Legislature(2019 - 2020)SENATE FINANCE 532

04/29/2019 01:30 PM FINANCE

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01:38:31 PM Start
01:38:58 PM SB104
02:33:54 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Bill Hearing Canceled>
<Bill Hearing Canceled>
+ Bills Previously Heard/Scheduled: TELECONFERENCED
Heard & Held
-- Public Testimony --
                  SENATE FINANCE COMMITTEE                                                                                      
                       April 29, 2019                                                                                           
                          1:38 p.m.                                                                                             
1:38:31 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stedman called the Senate Finance Committee                                                                            
meeting to order at 1:38 p.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Peter Micciche                                                                                                          
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
Senator Bill Wielechowski                                                                                                       
MEMBERS ABSENT                                                                                                                
Senator Mike Shower                                                                                                             
Senator David Wilson                                                                                                            
ALSO PRESENT                                                                                                                  
Juli  Lucky,  Staff,  Senator Natasha  von  Imhof;  Caroline                                                                    
Schultz,  Staff,   Senator  Natasha  von  Imhof;   Vikki  Jo                                                                    
Kennedy, Self,  Juneau; Senator  Cathy Giessel;  Senator Mia                                                                    
PRESENT VIA TELECONFERENCE                                                                                                    
Adam Hykes, Self, Homer; Lynette Clark, Self, Fox.                                                                              
SB 104    APPROPRIATION LIMIT                                                                                                   
          SB 104 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
SENATE BILL NO. 104                                                                                                           
     "An Act relating to an appropriation limit; relating                                                                       
     to the budget responsibilities of the governor; and                                                                        
     providing for an effective date."                                                                                          
1:38:58 PM                                                                                                                    
Co-Chair Stedman discussed housekeeping.                                                                                        
Co-Chair  von  Imhof  MOVED   to  ADOPT  proposed  committee                                                                    
substitute  for SB  104,  Work  Draft 31-LS0804\U  (Wallace,                                                                    
Co-Chair Stedman OBJECTED for discussion.                                                                                       
1:40:13 PM                                                                                                                    
JULI LUCKY, STAFF, SENATOR NATASHA  VON IMHOF, discussed the                                                                    
proposed committee substitute (CS).                                                                                             
Ms. Lucky noted  that there was a new section  added on page                                                                    
2 of the  bill that allowed for an allowance  outside of the                                                                    
cap for capital  projects. She said that an  amount equal to                                                                    
the 5 percent  of the cap could be spent  outside of the cap                                                                    
for projects  within a years   time. She furthered  that the                                                                    
erroneous  language on  Page 2,  lines  16 and  17 would  be                                                                    
removed in a future CS.                                                                                                         
Ms.  Lucky detailed  that  the first  year  of the  spending                                                                    
limit would be $5 million  and the amount allowable would be                                                                    
up to $250  million to be outside of the  cap. She clarified                                                                    
that  the  capital  budget would  not  necessarily  be  $250                                                                    
million, only that up to  $250 million would not be included                                                                    
under the  cap. There were  also technical changes  that did                                                                    
not change  the intent  of the  bill. The  technical changes                                                                    
provided clarifying language.                                                                                                   
1:43:12 PM                                                                                                                    
Co-Chair  Stedman WITHDREW  his  objection.  There being  NO                                                                    
further OBJECTION, it was so ordered.                                                                                           
Ms. Lucky addressed  the fiscal note, which  was a statement                                                                    
of zero fiscal impact for various departments.                                                                                  
1:44:15 PM                                                                                                                    
CAROLINE   SCHULTZ,  STAFF,   SENATOR  NATASHA   VON  IMHOF,                                                                    
directed attention to  the spreadsheet "Unrestricted General                                                                    
Fund Short-term budget  expectations (1.5 percent inflation)                                                                    
'A',"  (copy on  file). She  clarified that  the spreadsheet                                                                    
reflected a  short-term cash flow  analysis that  would show                                                                    
the expected budget given the  budget that had passed out of                                                                    
committee as  well as other policy  considerations currently                                                                    
in front of the committee.                                                                                                      
