Legislature(2017 - 2018)SENATE FINANCE 532
11/09/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Fy 19 Budget Planning | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
November 9, 2017
9:05 a.m.
9:05:39 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:05 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Peter Micciche
Senator Donny Olson
Senator Gary Stevens
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Senator
Bert Stedman; Senator Shelly Hughes;
SUMMARY
PRESENTATION: FY 19 BUDGET PLANNING
^PRESENTATION: FY 19 BUDGET PLANNING
9:06:01 AM
Co-Chair MacKinnon directed the public to find relevant
meeting documents online.
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced himself and remarked that the public may wonder
why the committee was considering the fiscal model again
when a bill was not before the committee. He explained that
the model was a tool designed to help evaluate fiscal
paths, and the legislature was considering the governor's
proposed employment tax. The model would show how much tax
(if any) was necessary to meet the state's fiscal goals.
Mr. Teal addressed the presentation, "Alaska's Fiscal
Future" (copy on file).
Mr. Teal showed slide 2, "What has changed since last
year?":
1. DOR updated the revenue forecast,
2. OMB updated its 10-year expenditure plan, and
3.The Permanent Fund revised its earnings projections.
Mr. Teal commented that much had changed since the end of
the previous legislative session. He remarked that revenue,
expenditures and earnings were three major drivers in the
Legislative Finance Division's (LFD) fiscal model, which
would affect the projections. He wanted to discuss what to
look for in any model scenario in general. He pondered that
there was a way of asking what conditions made a particular
fiscal plan a success.
9:08:39 AM
Mr. Teal reviewed slide 3, "Defining Success":
1. Deficits fade away before the projection period
ends
2. No unplanned draws from the ERA (the CBR is not
depleted)
3. PF balance keeps pace with inflation
4. PFDs of at least $1,000
Mr. Teal emphasized that fiscal model goal-setting was
individual, and individuals might not necessarily agree on
goals. He thought that setting individual goals would help
determine whether a plan worked, and more importantly how a
plan could be modified to make it work better.
9:11:25 AM
Mr. Teal discussed slide 4, "Fiscal Model Output Comparing
Revenue and Expenditures in FY18 and FY19 Versions," which
showed a data table. He noted that slide reviewed the
changes to revenue and expenditures that had occurred since
the previous session. He stated that the revenue was from
Department of Revenue's (DOR) October 2017 forecast, and
was generally slightly lower than the 4% decline scenario
used the previous year. He thought there had been some
confusion, and legislators as well as the press had
concluded the fall forecast showed an increase in revenue.
He noted that the DOR presentation showed increase in
revenue; but nearly half of the gain was in FY 27, which
was not in the projection period of the previous year's
model.
Mr. Teal continued discussing slide 4 and pointed out that
the FY 19 thru FY 26 revenue gain in DOR's slide was $529
million above the previous year's 4 percent decline
scenario. He noted that the previous DOR spring forecast
had excluded about $65 million annually from insurance
premium taxes. The $65 million was included in the forecast
for the current year, so the gain in the revenue forecast
was attributable to a technical correction, not to an
increase in oil revenue.
Mr. Teal concluded that the model-to-model cumulative
decrease from the spring forecast was about $54 million
over the period of FY 19 to FY 26. The amount was only
about $7 million annually, which would not be visible in
the model.
9:14:09 AM
Senator Micciche referred to the DOR revenue forecast
presentation given to the committee on October 30, 2017
(copy on file). He clarified that the official forecast
showed a 12 percent decline in production, and the 4
percent decline was from an unofficial update. He recalled
that the total change in Unrestricted General Fund (UGF)
revenue was $2.3 billion. The four percent decline
represented an almost $1 billion difference, with the
greatest change being in the out years of FY 26 and FY 27
once tax credits were paid off. He wondered why Mr. Teal
addressed numbers differently than DOR.
Mr. Teal explained that Senator Micciche was comparing
DOR's official numbers, and reiterated that the department
had not included $65 million per year in the spring
forecast. The funds were now built in to the fall forecast
and accounted for $529 million worth of difference. He
clarified that he was comparing what was used in the model
the previous year to what was being used in the model in
the current year. The revenue forecast presented by LFD had
contained the $65 million increase the previous year, and
it was still built in. He added that DOR had corrected the
$65 million error in the fall forecast, and now LFD and DOR
had the same numbers. The increase in revenue in the
official forecast was not due to increased oil price or
production but was primarily due to correction of a
technical error in the forecast.
