Legislature(2015 - 2016)FBX LIO
10/05/2015 10:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Update on Fy16 Operating Budget | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
October 5, 2015
10:06 a.m.
[Note: Meeting held at the Fairbanks Legislative
Information Office]
10:06:43 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 10:06 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Pat Pitney, Director, Office of Management and Budget,
Office of the Governor.
PRESENT VIA TELECONFERENCE
Sheldon Fisher, Commissioner, Department of Administration;
Valerie Davidson, Commissioner, Department of Health and
Social Services; Margaret Brodie, Director, Division of
Health Care Services, Department of Health and Social
Services; Representative David Guttenberg.
SUMMARY
PRESENTATION: UPDATE ON FY16 OPERATING BUDGET
10:07:18 AM
Co-Chair Kelly relayed that the intent of the meeting was
to touch base with the administration regarding the FY 16
operating budget. He mentioned a list of various people
available online. He referred to a letter [Dated: September
22, 2015 from the Senate Finance Committee] to Ms. Pitney
containing a series of questions. He asked her to present
the answers to each of the questions in her presentation.
10:10:09 AM
^ PRESENTATION: UPDATE ON FY16 OPERATING BUDGET
10:10:09 AM
Senator Kelly referred to the first question which
mentioned the "burn rate" on the state's savings accounts
and asked for a specific date by which the accounts would
be depleted.
10:10:26 AM
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, responded that the "burn rate"
depended on the price of oil and on spending. At the
current oil prices (roughly $50 per barrel) and applying
anticipated reductions to the operating budget the state
would run out of savings by early September 2018. She added
that if the price were to go up to $65 per barrel the
savings would last until December 2018 or January 2019. She
commented that if the price was lower than $65 per barrel,
running out of savings would be eminent. The state was
spending approximately $9 million per day from the
Constitutional Budget Reserve (CBR), 60 percent of the
state's current spending level. The state would draw $3.2
billion from the CBR for the year if the price of oil was
$50 per barrel.
Co-Chair Kelly noted that reporter Matt Buxton had walked
into the committee room and was the only one covering the
meeting. He recapped the topic for Mr. Buxton about the
"burn rate" on state savings. He thought people would be
interested in the topic. He reiterated that by September
2018 at the current burn rate with a $50 per barrel price
for oil the state would run out of savings. If the price of
oil were to increase to $65 per barrel the savings would
run out by December 2018. The state would not gain much
even with a significant jump in oil price. He asked if the
current burn rate from the CBR was $9 million per day.
Ms. Pitney interjected that the burn rate was precisely
$8.76 million at $50 per barrel, and the state would run
out of savings by September 2018. The state would be able
to close out FY 18 but would not be able to start FY 19.
Senator Dunleavy asked Ms. Pitney if she was referring to
savings accounts. He wanted to clarify that she was just
talking about the CBR. Ms. Pitney responded in the
affirmative.
Senator Dunleavy asked if there were any other accounts
that were being contemplated. Ms. Pitney responded that
currently there were not. She affirmed that there were
other accounts that could be drawn down. However, they were
statutorily designated for other purposes. At present the
administration had not considered using them.
Senator Dunleavy asked if the Alaska Performance
Scholarship (APS) funds, and the Power Cost Equalization
(PCE) funds were being considered for use to slow the burn
rate of the state's CBR. Ms. Pitney agreed and furthered
that the funds in the accounts mentioned by Senator
Dunleavy were to be used for the purpose they were
intended. They could potentially be used to offset
something but within the sane structure of the endowment
that they were set up for.
Co-Chair Kelly asked if the funds could be used. Ms. Pitney
indicated that they were legislatively assigned.
10:14:31 AM
Vice-Chair Micciche asked if Ms. Pitney could provide a
product that captured all of the accounts with the
corresponding statutory support. Certain funds that were
previously put into place might have to change. He thought
it would be helpful to the Senate's assessments.
Co-Chair Kelly conveyed that copies of the information
Vice-Chair Micciche was asking for would be distributed by
the end of the meeting.
Ms. Pitney informed the committee that questions 3 and 4
were related to question 1. She discussed the oil forecast,
summarizing that at $50 per barrel, the state would manage
through September 2018 if the CBR was used to fill the gap.
If the price of oil was $50 per barrel, the state would
draw $3.2 billion in 2016. If the price of oil decreased to
$40 per barrel the state would be drawing $3.4 billion. At
the end of session in the prior year the assumption was
that the price of oil would be $65 per barrel or a draw of
about $2.7 billion. The difference between $65 oil price
per barrel and $50 price per barrel equaled a discrepancy
of about $500 million.
Vice-Chair Micciche asked if it was a significant price
change. Ms. Pitney indicated that it was significant.
Co-Chair MacKinnon asked Ms. Pitney if she would be
discussing any tools the administration had implemented in
the first quarter to start reducing costs in state
government or holding expenditures down. Ms. Pitney
expressed a willingness to jump around or follow the
questions.
Co-Chair MacKinnon indicated she could wait.
10:18:03 AM
Co-Chair Kelly addressed question 2, having to do with
earnings reserve of the Permanent Fund (PF). He was aware
of a series meetings she had around the state and wanted an
update on the administration's plans for the earnings
reserve. He asked if legislation would be introduced.
Ms. indicated that legislation had not been drafted at
present.
Co-Chair Kelly asked if the administration would be
introducing one itself or looking at some of the pieces
that was part of other bills. He mentioned SB 114 sponsored
by Senator McGuire and one in the House by Representative
Hawker. He wondered if the administration would piggy-back
on already introduced legislation.
Ms. Pitney said there was no definite plan as of yet as to
whether the administration would rely on previously
introduced legislation or to introduce new legislation. She
relayed that they hoped to roll out a plan relatively soon.
She referred to the numerous presentations conducted around
the state with several more scheduled to discuss various
options. The starting point was looking at the Legislative
Finance Division's model presented in the previous session.
The administration was updating the model in order to start
the revenue conversation in June of the current year. The
components of reaching a sustainable budget would include
using earnings reserves, imposing broad-based taxes, and
reducing expenditures. The exact combination of the
components remained unknown. She thought it was likely that
there would be a piece of legislation dealing with the
earnings reserve account and likely piggy-backing on the
other bills as well.
Co-Chair MacKinnon pondered that the earnings reserve would
be affected with the passage of either of Senator McGuire's
or Representative Hawker's bills. She understood that there
was a management tool of the actual PF versus the reserve
account. She wondered if there were two different
philosophies that the administration was thinking about.
Ms. Pitney described the two philosophies as complimentary.
She explained that a person from Harvard that had done
studies on how countries were using their sovereign wealth
funds, the number of sovereign wealth funds, and best
practices. One of three studies was centered on Saudi
Arabia. Alaska had the constitutional protection of the
corpus of the PF, a major strength. Russia, Venezuela, and
Saudi Arabia had a sovereign wealth fund, but not the same
protections. Alaska had a fully isolated and protected
corpus of its PF, giving it lasting power for generations.
She noted Alaska's heavy dependence on oil revenue, and
correlated the spending ratios of Alaska and Saudi Arabia.
She continued that when oil prices went up government
spending went up. In comparing Alaska and Saudi Arabia for
the past 30 years they almost matched exactly. She
explained that the construct that was being discussed was
to use the PF to take the upside wealth off of the table,
placing it into the PF or the PF earnings reserve account,
and removing the immediate volatility factor. She added
that part of the construct also included using the earnings
in moderation so that it was always sustainable. She
reiterated that if the upside wealth was placed into the PF
it could not be spent, increasing the base from which the
earnings could be drawn. She summarized that the concept
was to strengthen the earnings reserve and at the same time
use it at a very moderate level.