Ms.  Schultz looked  at Slide  A, which  showed unrestricted                                                                    
general fund (UGF)  spending in millions except  for Line M,                                                                    
which showed the per capita  permanent fund dividend. Line A                                                                    
represented  the  oil  and  other  UGF  revenue,  which  was                                                                    
projected at $2.3 billion for FY20.  Line B showed the SB 26                                                                    
percent  of market  value (POMV)  draw, which  will be  5.25                                                                    
percent until  FY22, when it  switches to 5 percent.  Line C                                                                    
showed the UGF  revenue, which was the sum of  lines A and B                                                                    
and totaled  $5.23 billion. She continued  to the 'Spending'                                                                    
section  of the  spreadsheet,  which began  on  line D.  She                                                                    
noted that  the senate budget  was $3.785 for FY20  and grew                                                                    
at 1.5  percent inflation rate  through FY22. Line  E showed                                                                    
total debt  payments. Line F  clarified the debt  subject to                                                                    
the cap;  the bill explicitly  clarified that the  only debt                                                                    
considered debt issued  by the state were  excluded from the                                                                    
cap.  Items such  as school  debt reimbursement  and pension                                                                    
obligation  would  still  be  counted  under  the  cap.  She                                                                    
pointed to Line  G, which showed the  retirement payment and                                                                    
Line  H was  for  fund capitalization  and  was held  steady                                                                    
through FY22,  as it  was unclear  what those  numbers would                                                                    
be. She  stated that Line  I reflected that  total operating                                                                    
budget at  $4.3 billion  and Line  J showed  the placeholder                                                                    
capital budget of $150 million.  Line I and J added together                                                                    
reflected  the  total  government   UGF  spending  of  $4.46                                                                    
billion. She said that the  chart reflected a permanent fund                                                                    
dividend  of  only  surplus;  the  total  UGF  revenue  with                                                                    
subtracted UGF spending, which in  FY20 was $777 million and                                                                    
calculated  to  a  dividend  of  $1,200  for  all  qualified                                                                    
applicants. Chart B showed the 50 percent POMV split.                                                                           
1:48:20 PM                                                                                                                    
Ms.  Shultz  moved  to  Line   N,  which  showed  the  total                                                                    
expenditures,  including the  dividend,  of $5.237  billion.                                                                    
The deficit  would be zero as  the surplus would be  used to                                                                    
pay  the  dividend.  She  moved  to  Line  P,  which  showed                                                                    
appropriations  subject to  the cap  and was  the total  UGF                                                                    
spending,  less the  debt outlined  in  Line F,  as well  as                                                                    
capital as long  it was less than 5 percent  of what the cap                                                                    
allowed.  She said  that the  cap  would not  apply in  FY20                                                                    
because  the effective  date of  the bill  was for  the FY21                                                                    
budget. She  relayed that  based on the  modeling, in  FY 21                                                                    
the appropriation subject  to the cap were  $82 million over                                                                    
the $5  billion cap. She noted  the estimated constitutional                                                                    
budget reserve  (CBR) balance for  FY21 and FY22  and shared                                                                    
that the estimated for the  CBR balance for the beginning of                                                                    
FY20 was $2.3 billion but was subject to change.                                                                                
1:50:00 PM                                                                                                                    
Co-Chair  Stedman asked  how the  legislature would  address                                                                    
Line 'R'.                                                                                                                       
Ms. Schultz  noted that the  line suggested that the  cap as                                                                    
written in  the bill was lower  can could be expected  to be                                                                    
achieved in the first year.                                                                                                     
Co-Chair Stedman  wondered whether  the state would  have to                                                                    
have  more  revenue  and less  expenses,  or  less  expenses                                                                    
because it was delinked from revenue.                                                                                           
Ms. Schultz stated  that the cap was  delinked from revenue,                                                                    
so even with  a significant windfall in terms  of oil prices                                                                    
or  production, or  remarkably large  market returns  on the                                                                    
permanent fund,  it would not  matter because the  cap would                                                                    
still be set at $5 million.                                                                                                     
Co-Chair  Stedman asked  about  the  components driving  the                                                                    
negative number on Line R when operating budgets were flat.                                                                     
Ms. Schultz  stated that the  operating budget  grew slowly,                                                                    
