Legislature(2021 - 2022)DAVIS 106

04/06/2021 11:30 AM WAYS & MEANS

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.

Download Mp3. <- Right click and save file as

Audio Topic
11:36:33 AM Start
11:36:53 AM Presentation: Alaska's Fiscal Position and Projections
12:59:46 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Alaska's Fiscal Position & TELECONFERENCED
Projections by Alexei Painter, Legislative
Finance Div.
                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         April 6, 2021                                                                                          
                           11:36 a.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Ivy Spohnholz, Chair                                                                                             
Representative Adam Wool, Vice Chair                                                                                            
Representative Andy Josephson                                                                                                   
Representative Calvin Schrage                                                                                                   
Representative Andi Story                                                                                                       
Representative David Eastman                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative Mike Prax                                                                                                        
COMMITTEE CALENDAR                                                                                                            
PRESENTATION:  ALASKA'S FISCAL POSITION AND PROJECTIONS                                                                         
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
ALEXEI PAINTER, Director                                                                                                        
Legislative Finance Division                                                                                                    
Legislative Affairs Agency                                                                                                      
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided a PowerPoint presentation, titled                                                               
"Alaska's Fiscal Position & Projections," dated 4/6/21.                                                                         
ACTION NARRATIVE                                                                                                              
11:36:33 AM                                                                                                                   
CHAIR IVY  SPOHNHOLZ called the House Special  Committee on Ways                                                              
and  Means  meeting to  order  at  11:36  a.m.   Representatives                                                                
Schrage, Story, and Spohnholz were present at the call to order.                                                                
Representatives  Eastman, Josephson,  and  Wool  arrived as  the                                                                
meeting was in progress.                                                                                                        
^PRESENTATION:  Alaska's Fiscal Position and Projections                                                                        
    PRESENTATION:  Alaska's Fiscal Position and Projections                                                                 
11:36:53 AM                                                                                                                   
CHAIR SPOHNHOLZ announced that the  only order of business would                                                                
be a presentation on Alaska's Fiscal Position and Projections by                                                                
Alexei Painter, Legislative Finance Division.                                                                                   
11:37:24 AM                                                                                                                   
ALEXEI  PAINTER, Director,  Legislative Finance  Division (LFD),                                                                
Legislative  Affairs  Agency   (LAA),  introduced  a  PowerPoint                                                                
presentation, titled  "Alaska's  Fiscal Position  & Projections                                                                 
[hard copy included in the committee packet], and noted that the                                                                
following slides would  use LFD's fiscal  models and projections                                                                
to highlight future  fiscal options for the state.   He began on                                                                
slide 2,  which showed a  summary of the  governor's fiscal year                                                                
2022 (FY  22) budget request compared to  the FY 21  budget.  He                                                                
stated  that  the  spring   revenue  forecast  update  [line  3]                                                                
increased  projected revenue  in  FY  21  and  FY 22,  which  is                                                                
important, he said, because the  governor's FY 22 budget request                                                                
was written with a  lower revenue expectation.  Additionally, he                                                                
highlighted that the  FY 22 operating budget  [line 7] decreased                                                                
by $220 million from FY 21.  He explained that the decline was a                                                                
reflection of some  of the extraordinary circumstances in  FY 20                                                                
and FY  21.  He  noted that $94 million  in unrestricted general                                                                
funds (UGF)  was appropriated for COVID-19  across FY 20  and FY                                                                
21, which appeared as revenue in line  5 and as spending in line                                                                
8.  The  decline [in the operating budget] was  because the one-                                                                
time money for COVID-19 was not carrying forward.  Other reasons                                                                
for  the  decline  included  the education  formula,  which  was                                                                
projected to decrease in  FY 22.  He  expounded that the capital                                                                
budget was also  down due to the governor  using $104 million in                                                                
Alaska Housing Finance  Corporations (AHFC) bonds for  a portion                                                                
of the capital  budget.  He informed  committee members that the                                                                
governor was  proposing an  additional  payment to  increase the                                                                
Permanent Fund  Dividend (PFD) to  the statutory amount  of $1.9                                                                
billion in  FY 21; the  governor was also  proposing a statutory                                                                
dividend totaling $2 billion in FY 22.                                                                                          
MR.   PAINTER    directed   attention   to    the   pre-transfer                                                                
surplus/(deficit) [line 17], which showed the state's cash flow.                                                                
The  figures indicated  that there  would be  a  projected $1.76                                                                
billion deficit in  FY 21 and  a $1.6 billion deficit in  FY 22.                                                                
He noted  that per Alaska's constitution,  all expenditures must                                                                
be  paid for,  so  the difference  would come  from the  savings                                                                
accounts.    The governor  was  proposing  a  $1.2 billion  draw                                                                
directly from the Earnings Reserve Account (ERA) [line 18] in FY                                                                
21.  The dividend of $2  billion in FY 22 would be also directly                                                                
from the ERA, which Mr. Painter defined as deficit spending.  He                                                                
continued  to explain  that  $578 million  would  come from  the                                                                
Constitutional Budget Reserve  (CBR) account in FY  21 [line 20]                                                                
and in  FY 22, there  would be a  post-transfer surplus, meaning                                                                
money would end up going back to the CBR at the end of the year.                                                                
Lastly, he  directed attention  to the reserve  balances [bottom                                                                
right], which  showed an increase  to the  CBR due to  the post-                                                                
transfer surplus  and a decreasing ERA  due to draws  beyond the                                                                
statutory  percent of  market  value  (POMV)  transfer from  the                                                                
Alaska Permanent Fund.                                                                                                          
11:44:21 AM                                                                                                                   
CHAIR  SPOHNHOLZ   noted  that  the   governor  was  essentially                                                                
proposing more  than  $1.7 billion  in spending,  which required                                                                
pulling from  other accounts, including the  ERA.  Additionally,                                                                
she asked when LFD began listing the ERA under budget reserves.                                                                 
MR. PAINTER said January 2010.   He explained that when the POMV                                                                
draw began, [the ERA] went  from being listed as an undesignated                                                                
reserve to  a  designated reserve.   He  said arguably,  the ERA                                                                
should have been listed as  a designated reserve before the POMV                                                                
draw because of the  dividend.  He likened it  to the Power Cost                                                                
Equalization (PCE)  fund, as  the fund  was  used on  an ongoing                                                                
basis in the budget.  He  added that the fund had a balance that                                                                
could be appropriated but appropriating that balance would cause                                                                
