Legislature(1997 - 1998)
01/27/1998 08:05 AM Senate FIN
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* first hearing in first committee of referral
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MINUTES SENATE FINANCE COMMITTEE 27 January, 1998 8:05 am TAPES SFC 98 # 8, Side A (000-589) Side B (589-000) CALL TO ORDER Senator Drue Pearce, Co-Chair, convened the meeting at approximately 8:05 am. PRESENT In addition to Co-chairman Pearce, Senators Sharp, Donley, Adams and Phillips were present when the meeting was convened. Senator Torgerson arrived shortly thereafter. Also Attending: Representative GARY DAVIES; ANNALEE MCCONNELL, Director, Office of Management of Budget, Office of the Governor; LAURA BAKER and DAN SPENCER, Budget Analysts, Office of Management of Budget, Office of the Governor; MIKE GREANY, Director, Division of Legislative Finance; DAVE TONKOVICH, FRED FISHER, SUSAN TAYLOR, GRETCHEN MANNIX and GINGER PATTON, Fiscal Analysts, Division of Legislative Finance; and aides to committee members and other members of the Legislature. SUMMARY INFORMATION SENATE BILL NO. 229 "An Act making appropriations for the operating and loan program expenses of state government, for certain programs, and to capitalize funds; making appropriations under art. IX, sec. 17(c), Constitution of the State of Alaska, from the constitutional budget reserve fund; and providing for an effective date." SENATE BILL NO. 230 "An Act making appropriations for the operating and capital expenses of the state's integrated comprehensive mental health program; and providing for an effective date." OVERVIEW - FY99 OPERATING BUDGET PRESENTED BY OFFICE OF MANAGEMENT AND BUDGET After calling the meeting to order, Co-Chair Pearce informed the members of two appropriation bills, SB229 and SB230, before them, which they could refer to during the upcoming overview. She then introduced ANNALEE MCCONNELL, Director of the Office of Management and Budget and invited her to the table to give a presentation on the governor's proposed FY99 operating budget. Ms. McConnell started out by saying she planned to focus today on the operating budget, saving the capital budget overview for tomorrow. She did want to point out however, the governor's overall budget projection and how it fits into a five year plan. Early in this administration, the governor announced his intentions for spending to "hold the line" and the FY99 budget proposal reflects this. There is one exception: funding for education. She explained that enrollment increases in grades K-12 had been absorbed in the first two budgets proposed by Governor Knowles. However for this upcoming budget year, funding will be necessary to accommodate these increases. At this point, Senator Donley interjected with his observation that the last two budgets did not hold the line with the Legislature's plan of a $70 million reduction, and in fact proposed increasing spending by $30 million. This forced the Legislature to address cutting $100 million from the governor's budget. Ms. McConnell explained that spending plans drafted for the court system and the Legislature were beyond the control of the executive branch. Increases proposed for the court system budget therefore accounted for the higher bottom line in the overall budget request. At the same time, the governor's office hasn't used, as a credit, reductions made by the legislature in recent years. There were also some proposals introduced by the Governor were not taken into account by the Legislature, which would have resulted in further reductions. Ms. McConnell attested to the tremendous effort made in the last ten years to absorb costs associated with the rise in Alaska's population and inflation. Other states have considered their budgets as holding the line if they increase in proportion to population rises. This state has taken a tougher stance on that. She reported that the per person dollar amount spend by the State of Alaska in this proposed budget is $1470 less than what was spend in 1979. At the same time, additional services are being provided and agencies are being run more efficiently. One example of this is the Longevity Program. She said she gives a great deal of credit to both the Governor's Office and the Legislature for these accomplishments. Population increases are an important factor in Alaska. Children and senior citizens account for the largest areas of growth. These groups are also the most expensive to serve. For children, there is the cost of education. Alaska spends more per child for education than any other state. Senior citizens incur more Medicare costs. Other programs provided to seniors include the Longevity Bonus Program and the Pioneers Homes. One of the positives in absorbing population growth costs has been better efficiency. By focusing on results, state agencies are working towards this goal. Ms. McConnell cited improvements to the Division of Motor Vehicles where Services are being provided to the public electronically. Drivers are now able to renew licenses via the Internet and US mail, saving time and resources for both citizens and the state. An area the administration took on as a challenge when they came into office was to control costs in two of the fastest growing areas of the budget, WELFARE and MEDICAID. Ms. McConnell attested that through their efforts and those of the Legislature, we are starting to see some reduction in the growth rate in the total number of cases. In doing this, the two government