Legislature(2019 - 2020)SENATE FINANCE 532
01/23/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Office of Management and Budget - Budget Development Process | |
| Legislative Finance - Fy20 Fiscal Overview | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 23, 2019
9:01 a.m.
9:01:25 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Peter Micciche
Senator Donny Olson
Senator Mike Shower
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman
ALSO PRESENT
Donna Arduin, Director, Office of Management and Budget;
David Teal, Director, Legislative Finance Division; Senator
Cathy Giessel; Senator Chris Birch; Senator Lora Reinbold;
Senator Mia Costello; Senator Shelley Hughes;
Representative Tammie Wilson; Representative Cathy Tilton;
Representative DeLena Johnson; Representative LeBon;
Representative Sarah Vance; Representative George Rauscher;
Representative Dan Ortiz; Representative Jonathan Kreiss-
Tomkins.
SUMMARY
OFFICE OF MANAGEMENT and BUDGET - BUDGET DEVELOPMENT
PROCESS
LEGISLATIVE FINANCE - FY20 FISCAL OVERVIEW
Co-Chair Stedman reviewed the agenda for the meeting. He
noted that the upcoming budget would be available on the
13th of February. The focus of the meeting would be on the
process of the development of the budget versus the number
detail. He thought it was important for the public and the
legislature to be provided with the thought process behind
the budget. He invited the Office of Management and Budget
director to the table and requested that she provide a
brief background.
^OFFICE OF MANAGEMENT and BUDGET - BUDGET DEVELOPMENT
PROCESS
9:04:40 AM
DONNA ARDUIN, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
(OMB) introduced herself. She confirmed that she would be
presenting the governor's budget for FY 20 on February 13,
2019. She relayed that she would be reviewing the processes
employed by OMB to build the budget in her presentation,
"State of Alaska Office of Management and Budget; Building
the Budget: A Policy Driven Approach" (copy on file).
Ms. Arduin reported that OMB began on day 1 of the
administration by eliminating budget silos, tearing them
down.
Co-Chair Stedman interjected asking Ms. Arduin to provide
some background information about herself. He thought it
was important for the public to know the new director had
some background in the subject matter she was about to
present. Ms. Arduin conveyed that she had served with seven
different governors in six states. She had been a budget
director or deputy director for a substantial amount of
time. She worked once in the legislature for the Speaker of
the House of Florida.
Co-Chair Stedman queried her background outside of her
experience as a budget director. Ms. Arduin relayed that
prior to working as a budget director she worked in
investment banking. Following her service, she started an
economic consulting firm with Dr. Arthur Laffer, President
Ronald Reagan's economist, and Steve [Stephan] Moore, a
prominent economist in Washington D.C.
Co-Chair Stedman clarified that Ms. Arduin had been doing
her job for a few decades. Ms. Arduin responded
affirmatively.
9:06:42 AM
Ms. Arduin read slide 2, "Building the Budget: Eliminate
Budget Silos":
? Bringing Administrative Services Directors into OMB
? Collaborating with and across departments
? Identifying redundancies
? Establishing Policy Teams across Departments
? Boards and Commissions
? Regulatory reform
? Healthcare coordination
? State asset inventory and divestiture
Ms. Arduin explained that on December 14, 2018, OMB issued
the fiscal summary shown next to the governor's preliminary
FY 20 budget on slide 3, "Building the Budget: Define the
Problem." The Office of Management and Budget started by
using the numbers from the Department of Revenue's (DOR)
updated revenue summary book. The statutory earnings
reserve calculation was added to DOR's numbers to reach an
unrestricted general fund (UGF) revenue total of about $3.2
billion. The Office of Management and Budget estimated
about a $1.6 billion UGF deficit using the previous
administration's November 30th proposed spending plan - the
starting place OMB used. She highlighted that OMB
streamlined the fiscal summary by condensing the amount of
line items. The information still existed and would be
available to legislators who requested it. She argued that
it would be much easier for the public to see the revenue
line, the expenditure line, and either a debt or a surplus.
Ms. Arduin addressed slide 4, "Building the Budget: Where
is the money going?" She highlighted that the legislature
was accustomed to the blue line chart. However, she wanted
to make sure OMB was capturing everything going out of the
state's treasury. Therefore, OMB included designated
general funds (DGF) in addition to UGF. All money was green
and should be viewed and analyzed. She thought it was
important to look at everything the state was spending
money on regardless of the funding source.
