Legislature(2017 - 2018)SENATE FINANCE 532

01/20/2017 09:00 AM FINANCE

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09:03:00 AM Start
09:03:32 AM Presentation: Overview of the Governor's Fy 18 Budget Request
09:52:27 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Overview FY18 Operating Budget TELECONFERENCED
David Teal, Director, Legislative Finance
Division
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 20, 2017                                                                                           
                         9:03 a.m.                                                                                              
                                                                                                                                
9:03:00 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:03 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Mike Dunleavy                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
David Teal, Director, Legislative Finance Division.                                                                             
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION: OVERVIEW OF THE GOVERNOR'S FY 18 BUDGET                                                                           
              REQUEST                                                                                                           
                                                                                                                                
9:03:32 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy  made note  of  the  recent United  States                                                                    
Presidential inauguration.                                                                                                      
                                                                                                                                
Co-Chair MacKinnon noted  that the day was  the first Friday                                                                    
of  the  session in  which  the  legislature honored  Alaska                                                                    
Natives by wearing the regionally  distinct kuspuk [from the                                                                    
Yup'ik  'qaspeq'].  She  discussed the  history  of  "kuspuk                                                                    
Friday." She felt privileged to wear a kuspuk.                                                                                  
                                                                                                                                
^PRESENTATION:  OVERVIEW  OF  THE GOVERNOR'S  FY  18  BUDGET                                                                  
REQUEST                                                                                                                       
                                                                                                                                
9:05:19 AM                                                                                                                    
                                                                                                                                
DAVID TEAL,  DIRECTOR, LEGISLATIVE FINANCE  DIVISION, stated                                                                    
that  he would  present the  Legislative Finance  Division's                                                                    
(LFD) perspective  on the governor's  FY 18  budget request.                                                                    
He  thought it  was possible  to do  so with  just a  fiscal                                                                    
summary,   but  he   had  additional   information  to   add                                                                    
perspective and  information. He discussed  the presentation                                                                    
"Overview of the Governor's FY  18 Budget Request," (copy on                                                                    
file).                                                                                                                          
                                                                                                                                
Mr.  Teal  turned  to  slide  2,  "Figure  1:  Total  Agency                                                                    
Operating  Budgets,  Statewide   Items  and  Capital  Budget                                                                    
Compared  to Revenue."  The slide  showed a  bar graph  that                                                                    
depicted  a  history of  spending  compared  to revenue.  He                                                                    
qualified  that  the  LFD  fiscal  summary  did  not  differ                                                                    
significantly from  that of the governor.  The summaries did                                                                    
not  match  precisely,  but that  differences  were  more  a                                                                    
matter of  where numbers  were placed.  He noted  that there                                                                    
was  a  new  legal  opinion pertaining  to  Rural  Education                                                                    
Attendance Areas that contributed to  a recent change in the                                                                    
summary.                                                                                                                        
                                                                                                                                
Mr. Teal  prefaced further discussion  by pointing  out that                                                                    
revenue was represented by the  solid line on the graph, and                                                                    
the bars  represented expenditures. He pointed  out that the                                                                    
expenditures trended  upward from FY  07 to FY 14,  and then                                                                    
fell rapidly  through FY 17 and  FY 18. He remarked  that FY                                                                    
18 spending was indistinguishably similar to FY 17.                                                                             
                                                                                                                                
9:07:39 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:09:57 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair MacKinnon discussed the materials provided by LFD.                                                                     
                                                                                                                                
Mr.  Teal continued  discussing slide  2, noting  that there                                                                    
were some key  points to consider, including that  FY 18 was                                                                    
the sixth  consecutive year of  deficits. He  suggested that                                                                    
the deficits were not insignificant,  but rather were fiscal                                                                    
gaps known about  in advance that could  be termed long-term                                                                    
"structural"  deficits.  He  acknowledged  that  that  state                                                                    
continued  to struggle  with  deficits  despite the  massive                                                                    
spending reductions  reflected on the chart.  He pointed out                                                                    
that the chart  showed a $4.4 billion  reduction in spending                                                                    
from peak spending in FY 14 to FY 17.                                                                                           
                                                                                                                                