a reduction to the amount available for that designated purpose.                                                                
CHAIR  SPOHNHOLZ offered  her  understanding  that although  the                                                                
Alaska  Permanent Fund  earnings could  be appropriated  for any                                                                
reason,  the  legislature  typically   excluded  them  from  the                                                                
definition of available revenue.  She sought to clarify why PCE,                                                                
as well  as other designated  reserves, weren't included  if the                                                                
ERA  was being  described as  a  designated reserve  account and                                                                
compared to PCE.                                                                                                                
MR. PAINTER said the full  fiscal summary included the PCE fund,                                                                
the Higher Education fund, and  other major funds that were more                                                                
static from year to year.  He  said the CBR account and ERA were                                                                
included in the short fiscal summary [slide 2] because they were                                                                
utilized more frequently in the budget.                                                                                         
11:47:32 AM                                                                                                                   
REPRESENTATIVE STORY asked if that held true for AHFC.                                                                          
MR. PAINTER  sought to clarify whether  Representative Story was                                                                
referring  to  the  Alaska  Industrial  Development  and  Export                                                                
Authority  (AIDEA) funds  that the  governor was  using for  tax                                                                
REPRESENTATIVE STORY pointed to the $104 million.                                                                               
MR. PAINTER said the $104 million in AHFC bonding was not coming                                                                
from reserves.  Instead, it  was lowering the governor's capital                                                                
budget because  the bonds would  be paid off  by the corporation                                                                
over  the  next several  decades,  resulting  in lower  dividend                                                                
revenue to the  state from AHFC.  He  noted that AHFC's finances                                                                
were not considered as part of the state's budget reserves.                                                                     
11:48:52 AM                                                                                                                   
MR.  PAINTER turned to  slide  3, titled  "About the  LFD Fiscal                                                                
Model," which read as follows [original punctuation provided]:                                                                  
       Revenue is based on DOR's Spring Revenue Forecast                                                                        
            Assuming $53  oil in FY21 and $61  oil in FY22,                                                                     
     adding $331.7 million in FY21 and $459.6                                                                                   
     million in FY22 compared to fall forecast                                                                                  
       Permanent  Fund returns  are based on  APFC's return                                                                     
     assumption of 6.40%                                                                                                        
     in FY21 and 6.75% in FY22-30, unless otherwise stated                                                                      
            Default assumption is no inflation proofing for                                                                     
     FY21-24, statutory inflation proofing after                                                                                
     (consistent with legislative intent)                                                                                       
        Assumes  $50  million  for supplementals  and  2.0%                                                                     
     inflation growth on                                                                                                        
     agency operations                                                                                                          
       Assumes minimum $500 million left in CBR                                                                                 
       Full version of  the model includes many revenue and                                                                     
     spending options.                                                                                                          
     LFD  can  work  with   legislators  who  wish  to  see                                                                     
     additional options                                                                                                         
        A simplified,  shorter-time horizon  model  is also                                                                     
     available upon request                                                                                                     
11:51:36 AM                                                                                                                   
REPRESENTATIVE STORY asked  whether the inflation growth  of 2.0                                                                
percent had been  changed from 2.25 percent and  why that change                                                                
MR.  PAINTER explained  the Callan  LLC, the  state's investment                                                                
advisor, changed its forecast to 2.0 percent.  He noted that the                                                                
Alaska  Permanent Fund  Corporation  (APFC)  had not  officially                                                                
adopted that  rate; however,  it was  in  line with  the Federal                                                                
Reserve's forecast of  inflation.  He surmised  that 2.0 percent                                                                
would be the universal rate once APFC adopted it.                                                                               
11:52:25 AM                                                                                                                   
REPRESENTATIVE STORY recalled when $1  billion was the suggested                                                                
minimum balance for the  CBR.  She asked how  the new minimum of                                                                
$500 million  was working  "in balancing  our checkbooks,  so to                                                                
MR.  PAINTER related  the CBR  served two  purposes:  a cashflow                                                                
account and a  budget reserve.  He stated  that $500 million was                                                                
the bare minimum needed for cash flow; however, that amount left                                                                
no room for the CBR to function as a budget reserve or weather a                                                                
shock  to  the   state's  finances.    He  added   that  with  a                                                                
structurally balanced budget, $2 billion would  allow the CBR to                                                                
serve both purposes.                                                                                                            
11:54:11 AM                                                                                                                   
CHAIR SPOHNHOLZ noted that the  CBR operated as a budget reserve                                                                
for  a long  time.    She informed  committee  members that  the                                                                
account had a balance of $16 billion until it was depleted.                                                                     
11:54:25 AM                                                                                                                   
REPRESENTATIVE  SCHRAGE  questioned  the  purpose  of  a  budget                                                                
reserve served and asked why it was needed.                                                                                     
MR. PAINTER conveyed that because Alaska's revenue was unusually                                                                
volatile,  a budget  reserve allowed  the state  to  avoid tying                                                                
spending to short-term fluctuations in the oil market.  He added                                                                
that  having a  budget reserve  allowed the  state to  react and                                                                
"weather the  storm" for  10 years; however,  that time  was not                                                                
used to solve the deficit, he  pointed out.  He concluded that a                                                                
budget  reserve allows  for  time to  react  when there's  large                                                                
fluctuations and  allows the  state  to avoid  making short-term                                                                
changes when there's small fluctuations.                                                                                        
11:55:45 AM                                                                                                                   
REPRESENTATIVE SCHRAGE asked what  factors impact the forecasted                                                                
inflation  and inquired  about  the timeframe  of the  forecast.                                                                
Specifically,  he  questioned  whether increased  federal  taxes                                                                
would impact the forecasted inflation.                                                                                          
MR. PAINTER shared his belief that the assumption of 2.0 percent                                                                
was based  on the  federal outlook; additionally,  that Callan's                                                                
forecast went through FY 30.  He related that the forecast could                                                                
be impacted  by a number of  factors, such as  changes in taxes,                                                                
federal spending policy, economic conditions, or Federal Reserve                                                                
