Legislature(2007 - 2008)
02/05/2007 03:31 PM House W&M
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| Presentation by Office of Management & Budget | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
February 5, 2007
3:31 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
MEMBERS ABSENT
Representative Sharon Cissna
COMMITTEE CALENDAR
PRESENTATION BY OFFICE OF MANAGEMENT & BUDGET
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOHN BOUCHER, Senior Economist
Office of Management & Budget
Office of the Governor
Juneau, Alaska
POSITION STATEMENT: Presented an overview of future state
revenue and budget trends and answered questions.
MELANIE MILLHORN, Deputy Commissioner
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Presented an overview of future state
spending on retirement and benefit funds and answered questions.
CHARLENE MORRISON, Chief Financial Officer
Division of Retirement and Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Explained an accounting matter related to
budget projections.
JANET CLARKE, Assistant Commissioner
Department of Health and Social Services
Juneau, Alaska
POSITION STATEMENT: Presented an overview of future state
spending for the state Medicaid program.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means to order at 3:31:04 PM. Representatives Roses, Seaton,
Fairclough, and Wilson were present at the call to order.
Representative Gruenberg arrived as the meeting was in progress.
3:31:25 PM
^Presentation by Office of Management & Budget
CHAIR HAWKER noted that one of the committee's tasks is to
consider how to reconcile future expenditures with future
revenues. This task requires setting the stage and making
judgment calls to help determine future fiscal policy. The
information presented today may provide a background for future
policy discussions, he said.
3:35:15 PM
JOHN BOUCHER, Senior Economist, Office of Management & Budget
(OMB), Office of the Governor, paraphrased from the following
written testimony [original punctuation provided]:
First of all I want to say that the Governor supports
the efforts of this committee to address the
structural budget issues that face the State of
Alaska. These meetings are important in framing the
discussion about what options the state has moving
forward. The administration looks forward to
continuing this conversation that is critical to the
future of Alaskans.
In attempting to address the Committee's question
"Where did the fiscal gap go?" The answer might be
summarized best by saying that the fiscal gap has not
"gone" anywhere- It is an issue that needs to be
addressed. While timeframes and revenue pictures may
have changed, the fundamental issues surrounding the
fiscal gap have not.
Most of the fiscal plans crafted in the last 20 years
have emphasized a combination of controlling
government spending, setting aside Alaska's surplus
revenues for use during times when revenue is scarce,
and examining options for diversifying Alaska's
revenue base to help offset the impact that the
declining Prudhoe Bay production curve has on state
revenue
Governor Palin's FY08 budget proposal represents a
move toward meeting two of the objectives mentioned -
controlling the growth of spending and putting away a
portion of the projected surplus for use at a future
date. While the details of the FY08 plan are yet to be
determined, the Administration looks forward to having
the conversations necessary to help achieve the
desired results of controlling government spending and
setting surplus revenue aside for use in the future
while providing the level of services that Alaskans
deem appropriate.
3:37:21 PM
CHAIR HAWKER reminded the committee and the public that today's
presentation will be more of a macro overview of budget issues
and noted that he had requested that OMB address the issues of
the Public Employees' Retirement System (PERS), the Teachers'
Retirement System (TRS), and the Alaska Medicaid State Plan
(Medicaid). The decision to emphasize these areas of spending
should not be characterized as a policy call; however, he noted
that these issues are important ones that the legislature must
address.
MR. BOUCHER referred to an OMB PowerPoint presentation that was
provided to the committee. He directed the committee's
attention to a graph titled, "Total Appropriations by Revenue
Source," which shows four main categories of revenue. Mr.
Boucher explained the categories as follows [paraphrasing from
written testimony; original punctuation provided]:
The top or dark blue bar is revenues appropriated from
the Alaska Permanent Fund.