10:24:26 AM
Co-Chair MacKinnon asked if the legislature would have
access to the study from the Harvard professor. Ms. Pitney
responded that she could send it to the finance committee
in the current day.
Co-Chair MacKinnon asked if there was an analysis done
concerning additional revenue if the account was managed as
an endowment account. She asked if the model had been
tested with different percentages. She was specifically
interested in inflation proofing. Currently the state
inflation proofed by the growth in its assets and by a
specific number. Inflation proofing would happen overtime
based on the growth of investments growing in the endowment
approach. At present, the state saved a fixed amount.
Ms. Pitney recounted that in 2002 the PF Board suggested a
5 percent amount across a 5 year rolling average. She
likened it to a college endowment, and noted that the
administration had tested the scenario with a 1 year
approach. She reported that using a 5 percent model with a
relatively robust reserve depleted the earnings reserve at
a faster rate than the administration was comfortable with.
She conveyed that a 4.5 percent model kept the earnings
reserve steady. The administration also tested drawing a
set amount with an inflation increment. She suggested
taking an amount equal to 4.5 percent, approximately $2.4
billion along with a small inflation growth rate of 1.8 or
2.2 percent, the life of the earnings reserve account would
be extended and the earnings would not be exhausted unless
the state experiences several down years.
Senator Hoffman discussed inflation proofing, and recounted
that when asked about prudent practices in investments and
whether the state inflation-proofs the fund, Commissioner
Hoffbeck of the Department of Revenue answered in the
negative. Senator Hoffmann wondered if other countries such
as Saudi Arabia and Norway, inflation-proofed their funds.
Ms. Pitney responded that Alaska was the only state that
inflation proofed in the way it did. She explained that
with the endowment approach the state would be drawing less
than what the overall asset was earning. The way Alaska did
inflation-proofing was unusual.
10:28:52 AM
Co-Chair MacKinnon wondered if Ms. Pitney had charted or
had documents that provide a specific number, $2.4 billion
at a 4.5 percent draw. She was looking at a 4 percent draw
that would protect individual Alaskans Permanent Fund
Dividends. She wondered if she was correct.
Ms. Pitney responded that under either scenario there were
provisions that dividends would be available. It was the
amount of the check that could potentially change based on
4 percent or 4.5 percent. She added that the 4.5 percent
was the draw and then there was the share of what would be
distributed to Alaskans.
Co-Chair MacKinnon asked if there was a chart documenting
PF earnings made over time in order to examine the rate of
returns. She recalled a 21 percent rate of return several
years previously.
Ms. Pitney thought that the average rate of return over
several years was about 9.7 percent. The PF Corporation had
all of historical return data. The return for the current
year was low. However, the previous year's return was much
higher. She mentioned that she had seen in the paper that
it went from $8 billion down to $2.5 billion. She commented
that it was kind of scary that even on a low return year
the state made more in PF earnings than in oil revenue. She
reported that the state was looking at a 5-year moving
average rolling good and bad years together.
10:31:18 AM
Co-Chair MacKinnon asked if there would be a spreadsheet on
the different points affected in any conversion about the
earnings reserve, the PF, or inflation proofing. She
wondered if Ms. Pitney had statements that made it clear
what knob was tied exactly with what return in terms of
dollars to help address the state's revenue shortfall.
Co-Chair Kelly asked Co-Chair MacKinnon to restate her
question.
Co-Chair MacKinnon clarified that Ms. Pitney suggested
different components. The first was an endowment approach
with a 5-year average and a 5 percent payout which equaled
approximately $2.4 billion in potential revenues. The
components had associated dollar values. Specific to
inflation proofing, she wondered what the dollar amount was
and how it was different or how the dollars were affected
by 4 percent. She wanted to understand which knob was being
turned on the dollars.
Ms. Pitney indicated that the information would be
available once the plan was ready. She was not ready to
discuss the individual pieces. She suggested that if Co-
Chair MacKinnon was asking whether the amount of the
current check that went out for $2000 [Note: Ms. Pitney was
referring to the Permanent Fund Dividend check amount for
2015] would have changed if the state had not inflation
proofed the fund, the answer would be no. The inflation
proofing amount of 900 million was placed as a separate
action from the appropriation of the checks.
Co-Chair MacKinnon suggested that the state could calculate
the inflation proofing figure based on a 5-year average.
Her point was that there were different options.
Ms. Pitney added that if the state used an endowment model
it would by nature inflation proof the fund without having
to be a separate action.
10:34:17 AM
Co-Chair Kelly asked Ms. Pitney to update the committee as
to where the administration was in regards to the labor
contracts. The decision was made at the end of the previous
special session to fund the contracts out of one-time
monies. There were formal and informal conversations that
the state would see a zero percent increase in the
contracts coming up for negotiation. He asked whether the
administration had identified how it would internally
navigate the $30 million dollar budget cut to the base to
accommodate the contracts.
Ms. Pitney reiterated that the $30 million in one-time
coverage, and the corresponding $30 million base reduction
would result in a $60 million base reduction in FY17 for
the $30 million cost. She stated that the $30 million
decrement had been proportionally spread across various
agencies, and each agency had identified individual
reductions beyond the $300 million. She quoted that there
had been a reduction of $340 million, and additionally $30
million in agency operations. In terms of a labor strategy,
she reported that 86 percent of the state's workforce was
in a union or was directly affected by contracts up for
negotiation. She relayed that the administration was not
ready to disclose how it intended to navigate the union
negotiations. She noted that the unions understood the
state's fiscal predicament but had a responsibility to
advocate for their employees.
10:38:09 AM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF ADMINISTRATION
(via teleconference), related that this was a critical time
in terms of the magnitude of employees that were impacted,
as well as the fiscal situation of the state. He presumed
that both the state and the unions understood that the 2.5
percent cost of living adjustment (COLA) had been
appropriate as a one-time increment, and that that would
provide a framework for future discussions. He felt that it
had been the intent of the legislature to "claw back" or
reverse the salary increase. He said that the
administration intended to claw back or find other terms
that offered an equal amount of savings to the state in
labor contracts. He stated that any guidance offered by the
committee would be appreciated. He added that work had been
done with the bargaining units to develop strategies and to
explore options that would lead to a fair and equitable
solution for all parties.
Co-Chair Kelly surmised that the administration was
attempting to accommodate future increases by making
reductions elsewhere in the budget.
Commissioner Fisher replied no. He relayed that it had been
his understanding that the intent of the legislature was to
claw back the 2.5 percent COLA increase that had been
negotiated at the end of the fiscal year. He articulated
that the department either needed to claw back the COLA, or
find savings in other areas of the contracts that could be
offered as a replacement for the COLA increases. He stated
that it was not the intent of the administration to
negotiate additional salary increases during the current
bargaining period.
10:41:56 AM
Co-Chair Kelly related that he had distributed a letter
authored by himself and Representative Mark Neuman (copy on
file) that expressed the legislature's desires concerning
how to proceed with future labor contracts in light of the
current fiscal situation. He stressed that a reduction in
salaries had not been the intent; however, going forward,
he encouraged the administration to seek a net-zero
increase in union contracts. He asserted that reductions in
other areas should not be made to accommodate pay
increases; the reality was that government needed to be
reined in at all levels. He hoped that a piece of
legislation separate from the budget bill could be drafted
that would allow for the approval, or disapproval, of
increases. He awaited a bill based on the negotiations
reflective of the compromise set out in the conference
committee letter. He shared that, historically, union
contracts were separate from the budget bill; he believed
that keeping the contracts separate from budget legislation
would be a cleaner modus operandi. He reiterated that the
pay increases should not be honored at the cost of other
vital services, and that the department should negotiate
net-zero increases in future contracts.
