Legislature(2017 - 2018)Anch LIO
10/31/2017 10:00 AM Senate FINANCE
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| Presentation: Office of Management and Budget - Budget Forecast and Fund Balances | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
October 31, 2017
10:02 a.m.
[Note: The meeting was held in Anchorage, Alaska at the
Anchorage Legislative Information Office]
10:02:25 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 10:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Gary Stevens
Senator Peter Micciche
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Pat Pitney, Director, Office of Management and Budget,
Office of the Governor; Sheldon Fisher, Commissioner,
Department of Revenue.
SUMMARY
PRESENTATION: OFFICE OF MANAGEMENT and BUDGET - BUDGET
FORECAST and FUND BALANCES
^PRESENTATION: OFFICE OF MANAGEMENT and BUDGET - BUDGET
FORECAST and FUND BALANCES
10:03:10 AM
Co-Chair MacKinnon communicated that the Senate had worked
with the administration on fact-finding for consideration
while deliberating on a tax bill. The information would
provide detail on the fiscal gap.
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, discussed the presentation, "State
of Alaska Fiscal Overview - Budget Gap Analysis and Fund
Source Balances" (copy on file).
Ms. Pitney turned to slide 2, "Spending: State Budget
Overview":
The total state budget is $10.2 billion, and
comprises:
•Federally funded programs
•Service generated revenue
•State funded programs and services
Only 50% of the budget impacts the deficit, the
unrestricted general fund (UGF) portion.
Ms. Pitney reminded that the information on slide 2 was
inclusive of all funding sources. She continued that when
she was referring to the deficit it signified the
Unrestricted General Fund (UGF) shortfall.
Ms. Pitney looked at slide 3, "Spending: State Budget
Overview," which showed a pie chart depicting pieces of the
state's UGF spending. She pointed out portions of the pie
which included education, Medicaid, the Permanent Fund
Dividend (PFD), other health programs, public safety, and
statewide items. She noted that the larger portions
included education, Medicaid, PFD, and health; and
signified the choices when considering budget reductions.
10:06:00 AM
Ms. Pitney viewed slide 4, "Spending: State Budget
Overview":
More than 50% of the state-funded share of the budget
is sent as direct payments to communities, providers,
oil companies, and individuals.
Payments are for items such as:
•Medicaid payments to providers (on behalf of
enrollees)
•K-12 Schools
•Retirement payments (on behalf of communities and
schools)
•School debt reimbursement
•Senior benefits
•Public assistance
•Foster care
•Oil and gas tax credits
•Permanent fund dividends
Less than 50% of state funded budget is spent on
government services like troopers, road maintenance,
ferries, airports, prisons, the legislature, Pioneer
Homes, the courts, the governor's office, fish and
game, etc.
Ms. Pitney commented that half of the $5.1 billion in state
spending would be sent as a check out to individuals or
communities, and the amount would be under consideration if
budget cuts were deliberated.
Senator Micciche referred to slide 3 and wondered if Ms.
Pitney was adding UGF and Designated General Funds (DGF)
together to come up with a total of $5.1 billion as
reflected on the slide.
Ms. Pitney informed that she had added UGF and the PFD,
given that the Earnings Reserve Account (ERA) would become
a UGF component.
Senator Micciche stated that the representation was fair.
10:08:08 AM
AT EASE
10:08:51 AM
RECONVENED
Co-Chair Hoffman asked about what level of PFD encompassed
the $800 million listed on slide 3.
Ms. Pitney specified that there was an $1100 PFD calculated
into the figures.
Senator von Imhof asked if UGF spending was about $4.3
billion.
Ms. Pitney answered in the affirmative.
Senator von Imhof referred to a memo that stated the UGF
spending was $4.3 billion when the budget was closed out
the previous June, and- $200 million to $300 million in
one-time funding sources as part of the budget. She
wondered if the one-time funding sources were included in
the figures in the presentation.
Ms. Pitney stated that the presentation started with FY 18
spending (the current year's approved budget) on slide 3,
and subsequent slides would address ongoing spending with
one-time revenue solutions.
Co-Chair MacKinnon appreciated transparency with regard to
the budget. She referred to slide 2, which had showed a $10
billion spend. She thought Ms. Pitney had gone on to
discuss leveraging federal dollars on purpose and had
focused on UGF spending. She thought the slides reflected a
different way of looking at the budget in layers.
Ms. Pitney stated that what Co-Chair MacKinnon had surmised
was fair was represented what she had tried to convey.
10:12:01 AM
Ms. Pitney showed slide 5, "Spending: State Budget
Overview," which showed a data table entitled 'Unrestricted
General Fund Spending Trend.' She listed budget categories
on the slide. She reviewed reductions in various areas,
listing the total operating budget down by 23 percent.
Senator Micciche asked why the slide used a comparison from
FY 15 to FY 18. He pointed out that FY 13 was a spending
peak and could more appropriately be used as a comparison.
Ms. Pitney stated that the administration had used
different versions of budget comparisons. She noted that FY
13 had been the first year in the current oil price climate
that the state ran a deficit. She specified that FY 15 had
the budget that the current administration came to office
with. She stated she could easily change the comparison,
and then the FY 13 to FY 18 comparison signified a total
UGF budget reduction of 44 percent.
Senator Micciche thought that Alaskans did not understand
the comparisons that were being used. He stated that he
used the FY 13 comparison frequently. He considered the
reduction from FY 13 to FY 18 to be substantial. He thought
the legislature had done a pretty good job at reducing
costs, although some felt further cuts could be made. He
thought it was important for the public to understand the
substantial reductions that had been made.
Ms. Pitney stated that the administration agreed with the
44 percent reduction, and the 27 percent reduction in
operating budget reduction from FY 13. She stated that the
reductions were real.
10:16:34 AM
Senator Olson looked at the 19 percent reduction reflected
in the 'Medicaid & Other Health Formula' category on slide
5. He wondered what percentage of the reduction had been
related to Medicaid expansion.
Ms. Pitney explained that a large portion of the reduction
had been due to Medicaid expansion and increased federal
funding. She expected that the category would not stay at a
19 percent reduction.
Senator Olson asked if Ms. Pitney had specific numbers to
reflect the change.
Ms. Pitney did not have numbers readily available but
recalled that there was many fiscal notes associated with
SB 74 [a Medicaid reform bill passed in 2016] that were
enabled because of Medicaid expansion.
Senator von Imhof referenced the 19 percent reduction to
the 'Medicaid and Other Health Formula' category as listed
on slide 5 and asked how much funding had been replaced by
federal funds. She referred to Ms. Pitney's comment about
discussion of one-time revenue sources. After two years of
Medicaid expansion, she wanted to know what costs paid by
the federal government, versus any additional costs the
state was responsible for. She listed eligibility
processing and other administrative duties as possible
areas of cost.
Ms. Pitney stated thought that Senator von Imhof's
questions were in-depth enough to warrant additional
discussion time. She estimated that the amount of money in
Medicaid over the past three years had increased by
approximately $300 million to $400 million. She reminded
that healthcare was the only sector of the Alaska economy
that was growing, because of the additional federal
investment in Medicaid. She stated that the state level of
Medicaid funding had gone down due to additional federal
funding. She reiterated that it was possible to delve
deeper into the issue at a later time, when she would have
more specific figures.
