Legislature(1997 - 1998)
01/17/1997 09:05 AM Senate FIN
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MINUTES
SENATE FINANCE COMMITTEE
January 17, 1997
9:05 A.M.
TAPES
SFC-97, # 2, Sides 1 & 2
SFC-97, # 3, Side 1 (065)
CALL TO ORDER
Senator Drue Pearce, Co-chair, convened the meeting at
approximately 9:05 A.M.
PRESENT
In addition to Co-chair Pearce, Senators Torgerson,
Phillips, Parnell and Adams were present when the meeting
was convened. Co-chair Sharp was excused until plane time
and arrived as the meeting was in progress. Senator Donley
was excused.
Also Attending:
Senator Wilken; Senator Ward; Annalee McConnell, Director,
Office of Management and Budget; Mike Greany, Director,
Legislative Finance Division; fiscal analysts and aides to
committee members.
SUMMARY INFORMATION
FY 98 Statewide Operating Budget Overviews
were presented by
Annalee McConnell, Director
Office of Management and Budget
and
Mike Greany, Director
Legislative Finance Division
Upon convening the meeting, Co-chair Pearce invited ANNALEE
MCCONNELL, Director, Office of Management and Budget to the
table to begin her presentation. Ms. McConnell introduced
new staff members at OMB. She referred to issues for this
year such as the deferred maintenance elements to the long-
range plan and the education endowment concept raised in the
governor's state of the budget speech. Two specific items
she addressed were the $12 million incentive to provide
quality education, part of the state Board of Education's
proposal to rewrite the foundation formula, which is not in
the budget. The administration is committed to reduce
overall spending by $100 million over the next three years,
even with the decision to invest additional money in
education.
Ms. McConnell spoke of the context for the FY98 budget.
Each of the last two years' budgets have been smaller than
the previous year. Significant progress was made on
absorbing inflation by the legislature putting brakes on
state spending. Per capita funding of general fund dollars
is $340 less than 1979. The FY98 budget is a continuation
of the plan to close the fiscal gap. The two major tools
are continuing to cut the budget and the tobacco tax. It is
the only tax proposed for the fiscal year.
She believed the governor's long range financial plan
released last March which proposed a $100 million reduction
was an appropriate number. It was arrived at after
considerable deliberation by the Long Range Financial
Planning Commission. The state is now in a better financial
position than expected because of the price of oil and
recent announcements by Arco and BP regarding production.
The proposed budget absorbs more than $40 million of
increases, including $12.4 million in school enrollment,
fully funding pupil transportation and single site schools
at $2.6 million. Most formula programs besides education
are in the Department of Health and Social Services and
there was a net of $15.3 million to deal with. Health
insurance premiums for state government have gone up $2.3
million. University of Alaska overall personnel increases
are $2.8 million and general government are $6.4 million,
including contracts negotiated last year and equivalent
increases for employees not represented. In addition to
general increases in costs of supplies absorbed by the
departments, it brought the figure well over $40 million.
There was a need to reprioritize in areas of interest to the
legislature, those being education and crime prevention and
intervention. Money was added for domestic violence,
including a half-million dollars of new federal funds,
implementation of recommendations of the Youth and Justice
Task Force, addition of VPSO's in ten villages and a capital
item for the Johnson Youth Center. The repriorties add up
to about $7 million in the budget to get additional services
to deal with crime.
Additional investments were made in the economic
development, job creation area to help keep job replacement
and development to ensure the economy stays strong with both
large and small business development.
In response to a written request by Co-chair Pearce, Ms.
McConnell addressed what is affecting the fiscal gap. The
level of the budget itself makes a big difference, but the
biggest variable is on the revenue side because of oil price
volatility. Positive changes in oil production include
increased technology, expansion of fields and discovery of
new fields.
