Legislature(1999 - 2000)
02/05/1999 09:01 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT(S): Overview: Legislative Finance Division -
State Revenue Stability
Overview: Capital Projects - University of Alaska
The following overview was taken in log note format. Tapes and
handouts will be on file with the Senate Finance Committee through the
21st Legislative Session, contact 465-2618. After the 21st
Legislative session they will be available through the Legislative
Library at 465-3808.
Time Meeting Convened: 9:01 AM
Tape(s): SFC-99 # 22, Sides A & B
PRESENT:
Senator Parnell
Senator Adams
Senator Torgerson
Senator P. Kelly
Senator Donley
Senator Green
Senator Leman
Senator Phillips was
absent
Senator Wilken
ALSO PRESENT:
Wendy Redmond, Vice President University Relations, University Of
Alaska;
David Teal, Director, Division of Legislative Finance;
Ginger Blaisdell, Phil Okeson, Tammy Stromberg, Fiscal Analysts,
Division of Legislative Finance
Via Teleconference:
Pat Pitney, Director of Budget Development and Institutional
Planning, University of Alaska;
Ann Ringstad, Director of Government Relations, University of
Alaska.
Tape: SFC - 99 #22, Side A
Co-Chair Sean
Parnell
Introduction.
I asked the Division of Legislative Finance
to prepare and overview on state revenue
stability. It's relatively short. We all
know volatile oil revenues are but this
will give us a better historic picture.
David Teal
Director, Division of Legislative Finance
We're in the fourth of a five-year plan
designed to reduce or eliminate
expenditures of state revenue. Most
efforts have been to reduce the
expenditures. Real progress has been made.
Today you asked us to address the revenue
side.
Since you left last May, oil prices changes
and we came back to a $1.1 billion fiscal
gap. That's roughly 50 percent of the
budget.
If Rip van Legislature from 20 years ago
woke up and compared our situation to that
in 1979 he would have said we were lucky.
Because 20 years ago there was a feeling
that permanent fund earnings would replace
oil revenues as the primary and stable
source of state funding. Not because of
price declines but because of production
declines. Production has held up better
than anticipated. Price is still an issue
The present fiscal gap is so big that
nobody really expects to close the entire
gap through the expenditure side. Although
we've seen changes in expenditures the gap
still widens because of the low oil prices.
Now there is more attention on the revenue
side of the gap. Several Division of
Legislative Finance staff have spend hours
working on compiling the following
information.
Ginger Blaisdell
Fiscal Analyst, Division of Legislative
Finance
Handout: 25-Year General Fund History.
Graph: Oil Revenues as Part of Alaska's
Overall Revenue. The graph starts in 1973,
about two years before oil production
really got started. The graph ends with
projected figures for FY00. The bottom
line shows our standard general fund
revenues, everything that is not oil-
related. The upper line shows the oil
revenue. It includes taxes: property,
severance, rent and royalties - everything
that has to oil.
1981-82 shows $34.92 per barrel at 2
million barrels per day production. It
didn't last long but was a reflection of a
positive market.
The next peak was seen during the Gulf War.
1997 was an unexpectedly high priced oil
year.
More important to see is that even in high
price years at higher productions, we have
a basic trend of oil not being the most
stable economic revenue for the state.
It tends to continue to decline. It is
very volatile. You can see a simple drop
in price or production causes large swings
Co-Chair Sean
Parnell
The one thing really demonstrated here is
the stability or certainty of other
revenues vs. the certainty of oil revenues.
Ginger Blaisdell
The small spikes shown on the graph are due
to settlements. The largest is due to the
oil settlement. But it is due to activity
that happened in previous years and we
finally saw the payment here. Department of
Revenue felt that because it's a settlement
it's considered a one-time event. Those
one-time events do impact our general fund.
Co-Chair Sean
Parnell
On that spike in the blue FY85 or FY86, is
that settlement pre-Constitutional Budget
Reserve?
