Legislature(2003 - 2004)
02/19/2003 09:06 AM Senate FIN
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* first hearing in first committee of referral
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MINUTES
SENATE FINANCE COMMITTEE
February 19, 2003
9:06 AM
TAPES
SFC-03 # 4, Side A
SFC 03 # 4, Side B
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately 9:06 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde
Senator Ben Stevens
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: SENATOR KIM ELTON; CORINA ECKL, Fiscal Program
Director, National Council of State Legislatures
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
CORINA ECKL, Fiscal Program Director, National Council of State
Legislatures (NCSL), accompanied her testimony with a PowerPoint
presentation [copy on file], titled as follows.
State Fiscal Conditions
Presentation to the Alaska Senate Finance Committee
February 19, 2003
Corina Eckl
Fiscal Program Director
National Conference of State Legislatures
Ms. Eckl shared that Alaska is "not alone in dealing with budgetary
problems and fiscal gaps. She assured "This is a widespread
national problem with practically every state reporting some kind
of serious fiscal problem that has been going on for some years now
and unfortunately is expected to grow and get worse before it gets
better."
Background on NCSL
National Conference of State Legislatures
· Bi-partisan organization founded in 1975
· Serves all 50 states, territories and commonwealths
· Offices in Denver and Washington D.C.
Ms. Eckl gave a background of the NCSL organization noting that the
office located in Denver, Colorado addresses state services and the
office located in Washington D.C. tracks federal policy and budget
issues. She added that the NCSL staff working in Washington D.C.
lobbies the U.S. Congress and the Administration on behalf of
states. She listed state sovereignty and ensuring that federal
mandates are funded as some of the issues the NCSL lobbyists
address.
NCSL is a Valuable Resource
· Information from NCSL
o Non-biased research, publications, 50-stated data,
special projects
o Technical assistance on a wide range of topics
o Meetings and seminars
· Bob Boerner is the NCSL liaison to Alaska
Ms. Eckl encouraged the Members to "make use" of the NCSL
resources.
Summary of FY 2003 Budget Gaps
· The initial estimated gap for FY 2003 (prior to budget
enactment) was $49.1 billion (10.1%)
· At least 42 states reported initial budget gaps going
into FY 2003
Ms. Eckl noted the organization regularly surveys legislative
finance directors of states governments, usually after adjournment
of legislative sessions, and that these figures are the result of a
survey conducted in June 2002.
Ms. Eckl defined "gap" as "a shortage of revenues", i.e. revenue
collections below projected levels combined with spending overruns.
Ms. Eckl reiterated that many states have been encountering fiscal
problems for several years.
State Fiscal Update
(February 2003)
· State budget gaps have grown nearly 50% since November
· States now face at least a $25.7 billion (5.2%) gap in FY
2003
· Thirty-six states reported gaps
Ms. Eckl informed that the budget gaps increased from $17.5 billion
in November 2002, when the previous survey was conducted, to the
February 2003 amount of $25.7 billion in only two months.
FY 2003 Budget Gaps
[U.S. map indicating the percentage of the budget gaps for
each state, the District of Columbia and Puerto Rico.]
Ms. Eckl expressed that this map identifies the "magnitude" of the
fiscal problems. She noted four states have budget gaps higher than
ten percent. She stated that the cause of the large gap in three of
the four states, Oregon, Colorado and California, is due to the
significant reliance on state personal income taxes.
Ms. Eckl referenced a study conducted by the Fiscal Affairs Program
at the Rockefeller Institute in Albany, New York, which examined
"how vulnerable states were in terms of a correction in the stock
market." She shared that the aforementioned three states were
particularly vulnerable due to their tax structures. She qualified,
however, that the vulnerability is present "across the nation."
Ms. Eckl next indicated the 15 states that report no budget gap at
present. She stressed that some of these states "have already taken
action to resolve budget gaps." She explained that these states did
have budget gaps in FY 03 "post budget enactment", although some
addressed the matter with such methods as holding special
legislative sessions.
Revenue Growth Has Not Rebounded
· 30 states reported that revenues are below projections in
FY 2003
· In 12 states, collections are failing to meet revised
levels
· Aggregate state revenue growth was projected to be 2%
Ms. Eckl asserted the budget gaps are primarily due to state
revenue performance. She pointed out that several states have
revised their revenue forecasts, because performance has
continually been below expectations.
Ms. Eckl opined that the initial revenue growth projections of two
percent for all states, was conservative. She informed that several
states increased taxes, which affected the national aggregate
projection. Excluding those states from the aggregate, she stated,
results in a projected growth of less than two percent.
