Legislature(2019 - 2020)SENATE FINANCE 532

02/26/2019 09:00 AM FINANCE

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Audio Topic
09:01:52 AM Start
09:03:27 AM SB20
10:56:49 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 20 APPROP: OPERATING BUDGET/LOANS/FUNDS TELECONFERENCED
Heard & Held
+ Legislative Finance Division Overview by David TELECONFERENCED
Teal, Director
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 26, 2019                                                                                          
                         9:01 a.m.                                                                                              
                                                                                                                                
9:01:52 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:01 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
David Teal, Director,  Legislative Finance Division; Senator                                                                    
Cathy Giessel;  Senator Gary Stevens; Senator  Mia Costello;                                                                    
Senator Chris Birch.                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 20     APPROP: OPERATING BUDGET/LOANS/FUNDS                                                                                  
                                                                                                                                
          SB 20 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
Co-Chair  Stedman relayed  that the  day's meeting  would by                                                                    
comprised  of  a budget  overview  by  the director  of  the                                                                    
Legislative  Finance Division  (LFD). He  reminded that  LFD                                                                    
was  a non-partisan  arm of  the legislature  that aided  in                                                                    
analyzing and  working with budgets. The  presentation would                                                                    
be  an  overview  of the  governor's  submitted  budget.  He                                                                    
continued that  LFD also worked  with the legislature  as it                                                                    
put its budget together.                                                                                                        
                                                                                                                                
SENATE BILL NO. 20                                                                                                            
                                                                                                                                
     "An  Act making  appropriations for  the operating  and                                                                    
     loan  program  expenses  of state  government  and  for                                                                    
     certain   programs;    capitalizing   funds;   amending                                                                    
     appropriations;  making appropriations  under art.  IX,                                                                    
     sec. 17(c),  Constitution of the State  of Alaska, from                                                                    
     the constitutional  budget reserve fund;  and providing                                                                    
     for an effective date."                                                                                                    
                                                                                                                                
9:03:27 AM                                                                                                                    
                                                                                                                                
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
introduced  himself  and  shared  that he  had  a  staff  of                                                                    
approximately   six  budget   analysts  and   some  Internet                                                                    
Technology (IT)  staff that gave  support needed to  run the                                                                    
budget system  that produced  the part  of the  budget bills                                                                    
for the legislature.                                                                                                            
                                                                                                                                
Mr. Teal reiterated that LFD  was non-partisan, and provided                                                                    
information  primarily to  the  committee  while also  being                                                                    
available to  the full body  for questions  regarding fiscal                                                                    
matters of  any kind. He  used the examples of  past capital                                                                    
budget projects  and help with preparation  of amendments to                                                                    
appropriation  bills. He  had been  in his  current position                                                                    
for about  20 years. He commented  that he had never  seen a                                                                    
budget like the currently proposed governor's budget.                                                                           
                                                                                                                                
Mr. Teal remarked  that it was known that  the December 15th                                                                    
budget  submitted by  the governor  had been  a placeholder,                                                                    
and  overviews  prior to  December  13th  were primarily  an                                                                    
overview  of the  fiscal situation  as neither  LFD nor  the                                                                    
Office of  Management and Budget  (OMB) had a  "real" budget                                                                    
to  consider. The  timeline  had delayed  the  start of  the                                                                    
budget analysis.  He clarified that the  committee had spent                                                                    
more time and  engaged in greater detail  with the operating                                                                    
budget than  he could recall  any time  in the past.  He did                                                                    
not think  it was  necessary to  go through  specific budget                                                                    
items that  had already been  reviewed by the  committee and                                                                    
OMB.  He  thought  it  was  wise to  consider  some  of  the                                                                    
policies and  principles that drove  some of  the governor's                                                                    
budget proposals.                                                                                                               
                                                                                                                                
9:06:24 AM                                                                                                                    
                                                                                                                                
Mr.  Teal  discussed  the   presentation  "Overview  of  the                                                                    
Governor's FY20 Budget - Round 2" (copy on file).                                                                               
                                                                                                                                
Mr. Teal spoke to slide 2:                                                                                                      
                                                                                                                                
     Governor Dunleavy said: My reality budget is based on                                                                      
     five guiding principles:                                                                                                   
                                                                                                                                
     1. expenditures cannot exceed existing revenue;                                                                            
     2. the budget is built on core functions that impact a                                                                     
     majority of Alaskans;                                                                                                      
     3. maintaining and protecting our reserves;                                                                                
     4. the budget does not take additional funds from                                                                          
     Alaskans through taxes or the PFD;                                                                                         
     5. it must be sustainable, predictable and affordable.                                                                     
                                                                                                                                
     An Honest Budget: Fiscal Year 2020                                                                                         
     https://gov.alaska.gov/an-honest-budget-2020/                                                                              
                                                                                                                                
Mr. Teal  noted that the  OMB website contained a  video and                                                                    
statement  that accompanied  the release  of the  budget, as                                                                    
well as  five guiding  principles. He thought  everyone knew                                                                    
it was not possible to continue to use reserves.                                                                                
                                                                                                                                
Mr.  Teal reviewed  slide 3,  "Real Per  Capita Unrestricted                                                                    
General Fund  Revenue/Budget History,"  which showed  a line                                                                    
graph overlaid  with a bar graph.  He had used the  graph in                                                                    
January  and noted  that expenditures  equaling revenue  was                                                                    
simply    a    mathematical   relationship    with    policy                                                                    
implications.   He   noted   that   the   bars   represented                                                                    
expenditures  at various  times,  and the  green line  graph                                                                    
represented revenue. It  was possible to see  that in recent                                                                    
years expenditures had exceeded  revenues. The black portion                                                                    
showed what happened  when a percent of  market value (POMV)                                                                    
payout  from the  Permanent  Fund  Earnings Reserve  Account                                                                    
(ERA) was added to revenue.                                                                                                     
                                                                                                                                
Mr.  Teal  noted  that the  graph  excluded  Permanent  Fund                                                                    
Dividends  (PFDs). He  thought  it was  clear that  revenues                                                                    
were insufficient to  fund the budget for a  number of years                                                                    
since  FY 13.  He questioned  whether expenditures  were too                                                                    
high, or  whether revenue  was too low.  He stated  he would                                                                    
let the  committee be  the judge. He  recalled that  the OMB                                                                    
director had  clearly posited that the  expenditures must be                                                                    
too high, but he thought the  reverse could also be true. He                                                                    
thought it was  impossible to answer the  question until the                                                                    
entire  budget was  reviewed, and  spending priorities  were                                                                    
determined.                                                                                                                     
                                                                                                                                
9:09:35 AM                                                                                                                    
                                                                                                                                
Mr. Teal returned to slide  2. He recalled that OMB Director                                                                    
Donna Arduin  had stated that  the budget was built  on core                                                                    
functions and was  built from the ground up.  He stated that                                                                    
the budget was not zero-based  budgeting, and if it had been                                                                    
there  would  have  been  analysis   of  fiscal  impact  and                                                                    
background information to  justify reductions and inclusions                                                                    
in the budget. The director  later clarified that it had not                                                                    
been  zero-based  budgeting;   but  rather  was  "core-based                                                                    
budgeting,"  and  agencies   had  prioritized  the  services                                                                    
offered.   He   thought    many   legislators   shared   his                                                                    
disappointment  in the  lack of  evaluation and  analysis to                                                                    
support the governor's proposals.                                                                                               
                                                                                                                                
Mr.  Teal  continued  his remarks.  He  thought  the  budget                                                                    
shouldn't simply be  a math problem; and  that budgeting and                                                                    
policy were inseparable. He thought  one could not make good                                                                    
budget decisions without full  information. He asserted that                                                                    
all  budget  cuts were  not  equal  and recalled  that  when                                                                    
budget cuts had been questioned  the answer was to point out                                                                    
the deficit.                                                                                                                    
                                                                                                                                
Mr. Teal  addressed the third  bullet point on slide  2, and                                                                    
thought maintaining and protecting  the state's reserves was                                                                    
probably a  goal everyone shared.  He noted that  the budget                                                                    
pulled $436  million from the Statutory  Budget Reserve Fund                                                                    
(SBR)  and  from  other  reserves.  The  FY  19  budget  was                                                                    
expected to  pull less than  $300 million from  reserves. He                                                                    
pointed out that  the governor's budget claimed  not to take                                                                    
additional funds from Alaskans through  taxes or the PFD. He                                                                    
contended that  the proposed governor's budget  did not rely                                                                    
on existing state  revenue to balance the  budget but pushed                                                                    
costs  on   to  municipalities  and  shifted   revenue  from                                                                    
municipalities.  Some, if  not all  the costs  and revenues,                                                                    
would be passed on to citizens.                                                                                                 
                                                                                                                                
