Legislature(2019 - 2020)SENATE FINANCE 532
07/09/2019 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Legislative Finance: Fiscal Overview: Budget and Fiscal Review and Updates | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
SECOND SPECIAL SESSION
July 9, 2019
9:02 a.m.
9:02:45 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Mike Shower (via teleconference)
Senator Bill Wielechowski
MEMBERS ABSENT
Senator Peter Micciche
Senator David Wilson
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Senator
Gary Stevens; Senator Chris Birch; Senator Scott Kawasaki;
Representative Sara Hannan; Representative Bart LeBon;
Senator Cathy Giessel; Representative Dan Ortiz;
Representative Andy Josephson.
SUMMARY
^LEGISLATIVE FINANCE: FISCAL OVERVIEW: BUDGET and FISCAL
REVIEW and UPDATES
9:06:04 AM
Co-Chair Stedman reviewed the agenda for the day. He
discussed that the governor had signed the operating budget
that had passed the legislature, but he had made vetoes
that substantially adjusted the financial position. The
committee would hear from the Legislative Finance Division
(LFD) during the current meeting. He relayed that during
the afternoon meeting the committee would hear from
Legislative Budget and Audit on the sweeping of funds at
the end of every fiscal year into the Constitutional Budget
Reserve (CBR) as constitutionally required if there was
debt incurred by the CBR. He shared that the committee had
planned to hear from the Office of Management and Budget
(OMB) during the week, but they were unavailable. He
detailed that the committee would begin the process of
compiling a piece of legislation that may include the
Permanent Fund Dividend (PFD) and other budget issues. He
noted there may not be numerous committee meetings in the
coming weeks. He remarked that the issues had been well
addressed over the previous four or five months.
Co-Chair Stedman noted that Senator Shower was online.
9:07:59 AM
AT EASE
9:08:08 AM
RECONVENED
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
provided a PowerPoint presentation titled "FY 20 Budget
Update," dated July 9, 2019 (copy on file). He informed the
committee that he was unable to respond to the impact of
particular vetoes - he did not have the information on what
the impacts would be. He began with a table on slide 2
titled "FY 20 Fiscal Situation as of July 9, 2019." The
first column showed the budget adopted by the legislature.
He pointed out that agency operations of $3.8 billion,
statewide items of $554 million, and transfers of $42
million, were all included in the operating budget. Other
appropriations in the column included the capital budget
and fiscal notes.
Mr. Teal explained that the capital budget included $172
million in projects directly funded from the CBR. He noted
that taking funding from the CBR required a three-quarter
vote, which had failed. Subsequently, there was currently
no capital budget. The assumption in the fiscal summary was
that all $172 million of the projects funded from the CBR
would be funded from the General Fund as unrestricted
general funds (UGF). He highlighted that all numbers on the
slide were UGF only. He explained that the desired outcome
was a balanced budget and there could only be a surplus or
deficit in UGF. There was no such thing as a federal
surplus or deficit at the state level. The same applied to
"other" funds and designated general funds (DGF).
9:10:37 AM
Co-Chair Stedman remarked that many Alaskans may be tuning
into the budget process for the first time; therefore, he
asked Mr. Teal to avoid using acronyms. He asked for a
definition of UGF and why they should be paying attention
to that versus all other funds.
Mr. Teal stated that UGF stood for unrestricted general
funds and reflected the money that could be appropriated at
any time for any purpose. Once an agency was appropriated
UGF, it had the ability to spend the funds. He detailed
that other funds, DGF, federal funds, and other non-general
funds, could be spent only if the revenue appeared. He
explained it was the reason there could not be a deficit in
anything other than UGF and why the fiscal summary focused
on UGF. He noted that the capital projects previously
funded by the CBR had not been funded because the
[supermajority] vote had failed. He relayed that at some
point the capital budget would be added to the special
session "call" and the unfunded projects would be replaced
with UGF.
9:12:31 AM
Co-Chair Stedman announced that the governor had signed the
capital budget that morning, and that there may be a
briefing on that budget in the afternoon. He remarked that
it may or may not be added to the special session call.
Mr. Teal clarified that even if the governor signed the
budget without making any vetoes, the $172 million for
capital projects funded by the CBR did not go to the
governor for signature. He remarked that it was a very
miniscule capital budget. He remarked that the capital
budget also included fiscal notes - the estimated cost of
implementing bills - that were typically attached to the
operating budget. He explained that the fiscal notes had
been attached to the capital budget in the current year. He
clarified that where the notes were attached was not
important - it was important that they were attached and
theoretically that money was appropriated from bills in
that way. He noted that the "crime bill" [HB 49] was
interesting because all $30.8 million should have been
funded via fiscal notes. He elaborated that those fiscal
notes were funded from the Power Cost Equalization (PCE)
fund. He had been told by staff that OMB Director Donna
Arduin had stated on the radio that the PCE fund would be
swept. He had not heard firsthand, but he was operating
under the assumption that PCE and some other funds would be
swept. If the PCE fund was swept, the crime bill would have
no funding available for implementation.
