Legislature(2015 - 2016)SENATE FINANCE 532
01/21/2016 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Overview Fy17 Operating Budget | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 21, 2016
9:04 a.m.
9:04:41 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 9:04 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
David Teal, Director, Legislative Finance Division; Senator
Gary Stevens.
SUMMARY
^PRESENTATION: OVERVIEW FY17 OPERATING BUDGET
9:05:43 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
discussed the PowerPoint presentation, "Presentation:
Overview FY17 Operating Budget." He felt that the
appropriate beginning should be to examine the past,
present, and future budgets.
Mr. Teal highlighted slide 2, "Unrestricted General Fund
Revenue/ Budget History ($ millions). He explained that the
green background to the slide represented the state
revenue. He stated that the chart showed that more revenue
equaled more spending. He noted that there was a budget of
approximately $2 billion for almost 20 years, and then, in
2008, the budget spiked to almost $8 billion.
Mr. Teal discussed slide 3, "Total Agency Operating
Budgets, Statewide Items and Capital Budget Compared to
Revenue (UGF Only--$billions)." He noted that revenue
significantly declined in 2014.
Vice-Chair Micciche looked at slide 2, and queried the
significant fund transfers between 2005 and 2011, and the
decline below the bottom after 2011. Mr. Teal responded
that the red bars represented deficits, if they were below
zero, and surpluses if above the spending line. He noted
that there were many years with surpluses, usually at a
time of high revenue. He shared that there were a number of
years with a deficit when revenue did not keep pace with
population and inflation. He stated that the deficits were
generally less than half of a billion dollars. He noted
1998, when the deficit was larger than $1 billion. He
stressed that, currently, the state saw consistent
deficits. He noted that the most recent two years were each
a nearly $3.5 billion deficit. He furthered that the
projected deficit for the upcoming fiscal year was $3.5
billion. He stressed that the state was using reserves at a
rapid rate. He remarked that the state had substantial
reserves, but the reserves were depleting at significantly.
He remarked that there was only approximately three years'
worth of reserves, if the spending pace was maintained.
9:11:50 AM
Co-Chair MacKinnon thought that there were not enough
reserves to cover three years. She asked for further
explanation, with the difference between fiscal and
calendar years. Mr. Teal replied that there was
approximately two years remaining in the CBR, because there
was roughly $7 billion in the CBR. He stated that spending
one-half of the CBR in FY 17, the money would be gone in FY
18. He stated that, at that point, the remaining reserves
was in the earning reserve account, which was currently
used to pay the permanent fund dividend (PFD) and inflation
proofing. He stated that using the earnings reserve to
balance the budget, eliminated the inflation proofing and
PFDs. The earnings reserve accounts were currently at $8
billion, which would get the state through FY 20.
Co-Chair MacKinnon noted that the S and P report pointed to
the Department of Revenue (DOR), which did not
appropriately reflect the volatility of the downward trend
in the oil industry. She wondered if Mr. Teal was familiar
with that excerpt. Mr. Teal replied in the affirmative, and
furthered that the revenue forecast was accurate. He stated
that there should be a consideration regarding the revenue
forecast, at roughly $2 billion was based on a $56 per
barrel assumption and rising thereafter.
Co-Chair MacKinnon noted that between the spring and fall
forecasts, Alaska lost a minimum of an additional $700,000
million. She wondered if the $700,000 million differential
was taken into account in Mr. Teal's presentation. She
queried the price per barrel that assumed the state only
had three years of reserves. Mr. Teal replied that the
summary was based on the official revenue forecast of $56
per barrel. He noted that the adjustment for current
prices, which were below $30 per barrel, the picture looked
substantially different. He noted that S and P looked at
the oil forecast, and had questioned the numbers in the
forecast. He stated that S and P felt that the projections
of deficits were too low.