9:16:58 AM
Co-Chair MacKinnon explained that the committee had heard
from the administration, DOR, the Department of Natural
Resources (DNR), and the Alaska Permanent Fund Corporation
(APFC). As Mr. Teal had reflected earlier, the goal of the
presentation was to establish a range of possibilities
faced by the state. She discussed consideration of the
price of oil used in fiscal planning. She referenced SB
4001 [payroll tax legislation proposed by the governor].
Co-Chair MacKinnon thanked DNR for the updated forecast
numbers. She highlighted that there was a great upside
compared to what was being described as an error. She
discussed the previous forecast and subsequent changes. She
thanked the administration for providing a revenue forecast
early, in order for the legislature to use it in
deliberations.
Co-Chair MacKinnon discussed how tax credits were paid at a
calculated rate of 10 percent if the price per barrel of
oil was $60/bbl. If the price of oil was below $60/bbl, tax
credits were paid at 15 percent. She noted that the current
revenue forecast estimated the price of oil at $59/bbl,
which created an increase in operating expenses. If the
national average for the price per barrel of oil was in the
$60 to $65/bbl range, projections would show increased
revenue. She stated there were a variety of opinions on the
issue.
9:21:00 AM
Senator Micciche commented that when he first served on the
committee, the state had been using an optimistic outlook
on the price of oil and production level that overestimated
revenue. The committee had pressured the administration to
become more conservative. He thought the administration had
become very conservative with regard to price and
production forecast, and in many cases overly so. He
thought that it was essential to look at the numbers in a
realistic range. He reminded that the assumptions used were
part of a range, and the numbers provided by the Energy
Information Administration (EIA) were likely overly
conservative.
Co-Chair MacKinnon pointed out the LFD was trying to
provide an apples-to-apples comparison in order to examine
a specific set of criteria.
Mr. Teal clarified that DOR's forecast the previous year
had shown a 12 percent decline in production, due to the
fact that the production forecast had not been revised. The
department had later expressed that the production forecast
was "stale," and the numbers had not been used in the
model. The legislature and others had agreed that the 4
percent decline scenario was more reasonable. The error
that he referred to was the diversion of insurance premiums
to the healthcare reimbursement fund through a bill that
sunset in FY 18. The premium money would begin to go back
to the General Fund (GF), and DOR had overlooked the fact
in publishing the outyear projections. The oversight was
corrected. He reiterated that the previous year, LFD had
used the 4 percent decline scenario, and had added about
$65 million to it. In the current year, LFD matched the
official revenue forecast exactly.
Co-Chair MacKinnon believed that the last two years had
shown production increases, and another increase was
expected. She expected to see the trend reflected in the
Revenue Source Book.
9:25:38 AM
Mr. Teal continued discussing slide 4, which showed that
projected expenditures were up by a cumulative $934 million
from the spring model run. He explained that an inflation
rate of 2.25 percent was built into the numbers, as was the
increased oil tax credit contributions that were mentioned
earlier. He discussed statutory minimum deposits to the oil
tax liability, which accounted for a great deal of the
increase in the expenditures reflected on the slide.
Mr. Teal relayed that revenue and expenditures combined to
make up the deficit; and the slide showed how the deficit
increased by nearly $173 million over the previous year's
model.
Co-Chair Hoffman asked about the deficit without the
structural draw from the previous year.
Mr. Teal thought that the deficit had been close to $2.8
billion, which the next slide would address since there had
not been much change since the previous year.
Mr. Teal referred to when Commissioner Fisher was before
the committee, who had explained that Callan and Associates
[financial advisors] had recommended the APFC use a lower
rate of return than the 6.95 percent that was used the
previous year. The commissioner did not specify an amount,
but rather talked in terms of inflation plus an additional
amount. He relayed that the APFC release projections (dated
September 30th, 2017) used an anticipated rate of return of
6.5 percent.
Co-Chair Hoffman pointed out that the deficit was
substantial.