9:15:30 AM
Co-Chair Stedman asked Mr. Teal to explain what it meant to
"sweep" the PCE fund.
Mr. Teal replied that the Senate Finance Committee would
meet in the afternoon to address and explain the sweep of
the CBR. He explained that "sweeping" the PCE fund would
mean moving the entire fund balance of approximately $1
billion (along with some other funds) into the CBR. He
explained it was a constitutional provision (Article IX,
Section 17(d)) specifying that anytime money was taken from
the CBR (billions had been taken over time), the money was
to be replaced. He detailed that paying back the CBR meant
that any money left in the General Fund or sub-funds at the
end of the fiscal year available for appropriation, was
swept into the CBR. When the money was swept on June 30 it
was simply gone. He reported that the legislature typically
reversed that sweep, but the sweep did not occur in the
current year due to a failed three-quarter vote. Reversing
the sweep entailed taking money from the CBR just as if it
were being appropriated for any other purpose; therefore,
the action required a supermajority vote. He remarked that,
if the PCE fund was swept into the CBR, all $980 million in
the fund would be unavailable for FY 20 appropriations.
9:18:14 AM
Senator Wielechowski referenced Mr. Teal's statement that
the governor may sweep the PCE fund. He wondered where the
authority resided for the governor to decide whether or not
to sweep accounts or not.
Mr. Teal communicated his preference to address the
question later on slide 5.
Co-Chair Stedman added that the subject matter would be
addressed in more detail that afternoon. He provided
additional information about the afternoon meeting.
Senator Olson shared that he had done a radio report on PCE
earlier in the day. He asked about the current balance of
the PCE fund. He wondered if the balance was $970 million
minus the one-third that went to the crime bill [HB 49
passed the legislature in 2019].
Co-Chair Stedman requested a broader answer regarding the
timing mechanics of an FY 20 appropriation out of PCE or
any other account that would be swept. He asked for the
timing of the sweep as well.
Mr. Teal replied that it was probably best to leave the
question until reaching slide 5 that addressed the CBR
sweep and reverse sweep.
Senator Olson queried the mechanism to reverse the sweep to
put the money back into PCE.
9:21:03 AM
Co-Chair Stedman replied that it was an appropriation and
moving money from the CBR required a three-quarter vote of
both bodies and a signature by the governor. He held the
questions until later in the presentation. He noted that
the issue was not as clear as he or some others would like.
Co-Chair von Imhof referenced slide 2 and observed that the
second column pertained to vetoes. The slide also included
assumptions that some of the reverse sweeps would not
occur, such as crime, which would create a deficit of $9.8
million. She asked if Mr. Teal would address how the
reverse sweeps could potentially affect the bottom line.
Mr. Teal replied that the sweep or reverse sweep did not
affect the bottom line on slide 2. He explained that it
simply left FY 20 programs unfunded. He elaborated that it
did not spend or take money; the money was just unavailable
because it had been moved to the CBR and could not be
spent. He clarified that the sweep did not change the
deficit.
Co-Chair von Imhof thanked Mr. Teal for the clarification.
She noted that he had created an assumption about the crime
bill because it had been a high profile topic. In addition
to the vetoes, she wanted to discuss (in the afternoon
meeting) what else may not be funded if the reverse sweep
did not occur.
9:23:29 AM
Co-Chair Stedman agreed that the information would be laid
out for committee members and the public in the afternoon
meeting. He intended to address items that were funded and
items that were not funded. He noted there may be some
additive items from the [governor's] signing of the capital
budget.
Mr. Teal shared that he had been planning to discuss the
bottom line on slide 2 showing a $4.6 billion budget, but
based on the questions he thought it may be worth
digressing to discuss why the fiscal notes for the crime
bill had been funded with PCE funds. He could not answer
the question with certainty, but he described the gist of
the situation. There had been rumors that the governor
intended to expand the list of sweepable funds, which would
include PCE. Consequently, there had been some concern
about the possibility that the PCE fund would be swept. The
legislature had decided that if it funded something
important - like the crime bill - with funds that may be
swept, it would encourage the governor to leave the sweep
list at status quo.
Mr. Teal explained that funding the crime bill
theoretically put pressure or leverage on the governor to
avoid sweeping PCE or other funds. He had no idea whether
the strategy, which had occurred during the budget process,
would be successful. He noted that the statement from Ms.