Senator Dunleavy recalled discussions in which it was clear
that the bargaining units understood the position of the
state amid a fiscal crisis. He was impressed with the fact
that they wanted to negotiate. He asked if Ms. Pitney could
provide a document that listed reductions comprising the
$30 million across agencies. He thought it would be helpful
to have that information as the budget subcommittees go to
work. Ms. Pitney specified that the information would be
included in the full FY 17 detail.
10:46:32 AM
Senator Dunleavy asked if a hiring freeze had been
implemented by the Department of Administration (DOA). Ms.
Pitney replied in the negative but all departments had been
asked to scrutinizing positions. A hiring freeze for an
agency that ran a 24/7 facility, such as the Department of
Corrections, would be difficult to accommodate. In some
cases refraining from filling certain vacancies helped to
offset a portion of the $30 million reductions.
Senator Dunleavy asked if there was a hard freeze on
hiring. Ms. Pitney clarified that there was no hard freeze.
She elucidated that every business unit had a different
need; however, an assessment of need was being conducted
for every agency position that became vacant.
Senator Dunleavy asked if there was a state travel freeze
in effect. Ms. Pitney stated that there was an expectation
that agencies would limit themselves to essential travel
such as prisoner transport and travel for her to be at the
current meeting. Departments were being asked to pay close
attention to travel.
Senator Dunleavy asked if the question of hiring positions
was left to the discretion of division directors. Ms.
Pitney stated that within each agency there was a high
stress test for each spend because of all of the recent
reductions.
Senator Dunleavy spoke of trying to gain understanding as
to the perspective of the administration. In the previous
year the Senate had proposed steep reductions which were
thought to be too deep. He had been asked by constituents
whether there was a hiring freeze in place. He understood
there would be exceptions within certain departments such
as DOC.
10:50:46 AM
Co-Chair Kelly remembered that in 2000, he had sponsored
legislation that advocated a blanket hiring freeze. Through
his experience he learned that hiring freezes needed to be
crafted such that exceptions for essential personnel were
contained. He wondered if the administration had looked at
departments developing a hiring freeze consistent with
their operations.
Co-Chair Kelly relayed an announcement from Governor Bill
Walker in response to the FY 16 budget about instituting a
hiring freeze. He wondered if that had stayed in place.
Ms. Pitney responded that it came down to agency scrutiny.
The administration's preference was to accommodate
downsizing with the least destruction to individuals and
services. Attrition and retirement were the state's very
best tools. She suggested that when someone left a position
the commissioner would be evaluating the vacancy in the
context of service need, the current year's budget, and the
following year's budget. For example it did not make sense
to hire someone in the current year if the position was
slated to be eliminated in the following year. The number
of employees would be dropping. Recent statistics showed
that the state had 600 fewer employees at the end of August
2015 than there were in December 2014. She discussed taking
advantage of retirements and attrition. Employees either
retired or were transferred to positions not subject to
layoffs. The administration felt that such actions were
less disruptive for employees, and protected morale and
service levels.
10:55:07 AM
Co-Chair Kelly commented that Ms. Pitney had mostly
discussed attrition rather than a hiring freeze. He
supposed they were different.
Ms. Pitney clarified that attrition was not rehiring a
person. Attrition helped in a hiring freeze because when a
person left, retired, or moved to another job the position
would not be refilled. The positions would not be rehired
based on the three criteria mentioned previously. It also
assisted the state in not having to do mass layoffs.
Co-Chair Kelly expressed that he was unsure of the
correlation between a hiring freeze and the aforementioned
"mass layoffs."
Ms. Pitney explained that agency commissioners had been
directed to scrutinize every position that becomes vacant
prior to filling them as the state would continue to make
cost reductions.
Co-Chair Kelly concluded that mass layoffs were not
necessarily related to a hiring freeze. Ms. Pitney did not
mean to relate the two.
Vice-Chair Micciche surmised that every box on an
organizational chart should be defendable. Departments
running as efficiently as possible would likely have lean
organizational charts. Realistically, the ultimate goal
would be smaller departments in which every position was
key. He asked if the departments were evaluating key
positions. He wondered if all of the department
commissioners had evaluated the necessity of every position
within their department.
Ms. Pitney responded that each department was looking at
cost savings and efficiencies. She reported that there were
cross agency efficiencies in place. She could not confirm
with confidence that every commissioner had reviewed each
of the boxes on their organizational chart. She thought the
Senator's suggestion of being able to defend each position
and to ensure maximum efficiency was a reasonable guidance
measure.
Vice-Chair Micciche relayed that in the previous session
the legislature had reacted by making budget cuts, some of
which were clumsy. These cuts bought the administration
time to come up with more prudent reductions, an attempt on
behalf of the legislature to work with the administration.
He opined that one of the most effective ways to reduce
spending was to reduce head count, hence his suggestion
about defending positions. He expressed his concern that
after an additional year the administration was not putting
downward pressure on the departments to defend every aspect
of their operation. He believed that the commissioners
would be the people to bring forth creative solutions to
the budget deficit.
11:01:42 AM
Ms. Pitney specified that every commissioner had been
directed to place downward pressure within their
departments. How they applied the pressure would vary
depending on the constraints each of them had. The
commissioners had been instructed to find additional
reductions. She did not believe the agencies would get
anywhere close to the $400 million reduction in agency
operations taken in FY 15 to FY 16. She reported a 13.5
percent reduction for executive agency operations in the
previous year. She believed that only in the 80's was that
level of reduction taken. The next set of reductions would
not be as deep. However, the reductions would be prudent
and prioritized by different functions and services. Offset
revenues would be applicable in some instances. The above
listed items would be reflected in the budget put forward
in the following year.
11:03:43 AM
Vice-Chair Micciche asked about methods the administration
was using to determine what Alaskans believed were key
constitutionally required services and what kind of
messaging was going out to the public concerning certain
programs that would be at risk for cuts.
Ms. Pitney commented that it depended on which Alaskan was
being asked the question. The administration was using the
constitution as a primary guideline as well as the state's
priorities to ensure a prosperous future. She claimed that
every program had its constituents or a large level of
constituents. The hard choices would have to be made and
there would be some people supporting them and some that
would not. The administration was getting feedback from
Alaskans through a survey. Alaskans saw most state services
as important and provided some good ideas through the
survey. She hopped that when the administration rolled out
the budget detail additional feedback would come in from
constituents.
Vice-Chair Micciche remarked that he was neither anti-union
nor pro union; he was pro state employee. He mentioned the
unallocated 2.5 percent reductions that were added back
into the budget ($30 million restored in the budget during
special session). Although Ms. Pitney indicated that the
cuts were proportional, he wondered if any consideration
had been taken on a per covered state employee capita
versus a per non-covered state employee capita. In other
words, he wondered if the departments that had a greater
number of covered employees pushed to find a greater
portion of the unallocated increase versus departments that
had a fewer number of covered employees.
Ms. Pitney replied that since the executive branch took all
of the reductions, the units with a higher level of covered
employees took a much greater share. The executive branch
also took the offset (the unallocated reductions) for the
$3 million of increases for the legislature and the court
system.
11:08:50 AM
Vice-Chair Micciche responded, "Perhaps not proportional."
Ms. Pitney replied, "A proportionally larger share, by
far."