9:12:05 AM                                                                                                                    
                                                                                                                                
Mr. Teal  moved to slide  4, "Figure 2: Total  Operating and                                                                    
Capital  Budgets," to  address  Senator Micciche's  question                                                                    
about total spending. He discussed  the drop in the price of                                                                    
oil, and  thought it was understandable  that Alaskans would                                                                    
have confidence  that oil prices  would recover.  He thought                                                                    
people may conclude that government  spending had risen even                                                                    
though  revenue had  been decreasing  for  the past  5 or  6                                                                    
years.  He noted  that Figure  2 showed  what had  happened,                                                                    
with  blue  bars  representing  Unrestricted  General  Funds                                                                    
(UGF) and  with other  funds stacked on  top. He  noted that                                                                    
the  bars were  consistently at  about $6  billion. He  drew                                                                    
attention to the  big jump in FY 15, which  reflected the $3                                                                    
billion  deposit  from  the  Constitutional  Budget  Reserve                                                                    
(CBR)  to retirement  funds. He  summarized that  other than                                                                    
the jump, the state had not continued to spend in total.                                                                        
                                                                                                                                
Co-Chair MacKinnon  asked if Designated General  Funds (DGF)                                                                    
included receipts of the University for tuition.                                                                                
                                                                                                                                
Mr. Teal answered in the affirmative.                                                                                           
                                                                                                                                
Co-Chair  MacKinnon considered  that  some  might think  the                                                                    
state should cut DGF; when  in fact the funds were sometimes                                                                    
revenue  being  generated  from  other  sources  to  support                                                                    
activities that might be discreet from agency operations.                                                                       
                                                                                                                                
Mr. Teal  considered that  the topic  was complex,  as there                                                                    
were some  designated funds that were  unrestricted. He used                                                                    
the example of  the Alcohol Fund, which was  a general fund,                                                                    
and  was   money  deposited   and  designated   for  certain                                                                    
purposes.  He  explained  that   cutting  such  a  fund  was                                                                    
equivalent to cutting UGF.                                                                                                      
                                                                                                                                
Mr. Teal elaborated that there  were other examples (such as                                                                    
park receipts in the Department  of Natural Resources) which                                                                    
simply  covered the  department's  cost  of doing  business.                                                                    
Similarly, the University used tuition.  He was not sure how                                                                    
students  would respond  to the  legislature taking  tuition                                                                    
funds to  use for ferry  operations, for example.  He stated                                                                    
that  designated  funds  were  typically  designated  for  a                                                                    
reason, and  often because of  legislative intention  to use                                                                    
the money in a specific way.                                                                                                    
                                                                                                                                
9:15:56 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:17:38 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair MacKinnon  asked Mr. Teal to  provide the committee                                                                    
a  chart that  broke designated  funds into  categories. She                                                                    
understood that University receipts  were a large portion of                                                                    
designated funds, and wanted more detail.                                                                                       
                                                                                                                                
Mr. Teal agreed to provide the information.                                                                                     
                                                                                                                                
Senator  Micciche  requested  a detailed  document  of  what                                                                    
receipt  authority was  directly connected  to corresponding                                                                    
expenditures.  He thought  the committee  would be  spending                                                                    
more time on looking at DGF than it typically had.                                                                              
                                                                                                                                
Co-Chair MacKinnon  discussed the  Revenue Sources  Book for                                                                    
2018, and  thought the  administration had  done a  good job                                                                    
pointing out changes to the  book, and had dedicated Chapter                                                                    
1 to discuss DGF.                                                                                                               
                                                                                                                                
Mr. Teal  commented that the  previous interim LFD  had made                                                                    
note  of  designated  funds  that had  been  used  for  non-                                                                    
designated purposes. He furthered  that the occurrences were                                                                    
now flagged within  the budget. He continued  that the graph                                                                    
was not  something he normally  would have included,  but he                                                                    
thought  it was  a valid  inquiry  into what  the state  was                                                                    
spending. He thought it was important to get on the record.                                                                     
                                                                                                                                