Senator Bunde asked the number of states that had a fund surplus in
the last five years, and whether the deficit occurred because the
activities of states were "over expanded."
Ms. Eckl responded that some members of Congress argued that the
states "brought this upon themselves." She countered that state
lawmakers deposited "a record amount of money" into rainy day
funds, funded a "full range of programs" including education, and
also lowered taxes in some states. She reported that taxes were
reduced by $35 billion over a seven-year period. However, she
stressed that the "magnitude of the problem" of the current
financial situation "far surpasses" any actions of the states taken
during the previous years. She referenced a study conducted by the
Federal Funds Information for States, an organization operating in
Washington D.C., to determine the states' responsibility for the
current fiscal gaps. She cited that this study found that,
excluding Medicaid expenditures, state and local spending, as a
percentage of gross domestic product (GDP), has remained stable
over a 15-year period.
Ms. Eckl remarked that a major contributor to the states' budget
crisis are "soaring" health care costs. She listed Medicaid and
health care plans for state employees as some health care related
programs experiencing increases. She also noted the performance of
the stock market and the lowest consumer confidence rating in 15
years, are factors. She reiterated that the states with the largest
budget gap problem are those with a disproportional dependence on
personal income taxes, explaining that layoffs in technology and
other industries have reduced collections.
Ms. Eckl told of characterizations of the current fiscal situation
as "the perfect storm", given the various factors involved, many of
which are "outside the control" of state policymakers. She
surmised that the national economy is "probably the single largest
factor affecting the health of state economies." She commented that
state legislators could do little to impact the national economy.
Ms. Eckl emphasized that a possible economic stimulus of the
proposed federal tax reductions would be counteracted by any tax
increases imposed by state governments to meet balanced budget
requirements. She noted that reduced state spending and increased
taxes are both a "drag on the economy."
Senator Hoffman asked whether the proposed tax rebates would
benefit states' economies.
Ms. Eckl qualified that the NCSL has not conducted research on this
matter; although she relayed conversations she had with economists
and the "sense" that the federal tax rebates would have "some
stimulant effect." She cautioned that she also learned that
recipients of these rebates would not utilize the funds for "new
spending" but rather to pay down existing debt. She stressed that
the current financial situation contains "so many problems" that
significant federal input would be necessary.
Ms. Eckl recalled testimony recently given to the U.S. Senate by
Alan Greenspan, Chair of the Federal Reserve Board. Ms. Eckl told
of a question posed by a Senator asking whether the federal
government should provide financial assistance to help states
eliminate budget gaps. Mr. Greenspan, she noted, responded that
because states must balance state budgets by June 30, Congress
would not have an opportunity to assist states in FY 2003. Ms. Eckl
agreed, but stressed that assistance could be provided for FY 04
and FY 05. She reiterated that those in the federal government
should understand that actions taken by states would impact the
national economic recovery and therefore a partnership is necessary
between state and federal governments.
Co-Chair Green asked for further data indicating the various
factors contributing to the current fiscal situation.
Ms. Eckl referenced a report available on the NCSL website.
Co-Chair Green requested this report be provided to the Committee.
FY 2001 State Own-Source Revenue
[Pie chart demonstrating the percent of revenue sources as
follows.
Individual income - 37.1 percent
General sales and gross receipts - 32.1 percent
Selective sales taxes - 14.1 percent
Other - 9.2 percent
Corporation net income - 5.7 percent
Property taxes - 1.9 percent]
Ms. Eckl relayed national concern that states are "facing
structural budget gaps." She defined this as "state revenue growth
not growing sufficiently to cover state expenditure growth."
Ms. Eckl informed that the State of Oregon receives 70 percent of
its revenue from personal income tax. She qualified that this chart
does not reflect the revenue sources for the State of Alaska, but
pointed out that corporate net income tax as a revenue source has
become "susceptible and vulnerable in terms of its long term
viability".
Ms. Eckl referenced a recent article titled "The way we tax" in
Governing Magazine, published by the NCSL. She noted this article
includes one page describing the particular taxation issues of each
state.
Revenue Outlook for the Rest of FY 2003
· Optimistic: 2 states
· Stable: 11 states
· Concerned: 30 states and D.C.
· Pessimistic: 7 states
Ms. Eckl informed that survey completed in February 2003 asked
state financial representatives their outlook of revenue
performance.
Ms. Eckl noted some of the seven states with the pessimistic
expectations, were those that increased taxes in past year
Expenditure Update
· 37 states report that spending is exceeding budgeted
levels
· 32 states report that Medicaid or other health care
programs are over budget
Ms. Eckl commented that although revenue is a major factor,
expenditures are also considerations in state budget gaps.