targets.   He  further noted  that for  many purposes,  the U.S.                                                                
inflation diverged from Alaska inflation, later adding that that                                                                
the urban Alaska CPI was once referred to as the Anchorage CPI.                                                                 
11:58:05 AM                                                                                                                   
CHAIR SPOHNHOLZ  returned to  slide 2 and  pointed out  that the                                                                
governor was  proposing to draw extra  funds from the ERA.   She                                                                
highlighted the CBR  draw on lines  21 and 22  that would "lapse                                                                
into  the CBR  the previous  year."   She asked  Mr.  Painter to                                                                
explain her observations.                                                                                                       
MR. PAINTER  said last  year, the  legislature changed  the fund                                                                
source  for  one-quarter  of  the  budget  from  UGF  to  direct                                                                
appropriations from  the CBR.    He specified that  it  was one-                                                                
quarter of agency  operations, half of the  PFD, and one-quarter                                                                
of retirement payments, which amounted  to $940 million that was                                                                
directly authorized to come out of the CBR.  He remarked:                                                                       
     When  the governor  made  his  vetoes, he  essentially                                                                     
     vetoed down to where,  after those direct draws, there                                                                     
     would  be no  remaining deficit;  however,  we've seen                                                                     
     revenue increase and now  there's a remaining surplus.                                                                     
     ... I  would liken it,  in a kind  of personal finance                                                                     
     analogy,  to  -  if  you  have zero  dollars  in  your                                                                     
     checking  account and  you  have  a  $500 dollar  bill                                                                     
     coming up  ...  and you  transfer $1,000  dollars from                                                                     
     your savings rather than $500 dollars, you drew $1,000                                                                     
     dollars, you spent your $500 on your credit card bill,                                                                     
     and you  still have $500  in the bank.   However, your                                                                     
     real deficit,  the amount  you had  to draw  from your                                                                     
     savings, is  still the  net of those,  so you  drew an                                                                     
     extra $500 dollars.   And that's kind of  what we did,                                                                     
     where we said,  we're not drawing the  exact amount we                                                                     
     need we're drawing this  amount certain, and then that                                                                     
     turned out to  be more than we  needed as revenue went                                                                     
CHAIR SPOHNHOLZ opined that the legislature should return to the                                                                
practice of drawing the necessary balance  from the CBR to avoid                                                                
repeating the same scenario in the future.                                                                                      
MR.  PAINTER said  at the  end  of the  year,  any post-transfer                                                                
surplus would lapse  back to the CBR;  therefore, there would be                                                                
no difference in balance.  He noted that the practice of funding                                                                
the  capital  budget  directly  from   the  CBR  had  been  more                                                                
problematic  for  administration  because  those  are  long-term                                                                
projects  that  last over  multiple  years.    If one  of  those                                                                
projects  were unneeded,  he  said, it  would  require a  three-                                                                
quarter CBR vote to change it.                                                                                                  
12:02:03 PM                                                                                                                   
CHAIR SPOHNHOLZ referred to slide 3 and shared her understanding                                                                
that the APFC considered adjusting the projected returns down                                                                   
from 6.75 percent.  She inquired about the status of that                                                                       
MR. PAINTER reported that Callan  had indicated that the outlook                                                                
for FY  22 to FY 30  should be lowered to  6.2 percent; however,                                                                
that would  add the actual  returns experienced in FY  21, which                                                                
were significantly  above the  6.4 percent assumption  that APFC                                                                
was using.  He relayed that  APFC was expecting to roll out that                                                                
new assumption  when the fiscal  year closed.  He  expressed his                                                                
hesitation to  using  partial year  returns and  projecting them                                                                
forward and assured committee members that LFD would continue to                                                                
use the forecasted returns.                                                                                                     
CHAIR SPOHNHOLZ  asked whether LFD  updated its models  based on                                                                
formal actions taken by APFC.                                                                                                   
MR. PAINTER  answered yes, noting that  LFD's goal was  to match                                                                
APFC's official projections.                                                                                                    
12:04:18 PM                                                                                                                   
MR.  PAINTER   resumed  the  presentation  on   slide  4,  which                                                                
illustrated   the   governor's   budget   request   before   PFD                                                                
distribution.  The  significant implication was the  size of the                                                                
gap (or  lack thereof)  in FY  22 and beyond.   The  left chart,                                                                
titled  "UGF Revenue/Budget,"  featured  traditional revenue  in                                                                
blue, planned  permanent fund draws in  green, and CBR/Statutory                                                                
Budget Reserve  (SBR) draws  in orange.   The black  dotted line                                                                
represented the budget, and the solid black line represented the                                                                
"budget less dividends."  The chart on the right, titled "Budget                                                                
Reserves,"  featured the  CBR  balance  in  orange and  the  ERA                                                                
balance in green.  He explained that based on the spring revenue                                                                
forecast, the  state's fiscal position was  expected to increase                                                                
each year because revenue  would increase faster than inflation.                                                                
DOR  projected  that  oil  prices would  increase  exactly  with                                                                
inflation; however,  because of the  progressive production tax,                                                                
total revenue increased faster than inflation, which resulted in                                                                
growing  surpluses.   He  noted that  leaving  out the  dividend                                                                
allowed for  fiscal models  to be  considered without  the large                                                                
12:06:43 PM                                                                                                                   
CHAIR SPOHNHOLZ  noted that in  FY 21, the  legislature funded a                                                                
dividend just short  of $1,000 with $680 million.   She surmised                                                                
that in FY  22, a "balanced" dividend  would amount to $450-$475                                                                
if no  other fiscal measures were passed  before overdrawing the                                                                
ERA.  She asked if that was correct.                                                                                            
MR. PAINTER replied in the affirmative.                                                                                         
12:07:16 PM                                                                                                                   
REPRESENTATIVE EASTMAN observed that on slide 3, the CBR balance                                                                
was projected to increase.  He asked for the current amount owed                                                                
to the CBR and when that obligation would be satisfied.                                                                         
MR. PAINTER approximated that after the  reverse sweep in FY 21,                                                                
$12 billion  would be  owed to the  CBR.   He opined that  if no                                                                
dividend were paid,  it could be paid off  "somewhere in the mid                                                                
FY 30s."                                                                                                                        
12:08:15 PM                                                                                                                   