Senator Hoffman disagreed that the legislature would be
able to achieve the level of cuts that were made the prior
year. He reported that the state only had 24 months of
reserves. The Alaska Constitution required the legislature
to balance the budget. Given those facts the legislature
made substantial cuts but the projected revenues from the
prior few months was down by $400 million to $500 million.
Many of the cuts that were made were essentially offset
with decreased revenues leaving the state with the same
large deficit. In looking at a sheet passed out to members
by James Armstrong, staff to Senator Pete Kelly,[may be
referring to a State of Alaska Fiscal Summary FY 15 and FY
16 part 2] the state was spending $2.2 billion. Many people
have advised that the legislature needed to reduce the
budget to a target level of $4.5 billion which would
require additional cuts of about $700 million within 24
months. He reiterated that there was $2.2 billion in
unrestricted and designated general funds and $3.1 billion.
If the target was $4.5 billion, the legislature would have
to come up with cuts or revenues equal to $1.4 billion
within the following 24 months assuming that the state
could cut $400 million first. He suggested that within the
following 24 months the state would have to come up with a
combination of additional revenues and reductions of over
$2 billion. He thought the state needed to go beyond
looking at an organizational chart and defending each
position. He suggested the state should be looking at
restructuring in light of the vast state deficits. He
furthered that without restructuring the state would be
forced to chop up complete departments due to the magnitude
of the deficit. He believed the writing was on the wall and
drastic measures needed to be taken within the following 24
months. He stated that what the Senate did in the prior
session would look like a walk in the park in September
2018.
11:12:06 AM
Senator Dunleavy agreed with Senator Hoffmann. He referred
to a governor's press release about instituting a hiring
freeze across departments with certain exceptions. Ms.
Pitney had eluded to the hiring freeze having soft
boundaries. He wondered about the administration's
philosophy. He wondered if the state spent too much or did
not generate enough revenue. He suggested most of the
members of the Senate thought the state spent too much, but
recognized the state could not cut its way out of the
current budget crisis. He asked if the governor shared the
Senate's philosophy that the state had a spending problem,
or was the governor's philosophy that the state had a
revenue problem. If the Walker Administration's philosophy
was that the state had a revenue problem then it made what
Ms. Pitney was saying clear.
Senator Dunleavy thought it was best to be as close
philosophically as possible to reach the goal. Ms. Pitney
replied that the administration's philosophy was that
reductions to agency operations needed to continue.
Senator Dunleavy asked to what degree. He relayed that in
the previous year's reductions equaled 6 percent. The
senate had come in at a much higher rate and was told the
cuts were too deep. Overall the Senate had cut 10 percent
overall. He asked about the target percentage. Ms. Pitney
replied that it was 10 percent across the board, for agency
operations and 13.5 percent for executive branch non-
formula programs.
Senator Dunleavy asked for the goal for the coming year.
Ms. Pitney replied that the administration would inform the
legislature once the administration's plan was set. She
indicated that it would be down.
Senator Dunleavy commented that it would make it difficult
without a plan for the legislature to do its finance
subcommittee work.
Ms. Pitney responded that the plan would be released soon
and would reflect additional cuts to operating costs in FY
17 and FY 18. She agreed with Senator Hoffman that the
state would have to discontinue some programs. There were
some agency budgets, on an inflation adjusted basis, lower
than they were 10 years previously because of the
reductions taken in the past year. She opined that
decisions had to be made about the critical pieces that
would have to be preserved. She stated that agency
operations made up a certain amount of the spending
component. Other parts of spending included retirement,
debt service, and tax credits. She reported that one
decision on tax credits could counteract all of the
spending reductions on the operating side. The state did
not have a capital budget. If it were to decide to have
even a modest capital budget it would offset any savings
the state could achieve on the operating side. The
administration would focus on operating cost reductions.
She opined that there would likely be a difference between
what the governor thought was a prudent approach and the
Senate's approach. She added that the governor and the
agencies were committed to finding cost reductions on the
operating side. However, cost reductions alone would not
close the fiscal gap. She stressed that cost reductions and
new revenues had to be implemented in parallel in order to
prevent reaching the cliff. She furthered that it was very
important to preserve the state's credit rating if the
state was going to invest in a gasline. The alignment of
the state's revenues and expenses in the budget would be
the key factor in the evaluation of the state's credit
rating.
11:18:28 AM
Senator Dunleavy believed the committee knew all of what
Ms. Pitney had just stated. He thought it was important to
revisit history. He spoke to deeper cuts for the reasons
stated during the meeting. He discussed the price of oil.
He wondered if the legislature would be told again that
cuts were too deep. He did not believe the state could go
far enough. He wanted to better understand the philosophy
of the administration so that he could move forward
accordingly.
Co-Chair Kelly asked Ms. Pitney if the FY 17 budget for the
Department of Health and Social Services was going up or
down. Ms. Pitney responded, "Down."
Co-Chair Kelly asked the same question about Department of
Education and Early Development. Ms. Pitney answered,
"Flat."
Co-Chair Kelly next asked about employee contracts. Ms.
Pitney responded that the administration was trying to meet
the net zero mark. She added that it was very difficult to
do so in the current environment.
Co-Chair Kelly offered that Ms. Pitney's responses answered
Senator Dunleavy's question about the administrations'
philosophy. He noted that he was not crediting the
departments for any federal dollars received.
Ms. Pitney indicated that much of the reduction had to do
with what could be extracted from Medicaid reform. She
added that as far as supplementals, the state had foster
care and subsidized adoption formulas that would make up a
large part of the operating supplementals.
Co-Chair Kelly asked how much was anticipated. Ms. Pitney
reported about 10.
Co-Chair Kelly referred to the agency operations graph,
what he called the slider graph. He thought it put the
problem the state was dealing with into perspective. He
suggested that as much as the administration might want to
squeeze agency operations, there was not much to squeeze
unless it looked at reductions within the Department of
Health and Social Services and the Department of Education
and Early Development. The problem with the state's
payments was that it could not reduce its debt. He did not
agree with what the governor did with credits. In his
opinion it meant nothing to reduce the credits that would
just come back in the form of a supplemental. They would
have to be paid according to statute. There had been some
increase in the oil fields regarding one set of the credits
and in the other set had to do with keeping the lights on
in Anchorage. His point was that if education was going to
be flat then the administration was going to refuse the
final year of increases that came under HB 278 [Legislation
that was passed in 2014 regarding education]. He asked if
the administration was taking the Senate's position.
11:23:13 AM
Ms. Pitney replied that the goal was to keep the spending
level flat from year-to-year.
Co-Chair Kelly concluded that the legislature would have to
disregard the increase. Ms. Pitney responded that the
administration wanted to keep the education spending level
flat but not the per-student level.
Co-Chair Kelly remarked that it was a good start.
Ms. Pitney noted that statute regarding tax credits allowed
for 10 percent of the estimated production tax to be paid
out in any given year. It had a limiting factor. She
explained that the amount still had to be paid. However, by
waiting until the state had a tax revenue to help offset
expenses, the state's liquidity remained intact. It pushed
the bill out farther when cash was available. It did not
buy the state a savings, rather it bought time for cash
flow to materialize.
Co-Chair MacKinnon addressed a question to Commissioner
Fisher with Department of Administration. In light of
wanting to preserve as many jobs as possible and to ensure
the sustainability of Alaska's economy, she wondered if the
administration had taken any steps that the legislature
should be aware of regarding negotiations to bring all
parties to the table. She wondered if there was a working
group in place with different representatives from labor
unions, the administration, and the different departments
to discuss the workforce and to see if there were
conditions that could be changed to bring the legislature a
zero personnel growth budget.
