Legislature(2021 - 2022)ADAMS 519
03/18/2022 09:00 AM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB281 || HB282 | |
| Presentation: Spring Forecast 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
| += | HB 281 | TELECONFERENCED | |
| += | HB 282 | TELECONFERENCED | |
| += | SB 33 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 18, 2022
9:05 a.m.
9:05:18 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 9:05 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Andy Josephson
Representative Sara Rasmussen (via teleconference)
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
Representative Bart LeBon
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division.
SUMMARY
HB 281 APPROP: OPERATING BUDGET/LOANS/FUNDS
HB 281 was HEARD and HELD in committee for
further consideration.
HB 282 APPROP: MENTAL HEALTH BUDGET
HB 282 was HEARD and HELD in committee for
further consideration.
PRESENTATION: SPRING FORECAST BY THE LEGISLATIVE FINANCE
DIVISION
Co-Chair Foster reviewed the meeting agenda.
HOUSE BILL NO. 281
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs; capitalizing funds; amending
appropriations; making reappropriations; making
supplemental appropriations; making appropriations
under art. IX, sec. 17(c), Constitution of the State
of Alaska, from the constitutional budget reserve
fund; and providing for an effective date."
HOUSE BILL NO. 282
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program; making capital
appropriations and supplemental appropriations; and
providing for an effective date."
9:05:54 AM
^PRESENTATION: SPRING FORECAST BY THE LEGISLATIVE FINANCE
DIVISION
9:05:57 AM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced the PowerPoint Presentation: "Spring Revenue
Forecast Modeling Update." He began with slide 2 to review
an outline of the presentation.
9:06:53 AM
Mr. Painter turned to slide 3 showing a simple fiscal
summary. He explained that it represented the spring
revenue forecast in addition to the committee substitute
(CS) for the operating budget [HCS2]. It also used some
placeholders from the governor's budget. There was $1.2
billion of additional revenue in fiscal year (FY) 22 and $4
billion in FY 23. The percent of market value (POMV) draw
had not changed. Altogether, the state was looking at about
$7 billion of unrestricted general fund (UGF) revenue in FY
22 and about $8.3 billion in FY 23. He reminded committee
members of his past testimony about the automatic negatives
to reduce the budget in the adjusted base. He explained
that HCS2 was up by about 5.3 percent as compared to the
adjusted base due to the additional negatives.
Mr. Painter gave more details on the elements that were
included in each statewide item. He referred to line 9,
which showed that the statewide items in FY 23 were $670
million. This was an increase from the governor's request
due to the tax credits increase of $149 million as
prescribed by the spring forecast. The additional $2.4
million dedicated to repaying debt service for municipal
projects also contributed to the increase, referred to as
"528 projects." He spoke to line 10, which detailed the
appropriations for public education and the forward-funding
of kindergarten through twelfth grade (K12). He noted that
the way it was written in the bill was an "amount certain"
not an estimate. Prior to FY 14, the state would estimate
education costs based on the current year and adjust
accordingly. The number was not fully considered forward
funding because there was an element of estimation. If
there was a deficit in FY 23, the deposit to the public
education fund would decrease to act as a buffer to a
deficit. Under the CS, the $1.2 billion dedicated to public
education would drop to avoid a deficit. The way in which
the budget would react to oil prices was also an important
factor to consider.
Mr. Painter continued to line 11 on slide 3. The total
operating budget was $6.2 billion, but the forward funding
of education was responsible for some inflation.
9:11:27 AM
Representative Josephson shared his understanding that
forward funding accounted for $1.2 billion and energy
relief accounted for $800 million, totaling $2 billion. He
calculated that subtracting the number from $6.2 billion
[the operating budget total] would result in $4.8 billion.
He asked whether this calculation was correct.
Mr. Painter responded that he was correct. This was a large
increase as compared to the previous year's budget.
Representative Wool offered that the difference between the
budgets for FY 22 and FY 23 was represented by the oil tax
credits listed on line 9.
Mr. Painter responded that he was correct and that the
major difference was the $54 million oil tax credit
payments in FY 22. It was a significant increase. He moved
to line 12 which reflected the supplementals for the
operating budget. He explained that much of the
supplementals were replacing items that were short funded
in the previous year. Other factors were the oil tax
credits which added $60 million, the addition of the school
debt reimbursements, and the incorporation of nearly all of
the governor's requested supplemental items. This effort
aimed to achieve 100 percent funding for items that had
been short funded in the prior year. He shared that he was
using the governor's amended capital budget as a reference.
He explained that upcoming slides of the presentation would
use figures from the amended capital budget.
9:13:59 AM
Vice-Chair Ortiz referenced line 14 on the slide, which was
current year appropriations under the capital budget. He
indicated that the appropriations were $158 million in FY
23. He noted that this did not include the $91 million
[supplemental appropriations from FY 22]. He answered his
own question and stated that he understood the concept.