Ms. Arduin looked at slide 5, "Building the Budget: Combine
UGF and DGF":
? The Alaska Constitution does not allow for
designated funds
? State spending is State spending all programs
should compete for available dollars
? Examples of designated funds:
? Alcohol Tax
? Vehicle Rental Tax
? Motor Fuel Tax
? Fees
Mr. Arduin argued that the programs that competed for DGF
should be scrutinized because all money was green and
belonged to Alaskans. She provided some examples of
designated funds. The blue chart on the slide showed that
as a percentage of the general fund budget, DGF had been
increasing over the previous years.
Co-Chair Stedman commented that before moving to the
following slide he highlighted the first line that
indicated the constitution did not allow for designated
funds. He thought the word that should be used was
dedicated funds. Ms. Arduin agreed.
Senator Micciche noted the substantial percentage
difference between FY 14 and FY 18. He queried about the 80
percent increase from 10 percent to 18 percent UGF. Ms.
Arduin agreed to provide a breakdown of the point of the
analysis to show that it was no longer a sliver of the
budget. Instead, it continued to grow. She concluded that
the portion of the budget that had been relatively
unscrutinized was growing and should not be off the table.
Co-Chair Stedman noted that he had had some discussions
with the OMB director about keeping the 2 general fund
sources separate, but to analyze both and put them together
later if desired by the legislature. He did not want the
committee to concentrate on one without the other. He
suggested there would be work over the interim regarding
fund designations.
Senator Micciche felt that it was due largely to a function
of the reduction in UGF. He wondered about the constant and
would wait for a response from OMB.
9:12:29 AM
Ms. Arduin discussed slide 6, "Building the Budget: Colors
of Money." She indicated there were many different colors
of money coming into the state. However, OMB considered all
money green. The slide illustrated that although there were
receipts and revenues coming in from several sources, they
all went to the same place and should all be scrutinized.
Ms. Arduin highlighted slide 7, "Building the Budget:
Guiding Principles":
? Revenues = Expenditures
? Maintain reserves
? Department missions should drive Department programs
? Statute and regulation reform to reduce or eliminate
programs
? Policy driven proposals
? Doing less with less
Ms. Arduin indicated OMB was building the budget on a set
of guiding principles. She noted the governor talking about
revenues and expenditures remaining equal. In other words,
expenditures should not exceed statutorily available
revenues. Another of the guiding principles was to maintain
reserves. She read the remaining guiding principles listed
on the slide.
Co-Chair von Imhof appreciated the list of guiding
principles. She pointed to policy driven proposals and
department missions driving department programs. She
wondered how data fit into driving proposals, programs, and
resource allocation. Ms. Arduin appreciated the question
and would be addressing it in one of the upcoming slides.
She confirmed that data was a requirement for policy driven
proposals.
Senator Bishop noted that the director had mentioned doing
less with less within departments. He queried Ms. Arduin
about how the principle was weighted within each
department. He was sensitive to the issue of Alaska
workforce development and training. He mentioned the
governor's support of Alaska hire. He asked if she intended
to shut down workforce development, a critical mission of
the state, because revenues were down.
Ms. Arduin replied that the detailed proposals would be
available on February 13, but she noted that the discussion
of a policy driven approach was what OMB used with the
agencies. She did not give the agencies an across-the-board
cut number. Rather, she asked agencies to apply a policy
driven approach. She would review the approach OMB used
with each of the agencies to determine which programs were
priorities, core services, aligning core services, and
eliminating duplications. She would be taking the committee
through OMB's approach as she presented the slides.
Senator Wielechowski reported having asked questions of
people from the administration who deferred to Ms. Arduin.
He wondered if the cuts were coming from the commissioners
and the administration, or whether she was proposing them.
Ms. Arduin felt that the commissioners had been
consistently describing OMB's process which was to bring
the administrative service directors to OMB and allowing
the budget to be constructed within OMB. The budget process
was not strictly left for the agencies to build. The office
of Management and Budget had been working with the agencies
to review and identify the core programs, prioritize the
core programs, and to ensure programs fit within
departments' core missions and business processes. In the
final analysis, OMB was compiling the budget with the help
of the agencies. Department budgets were not constructed,
as in past years, solely by the agencies.
9:17:53 AM
Senator Wielechowski expressed concern, because the State
of Alaska had commissioners who were selected by the
governor and approved by the legislature, whereas, Ms.