9:15:29 AM
Senator Bishop looked at slide 2. He noted that there was a
600,000 to 2 million barrel per day production from 1981 to
2001. He stressed that the state would not see that kind of
production again. Mr. Teal remarked that, at its peak, oil
was moving through Trans-Alaska Pipeline System (TAPS) at 2
million barrels per day. Currently, TAPS was moving 500,000
barrels per day. He stated that the much of the graph was
based on production of oil, not price of oil. He stressed
that the price had been declining for years, and asserted
that the price would stabilize with additional oil field
production. He stressed that, without additional oil
fields, production would continue to decline. The forecasts
that included oil development, did not return production to
the 2 million barrel per day.
9:17:12 AM
Mr. Teal continued to discuss slide 3. He noted that, in FY
13 there was $7.8 billion in revenue, and $6.9 billion in
spending. He remarked that there were limited changes in
statewide spending due to debt service and retirement
services. He remarked that paying less debt service
required cash infusion. He stated that there was no
available cash infusion, so the debt service must maintain
continued payments over time. He looked at FY 17, and felt
that the issue was related to "doing the right thing." He
remarked that, if oil was lower that the projection, there
would be an even greater deficit. He felt that there were
differing opinions as to whether the deficit was related to
low revenue or high spending.
9:21:19 AM
Mr. Teal addressed slide 4, "Real Per Capita Unrestricted
General Fund Revenue/ Budget History (2014 dollars Per
Person)." He stated that the chart was the same as chart
one, but was adjusted to population and inflation. He
stated that the chart showed that the deficit could be
related to revenue. He felt that taxes would not fully
cover the deficit. He concluded that merely reducing
spending and adding taxes would not fully relieve the
deficit. He felt that the discussion was important, because
Alaskans understood that revenue was low, but remembered
that oil had been at a low price in the past, and there was
a positive result. Therefore, many felt that the spending
increase was the reason for the deficit.
Co-Chair MacKinnon wondered if the double dividend was in
FY 13. Mr. Teal replied in the negative.
Vice-Chair Micciche looked at slide 4, and felt that the
scale was incorrect. Mr. Teal replied that the slide was
adjusted for both population and inflation. He explained
further with slide 2, and noted the number differences. He
explained that adjusting for both population and inflation
would impact the spending.
9:27:32 AM
Senator Bishop felt that many Alaskans were paying
attention to the state budget. He looked at the statewide
operations on slide 4, and remarked that it was related to
debt service and retirement. He looked at FY 13, and
remarked that the bar had decreased since that time. He
wondered if the cash infusion in FY 13 helped to decrease
the debt. Mr. Teal replied that the liability had continued
to increase and the payments increased. He agreed that the
cash infusion helped to alleviate the debt service. Without
the cash infusion, the debt would have been nearly $1
billion in the current year. He stressed that it greatly
helped the deficit.
Mr. Teal continued to discuss slide 4. He remarked that
some people felt that spending, per person, had continued
to increase.
Mr. Teal highlighted slide 5, "AGENCY OPERATIONS 2014
Inflation Adjusted $." He stressed that the budget had been
reduced. He noted that most of the agencies were operating
within the FY 08 category.
9:32:07 AM
Co-Chair MacKinnon wondered why the comparison was for
management plans, rather than actual spending. Mr. Teal
replied that management plans and actual spending were
often very similar. He felt that the most recent spending
reports were not fully accurate. He stated that there were
many times when the actual spending was incorporated in the
comparison reports. He felt that the graph would not be
much different with actual spending comparison.
Mr. Teal explained that the public felt that the budget
continued to increase. He noted that this was the first
year with an operating budget reduction. He felt that there
had not been enough time for the public to fully understand
the pain of the state's budget impact.
Senator Bishop disagreed with Mr. Teal's last comment. He
stressed that his constituents had felt the budget impact.
Co-Chair Kelly noted that the Revenue Sources Book
reflected the forecast at $56 per barrel. Mr. Teal agreed.
Co-Chair Kelly wondered if there was an estimate for $30
per barrel. Mr. Teal replied there was not an estimate, but
further explained with slide 7, "FY17 Unrestricted General
Fund Revenue -Fiscal Sensitivity":
This graph excludes the Governor's proposed
legislation and is intended to provide a picture of
the "status quo" for FY17.