Ginger Blaisdell
Yes. Anything other settlements collected
on oil and mineral royalties are going into
the CBR instead of the General Fund as
before. That's pre-1990 and post-1990.
Next graph: Forecasted and Actual West
Coast Prices. What this shows is a pink
line is the Department of Revenue's price
per barrel projections. The dark blue line
is where the price per barrel actually was.
What this shows is that the Department of
Revenue typically projects very close to
what the actual prices are.
We get a lot of questions on what system we
should use to base our prediction on. We
based our last few budgets on Department of
Revenue's projections.
It's been pretty close. Over the last 20
years they've averaged 82 cents per barrel
less that what we've actually earned. The
have a fairly conservative projection.
The last three lines are for the years
2000-2003. They are projecting an increase
but we don't have actuals for that yet.
Senator John
Torgerson
They're adjusted annually (inaudible)
Ginger Blaisdell
These are the Spring forecast projections.
Senator John
Torgerson
Out on March 15
Ginger Blaisdell
Explain the numbers on the graph are from
last springs forecast plus this is the
projection Department of Revenue came out
with this past January.
Graph: Projected General Fund Revenues At
Various Oil Prices. This is the depressing
one. What this shows is the impact of
production on our oil revenues. The three
lines are for $20 per barrel, $15 per
barrel and $10 per barrel. If we were
getting $10 per barrel we would be getting
$1.1 billion.
As production continues to decline, by the
year 2020 the same $10 barrel of oil will
only generate about $500 million. As
production continues to decline, the amount
of fluctuations between each dollar per
barrel affects our earnings. A five-dollar
change at a low production rate doesn't
have nearly the same impact as it would
with a higher production.
This is also based on the current fields
that we have with their attrition rates.
If we get a new oil field maybe our
production will go up again.
This other part of the graph shows the oil
severance taxes, corporate income taxes,
and property tax. There are other funds
that are coming in with the oil revenues.
If we ever were to drop below $9 per barrel
it will drop at a much faster rate of
decline. As they drop lower the oil fields
are going to produce less and some of the
taxes actually go away. If you go above
$23 dollars you would make more.
Senator Gary Wilken
Could you call out on that graphs the
production levels of those years?
Ginger Blaisdell
This one gets us down to around 445,000
barrels a day as opposed to a million.
That's how far out this graph shows.
Senator Gary Wilken
Please include in graph for future
reference.
Ginger Blaisdell
Yes.
Co-Chair Sean
Parnell
I had focused on the instability of price
and its impact. But what this graph showed
me is that declining production is the 20
million-pound gorilla around our necks in
terms of declining revenue. Price is
stability but production is also key here.
Baring any new huge production, we are
going to be at a level of revenues
somewhere in the 500-700 million dollar
range for the state budget.
Production declines will be significant to
us
Senator Gary Wilken
I agree. Everyone is focused on the price
but production is also important.
Ginger Blaisdell
To make our current $1.257 billion goal in
the year 2020, we would need a price of
about $45 per barrel this year in today's
dollars. Adjusting for inflation, that
amount would actually have to be $91 per
barrel.
Senator Pete Kelly
The $45 was where?
Ginger Blaisdell
That is with today's price being $11.58.
Graph: General Fund Reserves Vs.
Expenditures.
Showing the revenues compared to the
expenditures.
There have been a couple of dips in here.
This big spike right here of $1.8 billions
was appropriated to the Permanent Fund.
The money was actually dispersed over a
four-year period. Depends how you look at
it, you could level this out slightly.
1986 the oil prices dropped but 1987 the
impact really took place. You'll see the
spending dropped the next year but suddenly
we got more money and spending was back up.
You can see spending was relatively stable.
It's come down some in the last several
years.
Our spending has been relatively stable.
Revenue is where we will find our
instability.
In the areas where there is a large gap,
the white spaces showing our fiscal gap.
Each of the gaps has been filled in with
other state savings accounts.
On the handout I've bulleted the years of
particular spikes up or down.
Graph only shows general fund revenues not
other program receipts.