Arduin had come much later. He stated that apparently the
administration still intended to sweep the funds, which
left crime bill funding an open question. He relayed that
slide 2 assumed that PCE funding for the crime bill would
be replaced with general funds, which would result in a
budget of $4.6 billion.
Co-Chair Stedman asked for verification that there was
currently no funding for the crime package that had been
signed the previous day.
9:26:39 AM
Mr. Teal clarified that if the PCE fund was swept, there
was no funding for the crime bill. However, if the governor
decided to leave the list of sweepable funds untouched, the
crime bill was funded. He explained it was not anything the
legislature could vote on or do anything about; the
decision was for the governor to make.
Co-Chair Stedman relayed that the issue would be discussed
further during the afternoon meeting.
Senator Hoffman shared that he had requested to hear from
specialists [in the afternoon meeting] on the PCE fund. He
had a legal opinion from Megan Wallace the director of
Legislative Legal Services regarding the PCE fund and
whether it was sweepable or not. The paper addressed the
Hickel v. Cowper case. He noted it could be interpreted
that the fund was not sweepable. He read an excerpt from
the legal opinion dated May 17, 2019 (copy on file):
Under this interpretation it seems clear that money
held by a public corporation of the state is, like
money in a trust fund, not "available" until
appropriate and, therefore, protected from the sweep.
On the face of this holding, it might legitimately be
concluded that the PCE endowment fund is not subject
to the "sweep."
Senator Hoffman shared that he would make copies of the
opinion for members. He elaborated that Ms. Wallace went on
to say there were other interpretations that could be held,
but the opinion above was the strongest in her view.
Co-Chair Stedman relayed that the legal opinion would be
copied and distributed to committee members after the
meeting. He noted that Ms. Wallace would address the
committee during the afternoon meeting along with several
other legal opinions.
9:29:40 AM
Mr. Teal relayed that the state currently had a governor
and attorney general who had publicly disagreed with court
interpretations of law and the constitution. The governor
was not necessarily acting in one way because it was what
had happened in the past. Additionally, the governor was
not necessarily relying on the legal opinions from
Legislative Legal Services. The governor was relying on the
Department of Law. He observed that the administration did
not seem to be shy about reinterpreting laws and policies.
He stated that "we simply don't know." He continued that
LFD had asked for lists of accounts that would be swept,
but the administration had communicated it would not
release the list to LFD. He believed Co-Chair Stedman had
also requested the list. The administration had reported it
would take several weeks to compile the list.
Mr. Teal continued to address slide 2. The budget adopted
by the legislature was $4.6 billion UGF, comprised
primarily of oil revenue. He relayed it was not unusual
that the state's traditional funding was roughly 50 percent
of its expenditures; it had been that way for a number of
years. The fact that revenue equaled about half the state's
expenditures went a long way towards explaining why the CBR
was virtually empty and it had contained roughly $15
billion several years earlier. The state did not have the
revenue to support the current level of expenditures.
Mr. Teal explained that the preceding year, the legislature
had supplemented traditional oil revenue with the percent
of market value (POMV) payout from the Permanent Fund
Earnings Reserve Account (ERA) to the General Fund. He
elaborated the POMV formula was set in statute and was $2.9
billion in FY 20. The POMV draw resulted in total revenue
of $5.2 billion and a surplus of $610 million before PFDs.
The governor had vetoed approximately $380 million UGF,
which when added to the existing surplus resulted in a
total surplus of approximately $1 billion. However, the
governor had also vetoed $1 billion in revenue by reducing
the payout from the ERA to the General Fund. He stated it
was a valid veto and resulted in a deficit of about $10
billion. He stated that the budget was constitutionally
required to balance. He highlighted that previous Governor
Bill Walker had vetoed a budget on the grounds that it was
not fully funded.
9:34:11 AM
Co-Chair Stedman pointed to an error on slide 2. He
believed the POMV revenue figure under the "FY20 Budget"
column should be $1.9 billion instead of $3.9 billion.
Additionally, he wondered if the $1 billion POMV figure
under the "Vetoes" column should be shown as a negative
number.
Mr. Teal apologized and agreed that the number [in the
"FY20 Budget" column] should be $1.933 billion and the $1
billion [in the "vetoes" column] should be negative.
Senator Wielechowski queried the impact of the vetoes on
federal funds. He asked if any matching or direct federal
funds had been lost.
Mr. Teal replied that he did not know the precise number of
federal funds that were lost. He noted the information was
easier to see in the capital budget. He shared that the
match rates change substantially in the operating budget.