Permanent Fund appropriations include the monies made
available for the annual dividend as well as inflation
proofing the fund. Operational costs for
administering the fund and the hold harmless provision
are accounted for here. (Amerada Hess is excluded)
The lighter colored bar that is 2nd from the top
represents federal funds in the state budget. For
federal funds, it is critical to understand that the
number presented represents the amount that state
programs are authorized to use in federal funds during
the budget cycle. Actual federal receipts spent
during a fiscal year often come in at a significantly
different level depending on a number of factors such
as the number of eligible participants in programs
that are partially paid for by federal funds.
The red colored bar is other state funds. The other
funds portion includes revenue that is statutorily
restricted for use by a particular program. For
example tuition receipts from the University is one
example of this type of funds. This is also where
appropriations of proceeds from the sale of general
obligation or Tobacco bonds would be counted.
The bottom, or light blue bar represents the General
Fund,
It is important to understand that when most people
are talking about Alaska's fiscal gap - they are
talking about the light blue bar in the picture-
The "fiscal gap" is most often defined as the
relationship between the amount of general funds
appropriated in any one fiscal year and the amount of
unrestricted general fund revenue accrued in any one
fiscal year.
REPRESENTATIVE GRUENBERG referenced the graph titled, "Total
Appropriations by Revenue Source," and asked if federal funding
is increasing at a rate greater than inflation.
MR. BOUCHER replied that it appears that Alaska received more in
fiscal year (FY) 2007 than in FY00. He did note that as past
chair of the U.S. Senate Committee on Appropriations, Alaska
Senator Ted Stevens was able to secure federal funding for
Alaska. However, the "future may not look quite so bright,"
cautioned Mr. Boucher.
CHAIR HAWKER expanded on the issue of available federal funding
by noting that previous legislatures did not spend a lot of
federal funds available to the state. Therefore, the House
Finance Committee refinanced some program changes, in Medicaid
for example, to take advantage of available federal funding.
3:42:22 PM
REPRESENTATIVE GRUENBERG suggested he would like to review in
the future the concept of taking full advantage of federal
funding opportunities as one way to raise revenue for the state.
CHAIR HAWKER stated he endorsed this type of future discussion,
for in the future there may very likely be a decrease in federal
funds for Alaska.
MR. BOUCHER concurred with Chair Hawker's observation that
future federal funding may not continue at the same level as in
the past.
3:44:03 PM
REPRESENTATIVE GRUENBERG noted that the committee needs to
carefully examine federal funding because there may be ways for
the state to continue to receive federal funding without having
to accept some of the restrictions the federal government places
on those funds. He referenced a recent House State Affairs
Standing Committee hearing on driving while under the influence
issues in which it became clear that if the state did not do
some things it did not want to do anyway, it would still receive
the same amount of federal funding, but with less restrictions,
said Representative Gruenberg.
REPRESENTATIVE ROSES confirmed this and noted the federal
funding referred to by Representative Gruenberg was put into a
different spending category, but "we didn't lose it."
3:47:24 PM
CHAIR HAWKER pointed out that the FY07 appropriations shown in
the graph titled, "Total Appropriations by Revenue Source,"
reflects appropriations of $500 million into the Education Fund,
$183 million into the Power Cost Equalization Fund (PCE), and
$300 million into the Capital Savings Account. In general, in
order to save money, the legislature has to appropriate it,
noted Chair Hawker, which is part of the reason why the spending
for FY07 looks high on the graph.
3:51:29 PM
MR. BOUCHER drew the committee's attention to the graph titled,
"General Fund Revenue versus Appropriations." He explained that
until oil price increases began in FY04, it was routine for
general fund appropriations to exceed general fund revenues.
Indeed, draws from the Constitutional Budget Reserve Fund (CBR)
were taken eight times between 1994-2004 to cover spending.
This resulted in an accumulated draw from the CBR of $5.2
billion, he said.
CHAIR HAWKER observed that oil prices were "in single digits"
during a couple of those years.