branches need to look at the investments they need to make, some of which are financial and some being time and energy (i.e. legislation and management changes.) Ms. McConnell stated that two of her prime budget targets are funding for the Department of Corrections and youth detention and treatment facilities. She shared a comment the Governor is fond of saying: "He would like to cut the Dept. of Corrections budget - but cut it because we have fewer prisoners." The only way to get control of this part of the budget is to start way back and think about ways to change prisoner's lives so they don't return to prison years later. She quoted studies that found the average education of inmates is no further than the seventh grade. She argued that because of this lack of schooling, these people are unable to hold a job and have poor life skills. She referred to efforts made in other states to combat this, which have paid off. These have been improvements to the quality of education early on, improved job training and better family environments. She pointed out statistics that show people who have been abused as children have a high propensity to become abusers themselves. An alarming number of detained youths and adults had been abused. Therefore focusing in and making investments in areas like child abuse prevention and education can really pay off. However, we won't see these results in the FY99 budget. According to Ms. McConnell, it's going to take a number of years. These are reasons why the Knowles Administration has focused so much attention on the Smart Start Initiative. Clear goals have been set and results are being analyzed. For example, a zero tolerance level has been set for child abuse. No reports of harm are allowed to go uninvestigated. This is an interdepartmental effort and also involves local communities, non-profit groups, parents, schools, etc. Ms. McConnell theorized that if we had made these kinds of investments ten years ago, we would be looking at a very different prison and youth detention budget now. She urged, however that the focus be not on the past, but in the future. We should be looking at what we can expect ten years from now if we chose to make these kinds of changes today. They won't give us immediate satisfaction with the budget or constituents, but we will know that we're on the right track to making those changes down the road. The public would appreciate it if a plan were laid out. Even if we don't get there in one fiscal year, it would be beneficial if we could lie out a target for the next three to five years. She suggested looking beyond one budget year and referred to House Speaker Phillips' bill to move into a two-year budget cycle. Ms. McConnell talked about other investments proposed in this budget, both the operating and capital side, to help keep our ECONOMY healthy and maintain job stimulation. She gave examples of WELFARE REFORM and "ALASKANIZING" THE WORKFORCE. They don't all require new money, the Alaska seafood industry being one area. Department commissioners are being directed to find new ways to employ Alaskans without requiring more funds. Some of the investments the Administration has made are not increases. For instance, this budget proposes holding the line on MUNICIPAL ASSISTANCE and REVENUE SHARING. While it doesn't propose a decrease in funding, many communities feel resentful at having the burdens shifted to them and by not taking away any more funding, this prevents more criticism. Ms. McConnell shared that a number of circumstances have changed in the last several years since the Long-Range Financial Planning Commission did its projections. This commission was a bi-partisan task force set up by the Senate, House of Representatives and Governor's Office to look at the status of Alaska's financial affairs. In 1995 they projected that the Capital Budget Reserve would be depleted by early FY99 or FY00. At that time it looked like there would be significant withdrawals every year, ranging from $600 - $900 million each year. In fact we now have a balance of $3.3 billion. This is the result of three factors: one is unanticipated large court settlements, second is the strong stock market resulting in higher investment earnings and third we haven't drawn as much from the fund as originally projected. In 1995 we thought it would be necessary to draw $513 million from the CBR but because our financial situation was better than anticipated due to high revenues, we only needed to draw $22 million. In 1996 we thought we would need $379 million and we actually only needed $285 million. The most dramatic year was the last fiscal year, FY97. The Legislature and Administration agreed the expected amount needed would be just over $400 million. However, at the end of FY97 we had a $70 million surplus. Oil revenues were much higher than anticipated and as a result we ended up $480 million better than expected. Ms. McConnell gave credit to the Administration and the Legislature that neither proposed to spend that money. It was recognized that although 1997 was a good year, there certainly would be times when we wouldn't have such a good year. Now that extra money is earning interest. Over the past four years a total of $1.6 billion had been anticipated as needing to be drawn from the CBR to balance the budget. In reality, we needed less than $450 million. According to Ms. McConnell, oil production forecasts are looking better. We are not seeing the decline for 1999-2001 that had previously