but it  was important to  take note that debt  payments were                                                                    
expected  to increase  in FY21  and FY22.  Additionally, the                                                                    
state's  expected retirement  payment should  go up  by $125                                                                    
million by FY21, based on the experience study.                                                                                 
1:51:50 PM                                                                                                                    
Co-Chair  Stedman asked  whether  the actuarial  assumptions                                                                    
and performance  of the retirement portfolio  could push the                                                                    
figures over the cap.                                                                                                           
Ms. Schultz replied in the affirmative.                                                                                         
1:52:06 PM                                                                                                                    
Co-Chair von Imhof  thought the key piece  of information on                                                                    
the  spreadsheet was  on Line  G, which  pushed against  the                                                                    
cap. She  thought that Lines  A through O were  separate but                                                                    
interrelated. She  believed that the  work of the  state was                                                                    
to  decide what  should  be done  with anticipated  expenses                                                                    
over  the  next few  years.  She  said  that Line  D  looked                                                                    
steady, but other state services  like debt, retirement, and                                                                    
capital made a  significant impact on the  cap. She affirmed                                                                    
that the  state needed to  adjust the  amount of the  cap or                                                                    
set  more  money  aside  to  help  fund  the  years  of  low                                                                    
1:53:49 PM                                                                                                                    
Senator  Bishop referenced  Page  2 of  the  bill. He  asked                                                                    
whether Line E  'Total Debt Payments' was  inside or outside                                                                    
of the cap.                                                                                                                     
Ms.  Schultz  explained  that  Line  E  included  the  state                                                                    
obligation for  state debt as  well as school  and municipal                                                                    
debt reimbursement;  Line F subtracted out  school bond debt                                                                    
Senator  Bishop asked  whether the  $103 million  listed for                                                                    
FY21, on Line F, was outside the cap.                                                                                           
Ms. Schultz answered in the affirmative.                                                                                        
1:55:17 PM                                                                                                                    
Senator   Wielechowski   understood    that   the   proposed                                                                    
appropriation  limit did  not apply  to an  appropriation to                                                                    
the principal of  the permanent fund but would  apply to the                                                                    
actual appropriation for the permanent fund dividend.                                                                           
Ms. Schultz answered in the affirmative.                                                                                        
Senator Wielechowski cited  the Alaska Constitution, Article                                                                    
9, Section  16, which excluded appropriations  for permanent                                                                    
fund  dividends.  He  thought  that in  a  conflict  between                                                                    
statute and the constitution, the constitution would trump.                                                                     
1:56:03 PM                                                                                                                    
Co-Chair   von   Imhof  addressed   Senator   Wielechowski's                                                                    
question.  She  affirmed  that  the  entire  statute  was  a                                                                    
Co-Chair Stedman  relayed that there was  a current spending                                                                    
cap, which was considerably  higher than the recent spending                                                                    
level.  To   bring  a  statutory  spending   cap  below  the                                                                    
constitutional spending  cap would lead to  conflict between                                                                    
statute and the constitution.                                                                                                   
1:57:34 PM                                                                                                                    
Senator  Wielechowski  wondered   what  ramifications  there                                                                    
would be if  there was as statute that was  at odds with the                                                                    
constitution.  He wondered  whether  the constitution  would                                                                    
overrule the statute, rendering the statute meaningless.                                                                        
Co-Chair  Stedman   thought  that  a   statutorily  mandated                                                                    
spending  cap  that  was  lower  than  the  constitutionally                                                                    
spending cap  would be a  non-issue. He believed  that there                                                                    
was an effort at hand  to adjust the constitutional spending                                                                    
cap  so  that it  was  more  viable  to the  current  fiscal                                                                    
1:58:46 PM                                                                                                                    
Senator Wielechowski looked at  the FY20 calculation for the                                                                    
dividend. He  noted that the  committee had  recently passed                                                                    