States with Overruns in Medicaid
Or Other Health Programs
[U.S. map showing that 32 states incurred the overruns]
Ms. Eckl concluded that those states not currently over budget were
able to accurately predict the necessary expenses. She informed
that the State of Massachusetts reduced the number of patients
eligible for Medicaid benefits by 50,000, and still incurred $300
million overruns in the Medicaid program.
Ms. Eckl also noted that New Jersey has incurred higher than
budgeted expenses for emergency snow removal.
Ms. Eckl stressed that health care costs "is truly affecting the
health of state budgets." She remarked that national experts
predict "this has the potential to really squeeze other parts of
state budgets if something isn't done and done soon."
FY 2002 General Fund Spending by Category
[Pie chart listing expenditures as follows.
Other - 37.8 percent
K-12 Education - 30.6 percent
Medicaid - 13.9 percent
Higher Education - 11.7 percent
Corrections - 6.0 percent]
Ms. Eckl noted that K-12 education has been affected by the
economic downturn because it comprises a significant portion of the
budget. She pointed out that the percentage of state spending
allocated to Medicaid has steadily increased over the past several
years.
All Other
What's in "other"?
· Public assistance
· Parks and recreation
· State police
· Employer contributions to pensions and benefits
· Information technology
· Environment
· Economic development
· Arts programs
Ms. Eckl gave the State of Oregon as an example of a state with
"one of the most severe budget problems" remarking that the police
force in this state has been reduced by 20 percent. She said
funding for arts programs has decreased as well. She described this
as "survival mode" necessary for maintaining principle programs,
such as education, public safety and Medicaid.
Senator Hoffman asked which category includes homeland security
expenditures. He also wanted to know if these expenditures have
been a significant portion of state budgets.
Ms. Eckl replied that homeland security spending is included in the
"other" category; however these expenditures are difficult to track
because of the many state agencies involved, including public
health, environment, transportation, public safety, etc. She also
informed that these activities are not necessarily funded with "new
money" but rather with redirected funds. In addition, she said a
portion of the costs is attributable to local governments, as these
entities are likely the first responders. She indicated that the
NCSL had considered undertaking a survey to determine the
percentages of budgets allocated for homeland security functions,
but decided against it after learning of the many factors.
Dealing with Shortfalls in FY 2002 & FY 2003
· Imposing budget cuts: 36 & 31 states
· Using tobacco settlement funds: 16 & 21 states
· Tapping rainy day funds: 23 & 14 states
Ms. Eckl explained the PowerPoint slide: the first figures (36, 16,
23) represent the number of states reporting for FY 02 and the
second number (31, 21, 14) represents FY 03. She remarked this is
to demonstrate that this is a multi year problem.
Ms. Eckl commented, "budget cuts have been widespread; virtually
every state program has been affected." She furthered that rainy
day fund balances are declining.
State Balances Fall
(billions of dollars)
[bar graph showing the following figures.
FY 2001 - $38.9
Cash on hand - $18.6
Rainy Day Funds - $20.3
FY 2002 - $19.9
Cash on hand - $8.0
Rainy Day Funds - $11.9
FY 2003 - $17.1
Cash on hand - $5.7
Rainy Day Funds - $11.4
Ms. Eckl pointed out that the "cash on hand" figures represent the
unobligated ending balance in the general fund at the end of the
fiscal year. She stated that during years that revenue forecasts
were perpetually underestimating the actual revenue, the ending
general fund balances were large.
Ms. Eckl commented that in FY 01 states held "record amounts" in
their rainy day funds and therefore, these states should be
applauded because those funds are needed now. She anticipated the
final balances of rainy day funds in FY 03 would be slightly below
the current amount, as the funds are drawn upon more than was
expected.
Co-Chair Wilken asked if the rainy day funds in this instance
include Alaska's permanent fund or the Constitutional Budget
Reserve (CBR) fund.
Ms. Eckl replied that the permanent fund is not included, although
the CBR is included.
Ms. Eckl admitted that the "cash at hand" term might not be the
most appropriate, although it is a term that non-governmental
entities could understand easier.
Senator Bunde clarified that the State of Alaska has one-third of
the rainy day funds for all states.
Ms. Eckl affirmed and shared that other states are "envious" of
Alaska's permanent fund balance.
Ms. Eckl informed that although 47 states have a rainy day fund,
they vary with some having larger balances than others.
Rainy Day Fund Balances for FY 2002
As a Percentage of General Fund Balances
[U.S. map showing the percentage range of each state's
balance.]