Co-Chair Kelly felt that the sensitivity chart was not easy
to understand.
Co-Chair MacKinnon noted that the revenue had fallen off
the cliff in the revenue sensitivity chart. Mr. Teal stated
that the chart was designed to show what would occur,
should oil not be at the DOR forecast level. He stated that
the chart showed what the price would need to be to balance
the budget.
9:40:02 AM
Vice-Chair Micciche surmised that there was a 4 percent
floor at $80 and below; and a 35 minus the applicable per
barrel credit at $80 and above. Mr. Teal agreed, except the
change in the schedule had an adjusted floor year to year.
He stated that the state operated on net profits, so the
floor could change from year to year.
Mr. Teal discussed slide 6, "State of Alaska Fiscal
Summary--FY16 and FY17 (Part 1)." He looked at lines 1
through 10, which added a number of new lines in FY 17. He
felt that the new fiscal plan should be presented, before
the other revenue sources were incorporated.
Co-Chair MacKinnon felt that the chart was "leaky", and she
explained a plumbing analogy. She felt that the new FY 17
budget had too many components. She wondered if it was
better to examine the current revenue structure, before
incorporated new sources. Mr. Teal replied that the
Legislative Finance Division (LFD) incorporated the
governor's proposal.
9:45:46 AM
Co-Chair MacKinnon wondered if a governor should
inconstantly incorporate and exclude certain aspects of the
budget. Mr. Teal recalled that the governor had previously
incorporated Medicaid expansion, and Co-Chair MacKinnon had
the same reaction. He furthered that the governor proposed
a budget, based on his desires. He stated that the governor
was required to submit a balanced budget, so the governor
should, therefore, incorporated revenue sources to maintain
a balanced budget. He stressed that the revenue must be
understood, before the budget could be discussed.
9:49:11 AM
Co-Chair Kelly explained that the committee would focus on
the current revenue sources, before discussing additional
revenue. He stressed that there would be discussion about
additional revenue sources.
Senator Hoffman wondered if the three year projected
reserves reflected the governor's proposal. Mr. Teal
replied that the projections only referred to "business as
usual." He stated that the expenditures for FY 17 in slide
6, were only related to the governor's proposal.
Senator Olson requested an evaluation of the strengths and
weaknesses of the governor's plan. Mr. Teal understood that
the question related to whether the governor's plan would
work. He felt that the discussion about the revenue plan
must be in depth. He would offer his opinion, once the
other issues were addressed.
Senator Olson felt that the issues were surrounded by
politics. He noted that the governor was not up for
reelection, so he wanted to be sure that the plan was
sound.
Mr. Teal continued to discuss slide 6. He encouraged the
committee to only look at the unrestricted general funds
(UGF) in FY 16 and FY 17. He stated that appropriations
were split between agency operations, statewide operations,
and capital appropriations. He highlighted each line of the
appropriations.
9:56:56 AM
Mr. Teal addressed slide 8, "Agency Operating Budgets
Percentage Change from FY16 Mgt Plan to FY17 Gov (UGF
Only)." He shared that there were a few departments that
had higher requests from FY 17. He remarked that the Alaska
Liquefied Natural Gas (AKLNG) had major increases in
Department of Revenue (DOR). He explained that the
Department of Military and Veterans Affairs (DMVA) request
was to expand the rural presence of the state defense
force. All other agencies had decreases in their budget. He
explained that the chart showed the axis's percent, so the
percentage reduction had varied between 25 percent in
Department of Commerce, Community and Economic Development
(DCCED) through other increases. He noted that the requests
for AKLNG and DNR were requests for general funds. He noted
that AGDC had been receiving and allocating money to
agencies. He stated that AGDC was intended as the
coordinating agency. He noted that the displayed numbers
were not reimbursable service agreements from AGDC, but
were requests for general funds, and may or may not be
coordinated through AGDC.
Mr. Teal highlighted slide 9, "Agency Operating Budgets
Change from FY16 Mgt Plan to FY17 Gov." He noted that
Department of Health and Social Services (DHSS) budget had
a dramatic decrease.
