Legislature(2019 - 2020)SENATE FINANCE 532

04/23/2019 09:00 AM FINANCE

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Audio Topic
09:01:17 AM Start
09:04:44 AM Fiscal Plan Review: Legislative Finance Division
10:28:34 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ David Teal, Legislative Finance Director TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      April 23, 2019                                                                                            
                         9:01 a.m.                                                                                              
9:01:17 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 Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
Senator Mike Shower                                                                                                             
ALSO PRESENT                                                                                                                  
David Teal, Director,  Legislative Finance Division; Senator                                                                    
Cathy Giessel; Senator Mia Costello.                                                                                            
^FISCAL PLAN REVIEW: LEGISLATIVE FINANCE DIVISION                                                                             
9:04:44 AM                                                                                                                    
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
discussed the  presentation, "Fiscal  Plan Review"  (copy on                                                                    
file).  He stated  that the  presentation would  outline the                                                                    
impact of the  budget decisions. He quoted a  tweet from the                                                                    
governor. He remarked that the  fiscal model was intended to                                                                    
see  the long-term  impact  of  decisions. The  presentation                                                                    
would provide screenshots  of the model, rather  than a live                                                                    
model. This  would be an educational  presentation. Mr. Teal                                                                    
looked  at slide  2, "Where  does  Governor Dunleavy's  plan                                                                    
lead?" The  slide was prepared  by the Office  of Management                                                                    
and Budget (OMB).                                                                                                               
Co-Chair  Stedman looked  at slide  2, and  felt that  there                                                                    
should be a  delineation of the source of the  slide when it                                                                    
is posted for the public.                                                                                                       
Mr. Teal agreed. He mistakenly  assumed that the seal on the                                                                    
slide would indicate the source.                                                                                                
9:10:11 AM                                                                                                                    
Senator  Micciche  remarked   that  his  constituents  often                                                                    
referenced  this  slide. He  felt  that  there should  be  a                                                                    
greater  analysis  of  the  slide,   and  why  it  could  be                                                                    
Mr. Teal agreed.  He stated that there would  be an analysis                                                                    
of the problem with the slide momentarily.                                                                                      
Mr.  Teal addressed  slide 3,  "Scenario  1: The  Governor's                                                                    
Plan." He  looked at the  line titled,  "Transfers from\(to)                                                                    
the CBR." He remarked that the  budget did balance in FY 20,                                                                    
and  had  a  small  surplus.  He stated  that  there  was  a                                                                    
projection for  the next six  years of draws  from reserves,                                                                    
with it peaking at $455  million. He noted that the deficits                                                                    
would decrease  once the budget  was balanced at the  end of                                                                    
the forecast period.                                                                                                            
Co-Chair Stedman  wondered whether the numbers  included the                                                                    
full statutory dividend .                                                                                                       
Mr. Teal replied in the  affirmative, and furthered that the                                                                    
governor's plan was also a revenue plan.                                                                                        
Co-Chair  von Imhof  noted that  there were  total available                                                                    
general  funds.   She  remarked  that  the   model  required                                                                    
transfers from the CBR beginning in 2021.                                                                                       
Mr. Teal agreed.                                                                                                                
Co-Chair von Imhof remarked that  the model was not claiming                                                                    
to  take money  the savings  or to  be net  neutral, because                                                                    
there was a draw of $455 million in 2022.                                                                                       
Mr. Teal agreed.                                                                                                                
Co-Chair von Imhof wondered if  those numbers were reflected                                                                    
in slide 2.                                                                                                                     
Mr.  Teal replied  in the  negative, but  remarked that  the                                                                    
difference between  the points were $5  billion. He stressed                                                                    
that  the scale  could  not  be seen  very  well within  the                                                                    
graphic.   He   remarked   that   the   governor's   graphic                                                                    
representation of the ten-year plan should be consistent.                                                                       
9:15:29 AM                                                                                                                    
Mr.  Teal highlighted  slide 4,  "Status Quo  Budgeting." He                                                                    
remarked that  the slide  was from OMB.  He stated  that the                                                                    
governor had  referred to  the House  budget as  "status quo                                                                    
budgeting",  meaning that  it was  the  same budget  process                                                                    
with  the  same result.  He  felt  that  the slide  did  not                                                                    
represent the  House nor Senate  budget, and was  a nebulous                                                                    
scenario. He did not know  the assumptions within the graph.                                                                    
He felt  that the governor  had provided the  scenario based                                                                    