9:29:05 AM
Senator Micciche looked at the 'Expenditures' section of
the table on slide 4. He considered oil price numbers used
in the fall forecast and noted that the price forecast did
not predict the price at $60/bbl until FY 21. He questioned
the assumption of larger credits on actual price beginning
in FY 20. He asked if there was a reason that Mr. Teal did
not match the tax payment liability to the price forecast
from DOR.
Mr. Teal affirmed that the revenue numbers in the LFD model
matched DOR's official forecast exactly. The expenditure
forecast being used matched OMB's 10-year expenditure plan,
which built in the change in oil tax credit payments. He
noted that the tax credit payments showed up as
expenditures.
Senator Micciche thought it looked like the tax credit
payments were accounted for early by a year or two. He
thought it would be interesting to see more background on
the calculation.
Mr. Teal stated that the model started entering the higher
oil tax payments in FY 19, which is why there was no
increase from FY 19 to FY 20. He thought there was an
advantage to higher tax credit payments. Instead of
continuing payments into the future, there was an
expectation that the credits would be paid off in 2025 and
2026 and 2027 deficits would decline substantially. He
stated the models would show that in 2026 and 2027 there
would be budget surpluses.
Vice-Chair Bishop asked if Mr. Teal was discussing credits
still owed.
Mr. Teal answered in the affirmative.
Vice-Chair Bishop asserted that if the tax credits had been
paid when the Senate had proposed, the deficits would
already be smaller.
Mr. Teal agreed.
Co-Chair MacKinnon observed that the legislative director
for the governor was in the gallery and asked for a follow
up with Senator Micciche to affirm that a 15 percent
payback for tax credits was in the forecast, or if the
amount dropped to 10 percent in the formula.
9:32:42 AM
Mr. Teal reiterated that the base case scenario of the
model used the official DOR forecast, the OMB spending
plan, and the Permanent Fund projection. He thought there
could be a tendency to overstate the decline in Permanent
Fund earnings and equated that losing a half a percentage
point on a $60 billion fund meant earnings were down by
$300 million. He thought it was important to know that FY
17 was a very good year for the Permanent Fund.
Mr. Teal discussed $4 billion worth of Permanent Fund
earnings that had not been projected in the previous year's
model. He asserted that the decline in earnings was not
$300 million; rather, the decline was $300 million offset
by $270 million in additional earnings with a net loss of
$30 million per year. He noted that lower earnings would
affect the balance of the Permanent Fund in the long run.
The model was not based on what the Permanent Fund earned
for government, but rather was based on a fixed 5 percent
to 5.25 percent payout. He explained that the 5 percent
payout was based on the balance rather than future
earnings, so the $4 billion extra provided higher payouts
in the newer version of the model.
Mr. Teal summarized that the budget goal was to cover the
additional expenditures. He posited that the state's fiscal
situation had deteriorated, but not by as much as might be
thought by looking at the major model drivers.
9:36:39 AM
Mr. Teal turned to slide 5, "No POMV Payout," which was a
screenshot of the LFD Fiscal model. He explained that the
model reflected what things would look like if the
legislature did not use the ERA to pay government. He
pointed out that there was very little change from the
previous year's model. He pointed out the depletion of the
Constitutional Budget Reserve (CBR), continued deficits,
unplanned ERA draws, and a Permanent Fund value decline. He
clarified that the total fund value included the principal
(which would not decrease) and the ERA.
9:39:10 AM
Co-Chair MacKinnon stated that the corpus of the Permanent
Fund was invested, and so it was possible for the fund to
go down as the assets fluctuated.
Mr. Teal confirmed that the balance could change, and
furthered that any investment was subject to loss. He
relayed that the Permanent Fund principal and the ERA were
co-invested; however, any losses or gains that occurred
would accumulate in the ERA. He clarified that a budget
reserve account was different than the ERA as it only lost
money through spending. He discussed the danger of
considering the ERA as a budget reserve and outlined a
scenario under which the ERA had a large loss.
9:41:44 AM
Senator Micciche referred to a recent committee meeting
with the APFC at which it was learned that the fund used to
automatically repair realized losses in the corpus by
drawing from the earnings reserve. He recalled that the
corporation had considered whether the practice was
problematic due to a court case that could require
legislative appropriation to keep the corpus whole from a
loss. He thought the matter could be complicated by use of
the ERA to fund government.