10:20:45 AM
Co-Chair MacKinnon wondered if the numbers reflected on
slide 5 (under reductions in Medicaid and other) included
the supplemental items that were secondary to the budget.
She wondered if subsequent slides would address anticipated
increases. She believed some of the slides were highlighted
to note that the supplemental items were not included.
Ms. Pitney stated that the supplemental budget was not
included in the FY 18 figures on the slide.
Co-Chair MacKinnon referred to the 'Debt, Retirement,
Credits, etc' category on the slide, which showed a 52
percent reduction. She asked for more detail and suggested
that the committee needed more discussion on the category
and reduction.
Ms. Pitney stated that the category was different from the
comparison of FY 13 to FY 18, versus the comparison of FY
15 to FY 18. Slide 5 showed the majority of the reduction
from FY 15 to FY 18 was a result of oil and gas tax
credits. She stated that the retirement number was about
the same. She noted that there was no retirement
contribution in the 982.7 million listed for FY 15 on slide
5, because it was the same year a roughly $3 billion
deposit went to the two retirement systems. The $982.7
million was largely made up of oil and gas tax credits. She
informed that the number from FY 13 was largely the same
but was largely made up of the retirement contribution of
$750 million. Because of the deposit in FY 15, the state
was able to reduce its on-behalf payments for the
retirement liability. She stated that the reduction
depended upon the year that was being considered.
10:24:16 AM
Co-Chair MacKinnon appreciated the information. She
referred to consistency in reporting and understood the
administration's choice of comparing years it was present
to measure budget changes with. She understood the
representation of the $3 billion contribution. She
referenced a bill that suspended the school debt
reimbursement program, which would sunset.
Co-Chair MacKinnon asked Ms. Pitney to provide a breakdown
of the category of 'Education & University.' She noted that
a future slide referenced inflation for education. She
wanted to see specific figures for the Court system, and
other details separated out.
Co-Chair MacKinnon warned that she would be asking for an
acknowledgement from the administration that the state owed
money for oil and gas tax credits. She referred to
businesses going bankrupt, with unpaid credits as a
contributing factor. She referenced companies approaching
legislators requesting a plan as to how the credits would
be paid to those that had risked capital. She asked if Ms.
Pitney believed the state owed the tax credits and that the
state was obligated to pay the tax credits.
10:28:22 AM
Ms. Pitney believed there was an obligation to pay tax
credits, although thought there was no time limit or cost
to the time other than that to the companies.
Co-Chair MacKinnon referred to a statutory formula that the
administration had been relying on and what some felt were
minimum payments.
Ms. Pitney answered in the affirmative.
Senator Stevens appreciated Co-Chair MacKinnon's request
for a breakdown of the education budget overview. He asked
for a rough approximation of the reductions to K-12
education and the University.
Ms. Pitney estimated there had been a 6 percent reduction
to K-12 education and an upwards of 12 percent to the
University. She offered to provide more precise numbers at
a later time. She stated that in FY 15 there had been an
amount of one-time funding for education; that was
available for FY 16, FY 17, and FY 18. The reduction to
education was an elimination of the one-time funding. She
summarized that the FY 16 and FY 17 one-time funding
intended to bridge to an increase in the Base Student
Allocation (BSA) had been eliminated and accounted for the
reduction.
Senator Micciche thought it was important to clarify that
there had been increases to the BSA after FY 15. He noted
that FY 18 was the first year without an increase in
several years.
10:31:09 AM
Ms. Pitney looked at slide 6, "Spending: State Budget
Overview," which showed a data table entitled 'Unrestricted
and Designated Spending Trend.' The reason the
administration had provided the particular slide
presentation was to provide a picture of UGF and DGF. She
explained that DGF was a category of funding that had a
statutory designation. She explained that some of the funds
were service fees for a particular item. She used the
example of University tuition and fees, wherein students
paid for a particular course, degree program, or dorm room.
Ms. Pitney continued discussing slide 6 and noted that
funds from the motor fuels tax (in FY 18) were also
considered DGF, because the statute pointed the money from
the tax to transportation purposes. She noted that the
motor fuels tax funds were not earned for a particular
item, like a ferry receipt. There were two different kinds
of monies in the DGF. Other types of DGF were community
assistance (formerly known as community revenue sharing),
which was a GF payment into a fund designated for
communities. She listed the Power Cost Equalization (PCE)
Fund as an example of a similar fund designated for a
particular purpose. Even counting all the DGF, the total
operating budget since FY 15 was down 16 percent. Compared
to FY 13, it was down over 20 percent. The total budget was
down 23 percent from FY 15 to FY 18 when DGF and UGF were
included.
Senator Micciche thought Ms. Pitney had been showing
numbers in a specific way for the past several years. He
thought that the grouping of funds demonstrated some value
for the administration but not for the committee. He
thought it was important to have a standardized format to
presenting the budget numbers. He asked Ms. Pitney to
provide budget information to the committee using the
standard style.
Ms. Pitney agreed to provide the information.
10:35:53 AM
Vice-Chair Bishop thought Senator Micciche had requested
the alternatively formatted budget information for the
benefit of the public.
Co-Chair MacKinnon asked if it was fair to extrapolate that
the spending total number would remain the same, but an
alternate format would provide greater detail and
transparency in understanding each operating line.
Ms. Pitney answered in the affirmative.
Senator Micciche suggested that in order to understand the
proposed spending for FY 18, which some members did not
necessarily support, it was important to understand
successful spending reductions and resistance to spending
increases.
10:37:39 AM
Ms. Pitney spoke to slide 7, "Budget Gap: State Budget
Overview - Known Increases FY2018 to FY2018." The slide
provided a list of increases the administration had known
the state would face between the FY 18 budget and the FY 19
budget. She explained that the table on the slide compared
the Office of Management and Budget's (OMB) list with the
Legislative Finance Division's (LFD) list, and there were a
couple of differences. She drew attention to the bottom
line, where OMB assumed a $360 million increase, and where
LFD assumed a $347 million increase. In addition to the
bottom line increase, there was a capital budget increase
as well as an offset for fiscal notes, one-time items and
sunset programs that brought the OMB total budget change
number to $388.3 million.
Ms. Pitney referred to the top of slide 7, noting that the
previous year the administration had known the Medicaid
budget would be about $32 million below what was expected
in FY 18. There was also a reduction in the Senate and in
the final legislation. She shared that Medicaid enrollment
had gone up much faster than was anticipated, through
traditional enrollment as well as expansion. Based on FY
17, the administration expected $75 million for FY 18. She
reiterated that she was speaking to known increases.