Ms. McConnell handed out Attachment #1 (Revenue Update) and
explained that last June, when the budget passed it was
expected that the budget gap would be about $411 million
based on the April forecast. The document shows the
difference between then and where it is believed to be at
this point. A $100 million surplus is expected based on
higher oil prices over a longer time period. The budget is
based on the fall forecast, released November 1. It was
expected the 1998 oil price average would be $17.71 per
barrel, resulting in a budget gap of $377 million. It is
now believed that the 1997 surplus of $100 will reduce the
fiscal gap to approximately $270 million. Ms. McConnell
referred to an improvement that was made based on
conversations with Mike Greany by issuing budget plans based
on official fall and spring forecasts. The other revenue
item affecting the fiscal gap is the tobacco tax. It is
shown just under $40 million for FY98 if the tax goes
through.
The other area that has affected the revenue gap is dramatic
change in formula programs. A major budget discipline
target this year has been to bring control to formula
spending that has affected the budget, such as Medicaid and
welfare reform. The target was to bring the rate of
increase down in formula programs.
The budget plan requires that $81 million from the general
fund be used for debt service. They expect a balance in
various debt service funds of $5.9 million to be applied
toward next year's need. Ms. McConnell referred to the
Department of Revenue's upcoming report on public debt
update, which will detail each category.
Next, Ms. McConnell walked the committee through items on
side 2 of Attachment #1. The categories included restricted
revenues, constitutional budget reserve, formula programs,
agency operations, supplemental estimates, debt service,
clean water fund, capital appropriations, permanent fund and
removal of duplicated expenditures. She summarized that an
increase in total funds was in part due to an increase in
federal funds, and the overall plan, while modest, was well
within reach of the $100 million pledge for three-year
budget cuts.
In response to a written request from Co-chair Pearce, Ms.
McConnell addressed several issues, the first being that of
supplemental funding requests. There has been considerable
reform in the last couple years and the departments are
living within their budgets. Specific legislative intent
for supplemental funding came to about $17 million for FY97
and estimates are being gathered for this year for areas
such as fires, leases, OPA and Public Defender.
Ms. McConnell next discussed OMB's process for reviewing
department adjustments throughout the year, called Revised
Programs. It allows departments to make adjustments within
appropriations. A summer analysis showed that all 2,000 met
legal criteria and appropriateness, resulting in a decision
to limit the paperwork process to the more significant
dollar items and key areas such as grants. OMB can always
track where departments are making adjustments.
The third issue was changes between the capital and
operating budgets. There were about ten items that were
proposed last year that the legislature addressed and no
additional items were being
proposed this year.
Ms. McConnell stated the major goal of budget presentations
is set forth what they intend to achieve with appropriated
dollars. She referred to the "Executive Budget Summary,
FY98" book which updates performance measures of the
departments in the back of the book. Performance measures
will be a major part of the automated budget system being
developed. She expressed appreciation to the Legislative
Finance Division for loaning their system during the interim
while developing the more complete system for roll-up of the
budgets.
Another issue in the aforementioned letter related to
current and projected reorganizations. She brought up two
executive orders introduced by the Governor. One moves the
Division of Motor Vehicles from the Department of Public
Safety to the Department of Administration, a more
appropriate department for dealing with information
technology and paperwork. The other consolidates
responsibilities relating to commercial vehicle weights,
size and safety in the Department of Transportation and
Public Facilities. It will improve coordination and insure
federal requirements are met. Internal reorganizations in
OMB have been made to produce cost savings and invest in
development of the computer budget system. Department of
Administration consolidated services relating to seniors.
With regard to new legislation, Ms. McConnell noted the
governor's proposal for quality education. There is a need
to look both at the mechanism the Board of Education is
proposing to use to distribute money to encourage quality
education and also revenue sources and possibilities.
In response to a question from Senator Adams, Ms. McConnell
stated that two pieces of legislation were built into the
budget plan. One was the Longevity Bonus proposal to cap
eligibility at $60,000 for individuals and $80,000 for
married couples. The other was an adjustment in the
geographic pay differential for non-represented employees.
The first splits $8 million between the Departments of
Administration ($6 million) and Health and Social Services
($2 million) because of the hold harmless provision. The
geographical differential anticipates a first-year savings
of about $100,000 and more after that.
Senator Adams asked about facility maintenance in the new
capital budget. Ms. McConnell replied that a final listing
for the capital budget will be released the beginning of
February. She acknowledged that the list of schools needing
attention was greater than what could be funded in one year.