Mr. Teal continued to speak  to slide 2. He addressed bullet                                                                    
5,  which asserted  that the  budget  must be  "sustainable,                                                                    
predictable, and  affordable." He questioned how  the budget                                                                    
would  be  any  more  predictable  if  expenditures  equaled                                                                    
revenues while  revenues were volatile. He  wondered how the                                                                    
legislature would respond to oil  price fluctuations. He did                                                                    
not  see how  simply setting  expenditures equal  to revenue                                                                    
would make things more predictable.                                                                                             
                                                                                                                                
9:13:17 AM                                                                                                                    
                                                                                                                                
Mr. Teal  displayed slide  4, "Traditional  Budget Balancing                                                                    
Tools":                                                                                                                         
                                                                                                                                
     1.Add revenue                                                                                                            
     2.Pull money from reserves                                                                                               
     3.Reduce expenditures                                                                                                      
                                                                                                                                
Mr. Teal pondered whether he  was too literal and understood                                                                    
that  people understood  words  differently.  He thought  it                                                                    
seemed as  though the governor  took two of  the traditional                                                                    
budget balancing tools  off the table and had  said the $1.6                                                                    
billion  deficit would  be filled  without  new revenue  and                                                                    
without pulling money from reserves.  He suspected that many                                                                    
people considered  that the budget was  balanced because the                                                                    
governor cut  $1.6 billion from spending.  He mentioned cuts                                                                    
to the  Alaska Marine Highway System  (AMHS), the University                                                                    
of Alaska (UA), and the Senior Benefits Payment Program.                                                                        
                                                                                                                                
Mr. Teal  showed slide  5, "Abbreviated  Fiscal Summary--UGF                                                                    
Only,"  which  showed  a  table  depicting  a  short  fiscal                                                                    
summary. He thought the summary  helped to put the budget in                                                                    
perspective. He  suggested that a  short fiscal  summary was                                                                    
all  that  was needed;  and  pointed  out  that LFD  had  no                                                                    
technical  issues with  the OMB  presentation of  the budget                                                                    
and  the numbers  all agreed.  He  stated that  LFD and  OMB                                                                    
varied on presentation,  and he thought it  was important to                                                                    
note that presentation of the  budget mattered a great deal.                                                                    
He used the example of  depicting the PFD as "off-budget" as                                                                    
the governor had  wanted to do. He argued  that when dealing                                                                    
with the state's budget, the  legislature should be aware of                                                                    
all expenditures  and all revenues.  He thought  PFDs should                                                                    
be  treated  as   a  budgeted  item.  He   pointed  out  the                                                                    
difference in revenue between the  'FY19 MgtPlan' column and                                                                    
the 'FY20 GovAmend' column as shown on the table.                                                                               
                                                                                                                                
Mr. Teal  continued to address  the fiscal summary  table on                                                                    
slide  5. He  commented that  the  revenues were  down by  a                                                                    
little over  $200 million  due to expected  lower FY  19 oil                                                                    
prices.  He mentioned  the drop  in appropriations  of about                                                                    
$73 million in FY 20. He  discussed the deficit shown on the                                                                    
table,  which was  before  consideration  of the  governor's                                                                    
revenue  measures.  He  mentioned  the  shift  in  petroleum                                                                    
property tax  of about $420  million from  municipalities to                                                                    
the state.  There was  another $28  million in  shared taxes                                                                    
that  the  state would  retain  instead  of handing  out  to                                                                    
communities.  He  recalled  that in  his  previous  overview                                                                    
publication he  had suggested that  the governor  would find                                                                    
it very difficult  to reduce agency operating  costs, and he                                                                    
may find  he had to cut  where the money was  or shift costs                                                                    
to local  governments. He  did not  think the  statement was                                                                    
going too far out on a limb.                                                                                                    
                                                                                                                                
9:17:29 AM                                                                                                                    
                                                                                                                                
Mr. Teal  reviewed slide  6, "FY19  Management Plan  to FY20                                                                    
Governor'  Amended  Budget,"  which   showed  a  table  that                                                                    
depicted  agency   operating  budgets  were  in   FY  19  in                                                                    
comparison  to  proposed  budgets   for  FY  20.  The  table                                                                    
excluded Medicaid and  K-12 education and showed  that FY 19                                                                    
appropriations were just over $2  billion. He noted that the                                                                    
governor was proposing  a 13 percent cut,  which was roughly                                                                    
$260 million.  He pointed out  that there had  been campaign                                                                    
statements that  $200 million or  more could be cut  with no                                                                    
impact  on   services,  because  agencies  had   funded  but                                                                    
unfilled positions and could  achieve efficiencies and other                                                                    
savings. He  believed that cutting $200  million from agency                                                                    
operations was a big stretch,  and the governor had proposed                                                                    
to cut  $260 million. He had  not foreseen a 41  percent cut                                                                    
to the  UA budget, or  an end to the  AMHS as the  people in                                                                    
coastal Alaska knew  it. He stated that the  detail on slide                                                                    
6 was greater than he wanted to address in the meeting.                                                                         
                                                                                                                                
9:19:39 AM                                                                                                                    
                                                                                                                                
Co-Chair  von  Imhof  thought it  was  noticeable  that  the                                                                    
Department of Education and  Early Development (DEED) budget                                                                    
did  not include  formula  funding of  $1  billion that  was                                                                    
payed to  schools. She  asked if the  monies were  paid from                                                                    
General Funds (GF).                                                                                                             
                                                                                                                                
Co-Chair  Stedman  asked Mr.  Teal  to  address the  forward                                                                    
funding  mechanism from  the previous  year's budget  in his                                                                    
answer to Co-Chair von Imhof's question.                                                                                        
                                                                                                                                
Mr.  Teal relayed  that the  slide showed  agency operations                                                                    
and  excluded Medicaid  and K-12  education, which  were big                                                                    
programs with  statutory formulas to allocate  money. He had                                                                    
taken  the items  off  the  slide because  the  rest of  the                                                                    
budget  was  what  most  people   considered  "day  to  day"                                                                    
operating costs of state government.                                                                                            
                                                                                                                                
Mr.  Teal   addressed  Co-Chair  Stedman's   question  about                                                                    
education funding.  He explained that  the FY 20  funding of                                                                    
between $1.2  and $1.3 billion was  already appropriated and                                                                    
could not  be vetoed. The  money was simply delayed  and was                                                                    
available  to school  districts beginning  July 1,  2019. He                                                                    
continued that in the governor's  budget, it was proposed to                                                                    
repeal the  provision from the  previous year;  deleting not                                                                    
only the formula money but  an additional $30 million, to be                                                                    
replaced with  a pro-rated amount  that was  approximately a                                                                    
cut  of  $300 million.  Because  the  money was  funded  the                                                                    
previous year, the legislature could  reject the repeal, and                                                                    
the  money that  was  appropriated the  previous year  would                                                                    
remain in the budget.                                                                                                           
                                                                                                                                
9:23:21 AM                                                                                                                    
                                                                                                                                
Co-Chair von Imhof had gleaned  that the legislature had the                                                                    
liberty to  pass the associated  bill to repeal  the formula                                                                    
funding  for   FY  20,  and   instead  put  forward   a  new                                                                    
appropriation. She asked  if the same was  true for Medicaid                                                                    
funding.                                                                                                                        
                                                                                                                                
Mr.  Teal stated  that there  was a  funding interplay  with                                                                    
Medicaid,  but not  in the  same way.  He detailed  that the                                                                    
education funding had passed with  a delayed effective date,                                                                    
but  Medicaid  funding  had  not.   He  thought  there  were                                                                    
statutes and requests to reduce  Medicaid funding. He viewed                                                                    
the  big formula  programs as  one  of the  areas where  the                                                                    
money was and  thought the governor may not be  able to find                                                                    
the money that was needed (to  cut) for day to day operating                                                                    
costs.                                                                                                                          
                                                                                                                                
Senator Hoffman referenced  supplemental budget requests for                                                                    
$20 million  and $30  million. He  asked what  triggered the                                                                    
distribution of  the $20 million  for FY 19 to  be dispensed                                                                    
to school districts.                                                                                                            
                                                                                                                                