Ms. Pitney pointed out an increase in the Alaska Marine
Highway System (AMHS), which had a deposit in FY 17 (into
the Marine Highway Fund) and then a draw in FY 18 because
of the Medicaid increase. She referenced an explanatory
memo that went out in the previous two months. She
explained that because of the cap on the CBR, the deposit
for FY 18 was not made. There was a minimum $40 million
shortfall. There had been a one-time item in addition to be
restored. In total, just to get even with the current
fiscal year's level, it would require a $44 million
increase in UGF for AMHS. She thought the configuration was
difficult to explain, but summarized that it concerned the
CBR cap, and supplementals hitting the cap the previous
year.
10:41:37 AM
Ms. Pitney continued to discuss the table on slide 7,
pointing out a $15 million placeholder for Fire
Suppression, which LFD had put in the budget documents, but
OMB had not. She noted that there had not been a huge fire
year the previous year, and there was funding in the Fire
Suppression account. She thought $15 million was a
traditional amount that was deposited for wildfire funding.
She stated that OMB had also not put in a figure for Salary
and Benefits, and there were very few contracts with salary
increases. She guessed the amount would be in the range of
$7 million. She relayed that LFD had communicated there
would be an increase in spending for employer contribution
for health. She had not confirmed that there would be an
increase, and the administration was trying to manage the
program and keep the employer payment the same. She
reiterated that the slide reflected known increases.
Ms. Pitney addressed an increase to the Department of
Corrections (DOC) inmate health. The previous year there
had been a $10 million supplemental request for inmate
health, which was not included in the FY 18 base
allocation. She referred to criminal justice reform
legislation that had passed the previous session. She
pointed out that the prison population had not decreased to
the level that was predicted, so there would be additional
increases for the correction population that were not built
into the number on the slide.
Ms. Pitney highlighted the $4.7 million increase in funding
for Mt. Edgecumbe listed by OMB. She referenced the Public
School Trust Fund.
10:44:12 AM
Senator von Imhof referred to DOC Commissioner Dean
Williams' testimony from the previous week. The
commissioner had discussed the closure of a prison in
Palmer, and she understood there was 400 vacant prison
beds. She thought there was a backlog in pre-trial
services, but the commissioner felt the individuals would
be addressed in January 2018 when the program kicked in.
She did not recall that the commissioner had stated that
there was a significant increase in inmates.
Ms. Pitney stated that the criminal justice reform bill had
estimated a decrease in the prison population, but the
decrease not been commensurate with what had been predicted
and budgeted for. She relayed that the administration had
taken a significant amount of money out of the correctional
system in anticipation of fewer inmates. The reduction had
not been what was anticipated.
Senator von Imhof understood that one of the supporting
arguments for Medicaid expansion was that the central funds
would be covering inmates.
Ms. Pitney stated that Medicaid expansion covered inmates
that were in a hospital setting for 24 hours or more. There
was about $7.2 million of inmate health that was covered by
Medicaid expansion. She clarified that the $10 million was
for healthcare that was provided within the walls of the
prison. She informed that Medicaid did not cover healthcare
that was within the walls of the prison.
Senator von Imhof asked if Ms. Pitney was referring to
Medicaid-eligible recipients.
Ms. Pitney stated that Medicaid did not cover the
healthcare costs within the prison; rather, it only covered
inmates that had to go to a hospital for 24 hours or more.
Prior to Medicaid expansion, the state had covered the
total amount.
Senator von Imhof understood the explanation but did not
think that the level of detail was not explained when
Medicaid expansion was being considered. She recalled
sitting in meetings in which she heard that inmate
healthcare would be covered under the expansion.
10:47:48 AM
Ms. Pitney continued reviewing slide 7, noting that the
next two items were not increases, but there had been
anticipation of an increase. The administration had
received new debt service information from the state's debt
manager. At the end of the previous session, there had been
an $8 increase to the Community Assistance Program, so
there was a resultant decrease. Oil and gas tax credits
would increase $118 million based on the statutory
minimums. She referenced the Public Education Fund, and
stated that there was one-time money of $17 million used
from a reappropriation, which would result in a known
increase. The actuarial increase to State assistance was
increased by $108 million.
Co-Chair Hoffman referred to the Community Assistance
Program and recalled that the law stated the legislature
would put in $30 million per year to keep a fund balance of
$90 million so that communities could anticipate where the
dollars would be spent. He had received information from
the administration that indicated it would treat the $30
million as an add-back similar to how AMHS was being
treated. He asked for clarification on the matter of
whether the administration had the same view on the
program, and if it planned on decreasing the Community
Assistance Program in the future.
Ms. Pitney referred to the $30 million deposit in the
Community Assistance Fund the previous year, and stated the
amount could be put in as a supplemental item in the coming
year if there was revenue to cover it. She asserted that
the $8 million item listed under Community Assistance on
the slide was somewhat different. The funds went to
Community Assistance as a direct appropriation rather than
into the fund. She elaborated that the slide did not
reflect the intent of the administration. She reminded that
the Senate's revision of the PCE Fund also provided the
ability to fund Community Assistance through the same
mechanism.
Co-Chair Hoffman thought it was more a question of whether
the state could afford the program or not. He did not see
how the administration could differentiate between the
Community Assistance Program, saying it was not affordable,
when it affected virtually every person in the state; while
saying the state could afford the AMHS, which served 20
percent of the state population.
10:52:18 AM
Co-Chair MacKinnon recalled that the House had added $7
million to Community Revenue Sharing as a direct
appropriation in the capital budget and wondered if the
overview was reflective of the funds not being added back
in a second year. She asked Ms. Pitney to explain the
funding history.
Ms. Pitney stated that as part of a budget compromise,
there had been $8 million in budgeting outside of the
normal process for Community Revenue Assistance.
Co-Chair MacKinnon stated that she had worked with Co-Chair
Hoffman to ensure that the program was funded at a lower
level. The change was 50 percent lower funding and a name
change from Community Revenue Sharing to Community Revenue
Assistance. She added that the program had been back-funded
with from Power Cost Equalization funds. She thought there
would eventually be a cost-savings. She supported
fulfilling the obligation.
Co-Chair MacKinnon continued her remarks on the Community
Revenue Sharing item. She hoped that the governor's budget
for the current year would show funding for the program.
She recalled that the previous year the full amount had to
be back-filled. She wanted to ensure that there was a $30
million contribution in order to keep the $60 million fund
whole. She pointed out that specifically smaller
communities suffered more adverse effects than larger
communities that did receive a higher portion of the fund
and had other ways to manage. She mentioned a tax cap in
Anchorage, and relayed Anchorage assembly members were
concerned with the lack of money coming from the state.
Ms. Pitney appreciated understanding the position of the
committee.
Co-Chair Hoffman thought it seemed that the administration
made one statement the previous year and was reversing that
statement; but not with AMHS, which benefitted a very small
portion of the state compared with the Community Assistance
Program. He was befuddled at the funding differentiation
between the two programs.
Senator Micciche reiterated that he wanted more detail
pertaining to the categories of Debt Service; State
Assistance to Retirement; and Fiscal notes, Sunsets, and
OTIs as listed on slide 7. He asked Ms. Pitney for more
detail on the expectations for all three of the categories.