Co-Chair MacKinnon noted that the meeting was
informational, so that Alaskans could ponder the fiscal
variables being considered. She mentioned the CBR, which
and about a $2 billion balance. She explained that the CBR
had a lower rate of return due to the necessary liquidity
of the reserve. She mentioned that the administration had
characterized the reserve fund as being a bridge. She
thought LFD and OMB had recommended a minimum of $2 billion
as a bridge due to budget timing. She asked if Mr. Teal
could comment.
9:44:33 AM
Mr. Teal concurred what Co-Chair MacKinnon had stated, and
thought it was also relevant that although there were cash-
flow needs, the CBR was not the only source for the funds.
He stated that it was possible to use the ERA for cash-flow
needs but reminded that the account earned 6.5 percent
rather than 2.5 percent or 3 percent. He discussed revenue
anticipation notes, which were short-term bank notes that
states commonly used and could cover immediate cash flow
needs. He agreed with OMB in that the CBR should have a
minimum balance of $1 billion, and that $2 billion was
reasonable. He preferred a CBR balance of $5 billion, but
thought the most important factor was considering the
chance of a revenue failure.
Mr. Teal continued to address Co-Chair MacKinnon's remarks,
and reminded that a budget reserve account was not intended
to be used as a constant source of revenue like it had been
used in the past few years. Rather, a reserve account was
meant to be used as a shock absorber when there was a
revenue failure such as a decline of oil revenue. He
pointed out that there had not been replenishment of the
CBR. It was not being used as a shock absorber, but rather
as a deficit-filler that had no hope of bouncing back.
9:47:29 AM
Co-Chair Hoffman thought Mr. Teal had made an important
point. He thought that the state was using the ERA the same
way. The legislature was required to balance the budget and
had been using the CBR to fill the deficit and now looked
to the ERA. He referenced slide 5 and the demonstrated
decline of Permanent Fund value. He thought if there was
not a POMV payout, the Permanent Fund could lose value of
close to $15 billion by 2027.
Co-Chair Hoffman continued his comments and noted that the
Senate had passed the Percent of Market Value (POMV) plan
twice, knowing that without such a plan the fund would
continue to lose value. The legislature had included
increases in the dividend in the Senate's version of SB 26
[2017 legislation relating to the Earnings Reserve Account
of the Permanent Fund]. He referred to issues of decreased
fund value and how to address the deficit, which is why the
legislature was considering structural changes to the way
the fund was used. He mentioned a revenue measure proposed
by the governor, and considered the fiscal challenges
represented on slide 5.
9:51:27 AM
Senator Micciche asked about Permanent Fund Dividends
(PFDs) as represented on slide 5.
Mr. Teal stated that the fiscal model assumed PFDs
continued be paid according to the statutory formula. He
thought the combination of the deficit and high dividends
that caused the value of the Permanent Fund to decline.
Mr. Teal referred to Co-Chair Hoffman's comments and
thought it was important to note that when the ERA was gone
(projected for 2028), dividends and/or a government payout
would not get the money as in years past. Dividends would
either have to vanish or drastically reduce, as there would
not be enough funds in the ERA to pay PFDs and fill the
deficit.
Co-Chair MacKinnon reiterated that the model was a snapshot
in time that measured a specific set of criteria. She had
asked her staff to pull the average earnings for the
Permanent Fund. Since its inception, the Permanent Fund had
grown by 8.78 percent. She referenced information from
actuaries, which had dropped the fund's earning assumption
down to 6.5 percent. She noted that the past 5 years of
earnings for the corpus and ERA was at 8.94 percent. The
last three years showed average earnings of 6.18 percent.
She commented that there were huge fluctuations to
consider, as the legislature considered the health of the
ERA and access to potential sustainable or unplanned draw.
Co-Chair MacKinnon continued her remarks. She thought an
unplanned draw was a worst-case scenario for the state to
contemplate. She referenced media coverage considering
unplanned draws on the ERA. She asked the public to contact
their elected officials for information.
9:56:15 AM
Vice-Chair Bishop commented that slide 5 was the "status-
quo" scenario with no plan implemented. He stated that the
Senate had a plan but needed to figure out how to achieve
the plan.