9:20:22 AM                                                                                                                    
                                                                                                                                
Mr.  Teal turned  to  slide 5,  "Figure  3: FY07-FY18  Total                                                                    
Budgeted  Positions,"  which  displayed   a  bar  graph.  He                                                                    
specified that there  was a peak of  about 25,000 positions.                                                                    
He  qualified that  the figure  represented 25,000  budgeted                                                                    
positions rather  than paychecks, and the  data would differ                                                                    
than  that  the  Office  of   Management  and  Budget  (OMB)                                                                    
provided.  He continued  that the  number  of positions  was                                                                    
down  to  22,000  positions  in   the  current  year,  which                                                                    
signified a  reduction of  approximately 2,400  positions or                                                                    
10 percent from the peak.                                                                                                       
                                                                                                                                
Mr. Teal  turned back to  slide 2,  noting that at  the same                                                                    
time the expenditures declined by  $4.4 billion, revenue had                                                                    
declined by $5.1 billion. He  reflected that during times of                                                                    
high  oil  prices,  a  budget   of  $5  billion  would  have                                                                    
typically produced a surplus of  about $3 billion. Currently                                                                    
the  price of  oil  was  accompanied by  a  deficit of  $2.7                                                                    
billion.                                                                                                                        
                                                                                                                                
Mr. Teal  did not  believe that  "crisis" was  an inaccurate                                                                    
way  to describe  the state's  current fiscal  situation. He                                                                    
recounted that  the state had built  massive reserves during                                                                    
the times when revenue was  very high, and had been spending                                                                    
the  reserves  quickly because  of  the  large deficits.  He                                                                    
thought  it  was  useful  to look  at  the  state's  reserve                                                                    
balances.                                                                                                                       
                                                                                                                                
Mr. Teal turned  to slide 7, "Figure  4: End-of-Year Reserve                                                                    
Balances,  FY07-FY18."  The graph  showed  at  one time  the                                                                    
between  the  CBR  and the  Statutory  Budget  Reserve  Fund                                                                    
(SBR), the state had over $16  billion in reserves. In FY 18                                                                    
the reserves  were down to  approximately $2  billion, which                                                                    
would be insufficient to get  the state through FY 19, while                                                                    
sticking to  existing revenue sources  and using the  CBR to                                                                    
plug the deficits that occurred.                                                                                                
                                                                                                                                
9:22:53 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy asked  if  Mr.  Teal's projected  scenario                                                                    
included reductions.                                                                                                            
                                                                                                                                
Mr. Teal answered in the negative.                                                                                              
                                                                                                                                
Mr.  Teal  turned back  to  slide  2, noting  that  spending                                                                    
included spending  from the Earnings Reserve  Account (ERA),                                                                    
which  included both  dividends  and inflation-proofing.  He                                                                    
recalled  that  the  spending   discussions  in  the  recent                                                                    
presentation by  the OMB had excluded  dividends. He thought                                                                    
it  was important  to be  consistent  in comparing  spending                                                                    
over different years.                                                                                                           
                                                                                                                                
Mr.  Teal informed  that LFD  had included  dividends as  GF                                                                    
expenditures, because it was what  the governor's budget had                                                                    
done.  He  continued that  to  make  it comparable  to  past                                                                    
years, LFD had included  dividends and inflation-proofing in                                                                    
the  expenditure bars  for  past years.  He  noted that  the                                                                    
revenue line  was adjusted upward  by the same  amounts, and                                                                    
in FY 17  and FY 18, the dashed line  on the graph indicated                                                                    
the addition of Percent of Market Value (POMV) payouts.                                                                         
                                                                                                                                
Mr.  Teal  discussed  POMV   payouts,  explaining  that  the                                                                    
percentage pertained  to the market  value of  the Permanent                                                                    
Fund specifically.  He relayed that the  governor's proposal                                                                    
was  to  pay  out  a  percentage (as  drafted  it  was  5.25                                                                    
percent)  of the  five-year prior  balance of  the Permanent                                                                    
Fund.  He specified  that in  FY  18, the  total payout  was                                                                    
approximately  $2.5 billion,  after net  dividends of  about                                                                    
$700 million there  would be an increase in  revenue of $1.8                                                                    
billion.                                                                                                                        
                                                                                                                                