on  what he  felt the  state would  be in,  if a  budget was                                                                    
adopted other than the governor's own plan.                                                                                     
Mr.  Teal  discussed slide  5,  "The  Governor's Plan."  The                                                                    
slide  showed  a  model from  Legislative  Finance  Division                                                                    
(LFD)  representing the  governor's plan.  He explained  the                                                                    
parameters built into the model.                                                                                                
9:17:50 AM                                                                                                                    
Co-Chair Stedman remarked  that there were some  who had not                                                                    
seen the slide, and there  were several slide with different                                                                    
scenarios.  He  asked  for   explicit  descriptions  of  the                                                                    
intricacies of the slide.                                                                                                       
Mr. Teal  explained that  the model  used the  Department of                                                                    
Revenue (DOR)  Spring forecast for  both oil prices  and oil                                                                    
production. That was done, because  DOR were the experts. He                                                                    
remarked that  LFD could prepare scenarios  with other price                                                                    
and production  forecasts, but it often  confused the issue.                                                                    
He stated  that in  order to  compare various  scenarios and                                                                    
decisions, there must be the same underlying assumptions.                                                                       
9:23:53 AM                                                                                                                    
Co-Chair Stedman  remarked that  some committee  members had                                                                    
Mr. Teal  looked at the  Permanent Fund Plan. He  noted that                                                                    
SB 26  had been passed the  session prior, which had  a POMV                                                                    
payout  from the  Permanent  Fund  Earnings Reserve  Account                                                                    
(ERA) to  the general fund  (GF). He stated that  the amount                                                                    
of 5.25  percent was listed  on the  slide with a  5 percent                                                                    
draw after  FY 21. He explained  that one might think  of it                                                                    
as approximately  $3 billion  per year.  He stated  that the                                                                    
money  would  go  to  GF and  to  Permanent  Fund  Dividends                                                                    
(PFDs). He remarked  that it would be  an unspecified split.                                                                    
He  stated  that  the  dividend  provision  itself  was  the                                                                    
statutory  provision,  which  was 50  percent  of  statutory                                                                    
earnings as defined by the Permanent Fund.                                                                                      
9:26:22 AM                                                                                                                    
Senator Micciche  surmised that there was  an effective rate                                                                    
of  1.5  percent.  He  assumed  that  a  growth  rate  below                                                                    
inflation meant  that it required cutting  in perpetuity for                                                                    
everything in between the bill and actual inflation.                                                                            
Mr. Teal agreed.                                                                                                                
Senator Hoffman asked the reason for the one.                                                                                   
Mr.  Teal replied  that  the  one referred  to  the kind  of                                                                    
inflation   proofing.  He   explained  that   the  inflation                                                                    
proofing   mechanism  was   only   covering  inflation.   He                                                                    
explained  that  there  were   several  other  models  under                                                                    
Governor Walker that proposed a  different kind of inflation                                                                    
proofing.  He  stated that  it  was  a holdover  from  those                                                                    
models.  It indicated  that the  legislature would  be doing                                                                    
inflation  proofing   as  the  Permanent  Fund   had  always                                                                    
functioned, within the statutory method.                                                                                        
Senator  Hoffman   noted  that  the  amount   for  inflation                                                                    
proofing was slightly above $900 million.                                                                                       
Mr. Teal replied that it was currently $943 million.                                                                            
Senator  Hoffman  wondered  how the  appropriation  complied                                                                    
with SB 26. He asked why  the $943 million coming out of the                                                                    
5.25 percent.                                                                                                                   
Mr.  Teal replied  that  it did  not come  out  of the  $943                                                                    
million. He  explained that the 5.25  percent payout limited                                                                    
the ERA payout to GF.  He stated that the inflation proofing                                                                    
statutes were not changed by SB 26.                                                                                             
9:30:39 AM                                                                                                                    
Senator Hoffman  stressed that  SB 26  stated that  the 5.25                                                                    
percent went  to GF, but  the inflation proofing did  not go                                                                    
to GF,  rather it  bypassed GF  and complied  with SB  26 by                                                                    
directly depositing into the corpus.                                                                                            
Mr. Teal agreed.                                                                                                                
Co-Chair Stedman asked for a walk through of the slide.                                                                         
Mr. Teal displayed slide 6, "The Governor's Plan":                                                                              
     1. PFDs are $3,000 or more every year.                                                                                     
     2. Past-year  dividends remove money from  the ERA, and                                                                    
     reduced earnings on the reduced  balances mean we never                                                                    