Arduin was not approved by the legislature and had only
been in Alaska for a month or 6 weeks. He was aware that
she would be leaving Alaska in the following few months
after the legislature was finished. He was troubled by the
amount of power and budget-creating ability was being
placed in her hands. He queried whether commissioners had
the ability to argue that decisions being made would hurt
their departments, or whether Ms. Arduin had the final say.
Ms. Arduin replied that she worked for the governor's
office, and all decisions were vetted through the governor
and through the commissioners. She stated that
commissioners had a say, as they were driving their core
programs and services. She emphasized that OMB had been
working very well with them.
Senator Olson asked about Ms. Arduin's receptivity to
supplemental budgets in the following cycle. Ms. Arduin
responded that OMB would be submitting a supplemental
budget for FY 19. However, it was not her intention to
build a budget that would require a supplemental for FY 20.
Co-Chair Stedman stated that a supplemental budget was
historically provided to address the previous year's
unforeseen events such as forest fires and earthquakes. He
remarked that there was a hope to have a budget that did
not require a future supplemental. He reported encouraging
OMB to include statutory language that would allow the
implementation of reductions in their budget submission. He
wanted to ensure that the legislature did not remove funds
in the budget that were statutorily required for the
governor to implement. He also asked the OMB director to
provide a list of statutorily structural changes that would
be needed to implement the budget. He hoped the information
would be delivered on February 13, 2019 along with the
budget.
Senator Micciche was glad Ms. Arduin had previous
experience in other states. He anticipated issues around
Health and Social Services such as the federal Medicaid
requirements and the Supplemental Nutrition Assistance
Program (SNAP) requirements. He queried about Ms. Arduin's
experience in delivering reductions and about tensions
between federal requirements and making reductions. Ms.
Arduin responded that many states had been able to work
with the federal government to receive waivers,
particularly Medicaid waivers, to implement programs that
were more efficient and tailored to a specific state. She
would pursue waivers for Alaska.
Senator Micciche mentioned the maintenance of effort being
a challenge for programs such as SNAP. He asked if she had
experienced successes with other public assistance
programs. Co-Chair Stedman asked Senator Micciche to define
SNAP for the public. Senator Micciche responded, "Food
stamps, if you will, for the public."
Ms. Arduin relayed that every state had different
challenges. She thought maintenance of effort was likely
more challenging in Alaska than in other states. It was
also one of the items on her discussion list for the
commissioner and the administration's talks with the
federal government. She believed OMB would be seeking
waivers that included maintenance of effort in certain
cases.
9:24:16 AM
Ms. Arduin read the list on slide 8, "Building the Budget:
A policy-driven approach":
? Consistent policies
? Core services alignment
? Program Prioritization
? Research: Metrics, Outcomes, Best Practices
Ms. Arduin addressed slide 9, "Building the Budget:
Consistent Policies":
? Reducing Dependence
? Business Process Realignment
? Unleashing entrepreneurialism
? Program Reform
? Maximizing return on assets
? Outsourcing
? Reducing regulatory burden
? Eliminate duplication
? Non-essential programs
? User pay
Ms. Arduin reviewed a list of examples of consistent
policies the administration was employing across state
government. She read the list.
Ms. Arduin discussed slide 10, "Building the Budget: Core
Services Alignment." she reported asking all the agencies
to start with a core services alignment. She pointed to the
illustration on the slide for the Department of
Environmental Conservation. She emphasized the importance
for any business or state agency to analyze what they are
doing and why, and to determine their most important
priorities. The Department of Environmental Conservation's
core services in priority were to protect human health,
then to protect the environment. There were other things
the department did that did not fall within its core
services. She thought it was a good place to begin the
analysis.
Senator Wielechowski looked at slide 9 and queried the
examination of outsourcing and nonessential programs. He
also wondered what areas the director envisioned more user
pay. Ms. Arduin replied that the administration's proposals
and specifics would be available on February 13, 2019.
There were opportunities across state government for all
the items listed including outsourcing. The slide described
the administration's belief that there should be consistent
policies throughout state government. She cited user pay as
an example. She posed the policy question about user
revenues matching expenditures because Alaska was not
allowed to have dedicated funds. Some agencies were asking
whether, for a low priority program, the state should be
working with user groups to determine if they would rather
pay for the services as opposed to seeing them drop from
the state.