9:14:19 AM
Representative Josephson asked if the supplemental was not
shown because it had been rolled into HCS2. He asked for
clarification.
Mr. Painter responded that there was one capital
supplemental in the bill. He thought if only one
supplemental was shown it would be more accurate as the
other numbers had not yet been considered. He also noted
there was one FY 23 capital item in the bill. He discussed
the permanent fund dividend (PFD) lines, starting on line
17, which reflected the roughly $1,100 dividend that had
been paid out in FY 22 and the roughly $1,250 dividend as
seen in HCS2 and HCS1. This indicated 25 percent of the
POMV draw. He noted that line 19, which showed the pre-
transfer deficit, looked at ongoing revenue and
expenditures. It would be a surplus of about $1.3 billion
in FY 22 and $532 million in FY 23. He explained that these
surplus amounts would occur on an ongoing basis. There were
also some fund transfers in an attempt to move money into
the general fund. Additionally, there was a proposed $300
million revenue replacement in FY 23, among other fund
transfers. The FY 21 sweep was not reversed from the
constitutional budget reserve (CBR) but HCS2 would mandate
it be transferred from the general fund. He added that line
22 reflected the replaced swept funds.
Representative Wool asked about the $452 million fund
transfer on line 22 and asked whether it included the
higher education fund.
Mr. Painter responded in the affirmative and shared that
the higher education fund represented nearly $400 million
of the $450 million total.
9:17:35 AM
Mr. Painter moved to line 23 which showed the post transfer
surplus and reflected the final amount of money left over.
The surplus would go into the statutory budget reserve
(SBR). The CBR would not be affected by the budget. The
only changes to the balance related to investment earnings
and new deposits. The POMV draw was coming out of the
earnings reserve account (ERA) and involved inflation
proofing.
9:18:49 AM
Representative Wool asked about the ERA balance. He
wondered if it was pre or post POMV draw.
Mr. Painter responded that it was after the POMV draw.
Representative Josephson asked whether the inflation
proofing in the bill was formulaic or a fixed amount.
Mr. Painter responded that it was based on the formula in
statute for inflation proofing. He noted that it was a
projection and it was likely that inflation would be much
higher.
Representative Josephson asked if the duty to inflation
proof was a "may" or "shall" provision.
Mr. Painter responded that it was a statute that was
subject to appropriation. There had been some years where
there was no effort to inflation proof and other years
where there was.
9:20:19 AM
Mr. Painter moved to slide 4: "Comparison of Oil Price
Forecasts." The orange line represented the Department of
Revenue (DOR) spring revenue forecast. The blue line
represented the DOR fall forecast, and the grey line
represented Brent Future prices which had increased by $9
since March 12, 2022. He indicated that the graph
illustrated the volatility in the short-term. There was a
difference of about $30 per barrel in FY 23. However, the
futures market was generally trending downwards. The
downward trend was apparent in the fall forecast and was
even more significant in the spring forecast. The futures
market did not appear to expect that the current oil prices
would last in the long term, however the short-term trends
were volatile.
Co-Chair Foster recognized Representative Rasmussen had
joined the meeting.
Vice-Chair Ortiz asked about the $1.2 billion for the
spring forecast. He wondered what the price of oil would
need to be in order to reach the forecasted $1.2 billion.
Mr. Painter responded about $115 per barrel of oil.
Vice-Chair Ortiz asked how the projected oil barrel price
compared to the necessary $115 per barrel price.
Mr. Painter thought he could talk to the issue on the next
slide. He stated that the price changed daily, and if he
gave the presentation yesterday, he would have reported a
different number than today.
Vice-Chair Ortiz agreed, but the problem was that the
legislature had to build a budget on some number. He asked
what the minimum safe assumption would be. He suggested it
might be $800 million or $1.2 billion.
9:24:55 AM
Mr. Painter continued to slide 5: "FY23 Oil Price
Sensitivity Chart" to respond to the question. He explained
that he looked back about a decade to prepare for the
presentation. His predecessor in the Legislative Finance
Division (LFD) had emphasized that when budgeting for oil
prices, one cannot use a specific number but instead use a
sensitivity chart to find a comfortable range. The slide
included the FY 23 sensitivity chart. The orange line
represented the spring forecast and the blue represented
the fall forecast. He noted that there was not a
significant difference between the lines.
Mr. Painter suggested that the legislature should consider
what price makes them feel comfortable. He recommended that
the budget assume a $95 per barrel price, which is the
assumption in HCS2. With revenue replacement funds factored
in, the budget actually balanced at $91 per barrel.