Senator Hoffman felt that Alaskans were concerned with
education funding. He noted that the governor had committed
to the previous budget level. He wondered how the $90
million education reduction was determined. Mr. Teal
replied that that the education spending was decreased, so
the budget had been reduced. He stated that the governor
had proposed the use of the rural trust fund to fund K-12
education.
10:01:20 AM
Senator Hoffman wondered if the $17 million was
sustainable. Mr. Teal replied that it was not sustainable.
He stated that usage of the trust would only allow
approximately $15 million. He explained that the governor
had a bill that changed the trust.
Mr. Teal continued to discuss slide 6. He noted that
Medicaid was down approximately $32 million. The savings
due to Medicaid expansion were taken in the FY 16 budget.
The $32 million was attributable to reforms. He stated that
DHSS had not specified the reforms, so it was hoped that
there would not be a supplemental request. He explained
that the net was the operating budget on line 13 at
approximately $100 million. He noted that debt service had
changed from $206 million in 2016 to $436 million in 2017,
which was an increase of $230 million. He looked at line
28, which showed retirement costs.
10:04:42 AM
Mr. Teal displayed slide 11, "FY17 Governor's Request
Agency Operating Budget, Statewide Items and Capital Budget
(Formula and Non-Formula) (UGF Only--$ millions)." He
explained that state assistant programs would stay at $99
million, with no change. He explained that issuing pension
obligation bonds would eliminate state assistance, because
the contribution rate would drop to 22 percent or lower. He
stressed that it cost money to issue the bonds, but the
debt service would go to $129 million. This adjustment
would cause $136 million in costs. The issuance of bonds
would cost the state $37 million more in FY 17. He stated
that the rate would not decrease as much with TRS, but
there would still be state assistance. He stated that the
cost of issuing TRS bonds would be an additional FY 17 cost
of $22 million, resulting in a $60 million cost increase in
FY 17 with the issuance of pension obligation bonds. He
stated that state would come out ahead at the end of 20
years with the issuance of the pension obligation bonds.
Senator Dunleavy wondered what would occur at a price per
oil decrease from $100 to $20, and asked about the ability
to fund the debt service in a deflationary period. He also
looked at the permanent fund scenario with the assumption
that the fund would develop a continual set number. He felt
that the numbers were often extremely inaccurate.
Senator Dunleavy wondered if the projection was based on
inflation. Mr. Teal replied in the affirmative.
Senator Dunleavy noted that the revenue was deflating
rapidly, with no guarantee of the permanent fund earnings
because of no market guarantees over 5 years. He understood
that the fund was diversified, and there was an averaging
concept. He restated that a downturn in the market would
result in a reversal of the revenue fund earnings. Mr. Teal
agreed.
Senator Dunleavy surmised that the state only had control
over spending. Mr. Teal agreed.
Senator Hoffman deferred to Co-Chair MacKinnon.
10:09:04 AM
Co-Chair MacKinnon noted that S and P reports had reflected
that there was a continued negative outlook at a cost of $1
million per $1 billion of borrowing assets. She stated that
the reports showed that conversations in the Alaska Bond
Bank had created the downgrade. She did not support moving
into pension obligation bonds in the current time. She
stressed that the market was focused on the committee, and
therefore the change in structure provided instability. She
asked about the debt service related to the credit rating.
She noted that the state's credit rating had recently
decreased. Mr. Teal explained that the credit raters looked
at Alaska as a "low debt state." He remarked that Alaska
had recently taken more debt. He stated that the models
were not often accurate, because they were merely
projections. He stressed that there was a substantial risk
in issuing bonds. He used an analogy of mortgaging a home
versus putting money in the stock market. He felt that
investing in bonds should only occur with a high level of
confidence. He explained that issuing bonds would cost an
additional nearly $60 million.
10:14:35 AM
Senator Dunleavy felt that issuing bonds only avoided the
eventual payment on the debt, however there was a
possibility that the bonds may not have a great return on
investment. He did not feel that many households would run
on the displayed scenario. He queried Mr. Teal's comments
on the models. Mr. Teal felt that models were helpful, but
should only be treated as projections, not predictions. The
models were run, with changes in the inputs.