Ms. Pitney agreed to provide five-year forecasts on each of
the areas requested. She stated she could also explain
highlights if necessary.
Senator Micciche stated that he wanted more detail on the
line items at a later time.
Co-Chair MacKinnon relayed that the committee had asked for
more detail to provide greater transparency for the line
items on slide 7. She stated that she would make the
information available to the public as soon as it was
received.
10:57:43 AM
Ms. Pitney reviewed slide 8, "Budget Gap: State Budget
Overview":
Known issues: Base scenario ~$600-800 million/year
Assumptions:
• Department of Revenue oil price and production
forecast: Fall 2017
• Agency cost increases are maintained at or below
inflation
• No federal cost shifts
• K-12 school increases maintained at inflation only -
no student growth
Ms. Pitney addressed the table on slide 8, entitled 'Base
Scenario Calculation ($millions).' She stated that the
slide did not include policy decisions, new items, or
reductions. Rather the slide reflected current status
including fiscal notes and sunsets, which had been built
into the future. She pointed out that the budget
(maintaining flat service levels) went up from the $4.3
billion budget to $4.7 billion. She detailed that inflation
of 2.25 percent for agency operating, known increases
(based on the revenue forecast for oil and gas tax
credits), known decreases of debt, and increases in
retirement were included in the calculation; after which
the budget would go from $4.7 billion in FY 19, to $4.9
billion in FY 20, to almost $5 billion in FY 21. She
qualified that the numbers were for government only and did
not include the PFD.
Ms. Pitney continued discussing the table on slide 8, which
projected a deficit that started at $2.7 billion and grew
to $2.8 billion in the following 2 years. The deficit in
the current fiscal year was roughly $2.5 billion. She
discussed the budget gap predicated on the Permanent Fund
plan (which existed in SB 26 as passed by the Senate), at
roughly $600 million. She considered the Permanent Fund
Plan as passed by the House (and included a sustainable
draw from the ERA), there was a gap of $900 million in the
short-term and $800 million in the long-term.
Ms. Pitney qualified that the figures on the slide had an
assumption of no federal cost shifts, and assumed funding
schools with no adjustments. She discussed the range of the
budget gap as calculated through the House and Senate
proposals. She stated that there was a number of items that
could change the range.
11:01:55 AM
Ms. Pitney discussed slide 9, "Budget Gap: State Budget
Overview":
A number of items could increase the gap:
•Compromise dividend ~$80.0-$100.0 million (cost)
•Federal level health care changes ~$100.0+ million
(cost)
•Supplemental budget ~100.0+ million (cost)
•Health care cost containment efforts (necessary to
meet forecast)
•Criminal justice initiatives (cost)
•Major disaster spending (cost)
•Market correction affecting permanent fund earnings
•Overdrawing the fund today, increases the gap in the
future:
Assuming $500.0 million/year in excess draw:
•Over 5 years: this will cost $153 million in
annual revenue forever.
•Over 10 years: this will cost $368.5 million in
annual revenue forever.
Ms. Pitney informed that both LFD and OMB were doing an
initial analysis on healthcare costs. If healthcare grew at
3.5 percent (analysis showed a 5.25 increase over the past
10 years), there would be a $100 million difference in the
budget in five years. The forecast budgeted a 2.25 percent
increase. She emphasized that in order to not have
healthcare taking a larger share of the budget, containment
efforts needed to be put in place.
11:03:40 AM
Senator Micciche thought that all the assumptions on the
slide 8 and slide 9 addressed an increase to the budget
gap. He wondered at the absence of items that might reduce
the fiscal gap; such as production, price, or efficiencies
in government. He considered that the presentation was
showing that the administration thought the status quo was
correct. He discussed reductions. He thought there was good
news in the state and considered that there should be a
balance of considering positive and negative effects on the
budget.
Ms. Pitney stated that a subsequent slide would address
healthcare cost containment, which was a huge cost driver.
She detailed that an initial look at the budget showed that
about $1.2 billion came through the state budget for
healthcare. She discussed the combined healthcare costs,
and rising cost pressure of healthcare over time. She
thought the state could avoid $200 million in cost if
healthcare growth could be contained at 2.25 percent. She
stated that other groups had considered that a 3.5 percent
growth rate would be a boon.
Ms. Pitney continued discussing increases to the cost of
healthcare. She emphasized that the state would need major
reform initiatives to limit the healthcare growth rate to
2.25 percent. She mentioned the controversy in healthcare
reform. She advised that the 5.25 historical growth rate
was not built into the projections. She discussed
administrative efficiencies such as shared services, and IT
and facilities maintenance consolidations as a way to cut
costs. She thought that there had already been dramatic
cuts. She reminded that there was still $360 million in
known increases to overcome. She stressed the need for
administrative efficiencies.
11:09:48 AM
Senator Micciche concurred that the reality of budget cuts
was difficult. He asked if the administration had gone
through the exercise of considering right-sizing services
to the size of available revenue. He asked if Ms. Pitney
had an assumption of what kind of government the state
could afford, and if she had engaged in an exercise to
determine the size of government the state could afford. He
felt the legislature's job was to challenge the
administration to find places to reduce.
Ms. Pitney answered in the affirmative and stated the
administration had done the exercise for three years. She
drew attention to slide 4 and emphasized that half of the
state funding of the UGF budget was payments sent out to
communities, providers, oil companies, and individuals. She
questioned where the burden would fall if items that the
state could not afford were identified. She detailed that
the administration had looked through every program,
statutes that were assigned to programs; to question if it
was a value to the state.
Ms. Pitney discussed the administration's process of
considering the right size of government. She asserted that
education was key to the future of the state.
11:12:47 AM
Vice-Chair Bishop looked at slide 9 and commented that
there were different ways to comment on the budget. He
asserted that the state was not locked into a certain
amount of budget increase, and that the matter was a
subject for debate.
Co-Chair Hoffman referred to the 'compromise dividend'
listed on the slide. He referenced slide 8 and considered
the Senate Permanent Fund plan versus the House Permanent
Fund plan. He stated that the difference between the plans'
deficits was $250 million, but slide 9 listed the
difference of the compromise dividend as $80 million to
$100 million. He asked Ms. Pitney if she could reconcile
the differences.
Ms. Pitney stated that the $100 million was based on the
$1100 PFD from the Senate plan.
Co-Chair Hoffman thought that the $1250 dividend proposed
in the House did not equate to $225 million. He stated that
the $225 million difference in the Senate and House plan
was higher than he had anticipated.
Ms. Pitney stated that the amount was the difference
between a 25 percent draw and a 33 percent draw.
Co-Chair Hoffman asked what population number the
administration had used when calculating slide 9. He
thought Senator Micciche had used a state population number
of 735,000.
Ms. Pitney informed that the administration had used
735,000 as a population number, and about 85 percent of the
population applied for the PFD.
11:15:40 AM
Senator von Imhof discussed the private sector, and thought
employees had good ideas as to where to find efficiencies.
She wanted to visit each state department unannounced in
order observe productivity and see what kind of activity
was being measured. She noted that there were component
detail reports for every department and budget item, but
talking with individuals provided more information. She
felt that talking to the Department of Revenue Commissioner
could be helpful.