REPRESENTATIVE SCHRAGE sought to verify whether the chart on the                                                                
right assumed  no dividend payment  and added the  surplus above                                                                
the budget [from left chart] to the CBR.                                                                                        
MR. PAINTER confirmed.  He noted that LFD was attempting to show                                                                
the  fiscal scenario  before paying  a dividend,  not suggesting                                                                
what the state should do or would do.                                                                                           
12:09:19 PM                                                                                                                   
MR. PAINTER advanced to slide 5, titled "Unusual Fund Sources in                                                                
Governor's  Budget:   Total  of  $295.0   million,"  which  read                                                                
[original punctuation provided]:                                                                                                
        Use   of   lapsing  balances   in  place   of  FY22                                                                     
            $35.0 million for Medicaid                                                                                          
            $5.0 million for fire break construction                                                                            
            $5.0 million to OMB  to smooth funding to rate-                                                                     
     setting agencies                                                                                                           
       Use of fund sources for non-designated purposes                                                                          
            $60.0 million of AIDEA Receipts for oil and gas                                                                     
     tax credits                                                                                                                
       Based on Spring forecast, that amount will be $114.0                                                                     
             $10.5 million  of  PCE funds  for  AEA capital                                                                     
             $4.0 million  of  Higher  Education funds  for                                                                     
     prosecutor recruitment and                                                                                                 
            $0.8  million of  PCE  funds for  AEA operating                                                                     
            $0.4 million of Higher Education funds for ACPE                                                                     
       Use of one-time or temporary fund sources                                                                                
            $104.0  million AHFC bond  package for  DOT and                                                                     
     DEC match                                                                                                                  
            $16.3  million of  Mental Health  Trust Reserve                                                                     
MR.  PAINTER defined  "unusual  fund sources"  as one-time  fund                                                                
sources or non-designated use of designated funds.                                                                              
12:14:45 PM                                                                                                                   
REPRESENTATIVE EASTMAN  sought further  explanation of  the $114                                                                
million of AIDEA  receipts for oil and gas tax  credits based on                                                                
the spring forecast.                                                                                                            
MR. PAINTER explained that the  tax credit calculation was based                                                                
on the forecast and the  production tax.  Per the fall forecast,                                                                
the amount of AIDEA receipts was $60 million, which was based on                                                                
15 percent of the production tax  levied before credits.  In the                                                                
spring forecast, a  higher amount of production  tax revenue was                                                                
projected,  which   increased  the  formula  to   $114  million,                                                                
reflecting 10 percent of the  production tax before credits.  He                                                                
further  noted that  the  increase was  based  on the  statutory                                                                
formula, in  which the  formula switches from  15 to  10 percent                                                                
when the price of oil is $60 or higher.                                                                                         
12:16:07 PM                                                                                                                   
MR. PAINTER  resumed the  presentation, explaining that  slide 6                                                                
adjusted  the  fiscal  summary  by replacing  the  unusual  fund                                                                
sources with UGF to  give a clearer picture of  the real size of                                                                
the  hole in  the budget.   He  conveyed that  collectively, the                                                                
unusual  fund  sources  increased the  budget,  resulting  in  a                                                                
deficit of nearly $1.8  billion in FY 21 and  $1.9 billion in FY                                                                
22.  He noted that  this lowered the CBR, while the ERA remained                                                                
unaffected [bottom right].                                                                                                      
12:17:12 PM                                                                                                                   
REPRESENTATIVE SCHRAGE  returned to  slide 5  and  asked whether                                                                
Higher  Education  funds  had  ever  been  used  for  prosecutor                                                                
recruitment and housing.                                                                                                        
MR. PAINTER answered  no; however, he said  the Higher Education                                                                
funds were used for other non-designated purposes.                                                                              
12:17:37 PM                                                                                                                   
MR. PAINTER proceeded to the model on slide 7, which illustrated                                                                
the fiscal summary on slide 6.  He concluded that the short-term                                                                
and  long-term surpluses  were  smaller compared  to the  fiscal                                                                
model on slide 4.   He continued to slide 8, titled "How Federal                                                                
COVID-19 Relief  Impacts Alaska's Budget," which  read [original                                                                
punctuation provided]:                                                                                                          
         Federal  Medical   Assistance   Percentage  (FMAP)                                                                     
     increase   from  50%   to   56.2%   for  non-expansion                                                                     
     population effective since March 2020                                                                                      
            Saves Alaska $15-17  million UGF per quarter in                                                                     
     Medicaid program                                                                                                           
            Likely to be extended through end of CY2021                                                                         
        Coronavirus Relief  Fund  (CRF)  used before  State                                                                     
     funds created lapse in FY20 and FY21                                                                                       
        Ongoing federal  funds  to DOTPF  through FY24  for                                                                     
     airports ($82.5  million), highways  ($124.4 million),                                                                     
     and Federal Transit Authority grants ($84.6 million)                                                                       
             $14.6 million  of fund  changes  in Governor's                                                                     
     FY22 budget to utilize DOTPF funds in place of general                                                                     
      CARES funds have mostly been expended, but CRRSA and                                                                      
       ARP have mostly not yet been incorporated into the                                                                       
12:21:00 PM                                                                                                                   
REPRESENTATIVE STORY returned to slide 6  and inquired about the                                                                
CBR draw of  $588.1 million in FY 21 [line  23], asking how that                                                                
translated  to  the  reserve  balance of  $850  million  [bottom                                                                
MR. PAINTER said  the reserve balance of  $850 million reflected                                                                
the remaining  balance after  the $588.1  million draw  from the                                                                
12:22:26 PM                                                                                                                   
REPRESENTATIVE JOSEPHSON, referring to  slide 8, highlighted the                                                                
ongoing  federal funds  to  the Department  of  Transportation &                                                                
Public Facilities  (DOT&PF) through FY  24 and asked  what would                                                                
stop the  legislature from  underfunding airports  and highways.                                                                
He questioned whether that could be a way to "backfill."                                                                        
MR. PAINTER  confirmed that  it is a  way [to  backfill], noting                                                                