Co-Chair Kelly recalled that Mr. Teal said, "Models are
nice, but I don't believe them."
Senator Dunleavy noted that there was a precedence in the
country using pension obligation bonds, and many cities had
suffered using the concept.
Co-Chair Kelly did not support pension obligation bonds in
any scenario.
Senator Hoffman wondered if other states had recently used
pension obligation bonds. Mr. Teal replied that there were
some states that had used the bonds. He stated that most
states had local government with different systems.
10:17:18 AM
Senator Hoffman asked what the states used the newfound
revenue toward. Mr. Teal replied that the money would be
only be used in the retirement trust funds to earn money
and pay benefits.
Senator Olson wondered how the numbers would vary as
related to Alaska's decreased credit rating. Mr. Teal
replied that the credit downgrade would only affect the
state's issued bonds. He stated that there was not a
consideration about loss of money, after the bonds were
issued. He explained that LFD had published a paper about
the subject.
10:19:58 AM
Mr. Teal addressed slide 12, "Unrestricted General Fund
Revenue/ Budget History (millions)." He noted that line 25
showed oil and gas production tax credits. He stated that
the credits went from $500 million in 2016 to $73 million
in 2017. He recalled that the legislature appropriated $700
million for tax credits, and the governor had vetoed $200
million. He stated that there was an anticipation of $625
million in tax credits in 2017. He noted that the addition
of the $200 million from FY 16 totaled the tax credits to
$825 million tax liability for 2017. He stated that the
governor's appropriation was for $73 million, which was the
statutory minimum.
Co-Chair MacKinnon surmised that there was still debt, but
the money would be used from a different source. Mr. Teal
explained that the money was still owed, but its payment
was not reflected in the budget. He explained that the
governor intended to take $1.2 billion from the CBR,
deposit it in the oil credit, which made it invisible on
the fiscal summary. He explained that the credits could be
paid with GF, and draw from the CBR to pay the deficit to
make the transactions more transparent. He shared that the
credits had incurred debt, so the committee must determine
the best way to deal with that debt.
Vice-Chair Micciche had a general understanding of the
priorities of credit rating organizations. He wondered if
LFD could provide a source of action to stop the downgrade.
Mr. Teal replied that LFD could not make that
determination. He stated that the credit rating
organizations would be the most happy with a very small
portion of debt.
10:24:02 AM
Mr. Teal looked at line 27 of slide 12. He noted that FY 16
did not have a number in that portion. He stressed that the
reserve account was not considered UGF.
Senator Hoffman queried the benefit by switching funding
sources. Mr. Teal replied that there was a disconnect
between the fiscal health of the state and dividend
payments. He explained that most people felt that the
dividends were their share of the permanent fund. He felt
that the dividend should be seen as a reflection of the
fiscal health of the state. He liked that the dividends
were considered an expenditure. He felt that the earnings
reserve account should be categorized as UGF.
Mr. Teal looked at line 32 of slide 12. He noted the $35
million supplemental appropriation for revenue sharing. He
explained that the program took one-third of the earning
balance, and distributed it to the communities. He stated
that the governor wanted to return revenue sharing to $60
million, therefore there was a required appropriation of
$80 million in FY 17. He stated that there was no money in
the governor's budget that was appropriated for revenue
sharing.
10:30:00 AM
Senator Hoffman stressed that the communities that depend
on revenue sharing should be very concerned due to
additional cuts to the budget. He stated that there would
be more pressure on the legislature in the upcoming year.
He felt that the revenue sharing program must be
reevaluated, because of the services to the smaller
communities in the state.
Mr. Teal explained that the revenue sharing program was
developed to provide communities with a predictable cash
flow, while also reflecting the state's current budget
situation. He felt that appropriating money in the
supplemental budget defeated the purpose of the financial
expectation.