However, if revenue fell below projections, that would
eliminate forward funding for education and balance the
budget at $75 per barrel. He explained that this was one
way to account for volatility. There was a relatively low
chance that oil prices would fall below $75 per barrel, but
there needed to be a comfortable base assumption. He
thought it would be smart to build a budget in a way that
ensured that the budget would function at different barrel
price levels. This would mean that if the state had more
revenue, then education could be forward funded. However,
if the state had less revenue, education would not be
forward funded. He suggested it was a policy call for the
legislature. He did not have a specific answer as to what a
minimum safe assumption should be; however it was difficult
to imagine prices going belong $80 or $90 in the short-
term.
Co-Chair Foster mentioned Representative LeBon was
listening to the meeting [Representative LeBon was not
physically in the meeting or online].
9:28:54 AM
Representative Wool commented that if the legislature
forward funded education in the FY 23 budget, education
would only need to be funded one time the following year
and therefore the subsequent budget would be reduced.
Mr. Painter responded that he would categorize it as a form
of savings. He indicated that forward funding was reflected
as a fund transfer in the past. He agreed with
Representative Wool's concept.
Representative Wool mentioned the futures market changing
frequently. He understood it to represent a price in the
future that was agreed upon. He asked whether there was a
certain amount of the "tail wagging the dog" when it came
to the futures market, and how far in the future oil would
be available to purchase.
Mr. Painter explained than the futures market went out
through FY 30. The futures market was most useful as a
directional indicator that indicated the direction of the
price of oil. He explained that most traders believed that
oil would go down in the long-term.
Representative Wool commented that predicting prices ten
years in the future was "anyone's guess."
9:32:41 AM
Representative Johnson asked which predictions seemed to be
the most accurate.
Mr. Painter responded that traders did not anticipate the
War in Ukraine, and therefore the fall predictions were not
accurate. He categorized it as a black swan event. He added
that no one saw it coming, just like COVID-19. It reset the
market in a fundamental way. He would not necessarily say
that the fall forecast was wrong and the spring forecast
was right, but instead he acknowledged that the forecasts
were based on a specific point in time and the expectations
of that time. He urged caution when crafting the budget due
to the volatility of the market and of world events.
Representative Johnson asked if there were particular areas
that tended to trend closer to reality than others.
Mr. Painter explained that DOR did some analysis when it
decided to switch to the futures market. He reported that
DOR found that the futures market was most accurate but
still had a large margin of error. The analyst forecasts
were not updated on a daily basis while the futures were,
and this contributed to the accuracy.
Representative Johnson responded that she understood.
9:36:40 AM
Representative Josephson commented that the governor had
stated in a press conference that he would like to spend
the increased revenue that was forecasted on the PFD. It
struck him that if the current legislature moved
conservatively, the beneficiary would be the following
year's legislature. He asked if there was some truth to his
comment.
Mr. Painter agreed that more funding left on the table
would mean more options for future legislators. He stated
that it was a policy choice on whether spending the money
immediately or saving it for the future would be more
beneficial.
Representative Josephson thought that the legislature had
learned a lot since 2014. The legislature had spent a
significant amount of the state's savings, but he suggested
that it was necessary. He commented that there may be a
need for savings in the future.
Mr. Painter agreed that it bought the legislature a few
years of time. He assumed that if the legislature had only
a few billion dollars in savings then it would have had to
act more quickly. He was confident that the legislature
would have acted fast enough to not crash the state's
finances.
9:39:28 AM
Representative Edgmon underscored the point Representative
Wool made about the importance of forward funding. Forward
funding gave schools some sort of security and certainty.
It would also take some pressure off of legislators in
terms of crafting the budget in the following year. He
thought that there was wisdom in saving the money and
putting it somewhere where it could have multiple benefits.
Co-Chair Foster indicated that he might recess the meeting
to the call of the chair if it ran much longer.
Mr. Painter continued on slide 5 and noted that they had
covered the majority of the information on the slide.
9:41:36 AM
Mr. Painter moved to slide 6: "Oil Prices, FY22 to Date."
He noted that the chart on the slide was created two days
prior to the meeting. Oil prices became volatile due to the
War in Ukraine, and the chart reflected this. The
volatility coincided with the deadline for DOR to prepare
the forecast. He recommended looking to the sensitivity
chart for budget purposes rather than being tied to one
number.
9:43:01 AM
Mr. Painter reviewed slide 7: "Takeaways on Spring
Forecast":
Oil prices have skyrocketed in recent months, but the
market does not appear to expect that this will last
over the long term.
Oil has been extremely volatile recently. ANS prices
rose by $31.11 (33%) from 2/25 to 3/8 and dropped by
$26.76 (21%) from 3/8 to 3/15.
LFD advises the legislature to approach oil prices
conservatively given the level of volatility combined
with relatively small savings account balances to
backstop any shortfall.