been projected. State Of Alaska revenues are more diversified. In the past, oil made up over 80 percent of the budget. The permanent fund is bigger than anticipated and we have had significant deposits from the earnings reserve account. In her opinion, the Constitutional Budget Reserve is working exactly as intended by the Legislature when it was created and proposed to the voters. It has worked well to prevent annual spending of any balloon earnings and at the same time, allow a cushion for years where earnings are not as good as expected. Co-Chair Pearce inquired as to the exact percentages of oil related revenue in our budget. She was informed that 78% of general funds and 32% of all funds totaled are from oil related sources. Senator Torgerson wanted to know if, with regard to the oil tax dispute monies, we are on target for $270 million deposits into the CBR. Ms. McConnell answered that she thought so but added the caveat that we never know the timing of receipt of the funds. Adjustments will need to be made throughout the year to account for various disputes as they work their way through the court system. This budget packet only shows $10.4 million because this is what was actually received to date. She didn't want to create the expectation that we would actually get all the funds by June 30. She stressed the timing issues for these settlements are the toughest to predict. Her solution is to spread the amounts out over several years and recognize that over a five-year period you would see the same total. Senator Donley spoke of efforts for improvement of Alaska hire in the seafood industry. He referred to a budget and audit report the committee received indicating the Administration hasn't invoked the same Alaskan hire requirements in the oil industry resulting decrease in Alaskans hired to work in the oil fields. His question was if the increases in the seafood industry would offset the loss of jobs in the oil industry. Ms. McConnell said she would get an answer back to him. Senator Sharp visited the issue of holding the line on capital matching grants and not shifting the burden for municipalities. He advised that the legislature last year approved $20 million, and this year's governor's proposal is only $15 million. He actually sees a 25% reduction from last year. Ms. McConnell agreed that the capital budget maintains the same level of general funds as requested last year and that the Legislature granted the $15 million plus added another $5 million of AHFC funds. Communities will receive $20 million more for school districts for quality education. This is in addition to funding for enrollment increases. Co-Chair Pearce asked if there is going to be another PERS dividend that will also benefit communities? Ms. McConnell advised that there is a PERS reduction that varies by communities. Some will see an increase and some will have a decrease. Most of the school districts will go back to what they were a year ago. They saw a dip last year, but it should go back up. Ms. McConnell directed the committees' attention to the portion of the handout that shows the COLA and PERS rate adjustments. Reductions are to be made to police and executive branch employees. The University will have an increase. Senator Adams followed up with an inquiry of the effect of reductions to municipalities and school districts on revenues to the State. It results in a net reduction of the total, answered Ms. McConnell. She referred again to the handouts, showing the different areas with different reductions. At this point, Ms. McConnell moved onto the next portion of her presentation: PROJECTION WITH GOVERNOR KNOWLES FY00 INITIATIVES AND JANUARY OIL PRICE FORECAST FOR FY99. She turned to a spreadsheet showing forecasts if the Governor's proposed investments were approved by the Legislature. She said the spreadsheet was created because she wanted to know, and be able to show the Legislature and the public, if these investments are responsible by the year 2002. In explaining this spreadsheet and what its results show, Ms. McConnell gave the following details. By taking the fall forecast (what the budget development process is based on for the out years, 2000-2002) and integrating the possibility of oil prices remaining stagnant at around $15/barrel, her office came up with a blended annual average of $16.48/barrel. The CBR earnings figure has been updated from $269 million and is now up to $285 million because the market was better than what was used for earlier projections. This year's budget has $70 million carried from the surplus from last year, which was unexpected. There was also $5 million from the Investment Loss Trust Fund that was used to partially fund COLA increases last year. Also there are the FY98 and FY99 budgets as proposed by the Governor with supplementals included. If the preceding information is gathered and we held those budgets and didn't provide for increases or decreases for agency operations, the spreadsheet shows us the following: For education, Ms. McConnell incorporated all of the effects of the Governor's proposed quality education legislation in addition to the enrollment increase, an estimated 1.5-%. The proposed budget plan, therefore shows a one percent increase every year which is to help maintain some ability for school districts to keep pace with inflation. This also includes the $20 million and $4 million in adjustments to the foundation formula as proposed by the Governor. Other formula programs show a