Co-Chair Sean
Parnell
Recess 9:20 am - 9:26 am
Co-Chair John
Torgerson
Chairing remainder of the meeting.
Wendy Redmond
Vice-president of University Relations,
University of Alaska
Over 50-percent of our capital budget is in
deferred maintenance, deferral, and
replacement and renewal items, which are
issues that both the House and Senate
finance committees, have dealt with in
incredible detail over the last several
years.
I don't know how much detail you want me to
go into on the deferred maintenance except
to give you a brief overview.
We have included the total amount of
deferred maintenance projects, which is
$139.6.
It continues to be our top funding priority
in the capital budget. We have had great
support over the last several years to deal
with this problem.
University of Alaska has made efforts to
educate the public and us of the importance
of degreed maintenance. The task force set
up by the Legislature a couple of years ago
have been very helpful in bringing the
issue to the forefront of both the
Legislature and the public.
We need to continue the progress we had
been making. We went a couple of years
with very small appropriations. Last year
we got $42 million.
We need another 3-4 years of funding at
that same level to be able to get a handle
on the problem.
If don't make annual adjustments of about
$30 million we tend to take one step
forward and two steps back. It's the kind
of problem we have to get in front of.
Board of Regents, when this problem first
became critical about six years ago, began
a process internally to reallocate money
into our maintenance budgets to ensure that
as we were taking care of deferred
maintenance with the help of the
Legislature that it wouldn't occur again.
We have increased our maintenance budgets
by 84 percent since 1994. We've
reallocated almost $8 million from
operating to expenses and programmatic
expenses to the maintenance budget.
On an annual basis we are fully funding
maintenance at the level set out by the
national formula.
Not able to fully fund internally for the
renewal and replacement portion. That is
something we will continue to need annual
appropriations for the actual replacement.
We think it's about $15 million per year.
About 44% of facilities belong to the
University of Alaska and over 55 percent of
those older than 20 years. So we are a big
player in the state's facilities.
I think it's significant that we've
attempted to take care of problems
internally.
Legislature has been very helpful. If we
can continue receiving appropriations on
the deferred maintenance side and the R&R
side, that will take care of the internal.
Want to insure that our facilities are
protected into the future
We put together each year an inventory that
lists all the projects, which campus they
are located as well as a historical
outlook.
That will be available in the next couple
of weeks
Co-Chair John
Torgerson
(Confirmed that the book will be available
in the next couple weeks for the committee
to see the proposed projects.)
Senator Dave Donley
I have a technical question. Where will
they appear in the capital budget?
Wendy Redmond
Deferred maintenance will be listed as our
Senator Dave Donley
I don't see any listed in the in governor's
budget.
Co-Chair John
Torgerson
You submitted them all to the Governor and
he only included one in his budget
proposal? That one was for the Hutchinson
Center?
Wendy Redmond
Correct. All but the Hutchinson Center of
the requests is not included.
Co-Chair John
Torgerson
I know there's another piece of legislation
on the Anchorage consortium library. Is
there other legislation that covers any
other of your capital needs?
Wendy Redmond
Not yet.
Senator Pete Kelly
You had said that we've given $30 million
per year. Do you advance on the problem at
$30 million?
Wendy Redmond
I was prepared to go through the University
of Alaska capital requests. Would you like
me to just address the Governor's capital
request?
Co-Chair John
Torgerson
My understanding that what we have before
us is what you submitted to the Governor.
Through their ranking process only one
project made it into his actual budget.
Senator Pete Kelly
You said also that you reallocated some
money from the operating budget. You gave
a number.
Wendy Redmond
$7.6 million over the last four years.
Senator Loren Leman
$21 million for the UAF School of
Fisheries. Is that number consistent with
the very recently announced reduced ore
delayed funding plans by the federal
government for the (Lena Point NOAA)
facility. Is that consistent with the
program that is now envisioned?