     quite recover (PF value falls behind inflation).                                                                           
     3.  High  dividends  come  at a  price  of  large  FY20                                                                    
     reductions in government services.                                                                                         
     4.  Deficits closely  match numbers  in the  Governor's                                                                    
     10-year  plan,  reaching a  maximum  of  15 percent.  A                                                                    
     balanced budget is achieved by FY27.                                                                                       
     5. The  CBR remains healthy:  the DGF infusion  in FY20                                                                    
     covers deficits in later years.                                                                                            
     6.   The   ERA   stabilizes  after   paying   past-year                                                                    
     dividends. This is a strong sign of a viable scenario.                                                                     
Mr. Teal  reverted back  to slide 5,  and announced  that he                                                                    
would skip slide 6.                                                                                                             
Co-Chair Stedman queried the section he was referencing.                                                                        
Mr. Teal stated that number 3  was the box in the upper left                                                                    
side. He  stated that  it showed UGF  revenue in  budget. He                                                                    
stressed that  it was  the revenue shown  as bars.  The blue                                                                    
was the  traditional revenue, and  the green was  the payout                                                                    
from  the  POMV payout.  He  stated  that,  if there  was  a                                                                    
deficit,  there  would be  an  orange  bar  at the  top.  He                                                                    
stressed  that  the  idea  was  the  revenue  always  equals                                                                    
expenditures,   and   the   slide  showed   the   level   of                                                                    
expenditures without dividends.                                                                                                 
Mr. Teal looked at slide 7, "The Governor's Plan without                                                                        
Legislation." He noted that the slide showed the same                                                                           
Co-Chair Stedman noted that slide 8 defined the numbers on                                                                      
slide 7.                                                                                                                        
Mr. Teal displayed slide 8, "The Governor's Plan without:"                                                                      
     1. Legislation that allows the  State to retain oil and                                                                    
     gas property tax revenue and                                                                                               
     2.  Transfers  of  the Power  Cost  Equalization  Fund,                                                                    
     Community   Assistance   Fund  and   Higher   Education                                                                    
     Endowment to the general fund                                                                                              
     1. PFDs remain at $3,000 or more every year.                                                                               
     2. Expenditures  are the same, but  lower revenue means                                                                    
     bigger deficits.                                                                                                           
     3. Those deficits  consume the CBR in just  a few years                                                                    
     and then begin eroding the ERA.                                                                                            
     4.  That  further  reduces   the  balance  (and  future                                                                    
     earnings)  of  the  PF,  so   the  PF  loses  value  to                                                                    
     5. The ERA is on a  downward trajectory, which is not a                                                                    
     good sign of a viable scenario.                                                                                            
Mr. Teal looked at slide 9, "House Budget (if Surplus is                                                                        
used for Dividends."                                                                                                            
9:41:54 AM                                                                                                                    
Mr. Teal addressed slide 10, "The House Budget":                                                                                
     1.  PFDs   are  substantially  lower  than   under  the                                                                    
     Governor's plandipping below                                                                                               
     $1,000  until  oil  tax  credits  are  paid  off,  then                                                                    
     climbing to $1,500 or more.                                                                                                
     2. Although  there are  no ad hoc  draws from  the ERA,                                                                    
     the payout  rate is a little  too high to allow  the PF                                                                    
     balance to keep pace with inflation.                                                                                       
     3.   Lower  dividends   mean   smaller  reductions   in                                                                    
     government services.                                                                                                       
    4. Deficits vanish immediately and do not reappear.                                                                         
     5. The  CBR balance growsthere   are no draws  from the                                                                    
     6. The ERA is stable. This is not a doomsday scenario.                                                                     
9:45:41 AM                                                                                                                    
Co-Chair  Stedman looked  at the  numbers for  dividends. He                                                                    
remarked that  the PFD  would start at  $1000 and  reduce to                                                                    
under $800 and then stay around $700 for several years.                                                                         
Mr. Teal replied  that the individual PFD  checks were shown                                                                    
on the  upper right  side. The checks  would reduce  to just                                                                    
under  $1000 and  then increase  back to  $1500 or  more and                                                                    
growing. He  noted that  in the lower  right corner,  it was                                                                    
not the  amount of individual payments.  The number referred                                                                    
to the millions of dollars, or rather the surplus.                                                                              
Co-Chair Stedman looked at FY  22, and queried the low point                                                                    
for the dividend.                                                                                                               