Mr. Teal thought the most  important issue in the governor's                                                                    
budget was that the POMV  payout was included as GF revenue,                                                                    
and appropriations from  the ERA were classified  as UGF. He                                                                    
thought in order to understand  the meaning of the proposal,                                                                    
one had  to understand  how spending from  the ERA  had been                                                                    
treated in the past.                                                                                                            
                                                                                                                                
Mr. Teal  turned to  slide 7, "Figure  5: Past  Treatment of                                                                    
Appropriations  from  the  Permanent Fund  Earnings  Reserve                                                                    
Account." He explained  that the data was taken  from FY 16,                                                                    
but  was the  same as  all prior  fiscal summaries  for many                                                                    
years. He  drew attention  to line  55, which  reported $941                                                                    
million  in  spending  of  DGF.  On  the  line  beneath,  it                                                                    
indicated  that  there  was approximately  $1.4  billion  in                                                                    
spending on the Permanent Fund.  He emphasized that the $941                                                                    
million of  DGF did not  include the $1.4 billion,  and that                                                                    
signified   that  the   ERA   expenditures  (dividends   and                                                                    
inflation-proofing) had been off  budget. The items had been                                                                    
excluded from  expenditures and  excluded from  revenue, and                                                                    
were not rolled in to any totals.                                                                                               
                                                                                                                                
9:26:34 AM                                                                                                                    
                                                                                                                                
Mr. Teal tuned  back to Figure 1 on slide  2, observing that                                                                    
the combined  $2.5 billion POMV  payout and $700  million in                                                                    
dividends created  a $1.8  billion difference  shown between                                                                    
the solid and  dotted line. He remarked  that the governor's                                                                    
budget  along with  the proposed  Permanent Fund  Protection                                                                    
Act (PFPA) meant  that revenues covered about  84 percent of                                                                    
revenue instead of approximately  30 percent of revenue, and                                                                    
filled a tremendous amount of  the deficit. He noted that FY                                                                    
17  looked the  same  as FY  18, as  the  governor had  also                                                                    
requested a POMV payout from the Permanent Fund earnings.                                                                       
                                                                                                                                
Mr.  Teal  had many  questions  about  the POMV  payout.  He                                                                    
stated  there   was  nothing  illegal  about   requesting  a                                                                    
supplemental appropriation.  He noted that despite  the fact                                                                    
that  the  PFPA  did  not pass  the  previous  session,  the                                                                    
governor had taken  steps to implement it  anyway. The first                                                                    
step  was vetoing  dividends back  to the  level that  would                                                                    
have  been funded  in the  governor's  proposal. The  second                                                                    
step was in submitting the  FY 18 operating budget, in which                                                                    
the governor asked  for the payout that  would have occurred                                                                    
in FY 17 had his proposal passed via legislation.                                                                               
                                                                                                                                
Mr.  Teal referred  to a  question by  Senator Dunleavy  and                                                                    
mentioned  the legislature's  supermajority  vote to  access                                                                    
the CBR for  FY 17. Normally the state would  expect to take                                                                    
about $3  billion from the  CBR. With a $2.5  billion payout                                                                    
from  the ERA  in  FY 17  to  the General  Fund,  the FY  17                                                                    
deficit was  close to $500  million rather than  $3 billion.                                                                    
He stated that the CBR  balance was essentially $2.5 billion                                                                    
higher than it would have  been otherwise. He expressed that                                                                    
the state didn't really need to  take money from the ERA and                                                                    
put it  in the  General Fund  in FY 17;  it would  have been                                                                    
just as effective to take money  from the ERA and deposit it                                                                    
directly into the CBR.                                                                                                          
                                                                                                                                
Senator Micciche  suggested that  the funds would  have been                                                                    
just as  easy to deposit in  the CBR, but not  quite as easy                                                                    
to extract.                                                                                                                     
                                                                                                                                