9:27:50 AM
Co-Chair von Imhof referred to the third item on slide 9,
unleashing entrepreneurialism. She wondered, within the
current labor laws and state contracts with unions, whether
the state could offer things such as merit pay, seniority,
job-sharing, the ability to work from home, and other
innovation rewards. The private sector engaged in many her
examples. She wondered if the state could offer the same
things within the confines of state government and union
contracts.
Ms. Arduin indicated OMB was exploring some of the things
Co-Chair von Imhof mentioned. There were many facets to
entrepreneurialism. She argued that the state should not be
competing with the private sector and believed state
government should encourage private enterprise. She agreed
that the businesses that stay within state government
should be able to reward those employees and departments
who were achieving their outcomes. She could provide labor
rule information to the committee.
Co-Chair Stedman looked forward to the release of the
information and supporting documents on February 13, 2019.
Senator Wilson had concerns about user fees and user
groups. He wondered if there was a process in place to
properly identify the user fees if the state was going to
have user groups pay for services. He wondered how the
services would be maintained without being able to have
designated funds in the budget.
Ms. Arduin replied that the details of the budget would be
out February 13, 2019. She furthered that the issue was how
the state would treat the related policies. It was a
question the administration was asking the legislature. She
asked, as a policy, whether the state would continue or
have user fees pay for services. She wondered if, because
the state did not have designated funds, the policy would
be not to require user fees to be consistent with
expenditures. She was asking a policy question.
Senator Micciche clarified that he was an avid supporter of
government not competing with the private sector. He
favored privatization and outsourcing when possible. He had
researched other states that had taken large swaths of
government and privatized them. Often, within a year or two
the government would pull those services back in when they
could not be offered at a lower price. He asked the
director if she had a team assembled that would adequately
analyze whether privatization of services would be at a
lower cost to the state. Ms. Arduin responded affirmatively
that there would be a team assembled to conduct the
necessary analysis.
9:32:12 AM
Ms. Arduin highlighted slide 11, "Building the Budget:
Program Prioritization." She referred to the core services
of DEC. Protecting human health was a priority over
protecting the environment. It did not mean that protecting
the environment was not a priority. However, in lining the
priorities, human health came first. She explained that the
department was asked to prioritize all its programs. She
reemphasized that the highest priority programs were those
that protected human health. It did not mean that all
programs protecting human health were priority programs.
She pointed to the right-hand side of the list noting that
some of the programs were not a priority because they were
inefficient. The Office of Management and Budget went
through the exercise of prioritizing programs with all the
agencies to begin to build a budget that focused on the
core programs that were most efficient.
Senator Wilson asked if the ranking data for all the
departments would be available on February 13, 2019. Ms.
Arduin indicated that OMB would have the outcome of the
prioritization - the governor's proposed budget.
Co-Chair Stedman added that the subcommittees would be able
to ask for the information when doing the subcommittee
work. He noted previous struggles getting the agencies to
prioritize. Much of the time the agencies prioritized all
the programs as number 1.
Senator Wilson mentioned that in his tenure he had been
trying to have the departments develop a priority list. He
appreciated the current administration doing so recognizing
the process of ranking programs was difficult. He wanted
some of the related details and could speak with the
director offline.
Senator Bishop clarified that Ms. Arduin was not lessening
the fact that protecting the environment was equally
important. Ms. Arduin replied that protecting the
environment was important. However, if the programs had to
be prioritized, protecting human health was DEC's highest
priority. It did not mean that the department did not have
a priority of protecting the environment. She indicated
that what was not shown were things the department did that
did not fall into either category. The low priority
programs were identified as potential programs for
elimination. Senator Bishop commented that he believed
protecting human health and the environment were one and
the same.
9:35:49 AM
Ms. Arduin displayed slide 12, "Building the Budget:
Metrics, Outcomes, Best Practices." She spoke of the metric
analysis on the slide. She started at a high level but took
a deep dive into all the state programs. For example, the
total per capital state spending in Alaska was represented
by the yellow bar and was higher than most other states.
She continued that on a per capita basis Alaska out spent
other states. She continued that OMB started comparing
across facilities and regions. From there, OMB looked at
outcomes and best practices from other states and around
the world. She relayed that the metrics, outcomes, and best
practice analyses would be used to finalize the
administration's budget proposal.