Mr. Teal stated  that the lowest line was  just under $1000.                                                                    
He  stated  that,  in  FY  20, it  was  right  around  $1200                                                                    
dropping to $1000, and then recovering again.                                                                                   
Senator Hoffman felt that the  underlying theme of the House                                                                    
budget was that government "gets  the first crack" at the $3                                                                    
billion, and anything remaining goes to the people.                                                                             
Mr. Teal replied that it was an accurate assessment.                                                                            
Co-Chair von  Imhof felt  that the  scenario shows  that the                                                                    
dividend was the eighteenth agency  and competed for funding                                                                    
with the  seventeen other agencies. She  stressed that there                                                                    
were  no  new   taxes.  She  pointed  out   the  $2  million                                                                    
reductions, and no money from any savings accounts.                                                                             
Mr. Teal agreed.                                                                                                                
Co-Chair von  Imhof wondered how  much was going  toward the                                                                    
capital account.                                                                                                                
Mr.  Teal  replied  that  the OMB  ten-year  plan  had  $100                                                                    
million. He  stressed that the slide  showed representations                                                                    
of  snapshots  of the  model.  He  explained that  he  could                                                                    
easily change that number for the capital budget.                                                                               
Co-Chair Stedman noted that the  $100 million capital budget                                                                    
would  be match  money to  get federal  highway and  airport                                                                    
money, leaving nothing to build  anything outside of federal                                                                    
assistance. He  felt that the  number was below  a barebones                                                                    
capital budget.                                                                                                                 
9:50:41 AM                                                                                                                    
Senator Micciche felt that there  were two ways to frame the                                                                    
discussion. He  remarked that  the governor's  plan required                                                                    
new taxes to the communities.                                                                                                   
Mr. Teal replied in the affirmative.                                                                                            
Senator  Bishop  noted that  the  two  scenarios of  a  flat                                                                    
capital budget. He  felt that there should  be an additional                                                                    
piece of insurance.                                                                                                             
Co-Chair von  Imhof expressed  concern about  the settlement                                                                    
money going  into the  CBR, but  hoped that  there may  be a                                                                    
time  when  there could  be  a  deposit  into the  CBR.  She                                                                    
commented that some  states had an income  tax, which caused                                                                    
citizens  to  pay attention  to  the  growth of  government.                                                                    
Alaska  had the  dividend, which  provided the  same impact.                                                                    
She noted that Alaskans were  paying attention to the growth                                                                    
of government.                                                                                                                  
Co-Chair  Stedman announced  that  Senator  Wilson had  been                                                                    
present since the call to order of the meeting.                                                                                 
Senator  Hoffman noted  that  the House  did  not include  a                                                                    
dividend in their operating budget.                                                                                             
9:55:16 AM                                                                                                                    
Senator  Wielechowski  noted  that  constituents  felt  that                                                                    
cutting the dividend could be considered a tax.                                                                                 
Co-Chair Stedman  understood that consideration,  and agreed                                                                    
to have that discussion with the tax experts.                                                                                   
Mr.  Teal  emphasized  the comments  from  Senator  Hoffman,                                                                    
about  how  the  House  had  passed  a  budget  without  the                                                                    
Mr.  Teal highlighted  slide 11,  "How Well  Does the  House                                                                    
Budget Meet Governor Dunleavy's 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.                                                                     
10:00:47 AM                                                                                                                   
Mr. Teal looked  at slide 12, "Senate Budget  (if Surplus is                                                                    
Used  for  Dividends." He  remarked  that  the Senate  spent                                                                    
approximately  $50  million  on school  debt  reimbursement,                                                                    
because it proposed 100 percent  reimbursement. He noted the                                                                    
slightly  different starting  point,  and  the governor  had                                                                    
larger cuts to  state agencies. The cuts were  offset by the                                                                    
100  percent debt  reimbursement. He  noted the  $20 million                                                                    
was associated  with the reimbursement, because  the formula                                                                    
for rural school construction was tied to the school debt.                                                                      
Mr. Teal  addressed slide 13,  "Senate Budget (with  a 50/50                                                                    
dividend  split)."  He  noted   the  endowment  payout,  and                                                                    
remarked that  the dividend would  be a split of  the payout                                                                    
rather than the current formula.                                                                                                
10:06:47 AM                                                                                                                   
Co-Chair  Stedman wondered  whether  there  were changes  in                                                                    