that  the  governor  proposed  reducing  UGF  revenue  going  to                                                                
airports and replacing that  with federal funds.  Alternatively,                                                                
the House Finance subcommittee could  use those federal funds in                                                                
place of  the Marine Highway  fund rather than UGF  funding with                                                                
the goal of building up a balance in that account for future use                                                                
in the marine highway budget.  He indicated that the legislature                                                                
could use those funds with a lot of discretion.                                                                                 
12:23:58 PM                                                                                                                   
REPRESENTATIVE JOSEPHSON sought to confirm that the third bullet                                                                
point  was CRRSAA  [Coronavirus Response  and  Relief Supplement                                                                
Appropriations Act] moneys as opposed to CARES [Coronavirus Aid,                                                                
Relief, and Economic Security] Act moneys.                                                                                      
MR. PAINTER  said the two  were combined  for this purpose.   He                                                                
explained that  airport funds  were in  both  the CARES  Act and                                                                
CRRSAA; the CARES  Act funds could be  used for either operating                                                                
or capital, while CRRSAA money  could only be used for operating                                                                
and was  allocated per  airport.  He  noted that  the governor's                                                                
budget was  released before CRRSAA  was passed, so  the governor                                                                
used money  from the CARES  Act instead; however,  he emphasized                                                                
the need  for CRRSAA money  to be  used in the  operating budget                                                                
because of  the restriction on  those funds.  He  suspected that                                                                
the  governor  or the  legislature  would  address that  in  the                                                                
12:25:01 PM                                                                                                                   
MR. PAINTER reviewed slide 9, titled "American Rescue Plan (ARP)                                                                
Impacts," which read as follows [original punctuation provided]:                                                                
       Alaska is set to receive $1.019 billion of flexible                                                                      
     funds, plus $112.3 million of flexible capital funds                                                                       
       Awaiting guidance on these funds  these are not                                                                          
     yet factored into the budget                                                                                               
       Also includes $230.7 million for local                                                                                   
       Many more specific areas, including $358.7                                                                               
     million for K-12 schools                                                                                                   
       For details, see the March 26 Senate Finance                                                                             
     Committee hearing meeting documents                                                                                        
MR. PAINTER said  the significant implication was  that only the                                                                
$14.6 million fund change was influencing the size of the budget                                                                
despite all the federal funding coming in.                                                                                      
12:27:07 PM                                                                                                                   
CHAIR SPOHNHOLZ  shared her  belief that the  federal government                                                                
may temporarily bail Alaska out given the size of the ARP funds.                                                                
12:27:27 PM                                                                                                                   
REPRESENTATIVE JOSEPHSON speculated that if the legislature were                                                                
to pass an operating budget and adjourn on May 18, 2021, without                                                                
touching those funds, the money  could come [to the legislature]                                                                
through the Revised Program Legislative (RPL) process.  He asked                                                                
if that was correct.                                                                                                            
MR. PAINTER confirmed.                                                                                                          
12:28:08 PM                                                                                                                   
REPRESENTATIVE  JOSEPHSON considered  a  scenario  in which  the                                                                
legislature appropriated  the moneys on  May 17, 2021,  and half                                                                
was vetoed by the governor.   He questioned what would happen to                                                                
the vetoed dollars.                                                                                                             
MR. PAINTER explained  that many of the funds  have a multi-year                                                                
timeframe; therefore, "they  could just wait until  next year or                                                                
the governor could submit RPLs  unless there's some ... specific                                                                
prohibition on the governor from doing that."                                                                                   
12:28:56 PM                                                                                                                   
CHAIR  SPOHNHOLZ noted  that the  governor introduced  RPLs that                                                                
were  out of  order  because  they created  new  programs.   She                                                                
expounded that  the RPL process  was designed to  accept federal                                                                
funds  for  programs that  already  exist.    As a  result,  she                                                                
continued,  a lawsuit  was  filed, and  the  legislature had  to                                                                
reconvene to ratify the RPLs.   She emphasized the importance of                                                                
the legislature being part of the appropriation process.                                                                        
12:30:35 PM                                                                                                                   
MR. PAINTER addressed the fiscal summary  on slide 10, which was                                                                
adjusted for  COVID-19 funding.   He noted  that that  there was                                                                
little difference in the bottom line; however, the $88.1 million                                                                
decreased to $67 million in  terms of post-transfer surplus, and                                                                
the  reserve  balance  was  slightly  impacted  as  well.    The                                                                
significant point of slide 10 was to show that the $14.6 million                                                                
in COVID-19 funding had little impact on the UGF budget.                                                                        
CHAIR SPOHNHOLZ  opined that the scale  of CRRSAA and  APA funds                                                                
was missing from slide 10.   She pointed out that a large amount                                                                
of funding had not  been appropriated yet; therefore, it was not                                                                
reflected  in  the  fiscal  summary.   She  asked  if  that  was                                                                
MR. PAINTER answered yes.                                                                                                       
12:31:49 PM                                                                                                                   
MR. PAINTER  briefly summarized  the fiscal  model on  slide 11,                                                                
noting its  similarity to  [slide 7]  with  the addition  of the                                                                
$14.6 million.   He  speculated that  if this  slide were  to be                                                                
recreated at  the end of  session, it  would show a  much bigger                                                                
change than  $14.6 million.   He continued  to slide  12, titled                                                                
"Obligations and  Funding Needs of  the State of  Alaska," which                                                                
read as follows [original punctuation provided]:                                                                                
      This is not an exhaustive list. The total for these                                                                       
     items is about $13 billion                                                                                                 
       PERS/TRS Unfunded Liability: $6.2 billion                                                                              
            Payment plan: annual payments though FY39                                                                           
            FY22 payment is $336.2 million                                                                                      
       General Obligation Bonds and State Supported Debt:                                                                     
     $1.1 billion                                                                                                             
            Payment plan: annual payments through FY41                                                                          
            FY22 Governor's Budget includes $91.3 million                                                                       
       State Share of Municipal School Debt Service: $789.1                                                                   