one-half percent growth in total, but some of our programs are actually going down. The Longevity Bonus program with its phase-out program, and a reduction in the caseload for temporary assistance for needy families are some examples. While there will still be need for growth in some areas, like Medicaid, she projected an overall growth at one-half percent. Ms. McConnell noted that the POWER COST EQUALIZATION number shown on the spreadsheet is simply the general fund number. There is a Governor's task force underway to make some recommendations about the future of PCE because we will not have enough in the fund a year from now to make payments to help equalize power rates across the State. The GENERAL OBLIGATION DEBT will be totally paid off by the year 2000. Only $3 million is required to make this year's payment. She pointed out the LEASE FINANCING program that has allowed for things like the Palmer Fire Facility and the Anchorage Health Lab. This is still at a very modest $16 million debt service level for existing lease/purchase facilities. There are more proposals on the table that are not included here. Senator Adams asked if the Bank of America building lease/purchase is included in these figures. Ms. McConnell answered yes; that everything approved by the Legislature to date is included. The SCHOOL DEBT REIMBURSEMENT program will have a declining obligation for schools already qualified. We will see some increase in the year 2000 and then back down in 2001 and 2002. She cautioned that these numbers do change as information is received from the schools. The timing on bond sales is under local control rather than state control. In the spring, when the Legislature is getting ready to pass the budget, you will be provided with the most recent updates received from the school districts. The currently projection is $44.8 million. This also takes into account revenues the Legislature deposited from ILTS into the debt fund and tobacco taxes collected in FY98 that will be going towards new school construction. This will reduce the amount needed from the general fund to fully meet obligations. For the capital budget, OMB has proposed $92.3 million in general fund. Ms McConnell acknowledged that there are concerns about continuing to fund at that level and that it has been difficult to meet needs statewide. The loans budget will be at about $17 million. She told the committee that she would address these issues in more detail during tomorrow's meeting. According to her figures, the CBR will still be right around $3 billion in the year 2002. None of these projections will affect the Permanent Fund. She anticipates having over $29 billion in the fund by the year 2002. The Governor opposes any changes to the Permanent Fund without a vote of the people and these proposals reflect that. TAPE 8 Side B Ms. McConnell said that by looking at all the factors, the Knowles Administration feels this budget packet is very responsible and in fact less expensive if we make these investments now. This is not just financially, with cost decreases for Department of Corrections and programs for troubled kids, but also because it is the right thing to do. She counseled the committee to work out a system of using the November forecasts for the development and early discussions of the budget and the spring forecast for the final action. Ms. McConnell said there are still many options for the future. Absorbing inflation can no longer be handled at the current rate. She spoke of deferred maintenance needs which simply builds up. Several things the Administration and the Legislature can agree on include showing the budget plans in a similar layout. This has helped the public to compare the two. We can work to agree on a way to handle the oil-forecasting period, how to show the CBR interest earnings, and listing the amounts of cuts taken. Another would be how to treat the F-map changes. For example, what would happen if congress agreed to pick up more Medicaid expenses bringing Alaska more in line with the other states? This Administration proposes to use that money for Smart Start. She said it would also be helpful to understand how the Legislature's deferred maintenance finance plan fits in with the Majority plan. Part three of the OMB's presentation concerned PERFORMANCE MEASURES. Ms. McConnell gave a short history of the program started four years ago where each department gave the Legislature four to five key performance measures. The intent wasn't to give details on every single aspect of state government, but to focus in on a handful of the most important areas in each department. The goal was to obtain a way to track the work done and see if progress is being made in these key areas. Last year's packet included a status report on progress made and target achievements. This year, we have included an updated report. Something new in this year's budget packet is the approach to PERFORMANCE BUDGETING. She referred to presentations made by Mark Freeman and Craig Holt that focus on base line indicators for major priority areas like jobs and economic development, children and education. The intent is to determine key indicators that would tell all of us (i.e., Administration, Legislature, public) if we are focusing on the right approach and if we are making progress. She gave examples in the area of education. Ms. McConnell also spoke about the AUTOMATED BUDGET SYSTEM. This is fully functional on the capital side and underway as a pilot program on the