3:52:57 PM
MR. BOUCHER explained that the FY08 appropriations shown on the
graph titled, "General Fund Revenue versus Appropriations," are
interim numbers because the governor is in the process of
developing an amended FY08 proposal. The graph shows that if
spending is held level for the next 8 years, there will have to
be a draw from the CBR in FY10; by FY15 the draw from the CBR
would be near $1 billion annually.
MR. BOUCHER then drew the committee's attention to the chart
prepared by the Legislative Finance Division titled, "General
Fund Budget." In reference to some abbreviations shown on the
chart, Mr. Boucher explained that PEF is the Public Education
Fund, ADRF is the Alaska Debt Retirement Fund, PCE is the Power
Cost Equalization Program, and AHFC is the Alaska Housing
Finance Corporation. Mr. Boucher noted that the budget
projections shown assume a 4 percent annual rate of growth and a
capital budget of $200 million annually. He said that under
this scenario, draws on the CBR will reach $1 billion around
2010, or about five years earlier than predicted in the scenario
presented in the graph titled, "General Fund Revenue versus
Appropriations." He pointed out that neither scenario is
necessarily better than the other; the scenarios just reflect
different outcomes depending on budget decisions and revenue
sources.
MR. BOUCHER suggested to the committee that a better way to
represent the effect of spending choices is presented in the
matrix titled, "Constitutional Budget Reserve Runout Matrix."
This matrix predicts how long the CBR will last depending on the
state's spending level and the price of oil. He emphasized that
the critical assumptions in this scenario are that all surplus
revenue will go into the CBR, and all revenue shortfall will
come out of the CBR. Mr. Boucher agreed with Chair Hawker's
observation that this approach simplifies future predictions by
only specifying one savings account.
3:59:26 PM
MR. BOUCHER responded to Representative Seaton by noting that
the OMB projections for future oil prices and production volumes
were taken from the Department of Revenue's Fall 2006 Revenue
Sources Book.
CHAIR HAWKER noted that the Department of Revenue (DOR)
forecasts include both oil price and production variables, and
asked if the figures on the matrix take both those variables
into account.
MR. BOUCHER assured Chair Hawker that the OMB summary did
incorporate the DOR variables of oil price and production. He
continued by advising that it is possible to maintain the CBR
until FY 2020 if the current oil forecast price holds and if
spending can be kept somewhere between $3.7-$4 billion annually.
The governor's initial FY 2008 budget falls in that range, but
Mr. Boucher acknowledged that keeping spending flat would be a
challenging task and require some significant changes in state
spending patterns.
MR. BOUCHER emphasized that although there are many factors that
exert pressure on state spending, today's hearing would only
address two specific forces: increased Medicaid costs and the
PERS/TRS unfunded liability. Mr. Boucher stressed that in the
proposed FY08 budget, PERS/TRS payments are estimated at one-
third of total state spending. This one-third figure is
understated because it excludes PERS/TRS increases prior to
FY08. For example, legislative increases to the student base
funding allocation are not included in the pie chart titled,
"The PERS/TRS/Medicaid challenges."
CHAIR HAWKER observed that over the last four years the student
base allocation has increased by 33 percent, or about $250
million per year, with a very large portion of that going into
these retirement funds.
REPRESENTATIVE WILSON advised that if PERS/TRS was included in
the education foundation formula, it would increase funding by
$1,005 per student.
4:03:21 PM
MELANIE MILLHORN, Deputy Commissioner, Department of
Administration, directed the committee to the chart titled,
"PERS Projected Contribution Amounts to FY 2015." Ms. Millhorn
advised the committee that the predictions made on this chart
were based on data from June 30, 2005, which is the most recent
information available to the Department of Administration (DOA).