Co-Chair MacKinnon relayed that the Senate had proposed a
set of ideas to close the fiscal gap, and the other body
had proposed a different set of ideas.
9:57:02 AM
Mr. Teal reviewed some of the assumptions that went into
the LFD fiscal model being presented. He explained that
there were two lines reflecting expenditures. The dark line
was the OMB ten-year expenditure plan with dividends, and
the dotted line was without dividends. He explained that
the holes that were previously mentioned by OMB Director
Pat Pitney were filled in the OMB ten-year expenditure
plan. He stated that the model used the OMB plan, but as
Director Pitney had noted, there was not a number included
for supplementals. The dotted line showed the OMB plan plus
$50 million per year for supplemental appropriations. He
stated that the number was arbitrary and was intended to be
for unanticipated costs for fire suppression and other
programs. He thought the amount was a reasonable guess, but
it was subject to change by the legislature, as were many
of the assumptions being used in the model.
Co-Chair MacKinnon wondered if there was an average for
fiscal notes if the most conservative estimate was used by
OMB. She wondered if more money should be added to the
fiscal scenario. She thought there were more variables
being added to the model than in the past.
Mr. Teal stated that variables were always problematic when
running models, and therefore LFD sought the expertise of
DOR for revenue projections. He added that LFD would use
APFC projections for earnings assumptions since APFC was
the one investing the money. The same was true for
expenditures. He explained that the expenditure plan listed
on the graph was intended to portray FY 18 expenditures at
the same level of service, and therefore grew with a 2.25
percent inflation.
Mr. Teal thought the committee might disagree with the
assumptions as well as supplementals but could change it in
another scenario. He asserted that there was no real way to
achieve a number achieved through concurrence of all
parties. He stated that LFD tried to use the best numbers
available from the various sources and fill in few things.
The model did not build in fiscal notes or supplementals.
10:01:43 AM
Co-Chair Hoffman declared that the Senate had requested to
use the best numbers possible. He was glad Mr. Teal had
mentioned the provenance of the numbers and thought
differences should be discussed at the table.
Co-Chair MacKinnon pointed out that fiscal notes were not
on the model yet were a spend. She relayed that the Senate
had consistently requested a downward trend in state
spending and had not been able to accomplish the goal
during budget negotiations with the other body. The Senate
was looking to the administration to find cost-saving
measures to provide services for less or determine which
services the state could no longer afford to provide. Even
with the addition of supplementals, there were sometimes
additional fiscal notes with impact. She considered a wide
range of variance in earnings.
Senator Micciche thought if FY 14 numbers were being used
(with 2/5 percent inflation rate), the chart would look
very different. He thought the state had reduced
expenditures fairly significantly. He thought that there
had been other changes to the model. He mentioned the OMB
capital budget assumption, which he thought changed the
picture. He asserted that the Senate did not necessarily
support many of the numbers used in the model. He
considered examining the model using other numbers.
10:05:28 AM
AT EASE
10:20:22 AM
RECONVENED
Co-Chair MacKinnon mentioned the variation of criteria in
the model.
Mr. Teal relayed that he had the opportunity to converse
with OMB Director Pat Pitney during the at-ease and had
confirmed that he was correct in saying the expenditure was
designed to maintain the FY 18 level of services. He
commented on the growth of expenditures. He discussed the
previous year's capital budget compared to what was assumed
in the model. He reported that Director Pitney had
mentioned that the administration would be revising its
plan. He emphasized that the spending forecast was not a
policy plan and would be revised to reflect the governor's
policies when the budget came out. He thought it was
important to see what the 10-year plan would look like
later.
Mr. Teal relayed that DOR had also stated that the forecast
it had provided in October was a preliminary forecast. By
the time the legislature convened in January, both the
expenditure and revenue plans could differ from what was
currently displayed in the model. He echoed Co-Chair
MacKinnon's remarks that the assumptions on the fiscal plan
were variables and did not require acceptance by all
parties. He mentioned the utility of a live model that gave
the ability for consideration of different variables. He
thought it was important to notice that the substantial
growth without dividends was at $4.4 billion in FY 18 to
$5.6 billion in FY 27. The cumulative increase built into
the expenditures was roughly $120 million per year. He
thought the committee might want to change the increase
assumption.