Mr. Teal stated  there was no trigger; the  money was simply                                                                    
available to school districts on  July 1, 2019. The governor                                                                    
had chosen to say that  the funds were "not distributed" and                                                                    
would  withhold the  funds until  the legislature  took some                                                                    
action on  the money.  He thought any  trigger was  a policy                                                                    
call   rather  than   anything   having  to   do  with   the                                                                    
availability of the money.                                                                                                      
                                                                                                                                
9:26:20 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked about the  latest date that the funds                                                                    
could be distributed to communities.                                                                                            
                                                                                                                                
Mr. Teal  thought it  was expected that  the funds  would be                                                                    
distributed along  with education formula  funding beginning                                                                    
July 1. He did not know  exactly what happened, but for some                                                                    
reason  the administration  had  withheld  the $20  million,                                                                    
saying it would  use the funds for "true-up"  money with the                                                                    
revised student count.  He emphasized that the  funds had to                                                                    
go out  before June 30,  and he did  now know why  one would                                                                    
withhold  the funds  until that  time. It  was possible  for                                                                    
school districts  to balance the  books after the  fact, but                                                                    
he  thought school  districts  would  feel more  comfortable                                                                    
knowing the money was coming.                                                                                                   
                                                                                                                                
Senator Wielechowski  discussed the  timing in  which school                                                                    
district funds  were historically released. He  asked if Mr.                                                                    
Teal had  seen a situation  in which a governor  had refused                                                                    
to release funds or waited until June 30.                                                                                       
                                                                                                                                
Mr.  Teal thought  there may  have been  instances in  which                                                                    
funds  had  been withheld.  He  referenced  the 1987  Alaska                                                                    
Supreme  Court  case  of  State  vs.  Fairbanks  North  Star                                                                    
Borough; after  former Governor Bill Sheffield  had withheld                                                                    
education funding when oil prices  fell. The court had ruled                                                                    
that the governor could not  withhold appropriated funds and                                                                    
must distribute funds as appropriated.  He did not think the                                                                    
ruling addressed  timing during the fiscal  year; he thought                                                                    
logically the funds should go out in order to be spent.                                                                         
                                                                                                                                
9:29:44 AM                                                                                                                    
                                                                                                                                
Senator  Shower  reminded  that  there  were  constitutional                                                                    
statutory  obligations,  as well  as  other  items that  the                                                                    
legislature  chose  to  spend  money on.  He  asked  if  LFD                                                                    
considered  all  the  obligations   that  were  required  in                                                                    
addition to spending  choices. He asked if  the governor was                                                                    
required   to   spend   all  money   appropriated   by   the                                                                    
legislature.                                                                                                                    
                                                                                                                                
Mr. Teal stated that the governor  did not have to spend all                                                                    
the funds  if there were good  reasons that it could  not be                                                                    
spent.  He used  the example  of the  Village Public  Safety                                                                    
Officer  (VPSO) program;  which  had  remaining funds  after                                                                    
offering funds to  grantees and fully funding.  There was no                                                                    
requirement  for  the  governor to  spend  remaining  funds.                                                                    
Conversely, if the  funds could be spent  the governor could                                                                    
not  unilaterally  withhold the  money.  The  funds must  be                                                                    
spent as the legislature appropriated it.                                                                                       
                                                                                                                                
9:31:49 AM                                                                                                                    
                                                                                                                                
Senator   Shower   asked   if  Mr.   Teal   had   considered                                                                    
constitutional  statutory  obligations  when  analyzing  the                                                                    
budget.                                                                                                                         
                                                                                                                                
Mr.   Teal  stated   that  LFD   considered  the   statutory                                                                    
obligations and mentioned debt  service and retirement costs                                                                    
and  things that  affected the  state's  credit rating.  For                                                                    
many  years,  people had  tried  to  break the  budget  into                                                                    
mandatory  versus  discretionary   expenditures,  hoping  to                                                                    
control  spending.  He  thought  there  had  always  been  a                                                                    
problem;  and   that  although   education  funding   was  a                                                                    
constitutionally  mandated  function  of  state  government,                                                                    
nothing stated  how much was required  to appropriate. There                                                                    
was nothing  in law to  say whether funding was  adequate or                                                                    
inadequate,  and the  matter could  only be  addressed by  a                                                                    
lawsuit. He  thought it was  highly likely that  there would                                                                    
be a  lawsuit if the  cut in the governor's  proposed budget                                                                    
were to pass.  He stated that it was difficult  to break out                                                                    
"mandatory" items that did not specify funding levels.                                                                          
                                                                                                                                
Senator Wielechowski  addressed the Base  Student Allocation                                                                    
(BSA) and asked  if there was any precedent  for not funding                                                                    
to the level provided for in statute.                                                                                           
                                                                                                                                
Mr. Teal stated  that there was a provision  in statute that                                                                    
stated that if under-funding  occurred, the state would pro-                                                                    
rate education funding.  He did not think  the situation had                                                                    
occurred intentionally  but recalled  that more than  ten to                                                                    
fifteen   years  ago   there  had   been  a   dollar  amount                                                                    
appropriated.   In  recent   years  the   appropriation  for                                                                    
education  had  been  "the  amount  necessary  to  fund  the                                                                    
formula." He stated  that there had been  no pro-rating; but                                                                    
it may have happened years ago  that there was not enough to                                                                    
fund the full formula.                                                                                                          
                                                                                                                                
9:35:16 AM                                                                                                                    
                                                                                                                                
Senator Micciche  wanted to clarify Mr.  Teal's last remarks                                                                    
for the  public. He thought  that budget  requests submitted                                                                    
by the  school districts could be  up to $20 million,  and a                                                                    
$20  million  appropriation  was  the current  "law  of  the                                                                    
land"; but the governor was  not breaking the law unless the                                                                    
funding  was not  provided  by June  30th,  2019 unless  the                                                                    
legislature changed existing law.                                                                                               
                                                                                                                                
Mr. Teal answered in the affirmative.                                                                                           
                                                                                                                                
Mr. Teal offered to review  the largest of the proposed cuts                                                                    
in the  governor's FY 20  budget. He addressed slide  6, and                                                                    
pointed out  a $30  million reduction  to the  Department of                                                                    
Corrections (DOC), due in part  to substitution of Permanent                                                                    
Fund  money  from convicted  criminals.  When  there was  an                                                                    
increase in  PFDs as  there was the  previous year,  more of                                                                    
the  funds  were  available.  The  primary  reason  for  the                                                                    
reduction  was  the  expectation  that the  state  would  be                                                                    
sending 500  prisoners out of  state, which would  result in                                                                    
savings. He wanted to know  the criteria for identifying out                                                                    
of  state  prisoners  and  where   they  would  be  located.                                                                    
Additionally, he queried the  amount of transportation costs                                                                    
as well as costs of  the psychiatric and physical exams that                                                                    
would be needed.  He questioned costs to  move prisoners for                                                                    
resulting  consolidation efforts.  He thought  there were  a                                                                    
number of things that were important  to know to back up the                                                                    
proposal.                                                                                                                       
                                                                                                                                
Mr.  Teal continued  to  address  slide 6.  He  had done  an                                                                    
abbreviated analysis  and would  not be  surprised to  see a                                                                    
supplemental request of $7 million from DOC.                                                                                    
                                                                                                                                
Mr. Teal discussed a proposed  an $87 million cut to various                                                                    
programs  in  Department  of   Health  and  Social  Services                                                                    
(DHSS).  He  thought  Pioneer  Homes   might  appear  to  be                                                                    
unharmed  but  thought people  were  aware  that there  were                                                                    
major  reductions to  the UGF  portion of  the budget  to be                                                                    
replaced  with  program  receipts. He  reiterated  that  the                                                                    
agency had  not provided data  that LFD would need  to fully                                                                    
evaluate the proposed cuts.                                                                                                     
                                                                                                                                
Mr.  Teal   spoke  to  large  cuts   in  behavioral  health,                                                                    
temporary  assistance  programs,  adult  public  assistance,                                                                    
tribal assistance,  and senior benefits. He  summarized that                                                                    
there were a  number of social services  programs other than                                                                    
Medicaid that  were substantially reduced in  the governor's                                                                    
proposed budget.                                                                                                                
                                                                                                                                