Based on that data, there is a $6.9 billion shortfall in PERS
contribution rates. However, in October 2006, the Alaska
Retirement Management Board (ARM Board) commissioned an
"experience" study of the PERS contribution history. This study
compared the actual experience of the system to the assumptions
used. Based on this study, the projected unfunded liability for
PERS/TRS rose to $8.6 billion, said Ms. Millhorn. She cautioned
the committee that because the state did not fund "at the
actuarial calculated rate" for FY05-07, there was a funding
shortfall of about $750 million. As a result, warned Ms.
Millhouse, the actual costs for FY09 will be higher than is
shown on the chart.
MS. MILLHORN referred to the now-repealed 2 AAC 35.900, which
limited PERS employer contributions from increasing more than 5
percentage points in any one given year. The effect of this
now-repealed regulation can be seen on the previously mentioned
chart as employer contribution amounts only went up by 5 percent
annually. The ARM Board has now adopted the actuarial
calculated rate using a level dollar amortization schedule, Ms.
Millhorn informed the committee.
CHAIR HAWKER observed that this change explains the large
increase in PERS contributions predicted for FY08, and the more
level spending predicted for FY08-15.
4:07:12 PM
REPRESENTATIVE FAIRCLOUGH asked whether there was any similar
chart for 1994 forward, and whether it used the same escalation
factor of about 5 percent.
MS. MILLHORN stated the DOA does have that information and can
provide it to the committee. Beginning with the valuation in
2001, the PERS system was 100.9 percent funded, so the
contribution rate was a minimal 6.77 percent, which was below
the normal cost rate.
REPRESENTATIVE FAIRCLOUGH, in trying to ascertain the cost
escalation of the benefit portion of PERS/TRS, asked if there
was some history showing past increases.
MS. Millhorn answered that the DOA's comprehensive annual
financial reports show the trend of the benefit increases. She
explained that approximately 2,000 members retire each year
under PERS/TRS, so "yes, that amount goes up each year."
REPRESENTATIVE FAIRCLOUGH, in reference to the flat spending
projections shown from FY08-15, questioned whether the
projections calculate front loading the program and paying the
actual costs "so that there is not a delta" in between the $8
billion shortfall.
MS. MILLHORN responded that since the plan is now closed it has
been amortized over a 25-year period and each year's valuation
will establish the contribution rate that must be made to
liquidate the past service cost. Ms. Millhorn explained that
there will be increased medical costs which will differ from
plan assumptions, but calculations are done each year to
determine how much needs to be paid to payoff the unfunded
liability.
CHAIR HAWKER said that the actuaries who determine the future
amortization rates for the PERS/TRS liability do include a
medical cost escalation factor when projecting future program
costs. This escalation factor, which Ms. Millhorn believes to
be 9.5 percent, is factored in and discounted back to achieve
level funding to pay off the future liability. If the state was
able to reduce the inflation factor to 1 percent, for example,
there would be an experience differential that would be
incorporated into each subsequent valuation, resulting in a
lower future cost estimate, he explained.
4:11:46 PM
REPRESENTATIVE FAIRCLOUGH stated she found it hard to believe
that future contribution rates for PERS/TRS could be fairly
flat. The trend for FY04-07 was an upward trend that would seem
to be what we may experience in the future, she opined.
REPRESENTATIVE SEATON volunteered that past legislatures were
informed that the eventual anticipated payout for PERS/TRS would
be about $15.6 billion more than was funded. Therefore this
chart shows the unfunded liability amortized by equal payments
until the under-funded amount is paid off.
REPRESENTATIVE FAIRCLOUGH acknowledged the calculations and
complexities, but maintained interest in any information that
illustrates a track record of level payments as are shown on the
chart titled, "PERS Projected Contribution Amounts to 2015."
4:15:03 PM
CHAIR HAWKER noted that in past years the retirement liability
was not fully funded, but that policy changed, which explains
the jump in spending between FY07 to FY08.
REPRESENTATIVE FAIRCLOUGH asked Ms. Millhorn if there is any
track history of level payments, or whether that was affected by
the prior 5 percent contribution rate increase cap.