Co-Chair Stedman interjected that the short answer to
Senator Wielechowski's was yes. He would work on getting an
impact list for the operating and capital budgets to
provide to committee members.
9:36:03 AM
Co-Chair von Imhof reported that specific to the capital
budget, the federal matching funds number was about $105
million UGF (or CBR funds in the case of the current year).
She would take a look to see what the signing had or had
not vetoed. Separately, she referenced Mr. Teal's mention
of a $9.8 million deficit [shown on slide 2]. She referred
to Mr. Teal's statement that former Governor Walker had
vetoed a budget that had a deficit. She stated that the
call for $10 million was easily correctible with the
assumptions that DOR provided with oil at $65 per barrel.
She noted that the price had been above that figure and was
not often far below the amount. She reasoned that depending
on what oil did between the present day and January, the
[$10 million deficit] could easily be rectified. She
pointed out that the situation was a moving target annually
- there was always some type of budget surplus or deficit
throughout the year. She stated it was nothing new; it was
something the legislature had to deal with all of the time.
Co-Chair Stedman asked Mr. Teal to discuss "headroom" or a
margin of extra funds available to insulate the state from
reasonable financial and oil market swings.
Mr. Teal agreed with Co-Chair von Imhof that oil prices
were volatile; therefore, actual oil revenue was unknown.
He explained that a point in time was used. Given the last
official forecast, the state may have a deficit of $9.8
million. He explained that if oil prices increased, the
deficit could be erased; however, if prices went down, the
deficit could increase. The normal method the legislature
used to address the problem, was to pass a CBR draw with a
supermajority vote. He elaborated that the legislature
includes a provision in the budget specifying that if oil
prices came in lower than expected, money would
automatically be taken from the CBR to make up the
difference.
Mr. Teal highlighted that use of the CBR had not been
approved in the current year; therefore, Alaska was looking
much more like other states were. Other states looked at
the official forecast when the budget was compiled and over
time the legislative finance and departments of revenue
looked closely at revenue to ensure it was tracking. He
explained that if revenue was not tracking, the legislature
often came back in special session to make additional cuts.
He had seen the situation play out in other states much
like a subcommittee where oil was down $200 million, and
the state had to find $200 million in cuts from programs
halfway through the year. Some states did increase revenue,
but it was very difficult of Alaska to do so. He explained
that Alaska did not have existing taxes and implementing
new taxes took longer to set up.
Mr. Teal continued that although the state may end up with
a bigger deficit or no deficit as oil fluctuated annually,
the normal means of addressing the issue had not been used
in the current year.
9:40:59 AM
Co-Chair Stedman reported his intention to let Mr. Teal get
through a slide before questions were taken.
Mr. Teal advanced to slide 3 and relayed that the budget
may be balanced in its current state. He discussed there
was not currently a [funded] capital budget - the
assumption was the legislature would replace the $172
million on slide 2 with UGF. He pointed out that it may not
happen, either by legislative action or veto. He continued
that $31 million for crime bill funding may be available if
the PCE fund was not swept into the CBR. He noted that no
one knew whether the fund would be swept. Additionally,
there was an $18.7 million error in the Medicaid veto that
may be corrected by the legislature. He explained that when
the governor vetoed the Adult Preventative Dental program,
he had vetoed general funds instead of federal funds. He
elaborated that the governor had intended to veto $9
million in general funds and $18.7 million in federal
funds. However, the federal funds had been left alone (even
though the state would not receive the funds because they
required a state match) and general funds had been
eliminated. He reported that the governor had vetoed an
extra $18.7 million in general funds.
Mr. Teal furthered that the $31 million for the crime bill,
if paid from PCE, would reduce the deficit. He relayed that
if the $18.7 million veto of general funds was rectified by
appropriating general funds back and removing federal
funds, the deficit would increase. He highlighted that if
all of the actions on slide 3 were taken it would result in
a surplus of about $2 million to $3 million. He
characterized the surplus as a very tight budget that left
no safety valve or headroom if revenue fell short of
projections. Additionally, the budget would leave no money
for supplemental appropriations.
Mr. Teal remarked that it was a large wildfire year, which
would take supplementals. The legislature had addressed the
2018 earthquake in 2019, but it may require several million
dollars more. Medicaid had also been vetoed strongly. He
reported it was easy to start talking about potential
supplementals of a couple hundred million dollars. He noted
there was not way to address that issue. He characterized
the situation as risky and high pressure. He noted that oil
prices may go up and the state may wind up with $300
million in unexpected revenue that would allow the funding
of the supplemental requests without worrying about a
deficit.
9:45:17 AM
Co-Chair Stedman asked Mr. Teal to elaborate on the $18.7
million error. He referenced Mr. Teal's statement that the
governor had inadvertently vetoed $18.7 million from
general funds. He asked what other impacts the shortage of
general funds would have on the budget.