9:40:05 AM                                                                                                                    
                                                                                                                                
Mr. Teal  continued to discuss proposed  reductions on slide                                                                    
6. He  pointed out a  proposed $57 million reduction  to the                                                                    
Department   of   Transportation  and   Public   Facilities,                                                                    
primarily for the  AMHS. The system was  only funded through                                                                    
October, which  did not  leave many  options. He  thought if                                                                    
the marine  consultant had findings other  than shutting the                                                                    
system  down,  there  were  no   funds  to  implement  other                                                                    
options. He  mentioned the University of  another example of                                                                    
zero  impact  on  total  GF,  but there  was  a  41  percent                                                                    
reduction in UGF. He mentioned  the UA president's testimony                                                                    
that the UGF  cut was to "real money," while  the ability to                                                                    
offset the cuts with tuition was "fantasy money."                                                                               
                                                                                                                                
Senator  Micciche understood  the  reason  and logic  behind                                                                    
slide   6;   but   thought   it   provided   a   danger   of                                                                    
misunderstanding.  He wondered  if  there could  be a  slide                                                                    
which listed other  reductions. He thought there  would be a                                                                    
significant misunderstanding  of the  impacts of  the budget                                                                    
document if only looking at slide 6.                                                                                            
                                                                                                                                
Co-Chair Stedman  asked if Senator  Micciche was  asking for                                                                    
LFD to  combine slide  6 and  slide 7 to  give the  public a                                                                    
better understanding of the impacts of the proposed budget.                                                                     
                                                                                                                                
Senator Micciche answered in the affirmative.                                                                                   
                                                                                                                                
Co-Chair  Stedman stated  he  would work  with  Mr. Teal  to                                                                    
procure the information.                                                                                                        
                                                                                                                                
Senator Wielechowski addressed the  proposed cut to AMHS. He                                                                    
noted that the ferry  system had stopped taking reservations                                                                    
after September  30, 2019. He  asked if it was  possible for                                                                    
the governor to unilaterally stop  the ferry system when the                                                                    
legislature was the appropriating body.                                                                                         
                                                                                                                                
Mr. Teal stated that the governor  had told AMHS to stop the                                                                    
reservations   on  after   September   30,   2019.  If   the                                                                    
legislature  appropriated money  to the  AMHS, the  governor                                                                    
was obligated  to spend it to  run the AMHS. He  thought the                                                                    
governor did not want the funds.                                                                                                
                                                                                                                                
9:43:52 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman stated  the governor  could  also veto  any                                                                    
proposed funding.                                                                                                               
                                                                                                                                
Senator Hoffman asked about the  Department of Public Safety                                                                    
(DPS). He  asked Mr.  Teal to expound  on the  proposed $3.2                                                                    
million reduction.  He wanted a  synopsis of how  each piece                                                                    
of  the governor's  proposed  legislation  would affect  the                                                                    
budget if passed.                                                                                                               
                                                                                                                                
Mr. Teal  addressed Co-Chair Stedman's point  about changing                                                                    
slide 6 to  include more information. He stated  that such a                                                                    
slide was posted on the LFD  website, and it was possible to                                                                    
observe the changes in revenue.                                                                                                 
                                                                                                                                
Mr. Teal  addressed the  proposed $3.2  million cut  to DPS,                                                                    
most of which  ($3 million) was to the VPSO  program. He was                                                                    
not sure  about the  placement of the  rest of  the proposed                                                                    
reduction.                                                                                                                      
                                                                                                                                
9:46:24 AM                                                                                                                    
                                                                                                                                
Co-Chair   von  Imhof   looked   at  Executive   Branch-wide                                                                    
Appropriations  for $23  million.  She  understood that  the                                                                    
administration  had lump-summed  salary  increases from  all                                                                    
state employees. She asked for Mr. Teal to comment.                                                                             
                                                                                                                                
Mr. Teal advanced  to slide 9, which showed  the $23 million                                                                    
Co-Chair  von Imhof  had referenced.  He  informed that  the                                                                    
governor had  decided to consolidate all  salary adjustments                                                                    
in one  area, and to  allocate them later. He  had requested                                                                    
for OMB to  provide LFD with greater detail  with the normal                                                                    
breakdown by  location and expected  to get  the information                                                                    
later in  the week.  He thought subcommittees  were expected                                                                    
to  incorporate all  the salary  adjustment  funds into  the                                                                    
agencies themselves.                                                                                                            
                                                                                                                                
Co-Chair Stedman asked members  to hold questions pertaining                                                                    
to slides later in the presentation.                                                                                            
                                                                                                                                
Mr.  Teal  thought the  matter  would  be addressed  in  the                                                                    
subcommittee process.                                                                                                           
                                                                                                                                
Senator Wielechowski asked about the  DHSS budget and the $1                                                                    
million  per  month  contract issued  to  Wellpath  Recovery                                                                    
Solutions.  He  did  not  think  the  legislature  had  ever                                                                    
appropriated  the funds  and wondered  where the  money came                                                                    
from.                                                                                                                           
                                                                                                                                
Mr. Teal stated that  the legislature had appropriated funds                                                                    
for the  Alaska Psychiatric Institute (API).  He stated that                                                                    
the  decision  to  go  to  a  contract  may  be  opposed  by                                                                    
bargaining units  but the executive  branch had  the freedom                                                                    
to  move money  within line  items. If  it chose  to fulfill                                                                    
responsibilities  at API  or  anywhere  else by  contracting                                                                    
instead of hiring employees, it was allowed.                                                                                    
                                                                                                                                
9:50:14 AM                                                                                                                    
                                                                                                                                
Senator Shower asked if Mr.  Teal had communicated with AMHS                                                                    
to determine if the system  had plans operating past October                                                                    
1,2019.                                                                                                                         
                                                                                                                                
Mr. Teal had not heard of  any other plans. He believed that                                                                    
OMB  had communicated  that the  agency had  hired a  marine                                                                    
consultant to look  into the matter. He did not  know of any                                                                    
other option  than shutdown as  there was no funding  to run                                                                    
the coastal runs  under the proposed budget.  He thought the                                                                    
ferry  run from  Bellingham,  Washington; to  Juneau in  the                                                                    
summer was  profitable and could  continue to run  under the                                                                    
proposed  budget scenario.  There were  program receipts  in                                                                    
the proposed budget, but no  subsidy for the smaller coastal                                                                    
runs.                                                                                                                           
                                                                                                                                
Co-Chair  Stedman stated  that DOT  would be  coming to  the                                                                    
committee, including airports and AMHS.                                                                                         
                                                                                                                                
Senator  Wilson  asked  if Mr.  Teal  had  obtained  program                                                                    
priority listing from  OMB that listed some  reasons for the                                                                    
proposed reductions.                                                                                                            
                                                                                                                                
Mr. Teal answered in the negative.                                                                                              
                                                                                                                                
Senator  Wilson   asked  when   the  information   would  be                                                                    
available.                                                                                                                      
                                                                                                                                
Co-Chair Stedman  hoped that the  prioritization information                                                                    
would  come  forward  during  the  subcommittee  process  as                                                                    
promised by OMB.                                                                                                                
                                                                                                                                
Mr. Teal qualified that agencies  had set priorities, but he                                                                    
was not  aware of  justification for  the proposed  cuts. He                                                                    
thought  such decisions  about  discretionary spending  were                                                                    
difficult for  the legislature  to make  without information                                                                    
from  the executive  branch. He  thought the  administration                                                                    
would be providing  more of such information  in the current                                                                    
year. He  thought by the  time the subcommittee  process was                                                                    
underway, agencies  would likely be asked  to provide impact                                                                    
statements  by program  to outline  what  the proposed  cuts                                                                    
would do to programs.                                                                                                           
                                                                                                                                
9:54:47 AM                                                                                                                    
                                                                                                                                
Mr.  Teal  referenced  slide  7,  "Filling  a  $1.6  Billion                                                                    
Deficit,"  which  showed  a  data   table.  He  thought  the                                                                    
preceding  agency overviews  had  provided good  information                                                                    
for  the  committee  to  start  its  subcommittee  work.  He                                                                    
referenced  blogs  and media  that  had  referenced LFD.  He                                                                    
stated  that  the  point  of the  slide  showing  what  $1.6                                                                    
billion  in cuts  would look  like was  to show  that agency                                                                    
budgets  were  not  good hunting  ground  for  finding  $1.6                                                                    
billion  in cuts.  He thought  the governor's  budget proved                                                                    
the  point by  proposing only  about $260  million in  cuts,                                                                    
many of them unvetted.                                                                                                          
                                                                                                                                