9:43:37 AM
Mr. Painter advanced to the graph on slide 8: "Comparison
of Potential Agency Operations Paths." He explained that
HCS2 increased UGF by 5.3 percent as compared to the FY23
adjusted base. The governor's amended budget would increase
UGF by just over 2 percent. Some of the biggest differences
were the way in which the Alaska Marine Highway System
(AMHS) was funded and the addition of $50 million dedicated
to K12. One of the changes from the spring forecast was
that the Callan inflation rate had gone from 1.5 percent to
2.4 percent. The governor's amended budget was up about $15
million from the governor's original budget, and this was
represented by the green line on the graph. The purple line
represented HCS2 with the growth of inflation. If the
growth rate of 5.3 percent was used by HCS2, the budget
would almost double. He noted that the difference did not
seem like a lot, but if it was compounded over a decade it
would make a difference.
9:45:51 AM
Mr. Painter continued to slide 9: "Learning from the Past:
Agency Operations Growth, FY04-13." He highlighted that
agency operations nearly doubled from FY 04 to FY 14. When
there has been oil revenue in the past, agency operations
were growing by about 10 percent each year. He noted that
agency operations would grow faster than inflation. He
referred to the quote on the right side of the slide about
expenditure growth during the FY 13 budget discussions. It
was easier to alter spending in the capital budget than it
was to alter agency operations spending. The state was not
able to go back to what it had been before. He suggested
that increasing the agency operations would make it harder
to balance the budget in the future and increased the
likelihood of needing new revenue. The long-term path could
be controlled through agency operations spending.
9:48:31 AM
Mr. Painter moved to slide 10: "Governor's 10-Year Plan
with Spring Forecast." In this model, agency operations
were growing slower than inflation and had more than 50
percent of the POMV draw going to the dividend. The model
showed surpluses each year. Although revenue was higher, it
had not changed significantly from the fall forecast and
the projected surpluses were not huge.
Mr. Painter turned to slide 11: "GovAmend Growing with
Inflation (2.25 percent), Spring Forecast." He explained
that even with the higher forecast, the projections on the
slide had fundamentally not shifted very much. The big
difference was that reserve balances were significantly
higher. Reserve balances in the governor's budget were
fairly low in the fall revenue forecast. In the model, the
reserve balances were built back up due to surpluses. There
were some small deficits, but they would not affect reserve
balances.
Mr. Painter advanced to slide 12: "HCS2 Growing with
Inflation (2.25 percent), Spring Forecast, 25 percent POMV
to PFD FY24+." The slide suggested that there would be
large surpluses every year. The dividend plan based on HCS2
growing with inflation would produce the large surpluses.
9:50:59 AM
Co-Chair Foster indicated the committee could also come
back after floor session.
9:51:24 AM
Mr. Painter continued on slide 13: "HCS2 Growing with
Inflation (2.25 percent), Spring Forecast, 50 percent POMV
to PFD FY24+." The slide assumed the energy relief check or
a larger PFD including the 50 percent POMV would continue.
He noted that the surpluses were shown to spike on the
slide due to oil tax credits ending in FY 24. Additionally,
the forward funding of K12 and agency operations played a
significant role. There would be significant deficits with
a 50 percent POMV plan.
Mr. Painter moved to slide 14: "HCS2 Growing by 5.3
percent, Spring Forecast, 25 percent POMV to PFD FY24+."
There would still be surpluses at the beginning in this
model, but there would be deficits at the end mostly due to
the leverage of the agency operations growth rate.
9:53:15 AM
Mr. Painter advanced to the last example on slide 15: "HCS2
Growing by 5.3 percent, Spring Forecast, 50 percent POMV to
PFD FY24+." He suggested that there again would be
surpluses in the first few years but would turn into large
deficits starting in FY 26. The governor's proposal worked
in his models in large part due to the expenditure growth
rate. If the state grew at a faster rate, the picture would
be very different.
Co-Chair Foster indicated he would recess the meeting and
allow for questions after floor session.
9:54:22 AM
Representative Josephson suggested that some of the
realized ERA balances seemed larger than normal. He
wondered if it would lead to the temptation to overdraw the
ERA.
Mr. Painter agreed that it could. In the example on slide
15, there was an overdraw to balance the budget. The high
SBR balance could create a temptation to overdraw as well.
He agreed that making high amounts of cash available could
lead to a pressure to spend.
Co-Chair Foster reviewed the agenda for the afternoon
meeting. He would recess the meeting in case members wanted
to come back with questions.
9:56:12 AM
RECESSED TO THE CALL OF THE CHAIR
[Meeting never reconvened]
ADJOURNMENT
9:56:12 AM
The meeting was adjourned at 9:56 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 33 Amendments 1-2 031622.pdf |
HFIN 3/18/2022 9:00:00 AM |
SB 33 |
| LFD Presentation- HFIN Spring Forecast, 3-17-22.pdf |
HFIN 3/18/2022 9:00:00 AM |