Legislature(2009 - 2010)SENATE FINANCE 532
02/06/2009 09:00 AM Senate FINANCE
| Audio | Topic |
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| Start | |
| Presentation: | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 6, 2009
9:06 a.m.
9:06:09 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee meeting to
order at 9:06 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Kim Garnero, Director, Division of Finance, Department of
Administration; Kevin Brooks, Deputy Commissioner, Department of
Administration; David Teal, Director, Legislative Finance
Division.
SUMMARY
^Presentation:
State Budget Reserves/Savings Accounts and Sweep Mechanics
9:06:15 AM
Co-Chair Stedman observed the importance of understanding how
sweep mechanics work and how the state's account books are
closed. He acknowledged the importance of the relationship
between the state's general fund and the Constitutional Budget
Reserve Account (CBR), which is the state's main fallback
account to cover any shortfalls. A 3quarter vote is needed to
access the CBR. He noted that the state's cash reserve would be
reviewed over the next months.
9:09:20 AM
KIM GARNERO, DIRECTOR, DIVISION OF FINANCE, DEPARTMENT OF
ADMINISTRATION, explained the sweep process. The sweep
calculation requires substantial, quality time with annual
auditors. She emphasized the need to understand the general fund
from an accounting viewpoint. The fund structure of the state of
Alaska is determined by generally accepted accounting
principles, which is reflected in the audited financial
statements contained in the Comprehensive Annual Financial
Report.
Ms. Garnero explained that accountants identify the overall
general fund as fund 11000 in AKSAS, the statewide accounting
system. Fund 11000 is comprised of all the sub-funds, most of
which were established by the legislature. Fund 11000 also
includes the lower level, primary general fund designated as
11100 in the accounting system; primary general fund is still
very large, and accounts for the majority of the financial
activity of the state of Alaska. Most funding sources are
revenue streams into this general fund, including federal
funds, program receipts, and receipt supported services.
9:12:56 AM
Ms. Garnero defined the reverse sweep as an appropriated
transfer that restores the balances of the sub-funds to repay
amounts previously borrowed or drawn. The reverse sweep is an
appropriated transfer that restores the balance of the sub-
funds. The sweep is done as the last step in preparing the
Comprehensive Annual Financial Report; the reverse sweep occurs
in early December, but the available balance is calculated as of
June 30 of the previous fiscal year.
Ms. Garnero informed that the sweep is required under the Alaska
State Constitution to repay previous borrowing every year with
the general fund available balance. Under the terms of the
constitution, anything spent from the CBR must be repaid by the
general fund. The reverse sweep, on the other hand, is a
legislative appropriation from the CBR, and it adds to the
repayment requirement.
Ms. Garnero clarified that the "available for appropriation"
calculation is the key to the sweep. The first step of the sweep
moves all available funds up to the overall general fund (fund
11000). Encumbered amounts and amounts for continuing and
specific appropriations of the subsequent year are set aside.
One of two criteria is used to determine which sub-funds are
excluded from the sweep requirement:
1. If it meets the definition of "available for appropriation"
as determined by the Supreme Court of Alaska; or
2. If it is legally restricted to a specific purpose by an
outside entity.
Ms. Garnero noted that if a sub-fund meets either of these
criteria, the available balance is not swept. The balance in the
primary general fund 11100 is available for sweep, and in years
of reverse sweep appropriation language, this is the only amount
retained in the subsequent fiscal year as repayment of CBR
borrowing.
Ms. Garnero provided a brief review of the state's recent cash
flow borrowing. She referred to a spreadsheet contained on the
department's webpage, which starts with the available balance of
the CBR at the beginning of the fiscal year. She observed that
from FY02 to FY05, borrowing occurred during the fiscal year to
address cash flow needs of the general fund. This borrowing was
authorized by appropriation language and followed a process
established in an interagency memorandum of understanding (MOU).
In FY02 and FY03, there was net cash-flow borrowing at June
30th. In FY04 and FY05, the state was able to repay the cash
flow borrowing by June 30th. The additional (deficit borrowing)
or repayment was the based on the available balance calculation
in the primary general fund 11100. In FY02 to FY05, more
borrowing was required to bring a negative available balance in
the general fund up to zero.
Ms. Garnero explained that in FY06 the general fund available
balance was appropriated to the Public Education Fund, and in
FY07, it was appropriated to the Alaska Capital Income Fund,
both of which are sub-funds of the general fund.
Ms. Garnero concluded that in FY08, the general fund had an
available balance to repay previous CBR borrowing, and $582
million was transferred for this purpose.
9:16:26 AM
Ms. Garnero elucidated that the designated fund balance is the
oil and gas production tax revenues budgeted in the next year.
There is an annual direct appropriation from the CBR to the
Treasury Division to pay management fees.