Department of Revenue Commissioner Sheldon Fisher was in
the gallery and indicated that Senator von Imhof would be
welcome to visit the department.
Co-Chair MacKinnon noted that the conversation was stalling
the advancement of the presentation. She agreed with
Senator Micciche that a list of priority programs should be
presented to the committee. She agreed that education was
valuable and mentioned low performance results. She
acknowledged that there was a disagreement about the
numbers and felt that change needed to happen. She thought
that there were statutorily mandated programs that could be
eliminated in an effort to curb spending. She mentioned the
Alaska Performance Scholarship (APS), and escalating
healthcare costs. She referenced public testimony on change
to the APS. She reiterated that the committee valued
education.
Co-Chair MacKinnon continued her remarks. She added that
the state was offering services that it could no longer
afford and directly mentioned the AMHS. She asked about the
Atwood Building that the legislature was renting and
wondered if consolidation had occurred.
Ms. Pitney replied that the state had been consolidated
lease space over the previous three years. She stated that
higher leases were being reconsidered for lower-cost leases
or state-owned properties. She recalled that there had been
a $4 million decrease in lease space cost between FY 17 and
18.
Co-Chair MacKinnon asked to see examples of lower cost
lease spaces for the Atwood building in particular. She
stated that the administration had interjected itself into
a conversation about lease space for the legislature.
11:22:16 AM
Co-Chair MacKinnon commented that the pension appropriation
of $3 billion had been used for healthcare rather than to
reduce unfunded pension liability. She wondered how the
change would affect the long-term funding ratio.
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE, said
that he would need to research the matter. He had
previously been the commissioner for the Department of
Administration (DOA), which included the management of the
Division of Retirement and Benefits. He said that the
Alaska Retirement Management (ARM) Board had allocated the
money had been according to the recommendation of the
actuarials, and that he had seen dramatic improvement in
the funding level of healthcare over the past few years. He
said that as there had been improvements and reductions in
the actuary assumption, healthcare costs had climbed up. He
thought there was a future opportunity to allocate more
money toward the pension side, which was an ongoing
conversation within the department.
11:25:47 AM
Co-Chair MacKinnon believed that when the legislature made
the appropriation, it was made to the retirement system
rather than to healthcare. She thought that if the health
side of the funding was at 95 percent, and the wage side
was lower; then the ARM board was able to make choices for
improved healthcare for retirees. She thought if the
legislature acted to make the funding side for the
retirement system whole, there was different implications.
She discussed the ARM board's flexibility to change
benefits and recalled that the legislative intent had been
to fund the pension side rather than health. She stated
that payments to retirement were affecting state in
different ways.
Commissioner Fisher clarified that the ARM board did not
weigh in on benefits provided to retirees, which were
defined in statute. He stated that the $3 billion came in
immediately prior to his role at DOA. He had not focused on
the issue of the legislative intent for the deposit to go
the wage side rather than the benefit side. He stated that
he would get back to Co-Chair MacKinnon's office with more
information on the matter.
Co-Chair MacKinnon thought that the matter could be
interpreted in different ways. She reiterated that she had
understood the deposit was going toward the wage side. She
reiterated that the court system had become involved in the
question of healthcare and restrained the legislature's
ability to do things. She had been to meetings with retired
state workers and discussed healthcare benefits.
11:30:46 AM
Ms. Pitney went back to slide 9. She drew attention to the
last item on the slide, "Overdrawing the fund today,
increases the gap in the future." She thought it was
important to understand that taking $500 million per year
in excess of a sustainable draw (as accepted by the House
and Senate) for five years would cost $153 million in
annual revenue from the ERA forever. She thought a
potential overdraw would diminish flexibility in the
future.
Co-Chair MacKinnon thought it was an important component
and suggested that reduction of the budget would provide
the same opportunity to grow the fund. She reminded that
the governor had the power to veto. She thought that if the
governor considered that the legislature was not adequately
responding or drawing inappropriately from the ERA, then he
could reduce the budget.
Ms. Pitney highlighted slide 10, "Budget Gap: State Budget
Overview," which showed a data table entitled 'Budget Gap
Under Various Assumptions.' The slide provided a view of
the budget gap under different circumstances. She looked at
range of estimated budget gaps from $371 million up to $900
million. She noted that the CBR was a tool.
Ms. Pitney turned to slide 11, "Budget Gap: State Budget
Overview," which showed a bar graph that trended forward.
The slide was based on the forecast and the revenue
projections. She observed the deficit trend over time for
various scenarios as outlined on the graph. She observed
that under the 'Compromise with Revenue' plan, it was
possible to get the deficit below $200 million by 2025.
Under the same compromise with a market crash (considering
2007 to 2015 actual returns) would bring up the deficit.
11:36:33 AM
Senator Micciche looked at the slide, which he thought also
represented the status quo. He asked why there was not a
representation of a significant market upside or other
positive scenario. He thought there was potential for
substantial improvement under all the outcomes reprsented.
He thought it was important to represent the upside.
Ms. Pitney displayed slide 12, "Savings: State Budget
Overview," which showed a line graph entitled 'FY2010-2018
State Revenue and Expenditure (Without Dividend).' The
slide showed state revenues relative to the expenditure
decline. The state had been in deficit since 2013 and had
drawn $14 billion from state savings. She argued that the
Permanent Fund as a revenue stream over a savings account
would be much less valuable to the future of the state.
Ms. Pitney looked at slide 13, "Savings: State Budget
Overview:"
• The gap between revenue and spending has been funded
primarily from the Constitutional Budget Reserve (CBR)
-- Alaska's rainy day fund
• By the end of FY2018, we will have drawn over $14.0
billion from savings
• The constitution requires that any borrowing from
the CBR fund be repaid
• CBR spend and non-repayment provisions require a
three-quarter vote
The slide showed a bar graph entitled 'Unrestricted General
Fund Budget.' Ms. Pitney pointed out that the slide
demonstrated how the state had spent down the CBR and the
SBR over time. The green represented how much of the total
budget in a given year was taken from savings. She observed
that 2016 was by far the highest proportion of spending
from savings, although even with reductions the following
years also showed huge spending from savings. She thought
the slide demonstrated the structural deficit.
Co-Chair MacKinnon asked about the $14 billion drawn from
savings as listed on the slide and asked if the amount
included the $3 billion that was invested in the retirement
system.
Ms. Pitney answered in the affirmative.
11:39:55 AM
Ms. Pitney viewed slide 14, "Savings: State Budget
Overview,":
• Alaska has the most volatile revenue of any state
• Any plan that leaves a fiscal gap depletes the
state's reserves
• Maintaining sufficient savings is prudent to hedge
against low oil prices, stock market volatility or
other unforeseen events
The slide also showed a bar graph entitled 'State of Alaska
Savings Balance (SBR & CBR),' which showed the depletion of
state savings.
Ms. Pitney observed that the significant drop in savings
from FY 14 to FY 15 was due to the deposit to retirement.