Wendy Redmond
Yesterday they announced that the federal
portions for that facility had been
somewhat reduced. I think what happened is
they reached a compromise with Sen. Stevens
and Sen. Gordon from Washington state. They
plan to make a research facility in Juneau
and maintain the administration portion in
Seattle. They've scaled back from $80 to
$50 million. The news report I heard said
they would appropriate $36 million over the
next 3 years for the federal portion.
It doesn't change anything for our $20
million. Our facility was always a
research facility. At this point it's my
understanding that our piece will remain
the same.
Senator Loren Leman
And is your portion of $21 million proposed
to be state general funds.
Wendy Redmond
Yes. You'll see that we put $5 million in
to the FY00 request. We knew it would be
$21 million total we just didn't know when
the out year would be. We put in this
request so we could proceed with the
planning and design of the facility.
As we get more information, we'll make an
adjustment in the budget.
Senator Gary Wilken
Confirm that this is the Lena Point
facility?
Wendy Redmond
Yes.
Co-Chair John
Torgerson
So the federal appropriation is not
contingent on a match? The $21 million is
for a completely separate facility?
Wendy Redmond
It is not contingent on a match. However
Sen. Stevens and Sen. Murkowski have
indicated to us that NOAA's willingness and
eagerness to relocate from WA to AK is
enhanced by state's willingness to make an
appropriation to the facility to the
facility.
Co-Chair John
Torgerson
The $22 million would relocate about 500
jobs from WA to AK?
Wendy Redmond
Not familiar with exact figures. It is
significant.
Co-Chair John
Torgerson
The intent is that the Alaska Fisheries
Research Center that is located in Seattle
would be in Alaska?
Wendy Redmond
Yes. I do want to say that the Governor's
office has been helpful over the last four
years in trying to work with us on the
maintenance and renewal and replacement
items. Even though there is not an
appropriation for these that is included
this year, I feel they will still try to
help find some other option as session
moves along.
The 2nd priority in our budget this year is
under the Instructional Equipment and
Telecommunication. We've requested $7.5
million. It's been over a decade since
we've had a major appropriation of any kind
for equipment.
The equipment includes about $900,000 total
for library books. We scramble every year
in Anchorage. Trying to get the base budget
for library books up has been very
difficult.
We found that capital appropriation for
one-time purchases best way we can do it.
Our student labs and instructional
equipment are getting seriously behind the
times. An employer group in Anchorage told
me that the students at the Anchorage
campus were not being trained on equipment
that was up to date. That is criminal. The
electronics program is a very high paying
and excellent career field. Community
colleges across the state are in the same
situation. We simply need to get an
infusion of instructional and laboratory
equipment, particularly in some of our
vocational and scientific areas.
In looking at new construction, a question
we are often asked is, "With the huge
deferred maintenance problem how can we
consider building anything new?" The
answer is that we can't stop progress while
we're fixing the facilities. There are new
things that also need to be done at the
same time. So we're trying to cautiously go
forward with new construction where we
think it's really essential.
We've prioritized new construction projects
based on 5 criteria. 1) How the project
meets a particular strategic initiative 2)
a demonstrated need 3) partnership
potential that it creates 4) the degree to
which the project will be self-supporting
either with instructional tuition or by
research revenues 5) the degree to which
there is a developed plan for the project.
So within that criteria the number one
priority is for the Hutchinson Center at
the Tanana Valley campus in Fairbanks.
That's a joint partnership with the school
districts where they share a facility.
The community of Fairbanks will be going
forward with a $ 10 million bond this fall.
Our share will be $5 million. People are
very excited about it. It's a wonderful
partnership that allows a lot of
opportunities for students at the school
district as well as the community college
to share programs.
Co-Chair John
Torgerson
Is it safe to assume that if bond issue
fails that your part fails also?
Wendy Redmond
Right, I would be surprised if the bond
issue fails.
Co-Chair John
Torgerson
Didn't we run other schools up there for
three or four years and have...? I don't
want to get into that.