Co-Chair Stedman suggested looking at the Kaiser Family
Foundation analysis in more detail if it was the will of
the committee. However, he believed Alaska was structured
much differently than other states in that it was the only
state that owned its subsurface held in commons. Also, the
state did not have counties with county sheriffs and
courthouses. He thought the analysis would have to be
broken down for an accurate comparison. He noted that
Alaska had massive geographical coverage with a very sparse
population and an underdeveloped infrastructure. He thought
it was difficult to compare Alaska to the original 13
colonies with no federal land but basically owned by the
federal government.
Senator Wielechowski asked if the chart calculation for
Alaska included appropriations for the Permanent Fund
Dividend (PFD). Ms. Arduin suggested that since the chart
referenced per capita state spending it likely did not
include the appropriation. However, she would find out. She
noted that the chart looked generally the same for every
program that OMB looked at comparing Alaska to other
states. Alaska, in general, outspent other states in most
programs. Co-Chair Stedman requested more detail from OMB
regarding the Kaiser Analysis. Senator Bishop concurred
with Co-Chair Stedman.
9:39:07 AM
Ms. Arduin moved to slide 13, "Building the Budget:
Streamlining the Fiscal Summary." She reported that OMB was
streamlining the fiscal summary. She noted on the December
14th summary several lines were collapsed leaving revenues
and appropriations and whether the state was in a deficit
or surplus circumstance. In addition, in the governor's
February 13th release, OMB would also be collapsing UGF
with DGF resulting in one general fund category. She
suggested that when the general funds were combined into
one category there would be about $4.2 billion in total
general fund revenues rather than $3.2 billion in UGF
revenues available for spending. She also reported that in
the coming budget, there would not be a deficit for FY 20.
Co-Chair Stedman encouraged OMB to keep all the general
fund classifications in their fiscal summary. The Office of
Management and Budget could comingle them in an easy
statement like the one on the slide. However, he noted that
it was nice to have the more detailed statement with
footnotes to be able to compare OMB's fiscal analysis with
that of the Legislative Finance Division (LFD). Going
forward he would work with OMB on potential classifications
between the two categories over the interim. The current
timeframe did not allow for them to be clearly defined
during session. He stressed that the finance committee had
no intention of comingling the two fund groups. He thought
the distinction should remain. The committee might target
one general fund group for a full analysis, then the other
- bifurcating the two and reassembling them later.
Otherwise, he believed the complexity would reach a level
that would make it difficult for legislators to understand
what was occurring in the budget process. He would work
with OMB on how they presented data to the committee. He
also pointed out that in most private enterprises forecast
revenues were placed on top and expenditures on the bottom.
However, governments typically presented the information in
the opposite order: Expenditures were on top and revenues
were on the bottom.
Senator Micciche noted that earlier in the slide deck there
was a focus on user fees. He cited an example with the
University of Alaska. He asked for clarification regarding
the delineation of user fee funds. Ms. Arduin replied that
the point of highlighting the DGF expenditures as general
fund expenditures along with everything else was so the
public could see the expenditures more clearly. The budget
would show everything that was coming in, everything Alaska
was paying, and everything government was spending on the
people's behalf.
Senator Wielechowski asked Ms. Arduin if she was looking
into Alaska tax credits or deductions. Ms. Arduin replied
that it was the administration's policy for expenditures to
match statutory revenues which would be reflected in the
budget being released on February 13th. The administration
was not proposing to change any statutory revenues.
9:44:38 AM
Co-Chair Stedman referred to the previous question about
combining the two general fund categories. Joining the
categories would provide a sense of the overall government
spend. He relayed that for numerous years the
administration had talked about DGF going down and
operating budgets going down. In reality, they were both
going up. He noted that most of the sound bites from the
press reflected expenditures dropping. However, they were
going up. He suggested that combining the categories would
provide a clearer overall picture. He reemphasized the
committee would be looking at the categories separately,
then combined. He wanted to be able to fix the problem
before the state ran out of cash.
9:46:08 AM
Senator Shower asked Ms. Arduin to review her philosophy
about an UGF approach and why it was a flawed approach. Ms.
Arduin echoed what the chairman iterated about being more
transparent. She thought some games had been played in
terms of moving funds back and forth to misrepresent the
size of state spending in Alaska. In addition to being
transparent, the administration believed that all revenues
coming into the state treasury should be available for
review and that some programs should not be treated
differently than others. They should have their spending
scrutinized from year-to-year to determine how money was
being spent. She thought that all spending should be
accounted for, rather than only UGF.