Mr. Teal answered that LFD had simply adjusted the vetoes
column [on slide 2] and increased the governor's vetoes by
$18.7 million. The slide showed vetoes of $379 million. He
explained that the governor's veto report showing UGF funds
would be $18.7 million less.
Mr. Teal noted that the numbers on slide 2 did not include
dividends. He remarked that dividends were the primary
focus of the current special session. He addressed slide 4
titled "What Does This Mean for Dividends?" He explained
that the budget was balanced and there was no UGF available
to supplement dividends; any payment of dividends from the
General Fund would result in a deficit. He discussed that
the governor vetoed $1 billion of the POMV payout from the
ERA to the General Fund, which left $1 billion in the ERA
to pay dividends. He acknowledged there was much more
available in the ERA; however, the payout from the ERA was
limited by statute to 5.25 percent. He elaborated that
spending more than $1 billion would exceed the statutory
payout. He shared that the $1 billion would pay a PFD of
about $1,500. He was not prepared to address any
speculation such as paying for the dividend out of the CBR,
a second round of dividends in the coming year, or changing
the [dividend] formula.
9:48:49 AM
Co-Chair Stedman asked for more detail about the ERA.
Mr. Teal replied that the ERA contained the earnings of the
Permanent Fund that were set aside and available for
appropriation at any time, for any purpose with a simple
majority vote. The only issue with taking money from the
ERA was the statutory 5.25 percent POMV withdrawal limit.
There were also fiscal issues with taking funds from the
ERA. He explained that every dollar spent from the ERA,
whether spent on current dividends or anything else,
reduced future dividends. He explained that dividends were
based on the earnings of the fund and anything that reduced
the value of the entire fund, reduced the earnings of the
entire fund, which reduces dividends. The statutory limit
on the payout had been implemented for sustainability. He
noted that legally, the legislature could draw as much as
it wanted from the ERA; however, if it took more than a
sustainable amount - which had been determined to be 5.25
percent, dropping to 5 percent in the next budget cycle -
the draws would be unsustainable and the Permanent Fund
would lose value. Exceeding the draw limit would mean
paying out more than the fund could afford to pay out and
keep the inflation adjusted value of the fund steady.
Co-Chair Stedman added that the fund would lose value over
time in perpetuity.
9:51:26 AM
Mr. Teal highlighted a table on slide 5 titled "FY20
Potential Impacts Resulting from Not Reversing the CBR
Sweep." The focus during the special session had been on
dividends and veto overrides. He thought the focus was
probably detrimental to another issue. He explained that
the CBR was created as a shock absorber that was supposed
to have money flowing out when revenue came in unexpectedly
low and it was supposed to be repaid by sweeping money back
in at the end of every fiscal year when there was more
money than anticipated. He detailed that at the time the
CBR was created, the state's revenue stream was oil. He
discussed the volatility of oil that resulted in extra
money in some years and less money in other years. When the
state received extra money, it went into the CBR and when
there was a shortage, money was withdrawn.
Mr. Teal understood that there would be a discussion on the
accounting and legal aspects of the CBR sweep and reverse
sweep during the afternoon meeting. He would provide a
budget perspective. He explained that the constitution
mandated sweeping all of the money from the General Fund
and its sub-funds into the CBR on June 30. The reverse
sweep, which required a supermajority vote of the
legislature, put all of the money back where it came from.
He shared that failing to reverse the sweep was considered
a "nightmare" from an accounting perspective. He elaborated
it meant there were appropriations with no money to back
them. He believed it was right to be concerned about
accounting issues, but that was not the main point. The
main point was to try to make the money available for
spending, consistent with the budget; it was where the
reverse sweep became important.
Mr. Teal explained that if the reverse sweep did not occur,
appropriations from the accounts that were swept had no
money backing them. He looked at slide 5 and addressed
category 1 showing significant impacts resulting from not
reversing the CBR sweep. He noted there were three
categories, but he had not included the second two. He
highlighted that the impact information shown on slide 5
was a draft because LFD did not have a list of sweepable
funds. He noted his earlier mention that there were rumors
of a greatly expanded sweep. He did not know the veracity
of the rumors, but he thought it was fairly reasonable to
expect the sweep would be expanded. There was nothing
technical driving the expanded sweep. He relayed that there
was a longstanding list developed by accountants within the
Division of Finance that specified what was swept. He
shared that OMB would not release the list of funds to be
swept at the end of FY 19. He relayed that any expansion of
the list was a policy decision that was solely in the
governor's hands.