Mr. Teal  agreed, and  reminded that the  ERA could  be used                                                                    
with  a  simple majority  vote,  while  the CBR  required  a                                                                    
supermajority three-quarters vote.                                                                                              
                                                                                                                                
Vice-Chair Bishop  asked about  the 84  percent differential                                                                    
increase in  the budget. He  asked if there was  $75 million                                                                    
in gas tax increase included in the amount.                                                                                     
                                                                                                                                
Mr.  Teal answered  in the  affirmative, and  clarified that                                                                    
revenue had covered 84 percent  of expenditures. Without the                                                                    
POMV payout, revenue would  cover approximately one-third of                                                                    
expenditures. He affirmed  that the gas tax was  built in to                                                                    
the  governor's budget;  and would  add $35  million in  the                                                                    
current year, and an additional $35 the following year.                                                                         
                                                                                                                                
9:30:57 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy mentioned  OMB  Director  Pat Pitney,  and                                                                    
thought  that there  appeared to  be (on  paper) a  shift in                                                                    
philosophy.  The previous  year there  had been  discussions                                                                    
about moving  money in  to the Permanent  Fund to  endow it;                                                                    
while the  proposed budget appeared  to be moving  money out                                                                    
in to the CBR.                                                                                                                  
                                                                                                                                
Mr.  Teal reiterated  that he  was able  to report  what the                                                                    
administration had  done, and  what the  effect was;  but he                                                                    
could not comment  on motivation. He posited  that the ERA's                                                                    
off-budget  status had  been a  reporting problem  since the                                                                    
inception  of the  Permanent Fund.  The  courts had  clearly                                                                    
stated that the ERA was  available for appropriation for any                                                                    
purpose, any  time. He thought the  statement would normally                                                                    
cause the  state to classify the  ERA as UGF. He  thought it                                                                    
would be problematic that even  in deficit years that the $8                                                                    
billion to  $10 billion  that was in  the ERA  balance would                                                                    
show as revenue in FY 18.                                                                                                       
                                                                                                                                
Mr.  Teal thought  it would  be very  distorting to  present                                                                    
budget documents  each year that showed  massive surplus. He                                                                    
related  that  the reporting  decision  had  been set  as  a                                                                    
precedent before  he was employed  at LFD. The  decision was                                                                    
in response to trying to  report what was available to spend                                                                    
without causing  the state  to spend  more than  it actually                                                                    
had. He  did not  think having  the Permanent  Fund earnings                                                                    
and the balance omitted from  GF revenue was the best method                                                                    
of accounting. He  continued that as soon as  the funds were                                                                    
reclassified from DGF to UGF,  there were huge implications.                                                                    
He  thought   the  committee  might  want   to  discuss  the                                                                    
implications with OMB Director Pitney.                                                                                          
                                                                                                                                
9:34:16 AM                                                                                                                    
                                                                                                                                
Mr.  Teal thought  a change  to accounting  practices should                                                                    
have been made  long ago; but there had not  been a pressing                                                                    
issue  when  the  CBR  balance was  high,  when  there  were                                                                    
surpluses,  and  when the  ERA  account  was only  used  for                                                                    
dividends and  inflation proofing.  By statute, the  ERA was                                                                    
designated  as  such, and  was  used  for nothing  else.  He                                                                    
thought that under the governor's  budget it was unavoidable                                                                    
to make  the reclassification, because  the ERA was  now UGF                                                                    
because there  was no inflation-proofing, and  the dividends                                                                    
came from GF rather from  the ERA. Neither of the designated                                                                    
uses for  the ERA were  in effect; and  the only use  of the                                                                    
ERA  was  to  put  it   into  the  UGF.  In  the  governor's                                                                    
presentation of the budget, there  was essentially no choice                                                                    
but to call the earnings reserve UGF.                                                                                           
                                                                                                                                