Senator Shower asked Ms. Arduin to elaborate on her
experience. He wanted to assure the public that her
approach had been successful in other states. Ms. Arduin
clarified that she had never been asked whether she was
planning to stay in Alaska, nor stated that she was not
planning on staying in the state. She reported that other
states had had tremendous success in working through
budgets with the processes she was applying. In her
experience, to attain a sustainable, predictable, and
affordable budget, a policy driven approach was required.
Programs were reviewed for efficiencies and prioritized.
She emphasized that continuous review was necessary for
success.
Co-Chair von Imhof returned to slide 5. She thought it was
okay to combine UGF and DGF in reporting. She agreed that
if UGF spending decreased it could be propped up with DGF.
She drew attention to the examples of designated funds on
the slide which included taxes and fees. The state might
have to increase user fees, or the University might have to
increase tuition if it received less general fund dollars.
She argued that, although it was fine to report UGF and DGF
combined, it was important to be able to look at the
numbers separately. She wanted the information to be
available to the Senate Finance Committee when requested.
Co-Chair Stedman remarked that the legislature and the
governor's administration were equal branches of
government. The governor and OMB did not have dictatorial
control over how the information would be handled. The
legislature would be working with the Legislative Finance
Division (LFD) and OMB to make sure there was a transparent
result. He did not mind the OMB director combining the
numbers in her presentations from time-to-time. However,
the legislature could not manage the resources of the state
without separating the numbers. He remarked that both
columns should be watched. He commented that the press only
looked at one column or the other. He continued that
without providing a whole picture, the public would be left
with a distorted picture.
9:52:19 AM
AT EASE
9:53:41 AM
RECONVENED
Co-Chair Stedman invited Mr. Teal to come to the table and
to provide the committee some background information.
^LEGISLATIVE FINANCE - FY20 FISCAL OVERVIEW
9:54:49 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
discussed his background. The primary role of the
Legislative Finance Division was to assist the entire
legislature in crafting a budget.
Co-Chair Stedman asked Mr. Teal the length of his tenure at
LFD.
Mr. Teal responded approximately 20 years.
Mr. Teal discussed the presentation, "Overview of the
Fiscal Summary and Alaska's Fiscal Situation" (copy on
file). He explained that the statutory deadline for the
governor to submit a budget was December 15th of each year.
For a sitting governor that was usually not a problem.
However, an incoming governor, particularly one from a
different party, had 2 weeks from the time of taking office
to the deadline to prepare a budget. No one expected a new
governor to submit a budget reflecting his policies and
priorities in such a short amount of time. He continued
that usually a place holder budget was submitted by the
deadline and an amended budget followed. Currently, members
had a place holder budget in front of them. He suggested
that analyzing a place holder budget was possibly a waste
of time. The chairman requested he discuss some alternative
topics, specifically the fiscal summary with an emphasis on
the find source classification. Secondly, he was asked to
discuss the state's fiscal situation.
Mr. Teal looked at slide 2, "State of Alaska Fiscal Summary
- FY 19 and FY 20 (Part 1)." He indicated that the fiscal
summary was the budget on one page. It was the highest
level of report LFD produced. The summary had a significant
amount of numbers and information.
Mr. Teal turned to slide 3, "Short Fiscal Summary FY19 -
FY20 UGF Only." He reported that LFD used a shorter version
of the fiscal summary. Frequently the short fiscal summary
was produced daily near the end of session because it gave
the chairman a status check based on any suggested changes
to the budget.
9:59:11 AM
Mr. Teal switched back to slide 2. He relayed that the
longer version was produced twice per year - once when the
governor submitted a budget and once the legislature
finished its deliberations. It was also produced after the
governor vetoed things. It was a reference document.
Mr. Teal continued that the most common question he
received was why there were so many lines and columns. He
responded that the summary provided detail including
sub-allocations among the three main categories of
expenditures. He reviewed the categories which included
agency operations, statewide items, and the capital budget.
Statewide items consisted of things that did not have to do
with day-to-day government operations. They were
expenditures that were difficult to avoid. He expressed
that there was a tremendous loss of information in a
summary.