9:56:39 AM
Mr. Teal advanced to slide 6 titled "Regarding the Sweep to
the CBR." He used the PCE fund to explain what happened if
a fund was swept. He explained that the PCE fund would be
swept on June 30 and even though $60 million was set to be
appropriated from PCE, the money no longer existed, and the
appropriation had no money to back it. He detailed that PCE
and the Higher Education endowments had not been swept in
prior years.
Mr. Teal moved back to slide 5 and highlighted columns
showing total spending in the FY 20 budget, the FY 18
amount swept into the CBR, and the estimated June 30, 2019
sweep. He noted that some of the items were fairly large
such as the vessel replacement fund estimated sweep of $21
million. He expounded that sweeping the balance of the
vessel replacement fund before the FY 20 capital project
became effective would create a $3 million hole because
only $3 million was appropriated from the fund in FY 20. He
elaborated that there may have been plans to spend the
other $18 million in the next couple of years.
Mr. Teal reiterated that the FY 20 hole was only the $3
million appropriated for FY 20. He explained that the hole
was not necessarily equal to the amount being swept. The
total sweep was something in excess of $1.6 billion based
on the list LFD had created on slide 5. The list included
several funds that had not been swept the previous year
including PCE, the Veterans' endowment, and the Higher
Education endowment. He relayed that PCE and the Higher
Education endowment accounted for approximately $1.2
billion and the appropriations from those funds would not
be available in FY 20.
10:00:09 AM
Mr. Teal looked at the column showing the estimated budget
hole on slide 5 and noted that PCE and the Higher Education
endowments made up $85 million of the $111 million total.
He stated that if the funds were swept and removed, there
was no FY 20 funding and there would be no money for PCE in
the coming year. He reminded the committee that PCE was the
funding source for the crime bill, meaning there would be
no money for the crime bill implementation. He detailed
that if the Higher Education fund was swept, there would be
no money for the Washington, Wyoming, Alaska, Montana, and
Idaho (WWAMI) program or post-secondary scholarships and
grants.
Mr. Teal believed it was important to consider the items
and he found it unfortunate it appeared the sweep would not
follow precedent and that changes would occur without
public or legislative knowledge or input. He explained it
was not simply a matter of students finding out in late
August that their WWAMI funds or scholarship did not exist.
He questioned how many students would have to decide not to
go to school in the current year. Additionally, the
situation left the legislature unable to weigh the
consequences of the reverse sweep vote. He observed there
was much focus on obtaining a veto override vote and he
believed there should be just as much focus on getting a
reverse sweep vote in order for the money available in the
coming year to be consistent with the money appropriated by
the legislature and signed by the governor.
Mr. Teal elaborated that it was not possible to look at the
budget and rest easy because WWAMI, PCE, grants, and
scholarships had escaped the vetoes. He explained that in
addition to the vetoes, the lack of a reverse sweep could
essentially end programs in FY 20. He highlighted that PCE
and the Higher Education fund alone impacted $85 million
and the money in people's pockets. He noted that the
University had a cut of $130 million, which did not include
the several million it received in tuition and grant money
from people who would no longer be receiving the grant
money and would be unable to attend.
Mr. Teal considered legislators' questions about the impact
on people and federal matching funds. He explained that for
federal funds with a matching requirement it was more
complicated than just saying "if we cut this, then you lose
an equal percent of federal money." He continued that there
could be several layers to the vetoes and the sweepable
funds.
10:04:52 AM
Co-Chair von Imhof stated that she would hold her questions
until the afternoon meeting. She commended Mr. Teal for his
testimony regarding the PCE fund and Higher Education fund.
She stressed that while WWAMI had not been vetoed, the
public should be aware that it still may not be funded
without the reverse sweep. She noted that WWAMI was one of
many items in the same boat.
Senator Bishop looked at slide 5 and highlighted the State
Training Employment Program (STEP) and the Technical
Vocational Education Program (TVEP) that were paid for
solely by working Alaskans. He thought there could be some
challenges in that area.
Co-Chair Stedman remarked that the issue could be directed
to the auditor during the afternoon meeting.
Senator Olson noted that the reverse sweep was typically
included in the operating budget signed by the governor. He
asked if the legislature was at fault for not including the
language in the budget.
Mr. Teal answered that typically the governor would want a
reverse sweep. He equated the absence of a reverse sweep to
throwing sand in the gears of government. He explained that
different things happened to different funds. The FY 20
budget included over $8 million for STEP.
Co-Chair Stedman asked Mr. Teal to state the full name of
the STEP program.
Mr. Teal replied that STEP stood for State Training
Employment Program. He explained that the program was a
diversion of unemployment insurance contributions paid by
employees.