at $3,000  for FY19 and  expressed curiosity as to  how that                                                                    
would impact the FY20 calculations.                                                                                             
Ms. Schultz offered to provide the information later.                                                                           
Ms.  Schultz addressed  a  second spreadsheet  "Unrestricted                                                                    
General  Fund Short-term  budget  expectations (1.5  percent                                                                    
inflation)  'B',"  (copy  on   file).  She  noted  that  the                                                                    
spreadsheet reflected the 50 percent POMV split.                                                                                
Co-Chair  Stedman noted  that the  original spreadsheet  'A'                                                                    
showed  a per  capita  dividend of  $1,215.  He thought  the                                                                    
statutory number  was more like  $3,000 or $1.8  billion. He                                                                    
asked how  much the  statutory number effected  the spending                                                                    
cap numeric.                                                                                                                    
Ms.  Schultz  stated  that increasing  the  dividend  payout                                                                    
would  not  affect  the  cap itself  but  would  impact  the                                                                    
appropriation  subject to  the cap  by adding  an additional                                                                    
$1.2  billion. She  thought  it was  important  to note  the                                                                    
difference   between   cash   flow   constraints   and   cap                                                                    
constraints when discussing expenditures.                                                                                       
2:00:54 PM                                                                                                                    
Senator Micciche  understood that spending over  the cap for                                                                    
a full dividend would exceed the cap by $800 million.                                                                           
Ms. Schultz  agreed that the  full statutory  dividend would                                                                    
put the state significantly over the cap.                                                                                       
Co-Chair Stedman  asked that the full  statutory dividend be                                                                    
added to the model.                                                                                                             
Ms. Schultz agreed to provide the information.                                                                                  
Co-Chair  Stedman   recalled  an  earlier   conversation  on                                                                    
changing  the  statutory  dividend calculation  to  a  50/50                                                                    
split  of the  5.25  percent between  the  dividend and  the                                                                    
portion that would  come to the state for  core services. He                                                                    
said that the slide reflected the split.                                                                                        
2:02:06 PM                                                                                                                    
Ms. Schultz  affirmed that slide 'B'  showed everything from                                                                    
the  prior  slide except  for  line  L, which  reflected  50                                                                    
percent of  POMV split for  the dividend, with the  other 50                                                                    
percent going to other government  spending.  She noted that                                                                    
lines A  through K  were unchanged  in the  second scenario.                                                                    
She pointed  out that M  was higher as  well as Line  N. She                                                                    
stated  that  the  revenue  less   expenditures  on  Line  O                                                                    
reflected  a  larger  deficit due  to  the  higher  dividend                                                                    
payout. She  thought it  was important to  note that  Line O                                                                    
was a  cash flow deficit,  which was distinct from  the cap;                                                                    
the appropriation subject  to cap on Line P  was also higher                                                                    
because  the dividend  amount was  higher. The  cap remained                                                                    
unchanged.  Line  R,  the amount  that  appropriations  were                                                                    
either under or  over the cap, was higher due  to the larger                                                                    
dividend payout.                                                                                                                
Ms.  Schultz shared  that the  model  assumed that  deficits                                                                    
would come from the CBR, and  it was observable that the CBR                                                                    
balances  depleted   much  more  quickly  with   the  larger                                                                    
dividend payout.                                                                                                                
2:04:13 PM                                                                                                                    
Co-Chair Stedman looked  at line O. He though  that in FY20,                                                                    
hypothetically,  the state  would be  $690 million  short of                                                                    
meeting  its obligations;  in FY21  the  shortfall would  be                                                                    
$865 million.                                                                                                                   
Ms. Schultz answered in the affirmative.                                                                                        
Co-Chair Stedman  understood that  the model used  the 50/50                                                                    
POMV split.                                                                                                                     
Ms. Schultz responded in the affirmative.                                                                                       
Co-Chair  Stedman looked  at line  R. He  surmised that  the                                                                    
state  would be  approximately $1  billion over  the cap  to                                                                    