operating side. This was designed to incorporate a real analysis of the trends, performance measures, anticipated results and how the budget can reflect these priorities. She championed the idea of Results Based Budgeting, saying it would make many improvements to the state system. She stressed the need for the executive branch and legislative branch to work together even though there are some places where they will disagree. However, some of the goals are very similar for both branches. To start the process, we should work to establish a vocabulary, agree to an approach and determine the key areas to try first. Ms. McConnell said the Administration would like to have sessions with the Legislature to set these guidelines and to focus on a couple key areas to test the ideas. She realized that many issues cross department lines but assured the committee that workgroups have already been set up consisting of representation from all affected groups. These groups are willing to give presentations to the committee if requested. She expressed a desire to allow departments to work directly with the committee. Co-Chair Pearce informed Ms. McConnell of a group consisting of staff from both co-chair's offices and Senator Parnell's office that have been working on a mock set-up using Department of Natural Resources. Once they have completed this work, they will bring their findings, both good and bad, back to the co-chairs to determine which direction should be taken. The committee plans to work with OMB to build on this concept. She listed other areas where legislators are breaking down issues and setting missions and goals. Ms. McConnell said OMB is doing mock-ups for commerce and revenue and would be interested in feedback from the committee. It would be helpful to know the committee's comments regarding her department's presentations. She is hoping that by testing this out in two areas and looking at other states, we can have better results than just by using a cookie cutter approach. At this point of the meeting, Co-Chair Pearce opened the floor to questions. Conversations ensued regarding specifics in education, public safety, federal funding, the Smart Start program and the status of Welfare to Work. After a fifteen-minute break from 9:45 to 10:00, Ms. McConnell continued. She made comments as to the layout of the proposed budget packet. The cost of living increase is shown in the front part of the packet rather than broken down by each department. The total cost of $9.2 million dollars is broken down by funding sources later in the packet. She gave details as to those breakdowns. Debt service is this year is $64.1 million down from $72.3 last year. A couple factors that influence this include the $5 million investment loss trust fund that was in the fund that reduces the amount of new general funds needed to appropriate in 1999. Another is on the school debt reimbursement side. Funding for SCHOOL PROJECTS will come from the Tobacco Tax. Revenues from this tax have been revised down from earlier estimates because of the inability to accurately project future receipts. This is due to a certain amount of stockpiling of tobacco products by consumers before the tax took effect. OMB anticipates this event resulted in fewer taxes being paid during the first quarter of the program, but that the income generated will level out once stockpiles are depleted which will enable them to better project future revenues. Answering a question by Senator Adams, Ms. McConnell estimated the revenue from this tax would be $16 million this year for the school fund. The committee requested it be provided with the actual figures collected in this first quarter and upcoming quarters, as they become available. She highlighted a technical glitch that may actually become helpful in the future. The automated system allows for tracking all numbers. These numbers were inadvertently included in this handout. She noted the advantage to having these numbers printed in the back of the budget packet for easy referral and suggested they could keep them in future budget publications. She pointed out another change, the documentation of supplemental appropriations. This year the supplemental requests are shifted into the main portion of the budget. This doesn't change the total dollar amount. This budget packet continues the AHFC dividend at the $50 million rate according to the agreement worked out between the AHFC and the Department of Revenue. This is to keep it off the credit watch and prevent any negative signals changes might send to the bond market. In summary, Ms. McConnell stressed the importance of looking at the budget in the context of several years. She feels this budget packet is responsible and maintains a very healthy CBR. It takes into account the possibility of oil prices dropping further than anticipated. The executive branch is continuing to look for efficiencies and improvements in service that will help deal with population increases and inflation. She reiterated her desire for continued joint efforts of OMB and the Legislature to find better ways to manage state government. Co-Chair Pearce asked if there were any large lawsuits pending that may affect the amount of funds available. Ms. McConnell didn't know for certain, but is expecting an update from the Department of Law that she would pass along. ADJOURNMENT Co-Chair Pearce adjourned the meeting at approximately 10:20am. SFC-98 (12) 1/27/98 am
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