10:07:47 AM
Mr. Teal believed Senator Bishop's point was to question
why the governor would sweep money that employees
contribute to the unemployment insurance fund. He detailed
that the fund had been specifically designed to educate and
train unemployed Alaskans. He advised the legislature to
ask the governor why he would want to sweep the funds. He
reiterated his earlier statement that not reversing the
sweep was like throwing sand in the gears of government. He
stated that a person may not like designated funds in
general, but he did not know the governor's reason for not
supporting a reverse sweep. He explained that most
governors supported the reverse sweep because without a
reverse sweep, money available for the programs was
inconsistent with the appropriations in the budget.
Mr. Teal noted that LFD had highlighted funds in gray [on
slide 5] that had not been swept in the past that were
likely to be added to the sweep in the current year. He
stated that whether an item was replenishable was an
important consideration in the reverse sweep. For example,
the estimated sweep for STEP was $3.5 million and the hole
in the budget was less than $500 million. He explained that
money came into STEP during the year. He detailed that at
the beginning of the year STEP may have no money to hand
out grants to train or educate unemployed people. However,
contributions came in during the year, which were available
to spend. He continued that some programs brought in more
during a year than was appropriated; those programs would
be fine at the end of the year. He detailed there were some
accounting oddities they would have to get over at the
beginning of the year, but accounting could be cleared up
by the end of the year.
Mr. Teal noted the same thing may be true for the Alaska
Marine Highway System (AMHS) fund - the money was swept,
but ticket sales could replace the money. He explained that
general funds could be substituted at the beginning of the
year and replaced later on. It was the reason the absence
of a reverse sweep was an accounting nightmare.
Mr. Teal highlighted that there were other funds that were
non-replenishable. He cited the PCE endowment as an
example. He detailed that the fund earned money based on
earnings from the endowment. He explained that if the
balance was swept, funds were not replenishable. Once PCE
was swept, it was gone forever. He stated there was much
more to the list on slide 5 than the total shown. The issue
was complex. He could speak more in detail during the
afternoon meeting.
10:11:56 AM
Co-Chair Stedman relayed his intent to have Mr. Teal give a
brief review during the afternoon meeting on the capital
budget the governor had signed earlier in the day.
Senator Olson reiterated his earlier question. He asked if
the legislature was at fault for not including the reverse
sweep in the budget.
Mr. Teal replied in the negative. He clarified that the
reverse sweep had been included in the budget. He reminded
members that it required a supermajority vote to reverse
the sweep; that vote had failed. There was another
opportunity, assuming the legislature considered a capital
budget again, to put the reverse sweep vote in the capital
budget. He explained that perhaps the vote would come out
differently if people understood the consequences of
failing to reverse the sweep.
10:12:54 AM
Co-Chair Stedman stated it was a possibility. He
highlighted that there would be several appropriation bills
between the present day and the next May. He stated that
the accounting would only worsen the later the sweep was
done, if it was done at all.
Senator Wielechowski remarked that failing to fund PCE
would impact thousands of Alaskans. He elaborated that the
crime bill would impact thousands of Alaskans, WWAMI would
impact dozens to hundreds of people, and postsecondary
scholarships would impact hundreds to thousands of
Alaskans. The impacts would begin in August. He asked if
Mr. Teal had stated that the governor had the ability to
reverse sweep the items himself.
Mr. Teal responded that the reverse sweep required a
supermajority vote of the legislature. The governor's
policy decision pertained to what was subject to the sweep.
He noted that the funds shown in gray on slide 5 including
PCE, Veterans', and Higher Education, had not been swept in
the past. He explained it was the governor's policy
decision to sweep the funds; if he did not sweep the funds,
the programs would continue without need for a reverse
sweep. He stressed that there were only rumors about what
the governor would sweep.
Senator Wielechowski planned to ask Legislative Legal
Services additional questions [during the afternoon
meeting]. He asked for verification that even if the
legislature passed the reverse sweep, the governor could
choose not to sweep the funds back into their subaccounts.
10:14:54 AM
Mr. Teal replied in the negative. He clarified that the
reverse sweep was fairly simple language. He explained that
exactly what was swept was not specified, but everything
that got swept was put back where it came from. The
language meant that even if the governor made a policy
decision to sweep the PCE fund and Higher Education fund,
passing the reverse sweep would put the money back into the
funds. He noted that the governor could veto a reverse
sweep; however, a vote that already had a supermajority
would theoretically be the same vote as a veto override. He
reiterated that it was possible the governor could veto a
veto override and say that he did not want the reverse
sweep at present. He highlighted Co-Chair Stedman's
statement that the legislature had until May to reverse the
sweep. He agreed but highlighted the example of a student
using a grant scholarship or WWAMI funds paying for their
education. He underscored that if the money was not
available for the student in August through January, they
would miss the school year. He explained that reversing the
sweep [after that time] would not change the scenario.