            Payment plan: annual payments through FY39                                                                          
            Full funding in FY22 would be $84.0 million                                                                         
       Oil and Gas Tax Credits: $760.0 million                                                                                
            Payment plan: statutory deposits to Oil and Gas                                                                     
     Tax Credit Fund                                                                                                            
            FY22 Governor's Budget includes $60.0 million                                                                       
       Deferred Maintenance: $2.0 billion                                                                                     
            Payment plan: annual appropriations using                                                                           
     Alaska Capital Income Fund                                                                                                 
            FY22 Governor's Budget includes $51.6 million                                                                       
       State Share of School Major Maintenance and                                                                              
     Construction Lists: $349.6 million                                                                                       
            Payment plan: REAA fund can be used for some                                                                        
     projects; no plan for remaining projects                                                                                   
       Rural Alaska Sanitation Funding Need (per DEC FY21                                                                       
     list): $1.8 billion                                                                                                      
            Payment plan: Village Safe Water capital                                                                            
            FY22 Governor's Budget includes $18.1 million                                                                       
     of state funds, $70.8 million total funds                                                                                  
       Rural Power System Deferred Maintenance: $327                                                                          
            Payment plan: capital appropriations to Rural                                                                       
     Power Upgrades program                                                                                                     
            FY22 Governor's Budget includes $5 million of                                                                       
     state funds, $17.5 million of total funds                                                                                  
       Bulk Fuel Deferred Maintenance: $800 million                                                                           
            Payment plan: capital appropriations to Bulk                                                                        
     Fuel Upgrades program                                                                                                      
            FY22 Governor's Budget includes $5.5 million of                                                                     
     state funds, $13 million total                                                                                             
MR. PAINTER stated that the point of slide 12 was to show that                                                                  
the state has a lot of obligations, most of which have a payment                                                                
plan that exists somewhere in the budget.                                                                                       
12:34:54 PM                                                                                                                   
CHAIR SPOHNHOLZ asked whether  general obligation bonds could be                                                                
used to address deferred maintenance needs.                                                                                     
MR.  PAINTER said,  "that's a  legally debatable  question," and                                                                
deferred to Legislative  Legal Services.  He  explained that per                                                                
the  constitution, general  obligation bonds  could be  utilized                                                                
only for  capital improvements.   He acknowledged that  the line                                                                
between a deferred maintenance project and a capital improvement                                                                
could be "a little fuzzy."                                                                                                      
12:35:59 PM                                                                                                                   
MR. PAINTER advanced  to slide 13, titled  "Legislative Power of                                                                
Appropriation," which read [original punctuation provided]:                                                                     
        "No  money shall  be  withdrawn  from the  treasury                                                                     
     except in accordance with appropriations made by law."                                                                     
     (Article IX, sec. 13). The dedicated funds prohibition                                                                     
     (Article IX,  sec.  7) prevents  the  legislature from                                                                     
     dedicating the proceeds of any state tax or license to                                                                     
     any special purpose.                                                                                                       
        An  appropriation  is  required to  carry  out  any                                                                     
     statutory formula.                                                                                                         
       In  Wielechowski v. State, the  Alaska Supreme Court                                                                     
     held  that the  legislature's  use  of permanent  fund                                                                     
     income  is subject  to  the  normal appropriation  and                                                                     
     budgetary   veto  process.   Thus,   each  year,   the                                                                     
     legislature may appropriate from  the earnings reserve                                                                     
     account to the dividend fund any amount, regardless of                                                                     
     the language in statute.                                                                                                   
        Unless   an  exception   to  the   dedicated  funds                                                                     
     prohibition applies,  each  year, the  legislature may                                                                     
     appropriate money  from any available source,  for any                                                                     
     public  purpose, as  it  deems  appropriate. Statutory                                                                     
     formulas serve as guidelines or policy suggestions for                                                                     
     the legislature to follow.                                                                                                 
        In  general,  each  year, all  state  programs  are                                                                     
     subject to appropriation.                                                                                                  
MR.   PAINTER  emphasized   that   the   legislative  power   of                                                                
appropriation could trump statutory formulas.                                                                                   
CHAIR  SPOHNHOLZ, referencing  the first  bullet,  addressed the                                                                
sentiment that the legislature "should follow the law" in regard                                                                
to the  PFD by noting  that the operating  budget is also  a law                                                                
that  is passed  each year.   She  discussed consistency  in the                                                                
legislature and  explained that sometimes conflicting  laws were                                                                
passed.  She  said it's helpful to try  to reconcile those laws,                                                                
but often very difficult politically.                                                                                           
12:38:59 PM                                                                                                                   
MR. PAINTER  turned to slide  14, titled "Governor's  Budget and                                                                
Statutory Formulas," which read [original punctuation provided]:                                                                
       Governor funds School Debt Reimbursement at 50% of                                                                       
     statutory level                                                                                                            
          100% funding would add $41.8 million to the                                                                           
     FY22 budget                                                                                                                
       Governor funds Regional Educational Attendance Area                                                                      
     (REAA) Fund at 50% of statutory level                                                                                      
          100% funding would add $17.1 million to the                                                                           
     FY22 budget                                                                                                                
       Governor funds Community Assistance at $12.4                                                                             
     million, versus the $30.0 million statutory deposit                                                                        
          100% funding would add $17.6 million to the                                                                           
     FY22 budget                                                                                                                
         Governor does not fund municipal project debt                                                                          
        100% funding would add $2.4 million to the FY22                                                                         
MR. PAINTER  noted that the  statutory formulas were  subject to                                                                