Commissioner Fisher replied that in addition to DOA doing
substantial analytical work all of the commissioners had
been engaged in a dialog around the state's workforce. Also
there had been a series of meetings with the state's
administrative service directors in terms of how to deal
with improving the quality of the state's workforce and
dealing with productivity and performance issues. He
indicated discussions would occur about shared services and
lean initiatives to improve the efficiency of Alaska's
workforce. Many of the discussions did not require that the
state bargain any additional flexibility of terms. There
would be some implications which would be on the table as
the state begins negotiating. The state had 5 bargaining
units that DOA was either currently negotiating with or
will be in the following several weeks.
11:27:49 AM
Co-Chair MacKinnon asked if the state would align holidays.
She wondered if there were benefits to limiting the number
of holidays in terms of consistency of operation throughout
the state. Commissioner Fisher answered that it went beyond
holidays. The department was looking at many of the terms
in the labor contracts to simplify and minimize any
inefficiencies. There was a general goal of trying to
standardize across contracts.
Co-Chair MacKinnon asked if the commissioner had reviewed
best practices related to accrued leave. She relayed that
the committee had been given a presentation that showed and
reflected a huge liability related to accrued leave. She
wondered if he was looking at it in the contract
negotiations. Commissioner Fisher replied in the
affirmative; they would continue to discuss the issue.
Co-Chair MacKinnon asked if the unfunded liability was on
the table as a negotiable item. She wondered if increased
contributions to the system or other ideas were being
looked at.
Commissioner Fisher had not contemplated additional
contributions by employees. He agreed that the unfunded
liability was a significant issue and upon her prompting
would look at it. There were other tools and factors
addressed. The administration shared the concern about the
unfunded liability.
Co-Chair MacKinnon asked about how the classification
system and the personnel rules affected the commissioner's
ability to act.
11:31:12 AM
Commissioner Fisher asked for specifics.
Co-Chair MacKinnon replied that the state had an overall
pay scale salary that had classified positions that the
administration boxed employees into particular areas. She
wondered if DOA was looking at the pay scale and the
classifications and whether they were affecting the growth
in government.
Commissioner Fisher replied that the department was looking
at pay scale. In the previous year in some of the hearings
the department showed some of the growth in salary of
employees over time that was impacted by the merit and pay
increments. The Department of Administration was also
examining general classification processes and how the
state classified its employees. He had not anticipated a
wholesale revision of the way the state classified
employees but it was an ongoing discussion within the
administration. He was open to being persuaded and was
looking at the way salaries grew over time more deeply than
the way classifications were structured.
Co-Chair MacKinnon asked specifically about the salary
discussion. She expounded that part of the difficulty in
the prior special session was addressing the 2.5 percent
cost of living adjustment (COLA). The legislature had
included merit raises and step increases in the budget,
giving 2 out of 3 raises for employees that were working
hard. Two years previously the legislature had seen a slide
presentation from the prior administration that showed a
nearly 34 percent cost increase on the personnel line for
several of the bargaining units because of the 3 layered
approach to incentivize performance. She wanted the
administration to look at the 3 different incentive models
to provide an opportunity for employees to see growth but
respect that the state could not support all of the 3
ideas. The Alaska Marine Highway System (AMHS) brought to
mind personnel rules. The personnel rules had employees
transferred or flown in to a particular location and the
associated costs. She was looking for ways the legislature
could help the administration implement some difficult
things. She wanted to do them as cooperatively as possible
at the bargaining table. Commissioner Fisher would be the
person at the bargaining table.
11:34:59 AM
Commissioner Fisher replied that the department was looking
at a number of rules that impacted the efficiency of the
workforce. He reported that all of the AMHS bargaining
units were not on the table currently, however the
department was looking generally at work rules to ensure
that the state was operating as efficiently as possible. He
felt that standardizing the contracts would be an important
tool. He shared her focus and concern.
Senator Bishop was fixated on Senator Hoffman's overview
earlier in the meeting. He was of the same mindset. He
mentioned that additional reductions would be seen in the
Department of Labor and Workforce Development, one of three
of his finance subcommittees. The department would likely
consolidate within the department. He had looked at doing
so when he had been the commissioner. Commissioner Drygas
and the governor had been able to consolidate the Business
Partnerships Division by rolling it into the Employment
Security Division, a division that had really stepped up to
the plate to carry on the tasks with fewer people and a
$600 thousand cost savings. He thought that it was an
example of trying to save money in the budget going
forward.
Vice-Chair Micciche indicated he was a big supporter of
Commissioner Fisher, one of the few private sector folks in
the administration. He thought that public sector
operations were less headcount efficient than private
sector operations. He mentioned that the administration had
been willing to hire pricey consultants with various levels
of expertise. When asking commissioners and directors to
evaluate efficiency there was inherently a level of
parochialism and protectionism for departments. He asked if
he had considered requesting the administration's support
in hiring a public sector consultant to evaluate program
efficiencies for things such as consolidation, the
potential for privatization, general department
efficiencies, and efficiencies specific to procurement. He
asked if the commissioner would support the idea.
11:39:58 AM
Commissioner Fisher noted that the question related to
Question 6. He discussed having looked to a shared services
model. Shared services would be those areas where there was
common functions that tended not to be mission-critical to
any department, but that every department had. Earlier in
the current year the administration had reached out to a
person with a great track record in history who had
performed similar consulting work for the State of Ohio.
Prior to the end of the session he hoped to get him in
front of the legislature to meet him and get a sense of his
work. The basic structure of his work was to simplify and
standardize all of the shared service type functions. For
example, the state was looking at procurement, information
technology, travel, collections, accounts payable, and
accounts receivable, all enabled with Alaska's Integrated
Resource Information System (IRIS) upgrade. He also
mentioned having unified facilities management
Vice-Chair Micciche asked if 60 percent of the general day-
to-day efficiencies were separated from the process.
Commissioner Fisher agreed. He elaborated that the shared
services would not include everything that was done by the
state. For the functions that did not lend themselves well
to a shared service model, DOA was examining the processes
that the state followed and improve them. Cutting out steps
and implementing tools or systems were things that could be
done to lean the processes. The person the state would be
working with had a lean background, essential to developing
efficient shared services. He was philosophically
completely aligned with the idea that the state had to be
more effective and efficient in the use of its workforce.
It would be important to examine the way the work was done,
to remove unnecessary steps, and to simplify the process.
He stated it would be present in the shared service model
and core functions of the various departments.
11:44:22 AM
Co-Chair Kelly asked for the best guess on the supplemental
figure. Ms. Pitney did not have a guess at present. She
knew of a couple of numbers pertaining to the Office of
Child Services, foster care, and the Division of Juvenile
Justice. The division had always depended on $1 million.
When the Department of Health and Social Services had the
ability to move within appropriations they found it.
Currently, they no longer had that ability. She also
mentioned that the pipeline funding ($120 million) would
also be a part of the supplemental request.
Co-Chair Kelly asked if there was a source for the pipeline
funding. Ms. Pitney replied that it would come from the
General Fund and would depend on the CBR. She thought that
for FY 16 it was reasonable. For FY 17 and future years it
would require thinking through the best source and how it
was repaid was an appropriate discussion. She did not
believe it would have to come from GF. She did not believe
the state would get by without financing the project. The
discussion would be how to fund the pipeline.
Senator Dunleavy asked for her answers to the questions in
writing. Ms. Pitney responded that she would be able to
distil some of them in writing.
Senator Dunleavy asked if new programs were being
considered by the administration. He referred to a news
broadcast of the governor. It sounded like a homeless
program was being contemplated. Ms. Pitney answered that
currently within the existing budget there was homeless
program funding. Her expectation was that the state would
look at what the state was currently spending and get the
most out of it. It was possible that to do so the state
would have to redefine the program. The administration was
looking at obtaining the most value.