balance the budget.                                                                                                             
Ms. Schultz agreed.                                                                                                             
Co-Chair Stedman thought there  was a demonstrated benchmark                                                                    
error of where  the starting number should be  and asked how                                                                    
that could be fixed.                                                                                                            
Ms. Schultz  suggested that  a way  should be  discovered to                                                                    
reduce  the  total  expenditure  by $1  billion  or  add  $1                                                                    
billion to the cap.                                                                                                             
Co-Chair  Stedman  explained  that  in looking  at  the  two                                                                    
models  it  was important  to  consider  the impact  on  the                                                                    
legislation that would  be made by a  new statutory dividend                                                                    
2:06:17 PM                                                                                                                    
Co-Chair von  Imhof agreed that  the cap could  be increased                                                                    
to reflect  any scenario.  She asserted  that the  cash flow                                                                    
was the  real issue. The reason  for a cap was  to constrain                                                                    
spending, so  that funds  were saved in  years of  high cash                                                                    
flow.  She   thought  the  consideration  was   an  academic                                                                    
experience. She thought reasons  such as retirement and debt                                                                    
expenses were valid reasons to increase the cap.                                                                                
Co-Chair von  Imhof pointed  out that  the spending  did not                                                                    
have  to reach  the  cap, particularly  if  the revenue  was                                                                    
unavailable.  She  noted  that   spreadsheet  'A'  showed  a                                                                    
dividend of  $1200 for  FY20 and noted  that there  would be                                                                    
pressure  on the  dividend because  of retirement  and debt,                                                                    
which  left a  weak capital  budget. She  lamented that  the                                                                    
state was  already short of  funds for capital  projects and                                                                    
noted that an additional $20  million had just been spent on                                                                    
an emergency  supplemental. She thought  that a  50/50 split                                                                    
was fiscally unwise.                                                                                                            
2:10:08 PM                                                                                                                    
Co-Chair Stedman  noted that Co-Chair von  Imhof pointed out                                                                    
the balancing of  the spending cap and  consideration of the                                                                    
net cash flow.   He thought there would be  great concern of                                                                    
taking the CBR below $2 billion.                                                                                                
2:11:28 PM                                                                                                                    
Senator Olson  agreed with  Co-Chair von  Imhof that  it was                                                                    
not necessary to spend up to the cap.                                                                                           
2:11:54 PM                                                                                                                    
Senator  Wielechowski  wondered   about  the  rationale  for                                                                    
excluding debt  obligation like  refundable oil  tax credits                                                                    
from the  appropriation cap and not  including state pension                                                                    
liability  and  school  debt   bond  reimbursement  in  that                                                                    
Co-Chair von  Imhof said that  retirement could  be excluded                                                                    
if it was the wish of  the committee. She explained that her                                                                    
initial proposal  was for  anything that  used UGF  but that                                                                    
conversations  with committee  members had  resulted in  the                                                                    
exclusion of some things from the cap.                                                                                          
2:13:37 PM                                                                                                                    
Senator Wielechowski  thought it  looked like  inflation was                                                                    
calculated on  the average  of the  previous five  years. He                                                                    
thought  it   was  important  to   ack  quickly   to  rising                                                                    
Ms. Schultz  stated that she  had considered  many different                                                                    
growth options for the cap.  Personal income was considered,                                                                    
and  several other  factors. Given  that inflation  had been                                                                    
fairly steady over the preceding  years, the window had been                                                                    
closest to the revenue forecasts for growth rate.                                                                               
2:15:20 PM                                                                                                                    
Ms.  Lucky  added  that  as  Senator  Olson  had  previously                                                                    
stated, steady  growth over time had  been considered. Since                                                                    
the cap  was not intended  to be a   spend to  target  but a                                                                    
rate of acceptable growth, the  five-year average seemed the                                                                    
best fit for the model.                                                                                                         