Mr. Teal remarked that there  were no changes in revenue and                                                                    
no reductions in expenditures.                                                                                                  
Senator  Micciche wondered  whether it  was painful  to have                                                                    
1.5 percent plugged into the growth rate in all the models.                                                                     
Mr.  Teal replied  that  it  was hard  to  achieve, but  the                                                                    
budget  had  been  cut  in recent  years  by  a  substantial                                                                    
amount.  He felt  that 1.5  percent was  aggressive, but  it                                                                    
must be done.                                                                                                                   
Senator Micciche  remarked that budgets were  often compared                                                                    
to  households, and  stressed that  beating  inflation in  a                                                                    
household was impossible.                                                                                                       
Mr. Teal agreed.                                                                                                                
Co-Chair Stedman  stressed that inflation  eroded purchasing                                                                    
power, so it must be  addressed. He remarked that the factor                                                                    
could be incorporated at a later date.                                                                                          
Mr. Teal stressed  that each scenario would  look worse with                                                                    
the higher expenditure growth.                                                                                                  
10:10:32 AM                                                                                                                   
Senator Micciche  stressed that over time  one must consider                                                                    
household budgets as related to the state budget.                                                                               
Co-Chair  Stedman remarked  that every  citizen with  a bank                                                                    
account understood inflation in their interest rate.                                                                            
Senator Hoffman  requested a presentation with  the dividend                                                                    
frozen  at $1600  for the  next four  years, and  then 50/50                                                                    
split going into effect in 2024.                                                                                                
Co-Chair  Stedman   stated  that  LFD  could   provide  that                                                                    
scenario in a meeting on Thursday.                                                                                              
Mr. Teal  discussed slide 14,  "Senate Budget (with  a 75/25                                                                    
dividend split)." He  stated that the scenario  was based on                                                                    
a budget with 25 percent of the payout going to dividends.                                                                      
10:15:56 AM                                                                                                                   
Co-Chair  Stedman noted  the request  from Senator  Hoffman,                                                                    
and asked for the same scenario with the 25/75 split.                                                                           
Co-Chair von Imhof asked for a higher capital number.                                                                           
Co-Chair Stedman  agreed, and asked  that the  higher number                                                                    
be $250 million.                                                                                                                
Senator  Micciche remarked  that  it would  be difficult  to                                                                    
reach all the  communities. He understood that  there was no                                                                    
way  to  determine beyond  ten  years,  so people  were  now                                                                    
looking  at  the  LFD  chart was  difficult  to  follow.  He                                                                    
requested an easier slide, like OMB.                                                                                            
Co-Chair Stedman  agreed that there was  much information on                                                                    
the chart.                                                                                                                      
Senator  Olson  wondered  whether there  was  a  significant                                                                    
difference if there was a one-third/two-third split.                                                                            
Mr. Teal agreed to provide that information.                                                                                    
Senator  Wielechowski requested  a chart  if the  per barrel                                                                    
deductible oil tax credits were removed.                                                                                        
Co-Chair Stedman  felt that would be  difficult. He wondered                                                                    
if the  request was for a  removal of the per  barrel credit                                                                    
in holding the tax rate constant at 30 percent.                                                                                 
Senator Wielechowski replied in the affirmative.                                                                                
Co-Chair  Stedman   stated  that  LFD  could   provide  that                                                                    
Senator  Hoffman  stressed that  the  House  and the  Senate                                                                    
budgets did  not deal with the  dividend, and left it  to be                                                                    
determined by a particular piece of legislation.                                                                                
10:21:41 AM                                                                                                                   
Co-Chair Stedman stressed that  the operating budget process                                                                    
was not complete.                                                                                                               
Co-Chair von Imhof remarked that  behind many of the numbers                                                                    
were behaviors.                                                                                                                 
Senator Olson  stressed that there  may be an  adjustment in                                                                    
the split, so  there could be a step down  over a few years,                                                                    
which might allow for a more reasonable budget.                                                                                 
Co-Chair Stedman agreed that LFD  could provide the multiple                                                                    
Co-Chair Stedman announced the schedule for the week.                                                                           
10:28:34 AM                                                                                                                   
The meeting was adjourned at 10:28 a.m.                                                                                         

Document Name Date/Time Subjects
042319 LFD SFC Long-Term House Plan.pdf SFIN 4/23/2019 9:00:00 AM
LFD Fiscal Plan Review