Wendy Redmond
Yes they have failed, but I think one of
the things that people were concerned about
in the failed bond issues was that they
were not for vocational training. That's
what people wanted to see. It's very
popular.
Co-Chair John
Torgerson
This brings me to timing. I know it's your
number one request. It looks like maybe
your smallest one too. The question
wouldn't be on the ballot until October so
the appropriation or the building probably
isn't going.. I'm concerned about timing
and if it's correct to match up with the
bonding money. Maybe that should be
considered as a FY01 capital project.
Wendy Redmond
I'm not sure when their bond issue is going
on the ballot.
The second new facility priority (and this
has been on the list for several years) is
the library classroom facility at the
Anchorage campus.
Last year $9 million were appropriated by
the Legislature for planning, design and
some parking construction. There is
additional legislation that is in on this
facility as well.
Senator Dave Donley
How much money has been expended so far and
how much more do you anticipate expending
in the next fiscal year on this?
Wendy Redmond
Refer to Pat Pitney to testify how much of
the $9 million had already been expended.
Pat Pitney
Director of Budget Development and
Institutional Planning, University of
Alaska. Linked to the meeting via
teleconference from Fairbanks.
I don't know off the top of my head, but I
can find out. Only a small amount has been
spent if any.
Co-Chair John
Torgerson
(Request information be sent to committee)
Wendy Redmond
The next priority is the School of
Fisheries/NOAA facility here in Juneau,
which is a UAF and UAS joint facility.
Senator Al Adams
Did you say the Alaskan congressional
delegation wants us to put up match?
Wendy Redmond
They know we have the $5 million in our
request this year. I assume that's a
sufficient amount. We didn't feel we were
ready to put in the full amount yet since
the federal piece did not fully come
together.
The next priority is the UAF residential
dining facilities. It's a major renovation
request. It goes well beyond what we would
have needed for regular renewal and
replacement. It needs to be redesigned.
The kitchen the very old and is not
adequate at this point to be able to
provide good service to the students.
Senator Pete Kelly
On that, I think it was interesting in the
decline of students in the last year at
UAF. The exit interviews showed that it
wasn't because they weren't getting a good
education or that they didn't have the
adequate level of funding. It was that the
food services were not up to standards.
This kitchen is a serious problem and I
think it needs to be addressed.
Wendy Redmond
The next priority is for classroom
additions costing $7 million at the Juneau
campus, our fastest growing campus. There
are [PAPER SHUFFLING - INAUDIBLE] small
buildings. This will add sixteen new
classrooms to this campus.
Bristol Bay Campus, $900,000. This has
been on our budget request for many years.
I can tell you from my prospective, this is
probably one of the biggest needs we have.
The campus is currently housed in what is
essentially a 3-bedroom house. They have
facility and students who are four people
crammed into a 10x12 ex-bedroom. The need
is tremendous. They are working closely
with other members of the Bristol Bay
community to try to do a partnership
project where they will work with the
library to try to maximize their facility
needs.
The next project is construction of a
biology and chemistry lab on the Sitka
campus. This is another renovation. As
some of you know, we have taken the old
W.W.II hangers and renovated those and
turned them into campuses. This has been a
very cost-effective project for us. We
have one of the hangers that has been
completely redone. This is now adding on a
second floor to add in a science lab that
would be used jointly with the University
of Alaska, Sheldon Jackson College and the
Mt Edgecumbe High School.
Currently our students have to go to the
local high school because we have no lab
space at all.
The next priority is the small business
development program. Senator Dave Donley
is probably the most familiar with this
one. This has been historically funded in
the capital budget. It came over as a
grant. It continues to be funded in the
capital budget. This is the same amount of
money they have been receiving for the last
decade.
Senator Dave Donley
But it's not in the Governor's capital
budget this year?
Wendy Redmond
Right. And this is an extremely highly
leveraged account. They bring in about $3
or $4 million a year.
Co-Chair John
Torgerson
How many years has that been funded?