Mr. Teal thought  slide 6 left a question of  how to balance                                                                    
the budget if it was  not through cutting agency budgets. He                                                                    
continued that  slide 7 explained  how the  reductions added                                                                    
up to  $1.6 billion.  The slide  showed non-formula  cuts to                                                                    
agencies, as well as DEED and  HESS. He thought it was worth                                                                    
mentioning that when the OMB  director was in committee, she                                                                    
had  stated  that  local  governments  also  contributed  to                                                                    
education.   He   clarified   that  local   government   did                                                                    
contribute  to  education  through  mandatory  contributions                                                                    
based on property  tax values - which would  not be affected                                                                    
by  state  funding.  He  explained   that  there  were  also                                                                    
voluntary contributions  to education by  local governments.                                                                    
He noted that  voluntary contributions had a  cap, which was                                                                    
23 percent of "basic need."                                                                                                     
                                                                                                                                
9:58:36 AM                                                                                                                    
                                                                                                                                
Mr.  Teal  continued  to  address   slide  7  and  education                                                                    
funding. He  explained that if  state funding was cut  by 25                                                                    
percent, then  the cap on voluntary  contributions also went                                                                    
down by 25 percent. For  cities that were already funding to                                                                    
the cap (such as Anchorage or  Juneau), a cut to state funds                                                                    
would  also cause  a cut  to local  contributions. He  noted                                                                    
that areas such as Mat-Su did  not fund to the cap and would                                                                    
not lose  local funds in  such a scenario. There  were other                                                                    
complications  such as  the state  not reimbursement  school                                                                    
debt,  which  would  result  in  less  money  to  spend.  He                                                                    
summarized that school funding was  not as simple as "if you                                                                    
lose state funding, local governments  would step up and pay                                                                    
more."                                                                                                                          
                                                                                                                                
10:00:00 AM                                                                                                                   
                                                                                                                                
Mr. Teal continued to address  slide 7. He asserted that the                                                                    
cuts had been anticipated in  some areas and were consistent                                                                    
with the  governor's opinion that  the state spent  too much                                                                    
money.  He discussed  cost shifts  to  local government.  He                                                                    
mentioned  shifting debt  service  reimbursement onto  local                                                                    
governments. He stated that there  were some shifts that did                                                                    
not save  the state money  and brought in state  revenue. He                                                                    
used the  Petroleum Property  Tax as  an example.  Under the                                                                    
governor's proposal, local governments  would no longer have                                                                    
a  share  of  the  funds.   He  reminded  that  school  debt                                                                    
reimbursement would  not be paid to  local governments under                                                                    
the  governor's proposal.  The impact  on local  governments                                                                    
would be $106 million, $68 million of which was UGF.                                                                            
                                                                                                                                
Mr. Teal  continued to discuss  cost shifts in  the proposed                                                                    
budget. He cited  some debt service that was  proposed to be                                                                    
shifted on to municipalities  or cooperatives that the state                                                                    
would  no  longer  be reimbursing.  He  recounted  that  the                                                                    
governor suggested  he had not  wanted to use  reserves, yet                                                                    
the  budget pulled  $172 million  from the  SBR, and  pulled                                                                    
$264 million  from reserves held  by state  corporations. He                                                                    
thought  it  was  complicated  since  the  governor  crossed                                                                    
fiscal years with the appropriation.                                                                                            
                                                                                                                                
10:03:05 AM                                                                                                                   
                                                                                                                                
Mr. Teal  explained that  the governor  had proposed  to cut                                                                    
$249 million  from Medicaid but  restored much of  the money                                                                    
in a  way that was  less than transparent. He  discussed the                                                                    
steps  of appropriation  from reserve  funds in  FY 19.  The                                                                    
funds were available  in FY 19 and allowed  to carry forward                                                                    
in the subsequent two years.  Using the money was contingent                                                                    
upon approval  of waivers and  other items from  Centers for                                                                    
Medicare  and  Medicaid  (CMS). He  thought  it  was  highly                                                                    
unlikely  that  the approvals  would  come  during the  next                                                                    
fiscal  year; and  saw  the  use of  reserves  to be  nearly                                                                    
certain. If the  CMS approval did not come,  the state would                                                                    
have a supplemental appropriation of  $70 million or more if                                                                    
the governor's proposals were followed.                                                                                         
                                                                                                                                
Mr. Teal  stated that  LFD's recommendation  was to  not use                                                                    
the budget  reserves. He  asserted that  it was  possible to                                                                    
reduce  the $172  million in  FY 20,  but it  was likely  to                                                                    
increase  the supplemental  budget  by the  same amount.  He                                                                    
discussed  adding money  to  Medicaid if  it  was known  the                                                                    
program  was   underfunded.  The  $260  million   in  Alaska                                                                    
Industrial   Development   and  Export   Authority   (AIDEA)                                                                    
receipts  were  spent directly,  $84  million  of which  was                                                                    
spent in  FY 19 to make  for a shortage, and  the funds were                                                                    
to  go into  the account  used  to purchase  oil tax  credit                                                                    
certificates. The $84 million in FY  19 was to make up for a                                                                    
shortage.   He  discussed   $27   million   that  had   been                                                                    
appropriated  for debt  service (but  not used,  since bonds                                                                    
were  not  issued) which  could  be  repurposed to  purchase                                                                    
credits.                                                                                                                        
                                                                                                                                
10:07:03 AM                                                                                                                   
                                                                                                                                
Mr. Teal continued to discuss  the use of reserves as listed                                                                    
on slide 7.  He thought it was possible to  ignore the legal                                                                    
and  credit rating  issues of  taking money  from AIDEA  and                                                                    
just focus on transparency. He  stated that excess cash held                                                                    
by state  corporations was reserves,  and the source  of the                                                                    
reserves  was  the  UGF  that was  used  to  capitalize  the                                                                    
corporation.   As  with   terminated   loan  programs,   LFD                                                                    
preferred to see any recovery  of the capitalization of loan                                                                    
funds simply  go back to  the GF and be  spent as GF  so the                                                                    
funds  were  shown  in  the   budget  as  both  revenue  and                                                                    
expenditure.                                                                                                                    
                                                                                                                                
Mr. Teal  noted that as  the budget appeared,  AIDEA revenue                                                                    
did not appear in the budget  as revenue or UGF spending but                                                                    
was  simply invisible  money. He  commented  that less  than                                                                    
half of the  $1.6 billion deficit was  filled by expenditure                                                                    
reductions. He asserted that there  were revenue and reserve                                                                    
actions  that  were  unexpected given  the  five  principals                                                                    
outlined  by the  governor. He  thought it  could be  argued                                                                    
that  the governor  (if following  his asserted  principals)                                                                    
should  submit  another  bill that  did  not:  cross  fiscal                                                                    
years, use  reserves, shift costs  to local  governments, or                                                                    
propose  cuts   that  the  legislature   did  not   wish  to                                                                    
implement. He  would be shocked if  amendments addressed the                                                                    
issues.                                                                                                                         
                                                                                                                                
Mr. Teal thought  OMB had suggested that  if the legislature                                                                    
did not accept  the governor's proposals, it  needed to find                                                                    
alternative  reductions   because  the  budget  had   to  be                                                                    
balanced. He pondered how the  legislature would balance the                                                                    
budget if it  didn't like the tax changes,  use of reserves,                                                                    
and  reductions  proposed  in   the  governor's  budget.  He                                                                    
addressed the  possibility of  revenue measures.  He thought                                                                    
it  was   proven  that   cutting  agency   expenditures  was                                                                    
difficult. He  thought there  might be  room for  savings in                                                                    
state-wide  items, but  it  was not  enough  to balance  the                                                                    
budget.  He discussed  other  items such  as  PFD cuts,  and                                                                    
discussed the  difficulty of  various solutions.  He thought                                                                    
there needed to be  strong supporting justifications for any                                                                    
proposals by the legislature.                                                                                                   
                                                                                                                                