10:16:24 AM
Senator Hoffman shared that when the constitutional
provisions had been discussed regarding the CBR, he had
been the chair of the House Finance Committee that had
reviewed specifics in detail. He did not recall the
dialogue where the decision about what was swept and what
was not swept was at the governor's discretion. He found it
a bit disturbing to be placed in a situation where
governors in the past had deemed the items to be
nonsweepable. He noted that the legal opinion he had
mentioned earlier specified that PCE was established by the
Alaska Energy Authority (AEA), a separate and independent
public corporation. The opinion cited the Hickel v. Cowper
case where the only amount actually appropriated was
counted as available for the purposes of applying the
formula under Article IX, Section 17(b). The only portion
appropriated by the legislature was $83 million for PCE. He
stressed that the legislature had not appropriated the
endowment itself. He thought it would be interesting to
hear what the legislature's legal counsel said during the
afternoon meeting and whether the issue would need to be
finalized by the court and not left to the discretion of
whoever was governor at any given time. He emphasized that
as a member of the legislature who had voted on the
constitutional change, it was not his interpretation.
Co-Chair Stedman responded that the committee would address
the issue during the afternoon meeting. He noted that being
subject to the political whims of whoever was the governor
was "quite the can of worms."
10:19:04 AM
Senator Wielechowski had been told that in prior budgets
there had been a provision giving DOR the ability to use
the CBR for general cashflow needs. He thought it had not
been included in the current budget. He asked Mr. Teal if
the situation created any cashflow issues.
Mr. Teal answered that the provision was in the budget and
did not require a supermajority vote. He stated it was a
quirk of the constitution that the CBR had to have an
investment purpose. He explained that early in the year
when oil revenue had not yet come in and money went out to
school districts and others, there was a cashflow issue.
The issue was typically taken care of by borrowing from the
CBR via a memorandum of understanding. As long as the money
was repaid with interest during the year it was considered
borrowing and not a withdrawal. There would be other ways
to handle the cashflow if the provision was not passed, but
he believed it was included in the budget for the current
year.
Co-Chair Stedman highlighted the existence of a report that
went through the cash draw scenario the state would face if
there was a deficit. The document included a pecking order
of accounts. He intended to have the document in front of
the committee in the coming winter for review. He believed
legislators may want to have a discussion about some of the
items. He noted that another backup account was the ERA. He
would provide Senator Wielechowski with a copy of the
information.
10:21:52 AM
Senator Hoffman asked if Mr. Teal planned to review slide
6.
Co-Chair Stedman responded that Mr. Teal had already
reviewed the slide. He referenced the Oil and Hazardous
fund at the top of slide 5 and recalled there was a minimum
balance requirement and a 1 cent and 4 cent tax on the flow
of oil through the pipeline. He asked Mr. Teal for a high
level description of the fund. He did not want to
inadvertently trigger a tax increase issue.
Mr. Teal replied that there was a one cent per barrel tax
on oil passing through the pipeline. The tax was triggered
when the balance of the Oil and Hazardous [Substance
Release] Prevention and Response Fund reached $50 million
or below. He relayed that the balance had been under $50
million for a couple of years and he expected it to remain
that way. Due to the balance, the tax was already "on" and
the legislature would not be causing a tax increase by
sweeping the balance.
Co-Chair Stedman asked about a 4 cent tax.
10:23:33 AM
Mr. Teal replied that the 4 cent tax was affected by the
sweep, but there was no tax that would be triggered by a
balance.
Senator Hoffman asked for verification that the SBR account
had been swept and was no longer available.
Mr. Teal replied in the affirmative. He elaborated that the
SBR had a balance of about $172 million. He detailed that
the account had typically been relied on for supplemental
funds. For example, if a supermajority vote to take funds
from the CBR was not obtained to fill a deficit caused by a
lack in oil revenues, there was $172 million in the SBR
that could be accessed with a simple majority. He reported
that the money was sweepable and unless there was a reverse
sweep, the funds would not be available at present or in
the future.
Co-Chair Stedman highlighted that the SBR had once
contained several billion that was amassed ten years
earlier. He noted that the SBR and CBR were the two primary
savings accounts.
Co-Chair Stedman thanked the meeting participants and
relayed the committee would meet in the afternoon.
ADJOURNMENT
10:25:20 AM
The meeting was adjourned at 10:25 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 7 9 19 SFC FY20 Fiscal Situation.pdf |
SFIN 7/9/2019 9:00:00 AM |
FY20 LFD July Fiscal Analysis |