Mr. Teal looked at slide  9, "State of Alaska Fiscal Summary                                                                    
- FY17 and FY18 (Part  1)," and discussed four categories of                                                                    
funds: UGF,  DGF, Other State  Funds, and Federal  Funds. He                                                                    
noted  that  the fund  types  were  in decreasing  order  of                                                                    
flexibility. The  state could spend UGF  for anything, while                                                                    
conversely  federal  funds  generally had  a  very  specific                                                                    
purpose. He explained that the  fiscal summary also included                                                                    
four   categories   of  expenditures:   Agency   Operations,                                                                    
Statewide  Items,  the  Capital Budget,  and  the  Permanent                                                                    
Fund. He thought the most  significant number was the $121.5                                                                    
change in funding Agency Operations from FY 17 to FY 18.                                                                        
                                                                                                                                
9:37:08 AM                                                                                                                    
                                                                                                                                
Mr. Teal  showed slide  10, "Figure 6:  Partial View  of the                                                                    
Fiscal  Summary." He  commented that  the state  budget from                                                                    
the previous  session (after vetoes) had  been $3.9 billion.                                                                    
The  governor  built  from the  previous  budget  using  the                                                                    
incremental model, and there was  a $63 million reduction to                                                                    
start  FY  18.  There  were some  temporary  increments.  He                                                                    
mentioned  maintenance  increments   that  were  related  to                                                                    
obtaining a  supermajority vote the previous  year. He noted                                                                    
that   generally   salary    increments   were   contractual                                                                    
agreements,  but for  FY 18  most  of the  $15.8 million  in                                                                    
salary   increases  was   comprised   of  health   insurance                                                                    
increases.   The  health   insurance   increases  were   not                                                                    
contractual, but  not funding them  would be  the equivalent                                                                    
of  taking  an  unallocated  reduction  and  would  hit  all                                                                    
agencies with staff equally.                                                                                                    
                                                                                                                                
Mr.  Teal continued  discussing  slide 10,  noting that  the                                                                    
governor's  proposed  budget  started  with  a  $30  million                                                                    
reduction  from FY  17. He  observed that  the governor  had                                                                    
added  another  $38 million  in  decrements,  offset by  $31                                                                    
million  in increments.  There had  also been  fund changes,                                                                    
which were  the largest  of the  actions represented  on the                                                                    
data table.                                                                                                                     
                                                                                                                                
Mr.  Teal   discussed  DGF,   and  referenced   a  committee                                                                    
discussion as to  how the funds might be the  same as GF and                                                                    
in some cases,  UGF. He thought Department of  Fish and Game                                                                    
funds were  a good  example. The legislature  raised hunting                                                                    
and  fishing  license  fees. There  was  additional  federal                                                                    
money  flowing in  to  the  Fish and  Game  Fund, which  was                                                                    
classified  as  "Other"  funds. The  reason  the  fees  were                                                                    
raised was so  that the Fish and Game Fund  could be used to                                                                    
fund  more activities,  and  as a  result  UGF spending  was                                                                    
reduced. Some  of the fund change  was due to the  change in                                                                    
fees, but  most (roughly $70  million) was due to  the motor                                                                    
fuel tax.  The governor's  budget request  was approximately                                                                    
$3.7 billion and was a $121  million decrease from the FY 17                                                                    
budget for agency operations.                                                                                                   
                                                                                                                                
9:40:39 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy recounted  that during  a special  session                                                                    
the previous year, the legislature  was asked to appropriate                                                                    
$50 million for an insurance  issue. He asked if the funding                                                                    
was reflected in the current budget proposal.                                                                                   
                                                                                                                                
Mr. Teal  recalled that  a $55 increment  was in  the budget                                                                    
for  a fund  to subsidize  health premiums  for people  with                                                                    
high health  risk. He  explained that  there was  an ongoing                                                                    
deposit,  and  the  law  stipulated   that  $55  million  of                                                                    
insurance  premiums  were  deposited  into the  fund  on  an                                                                    
annual basis.  The money in  the fund  could be used  to pay                                                                    
claims. In  the current  year's budget,  there was  a switch                                                                    
from appropriations  (by fiscal  year) to  the need  for the                                                                    
premiums (by calendar year).                                                                                                    
                                                                                                                                