10:12:12 AM                                                                                                                   
                                                                                                                                
Mr.  Teal  considered  the lack  of  justification  for  the                                                                    
governor's proposed  budget and  had wondered if  the budget                                                                    
had been designed to create  chaos. He mentioned the sixteen                                                                    
bills  associated with  the  proposed  budget, which  hadn't                                                                    
been seen yet.  There had been no analysis of  the effect of                                                                    
the proposed bills. He suggested  that it would take time to                                                                    
see how the legislation meshed  with the budget. He wondered                                                                    
if  there  was   hope  on  the  governor's   part  that  the                                                                    
legislature would  not have  the time  to evaluate  the full                                                                    
proposal  and  come  up  with  alternatives.  He  questioned                                                                    
whether the  chaos-creating budget was a  mechanism to force                                                                    
a necessary conversation.                                                                                                       
                                                                                                                                
10:14:45 AM                                                                                                                   
                                                                                                                                
Senator  Micciche referenced  slide  7 and  the school  debt                                                                    
reimbursement.  He  referenced  the Kasayulie  v.  State  of                                                                    
Alaska court  case [a court  case settled in 1999  that held                                                                    
that education is  a fundamental right and  the state system                                                                    
of  funding  school  facilities was  racially  dissimilatory                                                                    
against Alaska  Natives, in violation  of the  federal Civil                                                                    
Rights  Act] and  asked if  capital  was part  of the  local                                                                    
school  contribution  cap.  He  asked  if  the  school  debt                                                                    
reimbursement line also impact the DEED local reduction.                                                                        
                                                                                                                                
Mr. Teal  answered in the  negative. He understood  that the                                                                    
school  debt  reimbursement  bill reduced  the  payments  to                                                                    
municipalities;  while the  Kasuyulie  case revolved  around                                                                    
the state  requirements to provide rural  schools, which was                                                                    
done with  the Regional  Educational Attendance  Area (REAA)                                                                    
Fund. The fund was based upon  the amount of money that went                                                                    
to  school debt  and putting  a proportionate  amount toward                                                                    
rural   schools.  The   formula  broke   when  school   debt                                                                    
reimbursement  to local  governments went  to zero,  and the                                                                    
deposits for rural schools would  also go to zero. There was                                                                    
a provision in the bill that  said the state would put money                                                                    
toward  rural  schools  anyway. He  thought  Kasuylie  issue                                                                    
should be addressed.                                                                                                            
                                                                                                                                
Mr. Teal  continued to address Senator  Micciche's question.                                                                    
He thought  if Anchorage implemented  a sales tax,  it could                                                                    
increase  voluntary local  contributions  if  the sales  tax                                                                    
more than offset the loss of school debt reimbursement.                                                                         
                                                                                                                                
Senator  Micciche  asked why  there  wouldn't  be a  reverse                                                                    
lawsuit  if   urban  schools  were  disadvantage   with  the                                                                    
administration paying the cost for the rural schools.                                                                           
                                                                                                                                
Co-Chair   Stedman  stated   that   the  legislation   being                                                                    
discussed  may  or may  not  go  forward.  He was  sure  the                                                                    
subject of the Kasuyulie case  and its implications would be                                                                    
raised when  discussing school debt reimbursement  when DEED                                                                    
was before the committee.                                                                                                       
                                                                                                                                
10:17:46 AM                                                                                                                   
                                                                                                                                
Senator Bishop thought  there was much to  discuss. He asked                                                                    
if the use of AIDEA revenues would be recurring.                                                                                
                                                                                                                                
Mr. Teal  did not think the  use of AIDEA revenues  could be                                                                    
ongoing. There was  a report produced that  stated AIDEA had                                                                    
substantial cash reserves;  and the budget would  take a bit                                                                    
more than  half, so there  could be no continuation.  He had                                                                    
heard discussion  in the House pertaining  to reducing AIDEA                                                                    
reserves.  He  explained that  that  AIDEA  was an  economic                                                                    
development engine  and helped finance  economic development                                                                    
in the state.  He had heard testimony that  there were banks                                                                    
to lend funds; but noted  that AIDEA was often a participant                                                                    
in  the project  funding. Without  AIDEA funding,  a lot  of                                                                    
capital  to  fund  private  development  was  removed.  Even                                                                    
taking  the  amount of  reserves  being  proposed, it  could                                                                    
affect the money available for private sector development.                                                                      
                                                                                                                                
Senator Bishop  stated that Mr.  Teal had  already addressed                                                                    
his  follow-up question  and he  hoped the  public had  been                                                                    
listening.                                                                                                                      
                                                                                                                                
Senator Shower  asked Mr. Teal  for LFD to list  a breakdown                                                                    
of sources of DGF to get an idea what was required.                                                                             
                                                                                                                                
Co-Chair Stedman asked if Senator  Shower wanted a breakdown                                                                    
of AIDEA funds.                                                                                                                 
                                                                                                                                
Senator  Shower reiterated  that  he wanted  a  list of  DGF                                                                    
funds.                                                                                                                          
                                                                                                                                
Mr. Teal  offered to  follow up with  Senator Shower  to get                                                                    
the requested information.                                                                                                      
                                                                                                                                
10:20:46 AM                                                                                                                   
                                                                                                                                
Co-Chair von  Imhof asked if  Mr. Teal could talk  about the                                                                    
interplay of the SBR and how  it had been utilized as listed                                                                    
on  slide  7.  She  thought  it  looked  as  though  it  was                                                                    
incorporated under  HESS, and then  it was added  again. She                                                                    
asked how the math worked.                                                                                                      
                                                                                                                                
Co-Chair Stedman  asked for  an explanation  of the  SBR and                                                                    
reasoning for the use of the funds.                                                                                             
                                                                                                                                
Mr. Teal explained  that the SBR was intended to  be used as                                                                    
a shock absorber and was  similar to the CBR. The difference                                                                    
was the  CBR required  a supermajority  vote to  spend while                                                                    
the SBR required  a simple majority vote. He  noted that the                                                                    
proposed  cuts to  DHSS totaled  over $300  million. He  had                                                                    
reduced the amount by $172  million under the "Reductions in                                                                    
Agency Operations"  category on slide 7,  because the amount                                                                    
was  listed  in  another  place.  He  thought  it  was  more                                                                    
appropriate to  list the  funds were a  use of  reserves. He                                                                    
thought Co-Chair von  Imhof made a good  point. He explained                                                                    
that the numbers  worked out, and the slide  could have just                                                                    
as well  had shown that  DHSS had  cut $300 million.  If the                                                                    
reserves  had  been shown  as  savings,  it would  not  have                                                                    
appeared as using  reserves. He had tried to  make the point                                                                    
that despite the claim that  the governor wanted to maintain                                                                    
the reserves, he was in fact using them.                                                                                        
                                                                                                                                
Senator  Hoffman thought  the  numbers only  worked for  one                                                                    
year. He  asked what funds  would be  left in the  SBR after                                                                    
the expenditure of $172 million.                                                                                                
                                                                                                                                
Mr. Teal stated that there would be zero funds left.                                                                            
                                                                                                                                
Senator Hoffman  reiterated his point that  the numbers only                                                                    
worked for one year.                                                                                                            
                                                                                                                                
10:24:34 AM                                                                                                                   
                                                                                                                                
Mr. Teal reviewed slide 8:                                                                                                      
                                                                                                                                
     Are people aware that:                                                                                                     
                                                                                                                                
     1. Dividends consume 37% of revenue?                                                                                       
                                                                                                                                
     2. The proposed FY20 UGF budget is $123 million (2%)                                                                       
     below the FY19 UGF budget?                                                                                                 
                                                                                                                                
     3. Reductions to agency operating budgets address only                                                                     
     $650 million of the $1.6 billion deficit?                                                                                  
                                                                                                                                
     4. The remainder of the deficit is filled by shifting                                                                      
     costs to local government or draining reserves?                                                                            
                                                                                                                                
     5. The  impact of  the proposed  cuts to  the operating                                                                    
     budget is greater  than the 350 positions  shown in the                                                                    
     OMB overview? Add 600 AMHS,  1,300 UA, and 3,000 school                                                                    
     district employees to get over 5,000 jobs.                                                                                 
                                                                                                                                
Mr.  Teal  explained  that  the   slide  was  aimed  at  the                                                                    
conversation that  was being caused  by the  budget proposal                                                                    
and  listed some  questions  he did  not  think people  were                                                                    
aware  of. He  thought  it was  astonishing  that the  state                                                                    
could spend over one-third of all available money on PFDs.                                                                      
                                                                                                                                
Co-Chair Stedman informed that  the dividend being discussed                                                                    
was the statutory formula driven amount.                                                                                        
                                                                                                                                
Mr. Teal answered in the  affirmative and clarified that the                                                                    
dividend amount budgeted by the governor was $1.9 billion.                                                                      
                                                                                                                                