2:15:59 PM                                                                                                                    
Senator Micciche supported the five-year trailing average.                                                                      
2:16:49 PM                                                                                                                    
Senator   Wielechowski   asked  about   the   constitutional                                                                    
appropriation  limit, and  thought  the  bill proposed  one-                                                                    
third   set   aside   for    capital   projects   and   loan                                                                    
Co-Chair Stedman stated that the  issue had come up over the                                                                    
years.  He  thought  the  issue was  more  complex  than  it                                                                    
appeared.  He questioned  how to  embed the  capital project                                                                    
needs of the  state into a spending limit  that was targeted                                                                    
for the  growth of the  operating budget. He  suggested that                                                                    
the matter  be considered by  LFD and the  Legislative Legal                                                                    
2:19:08 PM                                                                                                                    
Senator   Bishop   stressed   the   importance   of   steady                                                                    
maintenance of the states  buildings  and roads. He believed                                                                    
drawing down  deferred maintenance  in the state  would help                                                                    
to smooth out the capital budget overtime.                                                                                      
2:20:37 PM                                                                                                                    
Co-Chair Stedman OPENED public testimony.                                                                                       
ADAM  HYKES,  SELF,  HOMER (via  teleconference),  spoke  in                                                                    
opposition to  the bill.  He did not  believe that  the POMV                                                                    
model  was workable  and did  not have  faith in  a spending                                                                    
cap. He said that the role  of the government was to promote                                                                    
the general  welfare, not  to provide for  it, and  that the                                                                    
state  was  going broke  trying  to  provide for  everyones                                                                     
needs. He supported less government spending.                                                                                   
2:22:55 PM                                                                                                                    
LYNETTE  CLARK, SELF,  FOX  (via teleconference),  testified                                                                    
against  the  bill. She  thought  the  bill  was in  aid  of                                                                    
growing bigger  government. She supported the  cuts proposed                                                                    
by the governor.                                                                                                                
2:24:59 PM                                                                                                                    
VIKKI  JO  KENNEDY,  SELF,  JUNEAU,  was  from  Kodiak.  She                                                                    
asserted that  when it was time  to act, it was  too late to                                                                    
prepare. She expressed a general  malaise with the seemingly                                                                    
redundant  conversation  surrounding  balancing  the  budget                                                                    
while  paying  out a  full  dividend.  She did  not  support                                                                    
further cuts  to education or  the ferry system.  She feared                                                                    
that the legislature was overcomplicating the situation.                                                                        
2:29:01 PM                                                                                                                    
Co-Chair Stedman CLOSED public testimony.                                                                                       
Co-Chair Stedman set the bill aside.                                                                                            
2:29:40 PM                                                                                                                    
Co-Chair von  Imhof shared  that the  $5 billion  figure had                                                                    
been chosen  because it  was inline  with the  expected next                                                                    
few  years revenue  would be  and  what the  past few  years                                                                    
expenditures  had  been. She  referred  to  Line K  on  both                                                                    
slides, which  showed that expenditures  had been  below the                                                                    
spending cap,  and only when  the surplus was spent  was the                                                                    
cap breached.                                                                                                                   
2:30:44 PM                                                                                                                    
Senator Micciche reiterated  his support for the  use of the                                                                    
5-year  average in  the  model. He  said  that the  governor                                                                    
supported  an  appropriation  limit.   He  stated  that  the                                                                    
committee  supported an  appropriation  limit,  which was  a                                                                    
seed for the future.                                                                                                            
SB  104  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair Stedman discussed housekeeping.                                                                                        
2:33:54 PM                                                                                                                    
The meeting was adjourned at 2:33 p.m.                                                                                          

Document Name Date/Time Subjects
SB 104 work draft version U.pdf SFIN 4/29/2019 1:30:00 PM
SB 104
SB 104 Work Draft v.U Explanation.pdf SFIN 4/29/2019 1:30:00 PM
SB 104
SB 104 Unrestricted General Fund Short-Term Budget Expectations.pdf SFIN 4/29/2019 1:30:00 PM
SB 104