Wendy Redmond
I think it's been with the university now
for about five years. It came over to us
from the Department of Commerce and
Economic Development. Frankly, I think
it's their preference that it continue to
be funded like this, probably because if
it's in the operating budget it would have
been slashed by now within the university.
I'm sure the people at the Small Business
Development Center feel that this is a
better option for them. No matter how
difficult this process may be for them,
it's still better than trying to deal with
the university internally. That is my
assessment of why they do it this way.
Wendy Redmond
I won't go into all projects unless you
want me to.
We've included in our budget the projects
into the out years FY01 through FY04. This
is because they are important projects and
we want to keep them as a high priority and
we want to keep them in front of the
Legislature so you are aware of the kinds
of issues and projects that we're looking
at over the course of the next couple of
years. I can discuss them if you'd like me
to.
Senator Gary Wilken
I want to make sure I clearly understand
that the Hutchinson Career Center is about
a $20 million project total. That $5.5 is
about half of what's needed on behalf of
general funds to get it started. The bond
issue will be voted on and you will be back
again next year for another $5.5 million to
complete the project.
Pat Pitney
The school district is going to contribute
$14.5 million. That plus $5.5 million
general funds and the $1.6 million in
planning money that we got last year equal
the $21 million total. Also included in
the $14.5 million bond is some additional
renovation items.
Senator Gary Wilken
So $5.5 million general fund allocation
does take care of complete state
obligation?
Pat Pitney
That's my understanding.
Wendy Redmond
Last priority is $800,000 in program
receipt authority for a student recreation
center on the Juneau campus. That was not
included in the Governor's budget, but I
think it may have been an accident since it
is non-general fund authority. The Juneau
campus is investigating several different
options of how we may put in a recreation
facility. Juneau doesn't have anything like
this. There's no ice rink. We have more
and more students who are residential
students at the Juneau campus and there is
a need to have some sort of a facility
available. This would be a simple facility
with an ice rink, a running track and a
couple of basketball courts.
We are looking at partnering with private
sector. We're looking at selling the Bill
Ray Center where we may have some proceeds
that we can put toward this. None of these
options use general funds. We'll be
putting in an amended budget request to
make sure that we get this program receipt
authority included in our budget for this
facility.
Co-Chair John
Torgerson
The $4 million we approved last year was
basically revenue from the sale of the Bill
Ray Center.
Wendy Redmond
I don't remember that actually being
included in last year's budget.
Pat Pitney
Yes it was. The $4 million was the
estimated cost of the project two years
ago. They've come back with a reassessment
and the project increased to $4.8 million.
So they're aggressively looking for funding
options. Since the project cost has
increased, that is what the extra $800,000
is for.
Co-Chair John
Torgerson
I understand that but didn't want you to
count the sale of the Bill Ray Center
twice.
Tape: SFC - 99 #22, Side B
Co-Chair John
Torgerson
I would just ask you to make sure your
program receipts are better identified than
the use of something from the year before.
Pat Pitney
It's not what we used last year. Right now
it is an unidentified source. But they are
actively pursuing other options.
Co-Chair John
Torgerson
How big is your Y2K request?
Senator Gary Wilken
$5.8 million.
Co-Chair John
Torgerson
Would anyone care to go into the out-years
on the capital budget? I think we can look
that over and get back to you with any
questions.
Co-Chair John
Torgerson
Announce Monday schedule Office of
Management and Budget cash-flow overview
and we will hear some bills SJR4 and SB 35.
No Tuesday meeting due to the Economic
Summit.
Senator Gary Wilken
I'll be late Monday morning due to plane
arrival.
Senator Al Adams
Will we have a spending plan for the
operating and capital budgets? The reason
I ask is University of Alaska has more than
the one request listed in the Governor's
budget. I would suggest the committee look
at a bond package for higher education plus
K-12 education.
Senator Dave Donley
I'm open to that idea by a vote of the
people.
Co-Chair John
Torgerson
Adjourn at 9:59 am.
SENATE FINANCE COMMITTEE
LOG NOTES
2/5/99
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