Mr. Teal continued to discuss  slide 8. He wanted to mention                                                                    
the economic impact  of the proposed cuts.  He recalled that                                                                    
the OMB  director and others had  referenced position counts                                                                    
and estimating  the job losses  totaling 150; which  had not                                                                    
included significant  job losses from AMHS,  the University,                                                                    
and school districts, which he  estimated to add up to 5,000                                                                    
jobs.  He  thought  the Institute  of  Social  and  Economic                                                                    
Research   (ISER),  Department   of   Labor  and   Workforce                                                                    
Development, and  OMB economists  would talk more  about the                                                                    
indirect effects of the proposed  cuts; and that it would be                                                                    
an  interesting  discussion.  He  considered  government  to                                                                    
include state, local, and school districts.                                                                                     
                                                                                                                                
Co-Chair  Stedman  thought it  was  highly  likely that  the                                                                    
committee would begin the discussion the following week.                                                                        
                                                                                                                                
10:28:11 AM                                                                                                                   
                                                                                                                                
Mr. Teal continued  to discuss slide 8. He did  not have any                                                                    
answers to the  questions posed on slide 8 and  did not know                                                                    
what  the  governor's  intentions   were.  He  pondered  how                                                                    
flexible  the   governor's  principals   were,  specifically                                                                    
regarding  the PFD.  He  considered  the forthcoming  budget                                                                    
bills proposed by the governor,  and hoped there was time to                                                                    
analyze  each  bill.  He  hoped   that  the  governor  would                                                                    
prioritize  the  bills,   and  thought  governors  typically                                                                    
focused on a  few bills. He thought there was  a fairly weak                                                                    
understanding of where the budget  would take the state, and                                                                    
whether the budget proposal would  stand up to scrutiny once                                                                    
there was time for analysis.                                                                                                    
                                                                                                                                
Senator  Wielechowski  referenced  oil  tax  credits,  which                                                                    
according to the Revenue Sources  Book consumed $1.9 billion                                                                    
in  FY  20.  He  asked  how  LFD  defined  revenue,  and  if                                                                    
corporate  earnings and  earnings  from  the Permanent  Fund                                                                    
were included in the calculation.                                                                                               
                                                                                                                                
Mr.  Teal  relayed  that  LFD   looked  at  revenue  in  the                                                                    
governor's  budget   proposal  primarily  as  the   two  tax                                                                    
changes;  including   the  Petroleum  Property   Tax,  which                                                                    
required legislation and would  generate about $420 million.                                                                    
There was another  $28 million in shared taxes  that did not                                                                    
require legislation  to change, that was  currently spent by                                                                    
distributing funds to local governments.                                                                                        
                                                                                                                                
Senator Wielechowski  clarified that  he had  been referring                                                                    
to  the  first point  on  the  slide  that had  stated  that                                                                    
dividends consumed 37 percent of revenue.                                                                                       
                                                                                                                                
Mr.  Teal   stated  that  the  first   bullet  included  the                                                                    
traditional oil revenue and the entire POMV payout.                                                                             
                                                                                                                                
10:31:57 AM                                                                                                                   
                                                                                                                                
Senator Wilson  addressed the  fifth bullet  on slide  8 and                                                                    
asserted that  it was not known  if the UA system  or school                                                                    
districts would  cut the jobs  as described by Mr.  Teal. He                                                                    
suggested  that  the  amount  of  the  cut  was  known,  but                                                                    
agencies  and  districts could  restructure  in  any way  to                                                                    
handle any  reduction. He thought  it was possible  to frame                                                                    
the conversation  in many ways and  suggested that sometimes                                                                    
the  information was  framed  in the  most  drastic way  for                                                                    
shock and appeal.                                                                                                               
                                                                                                                                
Mr. Teal stated  that Senator Wilson was correct  in that it                                                                    
was not known  how many jobs would be lost.  He relayed that                                                                    
LFD  was using  a "rule  of thumb"  to equate  approximately                                                                    
$100,000  per  job. He  continued  Senator  Wilson had  been                                                                    
correct in stating it was  possible to restructure; however,                                                                    
he had  simply translated  dollar cuts into  positions using                                                                    
the calculation.                                                                                                                
                                                                                                                                
10:33:36 AM                                                                                                                   
                                                                                                                                
Senator  Olson  realized that  Mr.  Teal  was not  a  policy                                                                    
analyst, and spoke  to his experience in his  role as budget                                                                    
analyst. He assumed  that Mr. Teal agreed  that the proposed                                                                    
budget was  the most unrealistic  that he had ever  seen. He                                                                    
asked how  crippling the proposed  budget was to  the state.                                                                    
He mentioned the  proposed cuts to DHSS,  which would affect                                                                    
the vaccine  control program, and jeopardize  public health.                                                                    
He mentioned students and faculty  leaving the UA system due                                                                    
to  funding  uncertainty.  He discussed  the  issue  of  the                                                                    
Petroleum Property  Tax funding shift, which  he thought was                                                                    
affecting the bonding rating of  the North Slope Borough. He                                                                    
thought the  borough might  have bonds  called in  early. He                                                                    
referenced  the   proposed  cuts  to  AMHS.   He  asked  how                                                                    
unrealistic the  budget was  and if Mr.  Teal had  ever seen                                                                    
another budget like it.                                                                                                         
                                                                                                                                
Mr. Teal had  never seen a budget like that  proposed by the                                                                    
governor.  He   looked  at  the   proposed  budget   as  not                                                                    
unrealistic in  budgetary terms, as  the cuts could  be made                                                                    
and the  revenue measures could  be adopted. He  thought the                                                                    
unrealistic  factor  was  any  expectation  that  there  was                                                                    
enough  time  for the  legislature  to  really consider  the                                                                    
budget proposal,  especially considering  the fact  that the                                                                    
information  was  not  available. He  thought  the  proposed                                                                    
budget  was a  case of  biting  off more  than anyone  could                                                                    
chew. There were many proposals,  and the proposals were not                                                                    
vetted.                                                                                                                         
                                                                                                                                
Mr. Teal continued  to respond to Senator  Olson. He thought                                                                    
an   unrealistic  workload   had   been   thrust  upon   the                                                                    
legislature.  He  thought  the   legislature  would  have  a                                                                    
difficult  time even  if  the proposal  came  with a  budget                                                                    
analysis. He  found it was  completely unrealistic  that the                                                                    
legislature would  be able  to complete  an analysis  of the                                                                    
proposed budget and make decisions in a regular session.                                                                        
                                                                                                                                
10:37:41 AM                                                                                                                   
                                                                                                                                
Senator Micciche  referenced the  second bullet on  slide 8,                                                                    
which  referenced  a two  percent  reduction  in UGF,  while                                                                    
slide  6  showed  a  13  percent  reduction.  He  referenced                                                                    
Senator Shower's  earlier comments and  wanted clarification                                                                    
of how the reduction might  impact Alaskans. He asked if Mr.                                                                    
Teal would provide the information.                                                                                             
                                                                                                                                
Mr.  Teal  explained  that the  difference  in  the  numbers                                                                    
reflected  the  13  percent reduction  in  agency  operating                                                                    
costs  listed on  slide  6, which  did  not include  formula                                                                    
funding.  He  returned to  slide  8  and  noted that  the  2                                                                    
percent  cut  referenced  on  slide   8  was  for  all  UGF,                                                                    
including  formula  cuts,  the   capital  budget,  and  fund                                                                    
transfers.  He  stated that  at  the  fiscal summary  level,                                                                    
there was a 2 percent reduction.                                                                                                
                                                                                                                                
Senator Micciche noted  that the UA budget  showed almost no                                                                    
reduction, while there  was a huge shift to  DGF. He thought                                                                    
it  was  important  to  separate out  the  funding  so  that                                                                    
Alaskans could see the impacts.                                                                                                 
                                                                                                                                
Senator Bishop  referenced Mr. Teal's earlier  comment about                                                                    
an  unrealistic  workload  on the  legislature  and  thought                                                                    
there   was   also   an    unrealistic   workload   on   the                                                                    
administration.                                                                                                                 
                                                                                                                                