10:24:45 AM
Mr. Teal displayed slide 6, "POMV Payout", which showed the
LFD fiscal model with what might happen if there was a POMV
payout. He wanted to be clear that the slide did not
reflect the entire Senate fiscal plan, but rather only the
Senate payout plan under SB 26. The graphs showed that the
deficits were filled and by FY 27 there was a surplus.
Although the life of the CBR was extended, it was exhausted
by 2023. Because the reserve was exhausted, unplanned draws
from the ERA came into effect. He pointed out that the
Permanent Fund almost kept pace with inflation, but the
real value declined by a small amount due to the unplanned
draws.
Mr. Teal extrapolated on the effect of inflation on the
return to the Permanent Fund under the model on slide 6. If
inflation took away 2.25 points of the fund's 6.5 percent
earnings, the real return would be about 4.25 percent. He
opined that a 5 percent nominal payout under the model was
not sustainable. He noted that PFDs maintained value and
grew with the payout.
10:27:56 AM
Mr. Teal continued to address slide 6. He clarified that he
was not trying to say the Senate plan did not work, as the
slide did not depict the entire Senate plan. He explained
that the revenue limit would reduce the payouts from the
ERA when oil revenue was high. He asserted that the revenue
limit, which would reduce the payouts from the ERA when oil
revenue was high. If the revenue limit was turned on, it
caused unintended draws because it shut down draws from the
ERA, thereby causing an unplanned draw.
10:30:10 AM
Co-Chair Hoffman asked if the unplanned draw was the same
as an unstructured draw.
Mr. Teal answered in the affirmative.
Senator Micciche asked if an unplanned draw was any amount
from the ERA above the POMV payout.
Mr. Teal answered in the affirmative.
Senator Micciche asked if the Permanent Fund real value
decline was a result of a new earnings number of 6.5
percent.
Mr. Teal answered in the affirmative and stated that the
biggest impact of a 6.5 percent rate of return on the
Permanent Fund was that it was much harder to keep pace
with inflation. The payout was higher at 6.5 percent
because of the big earnings in FY 17. In the long term, a
6.5 percent return with inflation was only 4.25 percent.
The fund could not sustain a payout of 5 percent under the
scenario, even with royalties going into the fund and
helping it retain its real value. He questioned if the goal
was to maintain the value of the PF above all else, which
he suggested was criteria for the legislature consider as
they evaluated the success of various plans.
Co-Chair MacKinnon thought the Senate had included a
provision for a three-year review for the reasons Mr. Teal
had mentioned.
Co-Chair Hoffman thought the general public wanted a fiscal
plan, and also wanted a PFD. He stated that the dividend
amount between the House and Senate ranged from $1000 to
$1,250. He asked about the increment of $100 million, and
if it was the sum of adding $150 to the dividend.
Mr. Teal thought it was fair to say that going from a $1000
to a $1,250 PFD would cost about $175 million per year.
Co-Chair Hoffman thought the amount of the dividend was a
major variable to consider. He discussed various dividend
proposals and the effect on the budget.
Mr. Teal added that the dividend amount was readily
changeable in the model.
Co-Chair Hoffman commented that $100 million was a
significant amount of funding to consider and would
constitute one-third of what the governor proposed in
additional income.
10:35:02 AM
Co-Chair MacKinnon cautioned the public about looking at
static representations of the model, which had an embedded
set of variables that could change the output dramatically.
Mr. Teal pointed out that the POMV Payout model on slide 6
(with no additional revenues and using the OMB expenditure
plan) failed to achieve two goals. He noted that under the
scenario the ERA was still growing, and the budget was back
to a surplus in 2027. He thought the two factors indicated
that the scenario was close to being successful.
Mr. Teal advanced to slide 7, "POMV Payout with
Expenditures Constrained to Half the Rate of Inflation."
The slide showed the LFD fiscal model from the previous
slide except the model assumed agency and capital
expenditures constrained to half the rate of inflation. The
single change to the model eliminated unplanned draws,
showed a recovering CBR, and grew the ERA. He summarized
that all it took to achieve all four goals was to constrain
expenditures. He clarified that constraining expenditures
was not merely cuts, and expenditures still grew by $50
million per year. He thought that someone would argue that
the state's fiscal problems were solved under the scenario.