Senator Dunleavy asked if new programs would be using
existing funds. Ms. Pitney answered that the administration
would look at funding offsets in the same area, looking at
ways the program could provide additional value for the
same or less money.
11:48:12 AM
Senator Dunleavy asked if any UA contracts would be coming
up in the current year. Co-Chair Kelly did not know.
Senator Dunleavy asked if the university would come
directly to the legislature. Co-Chair Kelly replied that
the contracts tended to expire in the off years from its
larger contracts. He imagined it was very possible but did
not know for sure. In general, the university only came
before the legislature a few times.
Ms. Pitney replied that the union contracts were staggered.
Co-Chair Kelly asked Co-Chair MacKinnon to incorporate the
answers to 9 and 10 in her question. The questions would be
finished.
Co-Chair MacKinnon mentioned space management. She believed
there was a significant portion of the Atwood Building
sitting vacant currently. She asked testifiers to discuss
the process that was used to evaluate space management and
what the state was doing with the excess lease space it
had.
Commissioner Fisher answered that the administration was
constantly evaluating space. Two years prior DOA
implemented some space standards freeing up a fair amount
of space in the Atwood Building and in other buildings and
leverage it in many respects. Currently the department was
examining the options to use the space which included
bringing in a couple of departments that could potentially
cancel their commercial leases. Also, the department was in
discussions with the legislature to hold the space open as
an option for the legislature to occupy should it choose to
leave the Anchorage Legislative Information Office (LIO).
It was an active and ongoing discussion in trying to manage
and maximize space.
Co-Chair MacKinnon asked if the commissioner would be
bringing a recommendation forward and whether he felt like
he had to hold the space open for the Alaska State
Legislature. She thought the state had a signed rental
agreement which it was not happy with. Her understanding
was that it would take litigation for the legislature to
get out of its lease.
Commissioner Fisher replied that he was not making a
recommendation how the legislature should handle the LIO
space. There had been some interest which DOA was trying to
accommodate and to balance it against other opportunities.
He thought it was fair to say that the department was
pursuing other alternatives in parallel and would be
looking to see what the legislature decided to do. Should
the legislature not be interested the department would act
quickly to move other departments into the space. Knowing
that the legislature was looking for space in the Atwood
Building, the department was wanting to accommodate the
need.
11:52:33 AM
Co-Chair MacKinnon wondered if the department was signing
new commercial lease agreements. Commissioner Fisher was
not aware of entering into any new lease agreements in the
past 6 to 9 months. The department was consolidating and
looking to get out of space or reduce costs.
Co-Chair MacKinnon asked how often the administration
cabinet met. Ms. Pitney replied that members typically met
quarterly. She added that various subcabinets met more
frequently.
Co-Chair MacKinnon asked if fiscal policy was on the agenda
for the meetings. Ms. Pitney answered that the
administration discussed the fiscal policy at least twice a
week with a strong contingency of cabinet members. She
furthered that half of the cabinet met at least once per
week.
Co-Chair MacKinnon asked Ms. Pitney to speak to the $200
million veto. She wondered if it had facilitated
conversation and if there had been any unexpected
consequences to do with the tax credit conversation.
Ms. Pitney answered that it had created the conversation
sought by the governor. One question that surfaced was
whether the state was getting the return the state
anticipated or a potential for the return from providing
the credits. Discussions ensued about how much the state
was spending on tax credits relative to income generated
from them. The other talks were about how much the credits
would improve the state's production tax picture in the
future and about what control the state had in the level of
tax credits going out the door. She believed there would be
a bill presented in the following session related to tax
credit reform. She elaborated that the legislation would
provide assurances that the investments would have a
reasonable level of return, a limit relative to the overall
production tax level, affordability, and the incentive for
production in different areas in order to generate future
returns for the state.
11:56:05 AM
Co-Chair MacKinnon referred to a newspaper article
reporting that Miller Energy filed bankruptcy: their
lending agency walked away from the company for a variety
of reasons. One of the reasons cited in the article was
that the state continued to owe the company $17 million in
tax credits and the uncertainty in the timing of the
payment had placed the company into bankruptcy. There were
several local businesses that had huge losses or potential
losses based on what happened in bankruptcy court. She
recalled a conversation with Ms. Pitney about the
governor's intension to veto the bill. She asked Ms. Pitney
for her comments.
Ms. Pitney answered that there were provisions to sell the
tax credits to producers with a tax liability. There was a
way for companies that had earned the credits to receive
the money outside of the cash payment made by the state.
She spoke of issues resulting from the reform effort. She
emphasized that the state would honor all credits earned,
it was the timing in which they were honored was in
question. The statue provided for having 10 percent of the
production tax set aside for production credits. The state
was at about 5 times the level currently.
Co-Chair MacKinnon asked about prioritizing the payment of
Alaska contractors that were owed from tax credits
payments. She wondered if there would be a provision in the
tax credit reform legislation being crafted by the
administration that prioritized Alaska companies since it
was the state's money that was going into a bankruptcy
court finding.
Ms. Pitney would have to follow up with an answer to Co-
Chair MacKinnon's question.
Co-Chair MacKinnon referred to pension obligation bonds.
She asked for an update on the status of pension
obligations and whether the administration was considering
bonds. She thought the original budget that was presented
had a reference to pension obligation bonds in the previous
year and that Governor Walker changed the reference
eliminating it in order to have a chance to review the
concept. The legislature provided the tool for pension
obligation bonds. She wondered if there was serious
consideration of pension obligation bonds and wondered what
kind of analysis was being done with the market to
understand the bandwidth available in the kind of market
for upside. She also wondered about the impact of cash
infusion into the current liability situation that the
state was facing inside of the pension or the arm board.
Ms. Pitney answered that the administration was seriously
considering pension obligation bonds with a significant
level of due diligence and caution. It could be a step that
had a nice upside but could also have a downside. The
administration had some of its bond council providing
information. Currently, the state was anticipating about a
5 percent rate. Over the previous 25 years the state had
earned almost 8 percent. Past returns did not guarantee
future returns. She relayed that there were several
considerations. She reemphasized that the administration
was serious about it but had not made the decision to
include it in the governor's budget request. She requested
that Commissioner Fisher add any information he thought was
fitting.
12:01:52 PM
Commissioner Fisher replied that the Department of Revenue
had taken the lead on the issue. He reiterated what Ms.
Pitney had said regarding the state's serious approach on
the issue. He remarked that it was a market timing strategy
and that if it was the right thing to do the state would be
in a position to do it.
Co-Chair MacKinnon followed up on the question. If the
state was considering pension obligation bonds and,
hypothetically speaking, had a $12 billion pension
liability and the state cash infused $3 billion leaving a
$9 billion pension liability still on the books, she
wondered what dollar amount for bonds the administration
would be considering. She was trying to establish the
magnitude of dollars for pension obligations the state was
considering. She had heard from some investors that there
was not a bubble in the market while other claimed that the
market would recalibrate downward in 12 to 24 months.
Proportionally, she wanted to know what the administration
was looking at.
Ms. Pitney responded that the limitation on the top end was
$5 billion. Whatever the administration decided would be in
the form of tranches. The administration was modeling at
the $3 billion and $5 billion level. She stressed that the
administration would be doing a significant amount of due
diligence prior to coming forward with a recommendation. It
was an interesting concept and one of its nicest features
was being able to preserve liquidity.