That was why the governor suggested the discussion about
deferred maintenance be expanded to include some new
facilities such as schools. The current level of $7 million
per year will only make a small dent in what needs to be
done.
Co-chair Pearce referenced the governor's plan of cutting
the budget by $100 million over three years and his claim
that $88 million has already been accomplished, including
the Miller's Reach fire and the $70 million cut by the
legislature last year. His current budget proposal is
approximately $2 million, excluding $12 million in education
incentives, which leaves about $10 million. She inquired if
the legislature could expect the FY99 budget to have a $10
million cut, since there was only $2.5 million this year.
Ms. McConnell stated the governor has made it clear that
there will be a $100 million reduction over three years and
could not say what the budget would be for next year. With
regard to the fire, she explained that each year there is
usually a significant one-time item. Co-chair Pearce
commented on using the Constitutional Budget Reserve Fund
for catastrophic events.
Senator Parnell asked if the FY98 budget eliminated any
programs. Ms. McConnell responded that there were some
recommendations for changes in how programs are delivered,
such as the Department of Environmental Conservation's work
relating to impaired water bodies. If the state
relinquishes that activity, the EPA will provide the
service, so the service will remain, but state dollars won't
be used in the future.
Begin SFC-97 #2, Side 2
Ms. McConnell summarized that there was no wholesale program
elimination, but they are looking at dropping some small
functions that wouldn't show up at an appropriation level,
such as routine reporting that doesn't seem to do anything.
Senator Parnell asked how many state employees have been
terminated during FY97 because of budget cuts and how many
new positions were added in the FY98 budget. Ms. McConnell
didn't have a tally, but would be addressing the Retirement
Incentive Program at her next presentation on January 20 and
would also explain positions added and their funding source.
Senator Parnell asked if the administration supported the
minority's education endowment plan proposed last year. Ms.
McConnell said he did not, but rather is suggesting this
year a concept for a secure source of funding for education
while acknowledging that it will have to grow and must be
tied to a higher quality of education. The administration
doesn't want to see more money going into education unless
it can produce better results. There have been a half dozen
proposals for how it could be done with different
mechanisms. What seems most appropriate is to agree that
the way in which education should be funded should be based
on quality schools. She noted that education is a huge
portion of the budget, over $700 million in the operating
budget. In response to another question by Senator Parnell,
Ms. McConnell recalled the governor's proposal last year of
basing an endowment on the earnings of the permanent fund.
She stated other ideas have been suggested, such as using
the constitutional budget reserve or excess earnings of the
permanent fund. The governor's proposal provided full
inflation proofing and there would have been no effect on
the dividends. In response to a query by Co-chair Pearce,
Ms. McConnell stated she did not know if the governor would
introduce a bill relating to education endowment. There was
additional discussion to clarify the governor's position
regarding permanent fund earnings to fund education. Ms.
McConnell explained that the governor was seeking discussion
and recommendations with the idea of having a public vote on
the funding mechanism. She noted again that other sources
besides the permanent fund could be considered.
Co-chair Pearce asked if it was the governor's opinion that
the legislature shirked it's duty to education and students.
Ms. McConnell replied that it was not, but pointed out that
there had not been a change for the last several years and
that cannot continue into the future. There is a need to
provide additional money to schools while being sure that it
is tied to some requirement for quality education.
Responding to a question by Senator Parnell, Ms. McConnell
informed the committee the capital budget would be submitted
in early February. Senator Parnell next asked about the
plans for the Office of Public Advocacy, since it was short-
funded. Ms. McConnell explained that both OPA and the
Public Defender Office needed supplementals regularly in
past years because they were caseload driven agencies and
funds had fallen short. Last year they proposed getting out
of the supplemental situation feeling it would be better to
acknowledge up front that costs were going to be higher but
the legislature preferred supplemental funding. Based on
that preference, there will be a need for a FY 98
supplemental. She noted efforts were underway for a better
system to determine eligibility for Public Defender
services.
There were no further questions from the committee on Ms.
McConnell's FY98 budget presentation.