Senator Dunleavy  asked if that  the expense  was considered                                                                    
part of an ongoing effort.                                                                                                      
                                                                                                                                
Mr. Teal answered in the affirmative.                                                                                           
                                                                                                                                
Co-Chair  MacKinnon  conveyed  that   there  would  be  more                                                                    
discussion   on   the   matter,  as   they   committee   had                                                                    
specifically  communicated  it  would not  fund  the  amount                                                                    
repeatedly.                                                                                                                     
                                                                                                                                
Mr. Teal added  that the members should be  aware that pupil                                                                    
transportation was not  fully funded, and could  not be seen                                                                    
on slide 10  or on the fiscal  summary. Pupil transportation                                                                    
was funded at the same level as  it was funded in FY 17, and                                                                    
in FY  17 there was  a $6.35 million veto  of transportation                                                                    
funds.                                                                                                                          
                                                                                                                                
Mr. Teal  showed slide  11, "Figure 7:  Partial View  of the                                                                    
Fiscal  Summary." He  stated that  debt  service related  to                                                                    
school  funding, and  the governor  had  vetoed school  debt                                                                    
reimbursement.   In   the   FY  18   budget,   school   debt                                                                    
reimbursement  was  restored,  and   debt  service  was  up.                                                                    
Community assistance was zero in  the FY 17 management plan,                                                                    
and was  funded in other  ways. He  noted that there  was no                                                                    
funding of  any kind for  community assistance in the  FY 18                                                                    
budget.                                                                                                                         
                                                                                                                                
Senator  Dunleavy   asked  if  Mr.  Teal   saw  any  funding                                                                    
reflected for  trails money from receipts  from snow machine                                                                    
purchases. He  recalled there had  been a veto  the previous                                                                    
year.                                                                                                                           
                                                                                                                                
Mr. Teal stated that the  funds were restored in the capital                                                                    
budget.                                                                                                                         
                                                                                                                                
Mr. Teal  continued discussing Figure 7,  recalling that the                                                                    
governor  had vetoed  oil and  gas tax  credits down  to the                                                                    
statutory minimum  the previous  year. In the  current year,                                                                    
the tax credits were increased  by $44 million. He discussed                                                                    
funding  for other  statewide items.  He  recalled that  the                                                                    
previous year  about $90 million  in higher  education funds                                                                    
were  used  to   pay  a  portion  of   state  assistance  to                                                                    
retirement. The  expectation had been that  state assistance                                                                    
would fall by  $90 million, but it had only  fallen by about                                                                    
$30 million.                                                                                                                    
                                                                                                                                
9:45:46 AM                                                                                                                    
                                                                                                                                
Mr. Teal  showed slide  12, "Figure 8:  Partial View  of the                                                                    
Fiscal Summary." He noted that  the capital budget grew from                                                                    
$96 million the  previous year to $115 million in  the FY 18                                                                    
proposed budget.  He continued that  the increase was  not a                                                                    
surprise; it  was known  the previous  year that  there were                                                                    
some fund sources used that  would not be available the next                                                                    
year. The budget  was the minimum required  to match federal                                                                    
money. He pointed out total  spending of $4.3 billion, and a                                                                    
deficit of $2.7 billion.                                                                                                        
                                                                                                                                
Mr.  Teal showed  slide 13,  "Figure 9:  Accounting for  the                                                                    
Reclassification  of  the  Permanent Fund  Earnings  Reserve                                                                    
Account  from  Designated   General  Funds  to  Unrestricted                                                                    
General  Funds,"  where it  was  possible  to see  the  base                                                                    
scenario  and the  governor's request  while discussing  the                                                                    
Permanent Fund.  He pointed out  that the base  was defined;                                                                    
and  was revenue  excluding the  POMV payout  and additional                                                                    
royalties  under  the  PFPA.  He  explained  that  the  PFPA                                                                    
repealed the  statutory 25  percent on  new oil  fields that                                                                    
was  deposited to  the Permanent  Fund (roughly  $55 million                                                                    
annually).                                                                                                                      
                                                                                                                                