12:04:49 PM
Co-Chair MacKinnon asked whether the administration had
offered any guidance on the travel issue to boards and
commissions. She indicated she served on at least one board
and was aware that the other legislators serving on the
same board stressed being conscientious of travel. She
reported that the legislature would be looking in the
finance subcommittees at the use of travel funds, not
necessarily taking them, but reviewing usage in a revenue
shortfall. She wondered if the governor asked boards and
commissions to meet via teleconference to mitigate travel
costs or to reduce or limit travel. Ms. Pitney responded
that there had been internal discussions about travel
restrictions but no mandate had been issued.
Co-Chair MacKinnon requested that there be a set of
guidelines for the boards and commissions. She acknowledged
those groups that have tried to cut down on costs when
possible using tools such as teleconferencing. She
understood the need for certain boards to meet face-to-
face. However, it would be helpful to have boards focusing
on reducing travel costs. Ms. Pitney responded that she
would commit to her request.
Co-Chair MacKinnon asked a question on behalf of Co-Chair
Kelly about the impact of the recent adoption of the
expansion of the Medicaid program. She asked whether the
current Xerox system had been certified by the federal
government and about increased costs related to the
expansion. Ms. Pitney responded that the certification
application would be submitted in December 2015 and
expected Centers for Medicare and Medicaid Services (CMS)
to be onsite the first quarter of calendar year 2016. She
continued to explain that the certification did not stop
the reimbursement process but was a necessary step in
streamlining certifications. She deferred to Commissioner
Davidson to answer Co-Chair MacKinnon's other questions.
12:08:46 PM
VALERIE DAVIDSON, COMMISSIONER, DEPARTMENT OF HEALTH AND
SOCIAL SERVICES (via teleconference), told of the
department pursuing certification in December 2015. Once
the state notified CMS of its intent to certify, generally
they would come onsite 2 to 3 months following
notification. Director Brodie had been in contact with CMS
to request an expedited visit. The state expected them to
be onsite within 2 months following the submission of the
state's official certification request.
Commissioner Davidson responded to the question concerning
payments to providers. A certification of the Medicaid
Management Information Systems (MMIS) was a separate issue
from the payments to providers. Similar to previous
testimony, the department had been seeing over 95 percent
of Medicaid payments being processed on time and
accurately; a better percentage rate than the state's old
Legacy System. The state was working with providers on the
issue of back payments for some that received advanced
payment. She reported the state being on track to have it
cleared up by December.
12:10:34 PM
Co-Chair Kelly asked if the anticipated $64 million was
included. There was not a way to track the amount paid out
and the reimbursement amount.
Commissioner Davidson responded that the state tracked the
amount of advanced payments that were made as well as the
payments received. She reported that all of the providers
were on a repayment plan and she expected to be able to
recoup the expenditures that were made. She deferred to
Director Brodie who had the most up-to-date information
regarding the payments.
MARGARET BRODIE, DIRECTOR, DIVISION OF HEALTH CARE
SERVICES, DEPARTMENT OF HEALTH AND SOCIAL SERVICES (via
teleconference), answered that there was not a direct
correlation between the advances paid out by the state and
when the claims were paid. There was a specific amount of
claims that the state manually adjudicated when the
advances were originally paid. The adjudication process
allowed the department to say how much the state owed a
provider which determined the advance payment amount. In
the meantime the department had corrected hundreds of
defects and put in change requests which have enhanced the
system dramatically. As the department fixed items the
claims were reprocessed. The disconnection was a lack of
tracking when the exact claims that had been partially paid
were reprocessed. The department would be doing a
settlement at the end of the process to ensure that all
claims that the state issued an advance for were properly
adjudicated through the system and paid out to the
providers. Currently the department was stepping up its
collection efforts on the advance payments. The department
sent out letters to 42 providers each agreeing to a
repayment schedule. The department would be mailing out
letters to another set of providers in the current month.
The last set of letters would be sent out in November 2015.
In the previous week the department collected over $1
million from the advances.
Co-Chair Kelly remarked that all of the questions had been
addressed and invited committees to wrap up.
Senator Dunleavy was looking forward to getting some
answers, as he wanted to avoid a repeat. He mentioned an
issue in the Mat-Su with the school district. The district
started a middle college concept several years previously
of which the local college did not want to be a part.
Therefore, kids were going through the Eagle River campus.
The program was fantastic and the individuals at the Eagle
River Campus had been very accommodating. He relayed that
he would be talking with the committee about shifting the
cost of travel via school bus from the school district to
the university.
Co-Chair MacKinnon relayed that when she was the former
chairman of the Legislative Budget and Audit Committee
there had been some difficulty with DHSS complying with
audit requests and providing information that was needed to
support the singlewide state audit. She wondered if it was
going better than it had been in the past under
Commissioner Davidson's new leadership and asked about any
continued challenges.
Commissioner Davidson responded that the department had
been able to meet the majority of the requests for the
audits. She relayed that there had been a couple of
instances in which the department had to request an
extension of 1 to 2 days. The department had been able to
meet all of the requests for information for the audits.
12:15:52 PM
Ms. Pitney added that Legislative Budget and Audit, given
the size and scope of the particular audit, requested to be
relieved of the responsibility of performing the audit. The
request included having the Department of Administration
contract the audit, the funding of which would be provided
through a capital budget item. She wondered if it was an
administration or legislative audit and thought the matter
deserved further consideration. She felt that the request
was out of the ordinary.
Co-Chair MacKinnon believed the legislature moved it into
Ms. Pitney's court because it was her team that had been
non-responsive to requests for information necessary to
complete the audit. The legislature was happy to have a
conversation. However, because of the Medicaid issue with
Xerox, Medicaid had been set aside from the audit. It had
been challenging from the administration's perspective in
trying to catch up. She was willing to work with the
administration on reassessing. She wanted to make sure that
the state's federal funding came through as anticipated and
the audit was an important component. Ms. Pitney agreed
that it was important and believed the participation was
high.
Co-Chair MacKinnon spoke of her and Co-Chair Kelly
discussing a first quarter review of the administration.
One of their goals was to know where the administration
stood to-date. After one quarter, while the state faced a
$3 billion to $4 billion draw from the constitutional
budget reserve (CBR), she wondered if the administration
had met the budget reductions that had been anticipated.
She wanted to know how the administration was tracking for
the first quarter.
Ms. Pitney responded that she did not have an exact
accounting with her. She relayed that in terms of the
state's budgetary process and communications the
administration was on track to accommodate over $3 million
in reductions. The administration was also on track to
recommend additional reductions for FY 17 for agency
operations. It was also taking steps to glean savings
within contract purchases, by imposing travel limits, and
by not refilling certain vacancies. She added that the
agencies would meet the budget with some formula driven and
some choice driven supplementals. She spoke of a
correctional facility in Nome that had a problem that
needed fixing. She relayed that the Office of Budget and
Management (OMB) was on track to produce the budget well in
advance of the December 15th deadline and hoped to have a
planned framework to the legislature sometime in mid-
October (although she did not have a precise date). The
administration wanted to give the legislature as much time
as possible to evaluate the FY 17 proposal to facilitate
efficiency in the 90 day session.
12:21:13 PM
Co-Chair MacKinnon asked when the legislature would see the
items on the call for the special session. Ms. Pitney did
not have the answer but would find out.
Co-Chair MacKinnon stated that it would be helpful in order
to get prepared ahead of time.
Senator Olson asked about the administration's philosophy
related to solving the state's fiscal circumstances. The
state had been told by experts that making cuts alone would
not completely solve its fiscal problems. Revenues would
also be necessary. He asked about the administration's
position on an educational head tax or instituting an
entire state income tax. He wanted to know if it was
leaning towards an individual income tax or a corporate tax
similar to the reserves tax.