She reminded that the state had the CBR and the Statutory
Budget Reserve (SBR) because Alaska was the state with the
most volatile revenue. The standard deviation of change in
the state's revenue (on the national scale) was 34.4
percent and six times the national average; while the next
closest state was Wyoming or North Dakota, with 11 percent
volatility. When another state looked at a budget crisis,
it considered a 1 percent to 3 percent decrease in revenue
projections; versus an 80 percent reduction in Alaska's
revenue over the time period examined.
Senator von Imhof referenced the third bullet point on the
slide and agreed that it was important to keep saving. She
considered subsequent slides that addressed the governor's
wage tax proposal and pondered that the proposal would take
cash from working Alaskan's so that the state could protect
its own cash.
Ms. Pitney would not say that she was referring to the
state's "own cash," but it was Alaskan's revenue to protect
operations going forward. She suggested that if there was a
market crash over time, funds preserved in a savings
account could be used to manage volatility.
Senator von Imhof relayed that the committee would be
hearing from Alaska Permanent Fund Corporation (APFC)
Director Angela Rodell the following day and would be
asking questions about how to hedge against market crashes.
She mentioned SB 26 [a bill related to using the Permanent
Fund] in which the committee had added a provision to
consider the average market value of five of the previous
six years to help balance things out. She considered a
historical look at the market and thought market crashes
generally did not last more than two or three years. She
did not think the state should budget for potential market
crash when it had been safeguarded against it through the
structure of SB 26.
11:43:36 AM
Co-Chair Hoffman referred to slide 14 and considered that
the last column on the graph indicated there was no plan to
draw from the SBR and the CBR. He referred back to slide 8
and observed that the projected deficit for FY 19 was $2.73
billion. He considered that the governor planned on
expanding the deficit by adding additional prosecutors and
other items. He thought it was extremely difficult to fill
the deficit, and he agreed that the CBR and SBR should not
be used. He noted that the Senate still needed to negotiate
with the House on SB 26, and there was a revenue measure
proposed by the governor. He thought that even with the
House number for the Senate's Permanent Fund plan, there
was still a gap of $300 million. He assumed that the state
would not be able to achieve one-third of the amount in
cuts. He anticipated that burden would fall on the ERA.
Ms. Pitney stated that the administration's expectation,
considering best practice and volatility (even when the ERA
was incorporated), was that it was prudent to target a
balance for the CBR. She thought it was reasonable to use
the CBR as a bridge. The reason the state needed a $2
billion balance in the CBR was that cash payments often
necessitated early draws of up to $1 billion. She thought
there should be a balance in the CBR for unforeseen
circumstances such as extremely low oil prices. She stated
that was that there were often funds drawn for cash
payments early in the year. If $2 billion was left in the
account, there would be returns to the state.
11:47:34 AM
Ms. Pitney showed slide 15, "Savings: State Budget Overview
- Other Fund Balances," which showed a data table entitled
'Selected Fund Balances ($millions).' She noted that the
combination of all the other fund balances was
approximately $2.1 billion - all the funds had associated
programs that would be damaged if the funds were used. She
drew attention to the other fund balances on the slide, and
qualified that the numbers listed were all projected fund
balances at the end of FY 18.
Senator Micciche thought some of the funds were
overcapitalized and wondered if Ms. Pitney had intended to
use the word "damaged."
Ms. Pitney stated that there was more funding in cost
equalization and the Higher Education Fund necessary to run
the program. She stated that there was money that could be
preserved to fulfill the original intent of the program.
Co-Chair Hoffman thought the PCE fund could be viewed as
potentially overcapitalized because of the high rate of
return that the state had enjoyed. He referenced
legislation that proposed using the excess fund earnings to
the greatest benefit. He thought there would be times that
the fund was undercapitalized. He thought the legislature
envisioned using additional (overcapitalized) funds for
Community Revenue Sharing other energy projects.
Vice-Chair Bishop relayed that he had sat on a pension
trust for 20 years and did not think a fund could be
overcapitalized.
11:50:59 AM
Ms. Pitney looked at slide 16, "Revenue: State Budget
Overview - Alaska Permanent Fund Earnings," which showed a
line graph entitled 'Permanent Fund vs. General Fund
Revenues.' The slide reflected that the earnings from the
Permanent Fund were the state's largest revenue stream. The
blue line showed the earnings and the red line showed
normal General Fund (GF) revenue. She commented that the
graph would predict the next 10 years looking very similar
to FY 17.
Co-Chair MacKinnon asked about the assumed rate of return
on the Permanent Fund.
Ms. Pitney shared that the graph on slide 16 was backward-
looking from FY 13 to FY 17 and reflected actual returns
and state revenue.
Ms. Pitney spoke to slide 17, "Revenue: State Budget
Overview - Permanent Fund Earnings Over Draw Impact":
•Maintaining the CBR balance at $2 billion minimum
level is crucial but leaves little flexibility.
•An additional $500.0 million annually taken from the
ERA above the structured draw reduces the Permanent
Fund balance by $5 billion compared to a structured
draw with additional revenues
•That $5 billion left in the PF generates $250.0
million annually - reducing future tax.
Ms. Pitney referenced the bar graph on slide 17. She
thought that the structured draw from the Permanent Fund
earnings (as presented in SB 26) was very important and
preserved the value of the fund. She noted that the slide
reflected an assumed 6.95 rate of return, but that APFC had
dropped the expectation to 6.5 percent. She stated that the
graph demonstrated the value of the fund, over a 10-year
period. She discussed the difference in the value of the
fund considering a structured draw versus a draw with an
additional $500 million taken from the ERA.
11:53:46 AM
Senator von Imhof appreciated seeing the chart on slide 17.
She referred to the "turduckhen" maneuver, in which the
House had passed an operating budget containing a Permanent
Fund bill as well as the capital budget. She asserted that
the Senate had been thoughtful and careful in deliberating
SB 26. She had not seen a slide that reflected how an
income tax could affect growth, productivity, employment
and confidence in the state. She wished there was more
acknowledgement and modelling of income tax proposals to
have a fairer comparison of fiscal plan choices.
Senator Micciche thought the state had to do better on the
CBR return, so there was not such a fiscal gap. He thought
if the structured draw became a long-term plan and the
state worked on rebuilding the CBR, it was important to get
a better return for the savings account. He asked if Ms.
Pitney had any statements pertaining to reducing the
earnings between the ERA and the CBR in out years.
Ms. Pitney noted that there was only $2.1 billion left in
the CBR. She considered that if there was only a structured
draw, and nothing else, the state would consume all of the
CBR within five years and would not have an appropriate
savings balance. She concluded that there was no way to get
a higher return on the CBR when statute dictated that the
funds stay in an investment option appropriate to near-term
spending.
11:57:55 AM
Senator Micciche asked if the administration had a plan for
a better return on the CBR balance once there was a gap
between one year of spending and an amount needed for a
safety margin.
Co-Chair MacKinnon thought the question might be better
directed towards Commissioner Fisher.
Commissioner Fisher had not taken a hard look at the asset
allocation of the CBR and how it should be managed. He
thought it made sense to examine optimizing the asset
allocation once the steady balance was known.