MS. MILLHORN explained that there was a percent of pay
contribution being made to Tiers 1-3; what has changed is the
amortization schedule now that Tiers 1-3 have closed. This
stops the addition of new members to the plans; however, medical
costs remain the primary driver contributing to the unfunded
liability. The new tiers do not have the volatility of prior
systems, which eliminates the unfunded liability component of
new tiers coming in, she said.
REPRESENTATIVE FAIRCLOUGH asked why the shortfall was being
estimated at $2 billion more than was estimated in 2006, for a
total shortfall of $10 billion.
MS. MILLHORN replied that the there will be many adjustments
based on the findings of the "experience study" and these
adjustments will be calculated into a determination of what the
liabilities will be as of June 30, 2006. The assumption now is
that the liability will be closer to $10 billion, Ms. Millhorn
concluded.
MS. MILLHORN agreed with Chair Hawker's observation that changes
to the system are slow to come because of the budget process and
pointed out that the June 30, 2005, valuation sets the FY08
rate.
REPRESENTATIVE FAIRCLOUGH asked what happens if the state does
not pay the retirement liability at the calculated rate.
MS. MILLHORN answered that if payment is not made at the
calculated rate,
"You essentially have not begun the process to pay
this off for that 25-year period, which is what has
happened to PERS/TRS. So, it's really important that
you hit that calculated rate and you begin the process
to liquidate the unfunded liability."
4:22:02 PM
REPRESENTATIVE FAIRCLOUGH pointed out that a payment-style
approach would result in a total greater payment amount due to
interest costs.
MS. MILLHORN agreed and added that Buck Consultants projected
that payment of $500 million into the PERS/TRS system would
result in a $680 million savings over the course of the
amortized schedule.
MS. MILLHORN referred to the graph titled, "PERS/TRS Projected
Contribution Amounts to FY 2015," which shows a dramatic jump in
the state's contribution amount from $174 million in FY04 to
$905 million in FY08. She told Chair Hawker that the actuarial
valuation reports project out until the year 2036, at which
point the unfunded liability will be paid off. Once the
unfunded liability is paid off, the employer resumes payment at
the normal cost rate for the defined benefit members, which she
estimated to be about 14.48 percent. In comparison, in FY08
PERS will be paid at 39.76 percent and TRS at 54.03 percent.
4:26:27 PM
CHARLENE MORRISON, Chief Financial Officer, Division of
Retirement and Benefits, Department of Administration, clarified
that the Division of Retirement and Benefits uses a 25-year
amortization schedule, but it also asks the actuary to prepare a
30-year projection.
MS. MILLHORN added that the ARM Board is authorized to adopt the
amortization schedule, and has adopted a 25-year amortization
schedule. She noted that generally accepted accounting
principles do not allow amortization beyond the 25-year period;
however the ARM Board did look at the effect of payment of the
unfunded liability over a 30-year period. To extend payment
from 25 to 30 years increases the total amount paid by almost
$2.4 billion, she said.
4:30:56 PM
REPRESENTATIVE FAIRCLOUGH raised the issue of whether there has
been any consideration of what will happen to remaining plan
assets if there are no more beneficiaries entitled to plan
benefits, but there are still assets in the plan. She
referenced a situation in which a plan with no remaining
beneficiaries had millions of dollars in plan assets left. The
result was litigation to determine what to do with the plan
assets, a result that could have been avoided with some
forethought, she noted.
MS. MILLHORN said she is not aware whether the aforementioned
scenario described has been considered. Ms. Millhorn explained
that retirees who return to work have to pay past service
associated with that member's return to state employment. A
returning retiree is no longer able to use their retiree medical
plan, they must use the active plan, she said.