appropriation.  He  elaborated that in some  cases, the governor                                                                
suggested that the legislature  should appropriate less than the                                                                
full formula.                                                                                                                   
12:41:12 PM                                                                                                                   
REPRESENTATIVE  JOSEPHSON  reflected on  the  recent  discussion                                                                
about  the legislature  failing  to meet  maintenance of  effort                                                                
requirements in bullet one and two.  He sought to verify whether                                                                
that was a federal requirement.                                                                                                 
MR. PAINTER asked whether Representative Josephson was referring                                                                
to the maintenance of effort requirement in both CRRSAA and ARP.                                                                
REPRESENTATIVE JOSEPHSON answered yes.                                                                                          
MR. PAINTER confirmed that  the federal government required that                                                                
the legislature maintain  K-12 and university  effort to receive                                                                
those funds.                                                                                                                    
12:41:57 PM                                                                                                                   
REPRESENTATIVE JOSEPHSON inquired  about the dispute  or concern                                                                
[surrounding the maintenance of effort provision].                                                                              
MR. PAINTER relayed that all  three federal relief bills - CARES                                                                
Act, CRRSAA,  and ARP  - had  a maintenance of  effort provision                                                                
tied  to the  K-12  aid.   He  reported that  Alaska passed  the                                                                
maintenance  of effort  provision required  for  the CARES  Act,                                                                
which   was  based   on  the   per-student  level   of  funding.                                                                
Alternatively, in both CRRSAA and ARP, the maintenance of effort                                                                
provision was  tied to both  the University of Alaska  and K-12,                                                                
indicating that  the K-12  funds could  not be  received without                                                                
passing  both.   He noted  that  recent guidance  indicated that                                                                
Alaska could receive  the first two-thirds of  school funds from                                                                
ARP,  then  certify to  qualify  for  the  last one-third.    He                                                                
summarized  that the  new  maintenance  of  effort provision  in                                                                
CRRSAA and ARP was based  on the percentage of state budget that                                                                
went  towards those  purposes; essentially, that  the  state was                                                                
spending the same percentage of the budget in FY 22 and FY 23 on                                                                
education and K-12 as before the pandemic (FY  17 to FY 19).  He                                                                
stated that K-12 might be at the  right level to pass due to the                                                                
statutory formula;  however, because of  the university compact,                                                                
the requirement would  not be met for  the University of Alaska,                                                                
as the state was  funding the university at a smaller percentage                                                                
of the  budget in FY  22 compared to  FY 17  through FY 19.   He                                                                
speculated  that the  state  could argue  that  the compact  was                                                                
instituted before COVID-19; therefore, it was  not a response to                                                                
the pandemic or  the federal aid.  He  conveyed that the federal                                                                
government was concerned that states would reduce these programs                                                                
and substitute them with federal money.  He noted that there was                                                                
a waiver process for states that experienced significant revenue                                                                
decline,  which Alaska  could qualify  for.   He  concluded that                                                                
there was substantial uncertainty about  whether the state would                                                                
meet the maintenance of effort provision.                                                                                       
12:45:25 PM                                                                                                                   
REPRESENTATIVE STORY remarked:                                                                                                  
     With the  funds for  K-12, we had  a $30  million veto                                                                     
     outside the formula, and we did  use CARES funds - the                                                                     
     governor did - to supplant that money. ... If you just                                                                     
     see  what was  awarded  it matches  exactly what  they                                                                     
     would have  gotten  if they  would have  kept  the $30                                                                     
     million in the formula.                                                                                                    
REPRESENTATIVE STORY sought to confirm that Mr. Painter had said                                                                
that does  not count,  as K-12  was meeting that  maintenance of                                                                
effort requirement.                                                                                                             
MR. PAINTER clarified that the maintenance of effort requirement                                                                
was satisfied for CARES Act funding.  He added that based on LFD                                                                
projections, it would depend  on the final budget for  FY 22 and                                                                
FY 23.   He said because the budgets  are generally smaller than                                                                
they were in FY 17 to FY 19, even without the additional funding                                                                
for  K-12, the  state  could  still meet  the  requirement.   He                                                                
reiterated that it would depend on where the budget ended up and                                                                
how  the formula  could  be  calculated, as  there  may be  some                                                                
flexibility  in  what  would   count,  such  as  TRS  [Teachers'                                                                
Retirement System]  payments, which had  substantially increased                                                                
over that time period.                                                                                                          
12:47:20 PM                                                                                                                   
REPRESENTATIVE WOOL concluded that the maintenance of effort for                                                                
K-12  and  the university  was  linked  and  therefore, must  be                                                                
maintained as a  group.  He  sought to confirm that  if K-12 was                                                                
maintained but the  university was not, the  federal funding for                                                                
both would not be released - at least not fully.                                                                                
MR. PAINTER answered yes, the state  would have to pass for both                                                                
K-12  and the  university  to certify  that  the maintenance  of                                                                
effort was met, which was required for the last third of the ARP                                                                
12:48:03 PM                                                                                                                   
REPRESENTATIVE WOOL reasoned  that because the  PFD was included                                                                
in the budget, the higher  the PFD, the higher the threshold for                                                                
the maintenance of effort.  He  asked, "where are we standing on                                                                
the PFD,  as far as  the budget goes.   Based on  the governor's                                                                
budget or what  we ultimately pass?"  He  assumed that a smaller                                                                
PFD would  make it easier  to satisfy the  maintenance of effort                                                                
MR. PAINTER said it is unclear whether the PFD could or would be                                                                
included.  He reported  that the executive branch discussed that                                                                
with the  U.S. Department  of Education and  did not  receive an                                                                
REPRESENTATIVE WOOL asked for confirmation that when Mr. Painter                                                                
said,  "we're  pretty close  on  K-12  but  pretty far  away  on                                                                
university," that statement  was independent of  whether the PFD                                                                
would be counted.                                                                                                               
MR. PAINTER  said the size of  the dividend and  whether the PFD                                                                
would be  counted could either help  or hurt the  effort to meet                                                                
the requirement.  He added that  it's difficult to say without a                                                                