Senator Micciche reminded that the legislature had wanted a
level of flexibility with the CBR but had a pretty good
idea of how much of it would be spent. He considered that
consequently, the state had lost hundreds of millions or
more in potential earnings.
Co-Chair MacKinnon had spoken against confirmation of the
previous DOR commissioner, who had put $3 billion on the
market and sold it in a very short time period. She relayed
that she was told that state statute dictated that any
funds needed within five years had to be monetized, which
created a lower rate of return. She had read media reports
about the legislature's inability to make a decision
regarding the draw. She questioned why the APFC board would
have to sell off or keep funds. She referred to the House
inserting the capital budget into the operating budget and
taking money from the ERA. She asked why the APFC board
would change its management style for liquidity if there
was a bridge in the CBR. She thought media had blamed the
legislature.
12:03:11 PM
Commissioner Fisher did not argue with Co-Chair MacKinnon's
characterization. He thought that there was a sense that
the legislature had been looking to the ERA as a source of
funding; and rather than disposing of assets in an
accelerated fashion, it made more sense to liquidate assets
as opportunities were presented. He did not want to try to
lay blame on any organization. He thought all shared the
view that if the state knew the rules, it allowed all
parties to operate in a more efficient way. He referenced
conversations with businesses about uncertainty in the
fiscal situation preventing investment in the state. He
thought if the uncertainty gap could be reduced, more
optimal decisions could be made managing state assets.
Co-Chair MacKinnon appreciated the commissioner's response.
She reminded that the commissioner was on the board of the
Permanent Fund. She thought increased uncertainty was
causing uncertainty in investment opportunity in the
private sector. She hoped that if the CBR was used as a
bridge, the APFC board would understand there was a
backstop so that there could be good decisions made with
Permanent Fund assets.
Co-Chair MacKinnon referenced a House proposal to withdraw
$5 billion, at which time the Senate leadership had
responded forcefully. She referred to a press conference on
the matter. She believed the legislature had been
responsive to the issue.
Senator Micciche stated that the reason the Senate had not
supported the House fiscal plan was because it had felt it
was too mulch a draw on the ERA and because of the loss of
earnings. He was surprised, considering the amount of the
Permanent Fund that was somewhat liquid. He thought the
Senate was stepping lightly when it came to use of the ERA
and wanted only positive effects on the fund.
12:08:33 PM
Co-Chair MacKinnon commented that when the state when
through a government shut-down, there had been a
conversation on the issue of an APFC shutdown. She wondered
if there was something that the legislature could do to
ensure that the investment managers got paid in the event
of a government shutdown. She thought most Alaskans would
understand the importance of making sure that APFC managers
would be paid. She recalled that the Department of Law
(LAW) had struggled with the ramifications of a government
shut-down. She hoped there would be a better plan in place
in the future.
Commissioner Fisher recalled an active conversation with
LAW about the safety of the Permanent Fund. He thought the
department had opined that the governor could continue
life, health and safety functions notwithstanding the
absence of a budget. He thought that the department had
struggled with the idea that money management fell into the
same category. He was hopeful that the issues would be
addressed and the topic of a shut-down would no longer have
to be addressed.
Co-Chair MacKinnon thought the matter was a good topic for
the following day when the director of the APFC would be
present. She discussed the importance of wise resource
management, and the need to move past uncertainty.
12:12:30 PM
Ms. Pitney reviewed slide 18, "Revenue: State Budget
Overview - Market Correction Impact," which showed a bar
graph that illustrated the market experience from FY 07 to
FY 15. The slide demonstrated a $600 million decline in the
structured draw of the Permanent Fund if there was a market
experience such as between 2007 and 2015. She thought the
slide emphasized the need for a CBR balance that was at the
target level and stressed the need of being cognizant of
fund levels so as to not overdraw the ERA.
Ms. Pitney discussed slide 19, "Revenue: State Budget
Overview - Market Correction Impact":
Ten Year Forecasts:
Average Return and Market Correction
•Scenario 1. Compromise Version SB26 combined with
various other actions - 6.95% annual returns
•Scenario 2. Compromise Version SB26 combined with
various other actions -FY07-FY15 market returns
*see two-page spreadsheet
Ms. Pitney noted that the slide had an accompanying
document "Budget Forecast Scenario 1 and 2," which
contained two data tables (copy on file). She discussed the
table entitled 'Scenario 1 - Compromise Version SB26
combined with various other actions ($millions) - 6.95%
annual returns.' She drew attention to the 'Planned
Permanent Fund Value (EOY)' on on the Scenario 1 document.
She explained that if there was a 6.95 percent return
annually along with a structured draw, there would be a
Permanent Fund Value of $80 billion in 2027. She looked at
the 'Planned Draw' on the document, which showed the draw
growing to $3.6 billion under the assumptions of Scenario
1.
12:15:55 PM
Ms. Pitney continued discussing Scenario 1 of the budget
forecast document, and considered the forecasted draw
combined with GF revenue, which showed a remaining deficit
of $727 million under the compromise plan. She commented on
additional royalties due to changes from SB 26. Scenario 1
also assumed a motor fuels tax. She informed that if the
remaining deficit was drawn from the ERA, instead of the
Permanent Fund being valued at $80 billion, the future
value of the fund would be $74.8 billion.
Ms. Pitney measured the effects of implementation of SB
4001 as shown on Scenario 1 of the budget forecast. She
discussed changes to the balance of the Permanent Fund. She
thought that the scenario pointed out that the ERA balance
was healthy due to no volatility in the annual return under
the assumption. The scenario showed a dividend starting at
$1100 and growing to almost $1400.
12:18:31 PM
Ms. Pitney looked at 'Scenario 2 - Compromise Version SB26
combined with various other actions ($millions) (Actual
FY07-15 returns)' on page 2 of the forecast scenario
document, which co. She drew attention to the middle of the
page, to the 'ERA Balance' line. She noted that under an
actual returns assumption, from 2021 to 2024 there was not
sufficient funding in the ERA. She contrasted the line with
the ERA assuming a broad-based tax, which showed the ERA
with a low balance in only 2024 and 2025.
Ms. Pitney continued to speak to Scenario 2. She asserted
that with a targeted $2 billion CBR, the state could manage
through a shortfall. She considered that without a broad-
based tax on top of the Motor Fuels Tax proposal, the
impact of a market reduction could be significant. She
reiterated that a broad-based revenue source made a huge
difference over the time of market volatility, and also
helped avoid an unstructured draw in the near term. She
mentioned the significant effects of an unstructured draw
on the revenue from the ERA.
12:21:10 PM
Co-Chair Hoffman thought the document had an assumption of
$1000 PFDs and suggested that the matter was not yet
resolved. He continued that the assumed rate of return was
possibly going to be adjusted. He thought that the document
had an optimistic viewpoint. He wanted to see an array of
scenarios with rates of return and PFD amounts. He thought
it would be helpful to members of the committee,
legislature, and the general public.
Ms. Pitney agreed to provide the information.