Mr. Teal continued to discuss slide 12. He stressed that
there was no additional money for AKLNG in FY 17, other
than the direct money in the departments. He looked at line
41, which was the total authorization. He noted that the
total authorization went from $5.4 billion to $5.5 billion.
He noted the increase in the budget of $65 million of UGF.
Co-Chair Kelly queried the line number. Mr. Teal replied
with line 41. He noted the increase of $65 million.
Co-Chair MacKinnon wondered if Mr. Teal meant million or
billion. Mr. Teal replied that he meant to say billion.
10:34:37 AM
Mr. Teal highlighted slide 42, which showed a $3.8 billion
deficit in 2016 and shifted to line 44. He stated that line
44 showed maintaining the status quo. He shared that the
best guess at adjusting the governor's revenue resulted in
a deficit of $3.5 billion. He stated that the current
revenue was expected to cover less than 30 percent of the
state's expenditures. He stated that the forecast of
increased revenue in FY 17, the revenue would cover
approximately one-third of the expenditures. He noted that
the revenue forecast could be very inaccurate, so there may
be no improvement. He looked at line 41, which showed that
the governor's plan had the deficit at under $500 million.
Senator Olson surmised that the governor's plan would
result in a $400 million which would go to zero in the
future, and doing nothing would continue with the deficit.
Mr. Teal agreed.
10:38:45 AM
Senator Olson asked for further explanation. Mr. Teal
explained that the governor's plan would bring the state to
zero deficit within his model. He furthered that there were
other factors such as oil revenue, interest, and other
factors that would affect the outcome.
Senator Olson wondered if Mr. Teal was optimistic about the
proposed model. Mr. Teal replied that he was optimistic,
but furthered that there were many separate models that
were essentially the same thing.
Senator Dunleavy surmised that it was a revenue-based
model. Mr. Teal replied that model relied on earnings from
the Permanent Fund.
Senator Dunleavy asserted that the model shifted the burden
of revenue to instruments related to the people of Alaska
such as taxes and the dividend. Mr. Teal agreed, and
explained that, conceptually, the money came from the
elimination of inflation proofing and reducing dividends.
Senator Dunleavy stated that it was a revenue model. Mr.
Teal agreed.
10:43:03 AM
Mr. Teal looked at the capital budget appropriations in
slide 12. He stated that the capital budget had increased
from $118 million to $195 million, which was a $75 million
increase.
Mr. Teal highlighted slide 13, "FY 17 Governor's Request
Agency Operating Budget, Statewide Items and Capital
Budget":
Revenue is estimated to be $1.8 billion in FY 17,
which is equal to the sum of appropriations for these
purposes.
Mr. Teal explained the graph.
Vice-Chair Micciche felt that the only way the state could
have saved money was to decrease the budget at an earlier
time. Mr. Teal agreed, and explained that there would have
been a larger reserve balance, had the statewide cuts
occurred earlier.
10:48:08 AM
Senator Dunleavy felt that the state could have saved money
by paying off the debts.
Mr. Teal looked at slide 14, "Unrestricted General Fund
Revenue and Budget History." He stated that the state was
"stuck." He stated that the Permanent Fund Act had been
revised since the analysis, so the governor's appropriation
bills needed to be revised to match the Act. He hoped that
the governor's plan was portrayed as the governor intended.
He stressed that business as usual would result in a gloomy
picture.
Co-Chair Kelly stressed that the $2 billion was more line
$1.7 billion. Mr. Teal agreed.
Co-Chair Kelly felt that there were many pitfalls in the
governor's plan. He felt that there should be continued
cuts, which would be much less complicated.
Vice-Chair Micciche noted that there was less current
spending. He stressed that there would be some very
difficult decisions.
Co-Chair Kelly felt that the press had done a poor job up
to the current point. He stressed that the legislature had
reduced the size of state budget. He remarked that the
press should focus on the good things that had resulted in
state savings.
ADJOURNMENT
10:54:00 AM
The meeting was adjourned at 10:53 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012116 FY17 LFD Overview.pdf |
SFIN 1/21/2016 9:00:00 AM |
SB 139 |