definitive budget.                                                                                                              
12:50:01 PM                                                                                                                   
MR.  PAINTER reviewed  the  fiscal summary  on  slide 15,  which                                                                
showed the governor's budget  adjusted with the additional $78.9                                                                
million to fully fund the statutory formulas that were reflected                                                                
in statewide  items.  He indicated  that the FY  22 budget would                                                                
increase, and the post-transfer number  would go from surplus to                                                                
deficit.    He   continued  to  the  bar  chart   on  slide  16,                                                                
highlighting the deficit  in FY 22 and smaller  surpluses in the                                                                
outyears.   He  discussed  the different  dividend scenarios  on                                                                
slide 17.  The slide  showed a statutory PFD beginning in FY 22.                                                                
He noted that  statutory dividend would require additional funds                                                                
beyond the CBR resulting in  unplanned ERA draws moving forward,                                                                
which would eventually drain the ERA to zero.  He pointed to the                                                                
gap in FY 30, which signified the lack of available funds to pay                                                                
for the  budget.   He said  the significant implication  is that                                                                
paying a  statutory dividend would require  budget reductions or                                                                
new revenue to balance the budget.                                                                                              
CHAIR SPOHNHOLZ said that would  require a significant amount of                                                                
revenue.   She added that potentially,  enough revenue proposals                                                                
were on the  table to fill the  gap, but it would  be a "massive                                                                
lift" to accomplish  that.  She addressed the  bar chart [right]                                                                
showing budget reserves and observed  that the ERA balance would                                                                
be negligible  by FY 28, resulting  in no dividend  and a gutted                                                                
budget.  She asked if that description was accurate.                                                                            
12:53:02 PM                                                                                                                   
MR.  PAINTER said  yes,  continuing to  distribute the  dividend                                                                
without reducing the  budget or adding new  revenue would result                                                                
in a  sudden cliff in  FY 30 that  would require a lot  of quick                                                                
12:53:25 PM                                                                                                                   
REPRESENTATIVE WOOL asked whether the permanent fund plan [green                                                                
portion] reflected  the reduced  value  of the  Alaska Permanent                                                                
Fund after calculating the 5 percent POMV.                                                                                      
MR. PAINTER  answered yes.   He added  that it assumed  that the                                                                
6.75  percent returns  were met.   He  opined that  in the  real                                                                
world, if this  much extra were drawn  from the Alaska Permanent                                                                
Fund, APFC would  have to change its  asset allocation to create                                                                
more cash availability, which would result in lower returns.  He                                                                
concluded  that  in  some  ways,  this  fiscal  model  was  more                                                                
optimistic than  what an  overdraw scenario would  actually look                                                                
like because of the policy response APFC would have to take.                                                                    
12:54:32 PM                                                                                                                   
CHAIR SPOHNHOLZ said it was a  staggering slide.  She noted that                                                                
slide 19  would illustrate the volatility,  elaborating that the                                                                
returns realized from the permanent fund were more volatile than                                                                
a stable 6.75 percent.  She further noted that 25 percent of the                                                                
UGF revenue came from a  volatile source, the oil industry.  She                                                                
concluded  that  slide 18  was  not  reflective of  a  real-life                                                                
12:55:19 PM                                                                                                                   
REPRESENTATIVE SCHRAGE characterized the bar chart as "Doomsday-                                                                
ish."   Nonetheless, he said it  was the chart  that matched the                                                                
governor's budget  proposal most closely  with the  inclusion of                                                                
statutory dividends,  no new  revenue, and no  substantial cuts.                                                                
He asked if that was correct.                                                                                                   
MR. PAINTER clarified that the governor proposed a change in the                                                                
dividend formula to 50  percent of the POMV draw, as  shown in a                                                                
subsequent  slide.   Further,  he maintained  that the  governor                                                                
would also  be proposing  some unspecified cuts  and unspecified                                                                
revenue.  He  said the dividend change would  make a significant                                                                
12:56:23 PM                                                                                                                   
MR. PAINTER continued to slide  18, which showed the same fiscal                                                                
model; however, instead  of the static 6.75  percent return, the                                                                
model  assumed   the  actual   return  to  the   permanent  fund                                                                
experienced from FY 2000 to FY  2008.  He noted that during that                                                                
period, the average  return was just short of  6.75 percent, but                                                                
quite volatile.   That timeframe incorporated  the "dotcom bust"                                                                
in the early 2000s and the  beginning of the 2008 recession.  He                                                                
highlighted the  bumpiness of  the budget line,  explaining that                                                                
the current  statutory dividend  formula was based  on earnings;                                                                
therefore,  as the  earnings  were more  volatile, the  dividend                                                                
amount was more volatile.   Consequently, models that use actual                                                                
returns show a much more volatile statutory dividend compared to                                                                
static  versions.    He  added  that the  effect  of  the  early                                                                
recession was  that the  state  would run  out of  money quickly                                                                
without the  ability to  recover because the  base to  draw upon                                                                
would be lower.                                                                                                                 
12:57:44 PM                                                                                                                   
MR.  PAINTER turned  to  the  fiscal model  on  slide 19,  which                                                                
assumed real  returns from the  period of  FY 09 to  FY 17.   He                                                                
noted that  FY 09  was the worst  year for the  Alaska Permanent                                                                
Fund, while  FY 10 to  FY 17 was  an extended bull market.   The                                                                
effect,  as shown  on  slide 19,  was  that the  ERA would  drop                                                                
substantially in the  first year and deplete to  zero because of                                                                
overdraws.  He highlighted the small size of the dividend, which                                                                
the model  forecasted would occur with the  statutory formula in                                                                
addition to a recession.                                                                                                        
12:58:58 PM                                                                                                                   
CHAIR SPOHNHOLZ thanked Mr. Painter  and announced that he would                                                                
return to finish the presentation on a later date [4/8/21].                                                                     
12:59:46 PM                                                                                                                   
There being no further  business before the committee, the House                                                                
Special Committee  on Ways  and Means  meeting was  adjourned at                                                                
12:59 p.m.                                                                                                                      

Document Name Date/Time Subjects
LFD Fiscal Position and Projections 4.6.21.pdf HW&M 4/6/2021 11:30:00 AM
HW&M 4/8/2021 11:30:00 AM