Senator von Imhof discussed focusing on expenses in
addition to revenues. She referenced general expense
increases and asserted that education and healthcare would
grow at a higher rate. She discussed potential reductions
such as healthcare reform as a way to further reduce the
budget deficit. She wondered if a budget reduction
component would be a good idea to consider within the
scenarios Co-Chair Hoffman had requested.
Co-Chair MacKinnon stated that adding Senator von Imhof's
idea to the request would be helpful.
Senator Micciche did not support the use of FY 07 through
FY 15 actual returns as a market return assumption in the
model. He thought it was more realistic to look at a trend
of longer than eight years. He suggested that a 6.95
percent rate of return had a layer of conservatism built
in. He emphasized the importance of long-term term trends
and thought there should be an adequate level of
conservatism used on the model.
Commissioner Fisher stated he would engage in conversation
with Director Rodell the following day. He relayed that the
change from an assumed 6.95 percent to a 6.5 percent rate
of return had been recommended by a consultant (Callan and
Associates) and was consistent with advice that was being
given worldwide as well as what the department was hearing
from many other funds. He thought the topic was important,
so that everyone felt comfortable with the assumptions that
underlie the models.
12:26:35 PM
Co-Chair MacKinnon stated that when the committee discussed
SB 26 (which proposed a sustainable draw from the ERA) it
considered a 5.25 percent rate of return, which had a
trailing three-year trend with an actual rate of return
that was even lower.
Co-Chair MacKinnon referred to questions from the previous
days meeting regarding indirect expenses and changes to
foregone revenue. She discussed evaluation of Cook Inlet
tax credits, and investment on the North Slope. She thought
it was prudent to look at whether the state was getting the
return it wanted from the foregone revenue before
considering a tax on Alaskans.
Co-Chair MacKinnon recalled that Ms. Pitney had alluded to
a reinterpretation of the motor fuels tax. She wanted to
understand why the administration considered the funds
dedicated and asked for more clarity on the matter. She
asked about the administration's proposed decrease of UGF
and increase of DGF, and the use of the revenue stream. She
asked for a response from the administration in writing.
12:29:52 PM
Ms. Pitney stated that there was rationale to looking at
general revenues differently than specific revenues. She
asserted that a motor fuels tax was considered designated
with a statute as opposed to dedicated. She stated that the
funds were reclassified due to a decision by LFD. She
believed that general tax revenue items should be
considered differently than items that came in as fee-for-
service revenue. She used the examples of a ferry ticket, a
university class, or a vehicle registration. She thought
there should be a discussion about the merits of items that
were GF-based or tax-based, such as the insurance fund or
the motor fuels tax.
Co-Chair MacKinnon stated the committee was happy to have
the conversation. She recalled that previous finance
committees had considered clarifying the process of moving
funds. She reiterated that clarity in accounting was a best
practice. She asked about the recommendation by LFD.
Ms. Pitney relayed that there was a statute that was in
place that designated the motor fuels tax to transportation
funding, which was brought to attention by LFD.
12:33:06 PM
Ms. Pitney highlighted slide 20, "Revenue: State Budget
Overview - Tax Proposal":
•1.5% tax on wages and self-employment income
•Does not tax investments, retirement income,
rental income, etc.
•Tax is capped at $2,200 or twice the PFD, whichever
is greater
•Cap begins at $147,000/year
•Targeted to generate $320.0 million
•Without a cap, it would only generate $10.0 million
more
•Including the PFD, most Alaskans will still receive a
net payment from the state
•Out-of-state residents will pay the highest rate
because they do not receive PFDs
Ms. Pitney stated that the slide was a recap of the tax
proposal that would produce $320 million once it had
matured. She noted that the tax would gather 15 percent of
its revenue from non-residents. She drew attention to the
table on the slide, which showed that under $50,000 there
was no net tax payment. The maximum net tax for a resident
was $1,000. She considered the tax proposal to be modest,
broad-based, and would have advantages with earnings
growth. She noted that there was a complete disconnect
between economic growth and state revenue, excepting oil
business. The tax provided a connection between the state
economy and state services but was still modest.
12:36:02 PM
Ms. Pitney turned to slide 21, "Revenue: State Budget
Overview - Tax Proposal." She emphasized that the proposed
tax would pick up a very small portion of the overall
burden of government. She noted that with such a broad-
based tax, Alaska still remained the lowest taxed state in
the nation. She pointed out that the items below the black
bar on the graph were largely alcohol tax, tobacco tax, and
motor fuels tax. She reiterated that the broad-based
connection to the economy was an important component for
the future.
Senator von Imhof referred to slide 20 and asked if the
proposal considered self-taxes by individual municipalities
around the state.
Ms. Pitney stated that the proposal considered a state-
level tax and did not include city taxes.
Co-Chair MacKinnon thanked the testifiers. She commented
that the testimony would help the committee understand the
budgeting process as it moved forward, as well as the
administration's planning. She asserted that some members
believed there was other options on the table aside from
income tax or a payroll tax, and the governor had the power
to review budgets. She relayed that she had received a
message questioning the administration's prioritization of
programs, which was a statutory requirement.
Co-Chair MacKinnon asked about the budgeting process with
the administration. She referenced the proposed draw from
the ERA and thought the entire committee wondered if the
administration had prioritized state programs so that the
legislature could decide to change statute and stop
programs.
12:40:21 PM
Ms. Pitney stated that the administration had a
prioritization matrix, and considered whether programs had
constitutional, statutory, or discretionary considerations.
She stated that many program factors were reviewed during
the subcommittee process the previous year. She looked
forward to engaging in the process again. She thought
familiarity with every budget item was becoming more
prevalent after the previous four years.
Co-Chair MacKinnon referred to a question she had asked two
years previously and felt she had not received an answer.
She discussed services provided in different geographic
regions, and the question of how many people were receiving
the services in each area. She used food stamps as an
example and wondered how many people were receiving public
assistance. She wanted to quantify how much the state was
contributing to families as opposed to what was received
from the federal government. She discussed the connection
between federal taxes and federal services. She mentioned
income taxes versus taking a portion of the PFD; and
questioned the amount of services being consumed. She
looked forward to more detailed information on the matter.
She did not think the legislature had a full picture of
what the state was spending on services.
Co-Chair MacKinnon discussed the schedule for the rest of
the week. She referenced the motor fuels tax and the
alcohol tax. She emphasized the need for transparency.
Co-Chair MacKinnon discussed the idea of various fiscal
proposals.
ADJOURNMENT
12:46:37 PM
The meeting was adjourned at 12:46 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 103117 Budget Forecast Scenario 1 and 2.pdf |
SFIN 10/31/2017 10:00:00 AM |
OMB Budget Projections |
| 103117 Ten Year Budget Forecast RElative to Preliminary Fall 2017 Revenue Projections (002).pdf |
SFIN 10/31/2017 10:00:00 AM |
OMB Budget Projections |
| 103117 Special Session House Sen Finance Pres_Final (003).pdf |
SFIN 10/31/2017 10:00:00 AM |
OMB Budget Projections |