Ms. Eckl pointed out that the states of Alaska and Wyoming have
rainy day funds balances over ten percent of their general fund
balances. She furthered that states that obtain a significant
percentage of revenue from natural resources also have the largest
rainy day fund balances.
Ms. Eckl added that the State of California has borrowed against
its rainy day fund and now has a deficient.
Co-Chair Wilken asked if deposits into the State of Wyoming rainy
day fund are systematic or rather unrelated appropriations.
Ms. Eckl described the use of "mineral trust money" to create the
State of Wyoming permanent fund. She explained that dividends are
not paid to citizens from this fund and that the principle is not
withdrawn. Rather, she said, a portion of the approximate $100
million annual interest earnings is deposited into the general fund
for operating expenditures.
Senator Bunde suggested that Alaska legislators could learn from
this method.
Senator Hoffman noted the Alaska permanent fund is a "highly
unusual" savings account and asked if other states have smaller
permanent fund accounts.
Ms. Eckl replied that some states do have mineral trust endowments
exampling the State of Texas, which utilizes these funds for higher
education expenses. She noted that additional deposits are not
being made to these endowments and that the withdrawals are of
interest earnings.
State Year-End Balances
FY 1978 - FY 2003
[Graph showing the percentage balance for each year from 1978
through 2002 with a projected rate in 2003.]
Ms. Eckl detailed the historical perspective of the fiscal gap
issue. She identified the national economic downturn in 1980s and
early 1990s and the impact on state fiscal conditions. She
attributed the significant increase of state year-end balances
during the middle and late 1990s to the record performance of the
stock market.
Ms. Eckl relayed that the Wall Street analysts who rate state-held
bonds recommend states maintain a five percent balance to obtain
high ratings. Because of this, she said that some states, including
Delaware "live by" this rule to ensure a high bond rating.
Senator Hoffman asked if these funds were inaccessible because of
state constitutional or statutory restrictions.
Ms. Eckl learned that some states assert that the reserve funds are
"held hostage" by bond raters because the ratings would be lowered
if these funds were used. She reiterated that the structure of
rainy day funds vary significantly by state, some are established
by constitution and others by statute. She furthered that access to
the fund in some states require a super-majority vote, while in
other states an emergency declaration by the governor is adequate.
Co-Chair Wilken asked if the $2 billion CBR balance less the $2.2
billion operating budget comprises Alaska's year-end balance in
relation to this chart.
Ms. Eckl explained the chart reflects year-end balances of all 50
states. She admitted that the CBR as well as the large rainy day
funds of other states is likely "skewing" the national totals.
Dealing with Shortfalls in FY 2002 & FY 2003
· K-12 spending cuts: 17 & 24 states
· Higher education spending cuts: 26 & 20 states
· Corrections spending cuts: 24 & 17 states
· Medicaid spending cuts: 16 & 16 states
· TANF [Temporary Assistance for Needy Families] spending
cuts: 6 & 8 states
· Cuts in local revenue sharing: 8 & 12 states
Ms. Eckl indicated that some states have implemented spending
reductions to education in both years. She added that in some
states, including Idaho, these reductions are less than reductions
made to other programs.
Ms. Eckl noted that students and parents are bearing more of the
costs of higher education. She learned that larger funding
increases are usually appropriated to higher education in years of
economic recovery to "make up" for the earlier reductions.
Ms. Eckl next informed that some states are releasing inmates
convicted of nonviolent offenses earlier than their sentenced
terms.
Ms. Eckl addressed the combination of restricted eligibility and
curtailment of optional services in state Medicaid programs. She
added that restricted eligibility has been applied to TANF programs
as well.
Senator Hoffman asked the percentage of funding reductions to K-12
these programs in FY 02 and FY 03.
Ms. Eckl did not have that information, explaining that the survey
only asked how the fiscal gaps were being addressed. She qualified
that more details were provided from some states than others. She
exampled that in some states, budget reductions were made to
specific programs within K-12 education, such as after school
programs, language programs, teacher mini-grants and energy
subsidies, rather than imposing reductions to the foundation
funding formula.
Dealing with Shortfalls in FY 2002 & FY 2003
· State employee layoffs: 11 & 9 states
· Employee travel bans/restrictions: 19 & 14 states
· Employee hiring freeze: 19 & 13 states
· Delayed capital projects: 9 & 10 states
Ms. Eckl asserted that state employees have been affected by the
current fiscal situation.
Ms. Eckl noted that delayed and cancelled capital projects were
some of the first actions taken when the fiscal problems began. She
noted that in some states, debt has been issued to fund capital
projects. She relayed that analysts are advising states to borrow
funds at this time due to low interest rates.