Mr. Teal continued discussing slide  13, explaining that the                                                                    
governor's proposed  spending, with dividends  classified as                                                                    
DGF,  led  to a  $2.7  billion  deficit.  He looked  at  the                                                                    
governor's  request;  which  reflected  an  additional  $2.5                                                                    
billion payout from the ERA,  the extra money that flowed to                                                                    
the General Fund rather than  to the Permanent Fund, and the                                                                    
same level  of expenditures.  To this  amount was  added the                                                                    
expenditures   for  dividends,   the  Capital   Income  Fund                                                                    
(another  fund   loaded  from  the  ERA),   and  some  other                                                                    
expenditures. There was a resultant  deficit of less than $1                                                                    
billion.                                                                                                                        
                                                                                                                                
9:48:21 AM                                                                                                                    
                                                                                                                                
Mr. Teal turned  to slide 14, "Figure  10 Potential Spending                                                                    
Increases," and thought the committee  might want to look at                                                                    
what  the governor's  proposed budget  did  not contain.  He                                                                    
thought  the slide  listed items  that  the committee  might                                                                    
want to address  as it went through the budget  process.  He                                                                    
addressed the proposed motor fuel  tax, which if not adopted                                                                    
would increase GF spending by $70 million.                                                                                      
                                                                                                                                
Mr.  Teal continued  discussing Figure  10 on  slide 14.  He                                                                    
indicated  that  community  assistance was  not  funded.  He                                                                    
recalled  that the  committee had  previously mentioned  the                                                                    
possibility   of  funding   community   assistance  with   a                                                                    
supplemental  budget.  He  thought the  committee  was  well                                                                    
aware  that  a  supplemental appropriation  did  not  really                                                                    
address the  problem, because the  funds would not  be there                                                                    
when  the communities  were developing  budgets. Communities                                                                    
would receive $30  million distributed in FY 18,  but if the                                                                    
legislature   did  not   put  $30   million   back  in   the                                                                    
distribution, in  FY 19 the  distribution would fall  to $20                                                                    
million.                                                                                                                        
                                                                                                                                
Mr. Teal  continued discussing potential  spending increases                                                                    
as listed  on slide  14. He stated  that if  the legislature                                                                    
were  to replace  the monies  to the  Higher Education  Fund                                                                    
(used  for retirement  assistance with  UGF), it  would cost                                                                    
$58 million. There  was no money in the  budget for deferred                                                                    
maintenance or  education projects of  any kind at  the K-12                                                                    
or university level. If it was  desired to pay more than the                                                                    
minimum  $74 million  for oil  tax credits,  there would  be                                                                    
additional  expenditures  to  consider. He  summarized  that                                                                    
there was a  total of $150 million to $250  million that the                                                                    
legislature could  be forced to  address and thus  bring the                                                                    
deficit up to slightly over $1 billion.                                                                                         
                                                                                                                                
Senator   Dunleavy  asked   if  Mr.   Teal  considered   the                                                                    
governor's  proposed  budget  to   be  a  fully  funded  and                                                                    
balanced   budget,  with   expenditures  matching   existing                                                                    
revenues and/or projected revenues.                                                                                             
                                                                                                                                
Mr. Teal answered in the negative,  and thought it was not a                                                                    
balanced budget  on a cash-flow  basis. There was  a deficit                                                                    
of $1 billion,  filled in the governor's budget  with a draw                                                                    
from the CBR  accessed by a required  supermajority vote. He                                                                    
thought  in that  sense  one  could say  it  was a  balanced                                                                    
budget.                                                                                                                         
                                                                                                                                
Senator  Micciche  indicated he  would  meet  with Mr.  Teal                                                                    
later, and commented  on the two spending  increase items on                                                                    
slide 14 listed as "other."                                                                                                     
                                                                                                                                
Co-Chair MacKinnon  discussed the  agenda for  the following                                                                    
week.                                                                                                                           
                                                                                                                                
ADJOURNMENT                                                                                                                   
9:52:27 AM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 9:52 a.m.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
012017 SFC LFD FY18 Overview.pdf SFIN 1/20/2017 9:00:00 AM
Operating Budget FY18