4:35:40 PM
JANET CLARKE, Assistant Commissioner, Department of Health and
Social Services, said that Medicaid costs present a long-term
challenge for the state budget. She reminded the committee that
Medicaid is the state-federal partnership program that provides
health care coverage for low-income individuals: children,
adults, and the elderly. Ms. Clarke referred to a study
prepared by The Lewin Group for the Alaska Department of Health
and Social Services titled, "Long Term Forecast of Medicaid
Enrollment and Spending in Alaska: 2005-2025" ("Lewin
forecast"). She noted that many of the program trends she will
present to the committee today were identified by the Lewin
forecast. Ms. Clarke presented her testimony with a PowerPoint
presentation provided to the committee titled "Department of
Health and Social Services Presentation to the House Ways and
Means Committee, February 5, 2007."
MS. CLARKE told the committee that past Medicaid spending was
primarily on children up to age 19, but future predictions show
that Medicaid spending on those over age 35 will increase in the
next 20 years. This trend is depicted on the chart sub-titled,
"Alaska's population growth will be driven by the elderly."
From 2006 to 2026, the elderly population of Alaska is predicted
to increase from 6 percent to over 16 percent of the state's
population. The elderly population uses long-term care, which
is one of the most expensive parts of the Medicaid program, so
the increase in the elderly population greatly increases the
state's Medicaid costs, said Ms. Clarke.
MS. CLARKE reminded the committee that Medicaid is a state-
federal partnership and currently the state receives federal
funding at almost 58 percent, so for every dollar Alaska spends,
almost 58 cents of that is federal money. Alaska's Medicaid
spending is projected to grow 7.9 percent, from 2006 to 2026.
Without calculating for inflation, this results in an increase
in spending from $1 billion in 2006 to $4.86 billion in 2026,
she concluded.
4:41:30 PM
CHAIR HAWKER noted the care that went into the Lewin forecast
which resulted in an accurate projection of the state's current
program. He warned that the federal contribution amount may be
lowered to around 53 percent due to federal statutory changes.
MS. CLARKE informed the committee that the federal money is not
inflation proofed and Alaska's contribution rate will drop to
52.48 percent in October 2007 unless there is a change in
federal law. The Division of Retirement and Benefits is working
with other states to find ways to avoid a reduction in federal
spending, she said.
MS. CLARKE referenced the graph titled, "Spending on the Elderly
will Surpass Spending on Working-Age Adults and Children by
2019." Increased costs for the elderly reflect a fundamental
and expensive shift in the program, which has typically
concentrated on children, Ms. Clarke said. She emphasized that
state general fund spending on Medicaid will increase at an
average annual rate of 8.6 percent, rising from $363.1 million
in 2006 to $205 billion in 2026.
4:51:21 PM
REPRESENTATIVE SEATON asked whether the program had to offer
everything, such as long-term care, to beneficiaries.
MS. CLARKE replied that the legislature has a lot of influence
on the policy choices of what services will be covered by
Medicaid. The federal government lists some services and
coverage as mandatory, others are optional. Some long-term care
coverage is mandatory, but choices can be made on the number of
nursing home beds, she noted. The legislature does have quite a
bit of choice with regard to the path of this program, she
stated.
4:54:22 PM
REPRESENTATIVE WILSON questioned whether federal funding will
increase as shown on the graph titled, "Projected Total Spending
on Medicaid by Fund Source."
MS. CLARKE replied that the graph referred to by Representative
Wilson is based on current federal policy.
MS. CLARKE compared the 2005-2025 Medicaid forecast to the 2006-
2026 forecast and noted that overall state spending for 2025 is
predicted to be 8.8 percent lower than was predicted in the
2005-2025 forecast. This may be due in part to some regulatory
changes in the personal care attendant program developed by the
DOA in conjunction with the legislature. This policy change is
one of many factors that have contributed to some flattening out
of Medicaid spending, she said. Ms. Clarke concluded by
reminding the committee that legislative policy choices can make
a difference in the long-term forecast.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
5:04:40 PM.
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