Ms. Garnero summarized that the ending available balance of the
CBR increased about $5 billion during FY08. This was the result
of $3 billion appropriated to the CBR, $1 billion net sweep and
reverse sweep, $582 million additional general fund repayment,
and the operating income of $416 million.
Ms. Garnero provided members with a description of each sub-
fund of the general fund, indicating whether or not it is
swept, and if so, how much was swept in FY08 (copy on file).
Ms. Garnero drew attention to sub-funds; the CBR itself is a
sub-fund of the general fund. The CBR is not swept to repay
itself. However, the Budget Reserve Fund established in
statute is a sweepable sub-fund, as is the Alaska Capital
Income Fund. She explained that any fund established with
language that allows a specific appropriation is sweepable
because if it can be appropriated for "X" it can be
appropriated for anything.
Ms. Garnero explained that language that establishes the fund
"as spendable without further appropriation" meets the Supreme
Court definition to exclude from sweep. The Public Education
Fund and Permanent Fund Dividend Fund are examples of funds
that are excluded from the sweep.
9:19:27 AM
In response to a question by Senator Stedman, Ms. Garnero
clarified that the reverse sweep has reduced the CBR by
$1,466,159. Another billion dollars was transferred to the CBR
based on an appropriation from the legislature from the general
fund. There has been a year to date current net loss in earnings
of $65 million. The current balance of the CBR is close to $6.8
billion. Co-Chair Stedman concluded that market values need to
be watched in discussions of appropriations from the CBR.
9:21:17 AM
Senator Olson asked if sweeps ever occur at other times. Ms.
Garnero noted that transfers are not appropriated [by the
legislature] or authorized under the constitution.
In response to a question by Senator Elton, Ms. Garnero
explained that the reverse sweep reinstates the cash to the sub-
st
funds on July 1. She acknowledged that state revenues flow in
more slowly at the beginning of the fiscal year than
expenditures because of large payments that are due in July and
August. A lot of the cash flow borrowing occurs at the beginning
of the fiscal year and repayment begins at the end [of the
fiscal year].
9:23:44 AM
Co-Chair Stedman stated that the hearing is not an issue of
solvency or liquidity of the state, but an attempt to look at
the next five years.
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, provided a
model to demonstrate the sweep process [members reviewed a excel
spreadsheet, which Mr. Teal manipulated via overhead projector].
He referred to investment returns and the "burn rate." He
observed that oil prices are currently down, creating deficits
instead of surpluses. Given the deficit, the question is: "How
fast are we burning through our reserves?" He observed that the
state is doing okay if the reserve balances grow, but that
action may need to be taken if the reserve balances decline.
9:28:03 AM
Mr. Teal explained that the model uses a simple growth rate as
demonstrated in the spreadsheet provided to members (copy on
file). Oil prices are averaged over the year, which is not a
good way to discern revenue. He emphasized that it is important
to watch the trends.
Co-Chair Stedman observed that a growth rate of 3 percent was
used, which could be higher or lower. The model draws from the
CBR first and then from the Statutory Budget Reserve Fund. He
stressed that these factors were used as a starting point and
that there would be opportunity for further discussion
[regarding the priority of funds].
Mr. Teal observed that the model reviews several funds:
Constitutional Budget Reserve Fund, Statutory Budget Reserve
Fund, Alaska Housing Finance Corporation (AHFC) Capital Savings
Account, Public Education Fund, and Permanent Fund Earnings
(realized only).
Senator Eton asked how the Permanent Fund Earnings were plotted.
Mr. Teal explained that only realized earnings were used. He
noted that there are substantial unrealized losses, but until
the losses are realized the cash is still in the account.
Additional losses could occur if money is pulled from the
account. He noted that the legislature has historically avoided
withdrawing from this account.
9:32:12 AM
Mr. Teal explained that he began with a 3 percent growth rate
and oil at $75 per barrel since the budget breaks. He explained
that $75 per barrel oil is the approximate breakeven price where
reserves are essentially flat. In his scenario, reserves are
fairly flat. The revenue picture looks better if oil prices are
higher. He observed that a 3 percent [rate of inflation] looks
better "if you want to hold a flat budget."
Mr. Teal observed that the budget picture would improve if there
were a five percent operating reduction, which may be possible
but has not been successfully done by the legislature in the
past.
Co-Chair Stedman observed that a little less than half of the
operating budget is formula driven, which cannot be controlled.
He stressed that it is a challenge to keep the operating budget
flat and virtually impossible to decline it at 4 percent per
year compounded. He felt that 3 percent growth is a realistic
range. Mr. Teal concurred.