The chart showed that budget reductions were not needed to
have a successful plan, but rather to reduce the rate of
growth.
10:38:09 AM
Senator von Imhof referred to the 1.25 assumed rate of
inflation, which she thought was similar to the 5-year
trailing Consumer Price Index (CPI) for the state, which
was based in Anchorage and was contained in the Senate
plan. She commented that merely controlling growth did not
give the state a cushion in case of an unplanned expense.
She did not think the scenario gave the flexibility that
was needed.
Mr. Teal concurred that the slide represented a scenario
and thought that Senator von Imhof was well aware that
constraining the budget was easier said than done. He
thought it might be difficult to constrain expenditures at
half the rate of inflation.
Senator Micciche pointed out that the slide reflected many
layers of conservatism in the production forecast and the
price forecast. He thought the model could change
considerably with a variety of small factors. He thought
the model represented a range. He did not believe that a
production decline was realistic in the short term but
considered that the price of oil was the least controllable
variable.
10:41:04 AM
Co-Chair MacKinnon asked if Mr. Teal could discuss the 2.5
percent to 1.25 percent shift equated to dollars.
Mr. Teal addressed an interactive model summary and
discussed the OMB 10-year expenditure plan, which showed
the change in inflation percentage in dollars. He noted
that filling the holes from FY 18 was a big jump of $400
million dollars in the FY 19 budget, after which it grew by
$100 million to $120 million through inflation. He looked
back at slide 7 and pointed out that while growth was
reduced by $2 billion the budget was still increasing. He
thought the model was constantly improving. He thought that
looking at the goals was valuable because goals came with
metrics and it was possible to measure whether the model
achieved the desired outcomes. He stated that LFD had added
several things to the model to help see whether the
legislature was achieving its goals or not.
Co-Chair Hoffman asked if Mr. Teal could point out whether
the interactive charts reflected a four-time draw.
Mr. Teal explained that there was a provision in a bill
proposed by the governor to transfer (the amount four times
the prior years payout) from the ERA to the corpus of the
Permanent Fund. He explained that the "four times" rule was
a way of inflation-proofing the fund but would not affect
the sum of the value of the fund. He looked at the 'Budget
Reserves' graph, which showed a large reduction to the ERA
in FY 19 and forward. If transfers were not made to the
ERA, the rest of the model would change except the
inflation-proofing goal would not quite be achieved.
10:45:57 AM
Vice-Chair Bishop commented that the proposed four-times
rule would be prudent.
Mr. Teal changed the interactive model to show Co-Chair
Hoffman the dynamics of the four-times rule. He stated that
LFD could go through the model with the committee in small
groups, or as a whole committee if desired. He thought it
would work better to do in informal small groups.
Co-Chair MacKinnon pointed out that there were agreed-upon
goals of the Senate Majority, including to right-size
government and reduce the budget. She stated that the
Senate wanted to preserve a dividend for the people of
Alaska, and to ensure the corpus of the Permanent Fund was
growing and retained its value. The Senate wanted to
reinvest and improve the position of the CBR and the ERA.
She thought small changes could achieve the goals. She
commented on the number of variables pertaining to the use
of the ERA and expressed reticence to discussing additional
revenues. She thought there were small things the
legislature could do to stem government growth.
10:49:47 AM
Co-Chair Hoffman thought a big point of contention between
the two bodies was the split of the earnings from the
Permanent Fund. He thought the decision be crucial as to
how much money went to PFDs and how much went to the
operation of government.
Senator Micciche thought it would have been nice for the
committee to have considered adjustments to variables oil
price and production. He thought the Senate plan worked. He
appreciated Mr. Teal's approach, which he considered a
worst-case scenario.
Co-Chair MacKinnon relayed that the Senate had been
reaching out to the administration. She appreciated the
administration coming forward with additional information
for the committee's consideration.
Co-Chair MacKinnon discussed the upcoming agenda.
ADJOURNMENT
10:53:28 AM
The meeting was adjourned at 10:53 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 110917 LFD SFC Model Presentation.pdf |
SFIN 11/9/2017 9:00:00 AM |
FY 19 Budget |