Co-chair Pearce noted the presence of Co-chair Sharp. She
invited Mr. Greany to the table for his presentation.
MIKE GREANY, Director, Legislative Finance Division, greeted
the committee. He noted he would be working from the
division's "FY98 Budget: Legislative Fiscal Analyst Overview
of the Governor's Request" that was before the committee
(Attachment #2). He explained the history of why it was
possible to have the document available so soon after the
governor's budget speech. He referred to an amendment of
Title 37 which required the submission of the budget by
December 15. There were only minor changes to the budget
bill introduced by the governor.
Referring to page 1, Mr. Greany noted the comparison between
the FY97 authorized budget and the FY98 proposal. The budget
is spent in several areas: the operating, capital, debt
service and other pieces. The operating budget breaks out
between agency operations and formula programs and the
governor's proposal would be an overall increase of $9.9
million. He noted a key element to the budget plan was a
statutory change to the Longevity Bonus program resulting in
an $8 million reduction to achieve an overall $2.6 million
reduction from the current authorized budget. The debt
service reduction is a function of 1) continuing decline in
the need to appropriate general obligation debt following
the Prudhoe curve in structuring debt to tail off to zero by
the turn of the century, and 2) projected carry-forward
amounts in the debt retirement fund which is used to make
the debt service payments for the general obligation debt
and the school debt.
Mr. Greany noted there are differences in perspective
relating to the budget. For example, the funding of a
fiscal note that accompanied a bill vetoed by the governor
and then overridden by the legislature would be included
from his perspective, but is not included in the governor's
FY97 authorized budget. It is the subject of a current
court case. Mr. Greany's division looks at "authorized" as
being what was enacted by appropriation law, specific fund
sources. The governor has a different view of FY97
authorized in that he increased the amounts for designated
program receipts. Mr. Greany said he would be bringing
before the committee a constitutional perspective of how
funds should be treated in the budget, relative to what is
and is not a general fund item, and how they should be
treated for budgetary purposes.
Other issues concern underfunding of agencies such as OPA,
the Public Defender, Leasing and supplementals. He
emphasized that supplementals are only estimates when
comparing budgets from one year to the next. Some
expenditures are predictable and can be dealt with earlier,
but others such as disaster relief and fire suppression are
unknown.
Mr. Greany noted differences between the actual
appropriation bill request and the spending plan. For
example, the governor includes the Court System in the
budget for information purposes, but treats it differently
in that the spending plan does not reflect the increments
the Court System is requesting of over $3 million, however
it does appear in the appropriation bill. The budget builds
in salary increases for the second year of contracts,
estimated at $19 million ($11 million GF) for just the
executive branch. It doesn't include the Court System or
Legislative Branch, which would require an additional $1
million. Mr. Greany concluded his presentation and asked
for questions from the committee.
Senator Adams asked what the majority's plan of cutting $60
million would do to public services. Mr. Greany replied
that from his perspective it would be painful. Because
there are only a handful of formula programs that could be
cut, it inevitably brings the cuts back to the agency
operations and would require substantial reductions. He
pointed out that the five largest departments account for
two-thirds of the budget: Health and Social Services, the
University, Corrections, Transportation and Public
Facilities and Public Safety. He felt there was a need for
a more surgical approach to the budget and prioritizing, but
there was no easy way to do it.
Senator Adams asked if Mr. Greany's agency had ever
prioritized what needed to be funded from the operating
budget according to what the Constitution says the state
should be doing. He mentioned the Alaska Railroad as an
example of privatizing state agencies. Mr. Greany responded
that attempts have been made in the past, and many of the
recommendations have been addressed. He commended the
legislature in holding down expenditures and cutting the
budget, noting that Alaska is the only state that has
actually reduced its budget. He felt that $60 million was
an ambitious target and it would be more difficult than the
$70 million cut last year.
End SFC-97 # 2, Side 2
Begin SFC-97 # 3, Side 1
Co-chair Pearce thanked Mr. Greany for his comments. She
then described for the committee next week's scheduled
overviews and previews.
ADJOURNMENT
The meeting was adjourned at approximately 10:45 A.M.
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