Legislature(2021 - 2022)DAVIS 106
04/06/2021 11:30 AM House WAYS & MEANS
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| Presentation: Alaska's Fiscal Position and Projections | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
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
credits.
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
occurred.
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
speak."
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
up.
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
effort.
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
variable.
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
appropriations
$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
million
$10.5 million of PCE funds for AEA capital
projects
$4.0 million of Higher Education funds for
prosecutor recruitment and
housing
$0.8 million of PCE funds for AEA operating
budget
$0.4 million of Higher Education funds for ACPE
operations
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
funds
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
funds
CARES funds have mostly been expended, but CRRSA and
ARP have mostly not yet been incorporated into the
budget
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
right].
MR. PAINTER said the reserve balance of $850 million reflected
the remaining balance after the $588.1 million draw from the
CBR.
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
future.
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
governments
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
accurate.
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
million
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
program
FY22 Governor's Budget includes $18.1 million
of state funds, $70.8 million total funds
Rural Power System Deferred Maintenance: $327
million
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
service
100% funding would add $2.4 million to the FY22
budget
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
funding.
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
requirement.
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
answer.
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
reductions.
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
scenario.
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
difference.
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
ADJOURNMENT
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 |