Mr. Teal looked at a model in which oil prices drop to $65 per
barrel. Reserve balances would fall and the CBR would be almost
gone by 2014. By 2015, the CBR, Statutory Budget Reserve Account
and the AHFC Savings Account would all be depleted. The only
funds left would be the Public Education Fund and the Earnings
Reserve Account. The CBR would be depleted by 2012 at $55 per
barrel oil. There would be no reserves by 2014 if oil were at
$55 per barrel.
9:36:55 AM
In response to a question by Co-Chair Stedman, Mr. Teal
explained the difference between the use of January 2009 and
FY09. He followed the sweep process from 2006, which began with
a CBR balance of $2.2 billion. He demonstrated that at the end
of January 2009 the CBR balance was $6.8 billion. At the end of
FY09 [June 30, 2009] there would be a deficit of $1.36 billion,
which would end the year with $5.4 billion in the CBR.
9:40:04 AM
Co-Chair Stedman asked Mr. Teal to review growth factors. Mr.
Teal observed that the permanent fund and retirement funds use
estimates of 8 percent for their earnings because they have a
long time horizon. The division used a 4 percent estimate to
reflect the shorter time horizon. As oil prices have fallen, the
investment horizon is shortened, due to the need to access
reserves. The numbers will change slightly depending on interest
rate assumptions. He felt that 4 percent is a reasonable return
on the CBR given the potential cash needs.
Co-Chair Stedman observed that the CBR could be exhausted in
three to eight years.
Mr. Teal explained that the CBR is split in to two accounts: an
aggressive portfolio and one that is not as aggressive. The
division looks at the CBR as one account. Co-Chair Stedman noted
that there would be further discussions on the investment of the
CBR.
9:44:10 AM
Mr. Teal reviewed the Statutory Reserve Fund. The legislature
appropriated money to the fund and has never withdrawn funds
from the account; the interest earned is not kept in the
account. A billion dollar deposit was made with no earnings; the
earnings or losses are credited to the general fund. He observed
that because there is no interest on the fund there can be no
loss.
Co-Chair Stedman observed that there is a question of whether or
not the fund could incur losses. Mr. Teal agreed that it was a
question for the Department of Revenue or Department of
Administration.
Mr. Teal noted that the AHFC Capital Fund was also a one-time
deposit with no withdrawals until 2010. The governor's 2010
budget request appropriates the funds. He observed that Co-Chair
Stedman asked that the funds be withdrawn from the model since
they are general funds and the desire was to address the access
to reserves. The assumption is that the governor's expenditures
of $238 million would not occur.
Mr. Teal observed that the Public Education Fund is more
complicated because there is an inflow and outflow every year.
The fund does not earn interest or sustain losses. The balance
is $1.1 billion. The model assumes that the Public Education
Fund remains at this level until conditions require the use of
the reserves. Any increase in education funding is built into
the 103 percent rate that goes to expenditures overall.
Co-Chair Hoffman asked if there were provisions for increases
regarding intensive needs and area-cost differentials, which
would affect the bottom line of the fund.
9:47:28 AM
Mr. Teal acknowledged that there were changes to the education
formula that would increase costs. He explained that the 2010
increase to education was about $50 million. The fund will
receive the increase for another couple of years because of the
increase in the base student allocation, intensive needs, and
the geographical differential. The [FY] 2010 operating budget
shows an increase of approximately 2.7 percent including the $50
million dollars [to the Public Education Fund]. He noted a
better model could be designed based on each agency's growth,
but [for simplicity] the division based its model on a 3 percent
[growth rate].
Co-Chair Stedman suggested that the Legislative Finance Division
could add to the model.
Mr. Teal reviewed the Permanent Fund Earnings Reserve. The
division relies on public statements for their information on
this fund. The fund contained $1.4 billion in FY06. Dividends
and inflation proofing are paid out and earnings are paid into
the fund. The fund gained earnings through FY08, with a total of
$5 billion in reserves. The December 2008 statement showed a
loss of $407 million dollars. He estimated that the reserve loss
is greater, but much of the loss is unrealized.
9:50:26 AM
Co-Chair Hoffman noted that the losses in the CBR were reported
through the first week of February at $765 million. Mr. Teal
calculated the losses at $789 million but noted that they may be
using different assumptions than the Department of Revenue.
Mr. Teal concluded with the fact that at $40 per barrel,
reserves would be gone by 2012.
ADJOURNMENT
The meeting was adjourned at 9:52 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2 4 09 Savings Accounts Cash Flow and Balances.pdf |
SFIN 2/6/2009 9:00:00 AM |
|
| 2 6 09 Savings Spreadsheet.pdf |
SFIN 2/6/2009 9:00:00 AM |
|
| General Fund subfund sweep list for Senate Finance.doc |
SFIN 2/6/2009 9:00:00 AM |
|
| Mechanics of Sweep overview & CBRF spreadsheet.pdf |
SFIN 2/6/2009 9:00:00 AM |