10:40:08 AM                                                                                                                   
                                                                                                                                
Senator  Shower discussed  position  reductions. He  thought                                                                    
there was a mixture of  discussion on positions versus jobs.                                                                    
He  reported  that  the commissioner-designee  had  informed                                                                    
that there  were 3,100 budgeted  but unfilled  positions. He                                                                    
discussed the PFD. He discussed  DGF versus UGF, and thought                                                                    
it  was important  to discuss  all fund  sources to  provide                                                                    
clarity for the public.                                                                                                         
                                                                                                                                
Mr.  Teal thought  that  it was  important  to consider  all                                                                    
kinds of  funding, and  understand that it  was not  all the                                                                    
same. He described UGF as  "real money," and stated that DGF                                                                    
turned  into  real  money  if  it  could  be  collected.  He                                                                    
addressed the classification of  dividends as DGF. There was                                                                    
a  time  when  the  ERA  had a  designated  purpose  to  pay                                                                    
dividends and  inflation proofing. The account  was not used                                                                    
for government,  and the classification  of the  account had                                                                    
been argued for  many years. He noted  that the constitution                                                                    
and  budgeting defined  that the  ERA was  UGF and  could be                                                                    
spent  at  any time  for  any  purpose.  The state  did  not                                                                    
classify the ERA  as UGF as dividends were  considered to be                                                                    
"below the line." The dividends  were on the fiscal summary,                                                                    
but not  rolled into any  totals; which changed under  SB 26                                                                    
[legislation passed  in 2018 establishing  a POMV  draw from                                                                    
the Earnings Reserve Account of the Permanent Fund].                                                                            
                                                                                                                                
Mr. Teal continued to address  Senator Shower's question. He                                                                    
thought that  as soon  as there  was a  payout from  the ERA                                                                    
that could be used for  general government purposes, the ERA                                                                    
was clearly identified as UGF  revenue and any spending from                                                                    
it (including  dividends) became  UGF revenue.  He mentioned                                                                    
the  relationship between  dividends and  revenue. If  there                                                                    
was $3  billion in payout,  one could pay dividends  and the                                                                    
remainder went  to the  General Fund.  He asserted  that the                                                                    
amount paid for  dividends was a choice to  make. He thought                                                                    
it was simply impossible to  continue to call dividends DGF.                                                                    
The funds  were not  designated any  longer, and  the amount                                                                    
that  went  to  UGF  was  affected  by  the  amount  of  the                                                                    
dividends.  He thought  many people  believed that  changing                                                                    
the accounting of the Permanent  Fund was the reason for the                                                                    
deficit; but it had nothing to do with it.                                                                                      
                                                                                                                                
10:45:18 AM                                                                                                                   
                                                                                                                                
Mr. Teal  showed slide 9,  "A Comparison of the  FY19 Budget                                                                    
with  the  Governor's  Amended   FY20  Budget  Request  (UGF                                                                    
only),"  which showed  a  bar graph.  He  thought that  even                                                                    
though there was  about $1 billion of the  deficit filled by                                                                    
reserves or  new revenue,  the takeaway  should be  that the                                                                    
$650  million  in  proposed cuts  fell  as  anticipated.  He                                                                    
pointed out  small changes  in funding  for agencies  on the                                                                    
right-hand side  of the  graph and noted  that the  cuts hit                                                                    
the big money programs as  anticipated. The larger cuts were                                                                    
also larger percentage reductions.                                                                                              
                                                                                                                                
Mr. Teal  thought it  was not a  surprise that  the governor                                                                    
cut where  the money was;  in areas many people  would agree                                                                    
were core services. He referenced  a remark by United States                                                                    
Senator  Lisa  Murkowski  that  stated  core  services  were                                                                    
education,  healthcare, and  access  to transportation;  and                                                                    
stated that the proposed budget hit the core services hard.                                                                     
                                                                                                                                
Co-Chair von Imhof considered Mr.  Teal's comments about the                                                                    
dividend  being   considered  UGF.   She  asked   about  the                                                                    
percentage of the dividend within the entire UGF spend.                                                                         
                                                                                                                                
Mr. Teal  stated that if  one followed the  proposed budget,                                                                    
the percentage  was exactly  the same  because there  was no                                                                    
deficit  and no  surplus, so  revenue and  expenditures were                                                                    
equal. The dividend  showed to be 37 percent  of revenue and                                                                    
37 percent of expenditures.                                                                                                     
                                                                                                                                
Co-Chair von Imhof had considered  what was allocated as UGF                                                                    
spend only was  about $3.5 billion for all  agencies. If the                                                                    
state  was spending  $1.9 billion  to pay  a $3,000  PFD; it                                                                    
would be equivalent to 54 percent of the agency spending.                                                                       
                                                                                                                                
Mr.  Teal  thought Co-Chair  von  Imhof  had posed  a  valid                                                                    
number. He  stated that LFD  had included  dividend spending                                                                    
as part of the total.                                                                                                           
                                                                                                                                
10:49:32 AM                                                                                                                   
                                                                                                                                
Senator  Wielechowski agreed  with  Senator  Shower and  had                                                                    
never viewed the ERA as UGF. He  asked if the PFD was in the                                                                    
governor's FY 20 amended budget.                                                                                                
                                                                                                                                
Mr. Teal thought the governor  had an interesting definition                                                                    
of the budget, and had said  or implied the dividend was not                                                                    
in  the budget.  He stated  the dividend  was in  SB 23,  an                                                                    
appropriation bill for the dividend,  which he thought would                                                                    
be before  the committee  soon. He looked  at the  budget as                                                                    
not  simply  the operating  bill;  but  rather as  the  full                                                                    
fiscal plan to include  all revenue measures, any associated                                                                    
bills, fiscal  notes, and all appropriations.  He thought it                                                                    
made no difference  which bill an appropriation was  in - it                                                                    
was  still an  expenditure.  He argued  that the  governor's                                                                    
budget included  all appropriation  bills, including  SB 23,                                                                    
which appropriated the $1.9 billion for dividends.                                                                              
                                                                                                                                
Senator   Wielechowski  mentioned   an  appropriation   bill                                                                    
seeking the back-payment of dividends.  He observed that the                                                                    
appropriation was not listed in the chart on the slide.                                                                         
                                                                                                                                
Mr. Teal stated  that the back payments would not  use FY 20                                                                    
money; and  would be used  in FY 21, FY  22, and FY  23. The                                                                    
chart was limited to FY 20.                                                                                                     
                                                                                                                                
Co-Chair Stedman  thanked Mr. Teal for  the presentation and                                                                    
asked if he had final comments.                                                                                                 
                                                                                                                                
10:52:26 AM                                                                                                                   
                                                                                                                                
Mr. Teal pointed out that there  was no language in the bill                                                                    
addressing a draw from the CBR.                                                                                                 
                                                                                                                                
Mr. Teal  reiterated that the  CBR was not mentioned  in the                                                                    
operating budget. He thought some  might argue that none was                                                                    
necessary because there was no  deficit. He pointed out that                                                                    
the  budget was  passed as  proposed, there  would be  a $20                                                                    
million surplus. A decline of even  50 cents in the price of                                                                    
oil would cause  a deficit, and there would  be no automatic                                                                    
way  to  fill a  deficit  and  would necessitate  a  special                                                                    
session to address a revenue  shortfall. He knew many states                                                                    
addressed revenue shortfalls with  a special session, but he                                                                    
considered it to be inefficient.  He reminded that the state                                                                    
had  the most  volatile revenue  stream in  the country  and                                                                    
could not count on accurate projections.                                                                                        
                                                                                                                                
Mr.  Teal thought  a  second  issue was  that  there was  no                                                                    
reverse sweep. He  explained that at the end  of every year,                                                                    
any liability to  the CBR was filled by  any remaining funds                                                                    
in the General Fund and sub  funds were swept in to the CBR.                                                                    
The reverse  sweep provision  was in  the budget  every year                                                                    
and returned all the money swept  from the sub funds. If the                                                                    
reverse sweep did not happen,  the funding for the sub funds                                                                    
was  lost.   He  recalled   that  even   in  years   with  a                                                                    
controversial supermajority  vote, the "reverse  sweep" vote                                                                    
was   not  controversial.   Rather,  the   practice  avoided                                                                    
terrible accounting  issues. He thought the  committee might                                                                    
want to  address the matter  when it considered  a committee                                                                    
substitute for the bill.                                                                                                        
                                                                                                                                
SB  20  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:56:49 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:56 a.m.                                                                                         
                                                                                                                                

Document Name Date/Time Subjects
2 26 19 SFC FY20 Overview round 2.pdf SFIN 2/26/2019 9:00:00 AM
SB 20