Dealing with Shortfalls in FY 2003
· Raising taxes by more than 1% (18 states)
· Raising taxes by more than 5 % (Indiana, Kansas,
Massachusetts, New Jersey and Tennessee)
· Hawaii was the only stated to cut taxes by more than 1%
Ms. Eckl stated that taxes were not increased in FY 02, although
they did in FY 03. She remarked that almost every state held
general elections in this past year and she ascertained that the
legislators recognized the "magnitude and severity" of the fiscal
situation and were willing to impose these tax increases despite
possible election consequences.
Ms. Eckl qualified that the Hawaii State Legislature allowed a
previously planned tax reduction to occur as scheduled.
Net State Tax Changes
By Year of Enactment, 1990 - 2002
[Bar graph showing percentage of prior year collections and
the amount for each year from 1989 through 2002.]
Ms. Eckl expressed the importance of understanding the "magnitude"
of the issue.
Ms. Eckl commented that if a 5.4 percent tax increase, the amount
implemented in 1991, was implemented in FY 04, approximately $27
billion would be generated.
2002 Net State Tax Changes
(in millions)
Personal income $1,605.3
Corporation income 2,315.6
Sales and use 976.5
Health care 338.7
Motor vehicle 136.6
Miscellaneous 724.5
Alcoholic beverage 7.0
Cigarette and tobacco 3,018.1
Net Change $9,122.3
Ms. Eckl pointed out that one-third of the tax increases were
imposed on tobacco products. She surmised implementing these
increases posed "the path of least resistance." She noted the
personal income tax increase figure is significantly influenced by
actions taken in the State of Massachusetts. She furthered that the
corporate tax in the State of New Jersey was "increased, modified
and reformed" with the intent to generate an additional $900
million.
FY 2004 Budget Projections
· The FY 2004 projected budget gap is $68.5 billion
· 36 states are facing gaps:
o 33 with gaps >5%
o 18 of these with gaps >10%
Ms. Eckl remarked that the budget gaps continue to increase with 36
states incurring a $70 billion aggregate budget gap. She indicated
that 12 states have not reported the status of their budget gap due
to the unknown costs related to passage of education-related ballot
measures, including class size reductions, which would be
significant. She informed that with the reporting from these
states, plus others that have not yet responded, the national
budget gap amount would increase.
Ms. Eckl stressed that many of the 18 states experiencing a budget
gap of over 10 percent, have been in this situation for four years.
FY 2004 Budget Gaps
[U.S. map indicating the percentage of the budget gaps for
each state, the District of Columbia and Puerto Rico.]
Ms. Eckl reiterated that this is a "widespread" and "severe
problem."
Possible Tax Increases?
· 25 states have tax proposals under consideration
· Sin taxes are the focus of early proposals
o 14 states with cigarette tax proposals
o 6 states with alcohol tax proposals
Ms. Eckl noted that although tobacco taxes have been recently
increased in some states, additional increases are under
consideration in some of the same states. She also informed that
some states are considering other types of taxes, such as sales tax
increases in the states of Idaho and California. She surmised this
is due to an understanding that excise taxes are unlikely to
generate significant revenue.
For More Information
www.ncsl.org
Ms. Eckl invited Members to visit the organization's website for
more detailed and updated information.
Co-Chair Green relayed recent reports that the governor of the
State of Wisconsin would eliminate thousands of state employee
positions. Co-Chair Green commented, "We are not alone."
Co-Chair Wilken noted the Alaska State Legislature has been
restructuring the state budget over the past several years and he
appreciated the assistance provided by the NCSL.
SFC 03 # 4, Side B 09:53 AM
Co-Chair Wilken continued sharing that he traveled to Illinois,
Wisconsin, Washington and Arizona, prior to the start of this
legislative session. He indicated that the headlines from a recent
Phoenix, Arizona relating to budget difficulties and proposed
solutions could be applied to any of those states. He listed lower
revenue, increased Medicaid expenses and lack of economic
development as the reported problems, and the suggested solutions
to increase taxes, "steal from their neighbors", and "steal from
the corporations." He expressed that Alaska has the option of
developing other resources, which the other states do not have.
Senator Hoffman asked if the NCSL has information about school
construction occurring in other states. He admitted that budgets
are tight, but stressed that population increases require
additional facilities.
Ms. Eckl responded that her coworkers could provide detailed
information.
Senator Bunde told of conversations from lawmakers in other states
who assert that because the State of Alaska continues to pay
citizens annual dividends, it is not experiencing the same fiscal
crisis.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 09:57 AM
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