some smaller efforts towards reductions. He noted
closing some of the Division of Motor Vehicle (DMV) offices
which would result in a reduction of positions and in a
smaller savings. The Department of Revenue within the Child
Support Division experienced the second largest reduction
of positions. The reduction was due to a re-platforming
project. Most of the decreases applied to contractual
services rather than positions.
Representative Wool summarized that the Public Assistance
Division and the Division of Child Support had received the
largest reductions. He pointed to the short fiscal summary
on the bottom of slide 18. He asked for clarification about
the balance of the CBR. Mr. Painter answered that LFD
projected that $900 million would be left in the CBR at the
end of FY 21 following the deficit draw. The amount had
already been calculated out because of the way the
legislature funded the budget. The legislature had approved
one-quarter of the budget coming directly out of the CBR.
The amount was drawn at the beginning of the year and was
factored into LFD's projections.
Representative Wool confirmed that the balance included the
withdraw of $896 million. Mr. Painter responded, "Yes,
that's correct."
12:29:07 PM
Representative LeBon referred to slide 16. He wanted to
discuss AIDEA receipts being used to fund oil and gas tax
credits. He opined that it was not possible for AIDEA to be
overcapitalized, as it was the state's bank. He suggested
it would be helpful to define what it meant for AIDEA to be
overcapitalized. He continued that AIDEA's capital level
helped them to originate investments on behalf of the state
and to secure low interest rates on their bond raising
activities. He disagreed that AIDEA was overcapitalized. He
asked if it was a practical strategy to draw $60 million
from AIDEA in FY 22 to fund the oil and gas tax credits. He
was unsure if the governor's plan was a one-year or multi-
year plan.
Mr. Painter did not know the governor's plan in subsequent
years. Based on the governor's 10-year plan there did not
appear to be an increase in FY 23 that would suggest that
the the administration planned to pay for tax credits with
UGF. Two years prior, the legislature had discussed whether
AIDEA was capitalized at the proper level when the governor
had proposed to directly draw AIDEAs funds. It was the
legislature's policy call as to how much funding AIDEA
should have.
Mr. Painter suggested that if the legislature thought AIDEA
had more reserves than needed, it could increase the
dividend statute to match AHFC's dividend statute. The
Alaska Housing Finance Corporation had to pay about 75
percent of its earnings of net revenue as its dividend.
Alaska Industrial Development and Export Authority's
dividend statute called for a dividend payout of between 25
percent to 50 percent of earnings. He noted that the most
recent credit rating for AIDEA specifically cited the
legislative appropriations from AIDEA receipts from 2 years
prior with a note of caution for AIDEA's credit. There was
a general concern that AIDEA funds would be used by the
state to meet its expenses which could result in a reduced
credit rating.
12:32:35 PM
Representative LeBon appreciate the input.
Mr. Painter moved to slide 19 to discuss the governor's
10-year plan. It called for ERA draws beyond the statutory
level in FY 21 and FY 22. However, his plan called for a
balanced budget beginning in FY 23. He achieved his plan
through three main mechanisms. The first mechanism was to
change the statutory dividend formula from 50 percent of
statutory net income to 50 percent of the POMV draw. It
would be a reduction of approximately $400 million per year
and was contingent on a vote of the public. The second
mechanism was to reduce agency operations by about $100
million each in FY 23 and FY 24. In out years he planned
for 1.5 percent growth, which was consistent with the
constitutional spending limit proposed by the governor. The
largest deficit filling item in the governor's 10-year plan
was $900 million to $1.2 billion in new revenue starting in
FY 23. The governor did not specify where the revenue would
come from. The largest year of revenue was in FY 23 and the
amount moved around as needed to ensure there were no
budget deficits each year.
12:34:25 PM
Mr. Painter moved to final slide, slide 20. The overdraws
from the ERA increased future deficits by reducing the
amount of money in the PF. The Legislative Finance
Division's rule of thumb was to have a 5 percent POMV.
Therefore, $3.2 billion of draws meant that 5 percent was a
permanent increase in the deficit. He suggested that
5 percent of $3.2 billion was $160 million. Future deficits
would be $160 million larger in real terms or inflation-
adjusted terms. The legislature needed to weigh its desire
for stimulus spending in the current year. Because the
economy was struggling, the governor wanted to inject
capital into the economy through higher dividends and a
bonding proposal. Both would come at a long-term cost in
the form of reductions to future revenues which could lead
to future taxes and reduced services.
Mr. Painter also noted that the new revenue in FY 23
proposed in the governor's budget would need to be
authorized in the current year because of the time it would
take to implement tax measures. It was possible to
incorporate revenue measures quickly, particularly with a
sales tax. He noted several municipalities that had sales
taxes in place and reiterated the possibility of having a
sales tax in place in a timely fashion. He suggested the
legislature would need to take up the issue in the current
session. He pointed out that in the following year the
legislature would still be faced with a large deficit even
with turning a corner with the pandemic and infusing cash
into the economy. There would be no other measure to
resolve the deficit than to take another unplanned draw
from the ERA. He thought the ERA could be drained rapidly
similar to how the CBR and SBR were depleted. Each year the
legislature delayed resolving the long-term deficit, the
deeper the deficit hole would become. Every year the
legislature drew more from the ERA than the statute called
for would result in higher taxes or reduced services in the
future.
Mr. Painter continued that if the legislature pulled from
designated funds such as the PCE fund, additional funding
would have to be identified or the program would cease
placing increased pressure on the budget. He presented an
analogy. The governor's stimulus plan was akin to getting
dessert (stimulus monies) but only if a person also ate
their vegetables (budget cuts and new revenue) - the
governor's plan relied on both. The legislature could make
completely different policy decisions such as calling for
lower dividends, less revenues and deeper cuts, and other
actions. However, the bottom line was that every year the
legislature delayed closing the structural deficit would
make it more difficult and more costly to do so in the
future. He concluded his presentation.
Co-Chair Foster asked about the FY 22 budget and wondered
what the price of oil would need to be to balance the
budget. Mr. Painter could provide an answer at a later
time.
Mr. Painter looked forward to working with the legislature
in the coming session.
Co-Chair Foster thanked the presenters.
ADJOURNMENT
12:40:26 PM
The meeting was adjourned at 12:40 p.m.
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