Ms. Pitney relayed that the administration's plan would
include a mix of solutions. The fiscal gap was too drastic
to solve with only one answer. All options would be
considered with a phased approach in mind. The
administration wanted to preserve the CBR and the state's
credit rating, knowing the potential investment in the gas
line. If the state could take significant steps through
spending reductions and new revenue measures to address
about half of the budget gap, then broader measures could
be taken in the following years. She posed the question of
how to have a balanced approach. She did not want to pull
any lever too hard making it impossible for a particular
sector, community, or industry to work viably in the state.
She wondered how to fix the fiscal gap for the long term
and to stabilize the state government budget.
12:25:42 PM
Senator Olson was concerned that there was not a definitive
plan. Ms. Pitney responded that there would be a plan
released within the following ten days.
Senator Bishop suggested the key was to fix the problem
long-term. He suggested focusing on a price per barrel
amount which the state would build its budget around. He
suggested that even if the price of oil recovered somewhat,
the state should fix its current problem. He did not want
to leave a mess for others to clean up later. The cuts that
had been brought forward had to be dealt with by the
departments. They had to take the budget amounts and dealt
with them the best way possible. He mentioned various cuts
to the Department of Transportation and Public Facilities
(DOT). He wanted people at home to know the reality of the
state's fiscal situation.
12:28:21 PM
Vice-Chair Micciche relayed that Ms. Pitney had made the
statement that the savings from the agency non-formula
funding was only a portion of the solution. He stated the
state was still at the $4.9 billion unrestricted general
fund (UGF) spending level with a $2.7 billion gap. He was
concerned because the state was still spending $2 billion
for agency operations. He worried that it was not the
priority of the managers of the various agencies to make
additional cuts. He believed that every bit of potential
savings counted in the current fiscal situation. He
wondered if she was reflecting the administrations
perspective that the cuts had been reached or that the
managers needed to look under every rock for other
substantial savings in agency operations.
Ms. Pitney indicated that she had 14 budget "heads-up"
meetings to discuss budget cuts and potential options. The
choices that were discussed would be tough choices and
difficult to communicate. After adding up every reduction
dollar the gap would still be large. The monumental task of
finding every potential savings and the impact that it
would have on a particular service or function was large.
The state had to incorporate all possible reductions but,
in the end, they made up a small portion of the gap.
Vice-Chair Micciche asked what individual groups (the
Senate, the House, or the administration) could do to
collaborate better. All parties knew that additional cuts
and efficiencies were needed.
Ms. Pitney commented that Vice-Chair Micciche posed an
excellent question. She thought it came down to those
things to preserve and making sure they were running
efficiently. Not only did the state want to know that it
was funding only those things the state chose to run, but
also to know that they were running as efficiently as
possible.
12:33:18 PM
Senator Hoffman understood the magnitude of the problem but
opined that the state did not take every possible cut at
the opportunity provided in the previous session. He
mentioned that the reductions that were proposed in the
senate were hard-fought. He suggested that because the next
year was an election year members would not want to make
the necessary cuts. Many legislators were not going to be
willing to make the hard cuts. He was predicting that the
needed cuts were not going to happen with politicians
worrying about their careers. He did not feel that what was
needed to be accomplished would happen until the following
session. He added that the senate was gun shy after the
administration stated that the senate went too far. His
greatest concern was that because of politics the
legislature would have to be on hold for one year in order
to address it the year after with a new group of people due
to election cycles.
12:36:35 PM
Co-Chair Kelly asked if OMB had started the feasibility
studies necessary for any of the privatization of services.
Ms. Pitney conveyed that the Pioneer Home and the Alaska
Psychiatric Institute (API) feasibility studies to be out
in advance of session. She also reported working with the
municipalities, the tribes, and across agencies to partner
to minimize staff.
Co-Chair Kelly relayed that prior to privatizing a state
agency with contracts a feasibility study had to be done
first. He suggested that the requirement acted as a barrier
to privatization efforts. He wondered about the percentage
of cuts for agency operations.
Ms. Pitney responded that for formula and non-formula it
was about 3 percent.
Co-Chair Kelly wrapped up by saying that a person had to
paint their house to keep it from falling down. However,
prior to painting things like furnaces had to be fixed. He
indicated that when he heard terms like efficiency,
streamlining, and collaborations among agencies it was
"normal speak." He suggested that "normal speak" was common
in years without budget problems. He opined that the
legislature was at the cliff. He expressed his concerns
about the administration making a sincere attempt to cut
the budget but it would not be enough standing by itself.
The administration would then rely on revenues to fix the
remainder of the state's fiscal problems. He explained that
the people of Alaska wanted to see cuts before new revenue
measures were implemented. He had the sense that many
people were more in favor of revenue measures than they had
ever been. However, if the legislature ended up with very
little cuts or 3 percent cuts the people of Alaska would
say it was not enough.
12:41:29 PM
Co-Chair Kelly expressed his concerns about the previous
cuts amounting to nearly $800 million that were made
including cuts to the capital budget and the fact that they
had not been adequately communicated to the people of
Alaska. He did not believe the public had seen services
reduced to the point that people took notice. He believed
there was more to cut. He pointed out that the magnitude of
the cuts was not communicated properly and attributed it to
poor reporting by the press at the end of session. He added
that for the most part he believed the reporting done was
agenda driven. Progress was made last session but the
legislature did not receive its due credit and placed more
pressure on the agencies. He encouraged Ms. Pitney to look
at further agency reductions rather than adding additional
revenues. He believed it was time to pull the fire alarm.
He did not believe she would find support for new revenues
in the Senate or in the House. He added that people would
likely support serious budget reductions. Once the cuts
were made he thought she would find more support to discuss
revenue measures towards the end of session because
reductions that were made could be pointed out.
12:45:08 PM
Senator Hoffman remarked that if Ms. Pitney could get
revenue measures through the House he was certain they
would be given very serious consideration by the Senate.
Ms. Pitney suggested that the agencies would argue about
the size of reductions and the priority of particular
services. However, even with the largest imaginable
reductions she believed that there would be a diminishment
in the state's credit rating reduction without implementing
new revenue measures. She closed by stating that revenue
was a critical step in the current legislative session.
Co-Chair Kelly stated that the legislature would be going
to some difficult places and needed the administration to
have the courage to go with the legislature. At the end of
session the branches needed to be working together to get
things accomplished.
ADJOURNMENT
12:47:17 PM
The meeting was adjourned at 12:47 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 100515 Committee Questions for OMB.pdf |
SFIN 10/5/2015 10:00:00 AM |
FY16 Budget |
| 100515 - Pages from Fiscal Stability House Finance 8-24-15 FINAL Revised (page 17).pdf |
SFIN 10/5/2015 10:00:00 AM |
FY16 Budget |
| 100515 4-26-15 UGF Non-Formula Agency Ops Bar Graph.pdf |
SFIN 10/5/2015 10:00:00 AM |
FY16 Budget |
| 100515 4-25-15 FY07-16CC Graphs.pdf |
SFIN 10/5/2015 10:00:00 AM |
FY16 Budget |
| 100515 DRAFT 8-12-15 FY15 FY16 Fiscal Summary.pdf |
SFIN 10/5/2015 10:00:00 AM |
FY16 Budget |
| 100515 - final conference_committee_walker_communication 06092015.pdf |
SFIN 10/5/2015 10:00:00 AM |
FY16 Budget |
| 100515 SFC OMB Response to Questions.pdf |
SFIN 10/5/2015 10:00:00 AM |
FY 16 Operating Budget |