Mr. Teal spoke to the number of columns which accounted for
FY 19 and FY 20. He highlighted the columns for FY 20. He
noted the earlier discussion about consolidating UGF and
DGF into a single column of general funds. He recalled that
the OMB director thought it was more transparent to combine
all general funds, as they were all green. He disagreed and
presented an example for clarification. He suggested that
if he was given a $10 bill to purchase a bag of chips at
the lounge, he would come back with a bag of chips.
However, if he went down to the lounge with a $10 Monopoly
bill, he was not sure he would come back with a bag of
chips. He equated DGF to Monopoly money - it was authorized
to be spent. However, the authorization was worthless
unless the receipts were collected to spend. He asserted
that authorized money was not real money but could become
real money. In other words, all appropriations, or
authorizations, were not green.
Mr. Teal continued with his example. If he were to collect
$15 dollars, he would only be able to spend $10, the
authorized amount. He conveyed that UGF could be spent any
time for any purpose. Whereas, designated funds could not
be spent unless they were converted to receipts, such as
university tuition, snow mobile trail receipts, and ticket
sales for the Alaska Marine Highway System (AMHS). He
furthered that DGF was money that, if collected, could be
spent. The reason a separate category, DGF, was needed was
to prevent games. He suggested that combining DGF and UGF
into a single category had the opposite effect. He returned
to Senator Micciche's example of university tuition. The
University might have $30 million DGF in surplus tuition
authorization on its books. If the Senate Finance Committee
were to cut $30 million out of the budget, it would be
cutting $30 million in hollow authorization - uncollectable
receipts. In other words, the committee would not be
preventing the University from spending money, and it would
not change the deficit. However, it would appear as if the
committee reduced the budget by $30 million. If the reports
were combined it would reflect a $30 million reduction. He
explained that it would be very different if the
legislature cut $30 million in UGF.
Mr. Teal suggested that the subcommittees should be looking
at the impact of any reduction. For example, it would be
helpful to look at whether a reduction would result in
increased tuitions or the loss of grant monies without
matching state funds. He indicated that the subcommittee
should be asking questions to help their analysis of
reductions. He believed a combined fund source made it more
difficult to analyze. He favored simplifying things if it
helped legislators make decisions but believed they would
have an easier time making decisions if they understood the
fund sources.
10:08:47 AM
Mr. Teal expounded that over-simplifying fund sources lead
to unintended consequences. As an example, he cited the
Pioneer Homes. There was a waiting list for rooms in the
Pioneer Homes at the same time there were vacancies. The
cause had to do with not understanding the difference
between DGF and UGF.
Mr. Teal continued to address slide 2. The concept of
spending being limited to the lessor of the authorization
or what could be collected applied to the other state
funds. International airport funds, the permanent fund
operating budget, and retirement funds, for example, could
not be used for anything other than the purpose for which
they were dedicated. He discussed federal funds, which
often had requirements attached and were only to be used
for specific purposes. The legislature had very little
discretion in spending federal funds. Other state funds
were often dedicated monies.
10:11:55 AM
Mr. Teal reiterated that discretion was necessary with DGf
- unlike UGF that could be spent anytime, for any purpose,
for any amount. If the state could not spend more than it
received in federal, other, or designated funds, it could
not have a deficit in those fund categories. A deficit was
only possible within UGF.
Mr. Teal asserted that the summary helped him to keep the
numbers straight. He suggested that it was important for
legislators to understand how the funds were used and for
what purpose. Decisions would be easier and better during
the subcommittee process. The long summary was produced in
the overview LFD produced each year. He remarked that the
summary was thin in the current year because there were no
narratives included for each agency. They could not be
produced because the budget was not out. An introduction
was included which discussed the state's fiscal situation.
Mr. Teal moved to slide 3: "Short Fiscal Summary FY 19 -
FY 20 UGF Only". He indicated that the short summary was a
good reference document. It could be used if the focus was
to balance the budget. He highlighted that the short fiscal
summary was only UGF, as it was the only fund category that
could have a deficit. The slide conveyed that in FY 20
there was a deficit of $1.6 billion. The deficit reflected
two sides, expenditures and revenue. He recommended
legislators asking whether the deficit problem had to do
with revenues or expenditures and about how to tell the
difference. He pointed out the traditional revenue, such as
oil, was down by about $400 million from FY 19 to FY 20. He
explained that the reason for the revenue change was due to
an expected change in oil price from $68 per barrel in FY
19 to $64 per barrel in FY 20. He thought it was safe to
assume that future years would look like FY 20 in terms of
traditional revenues. He wondered if expenditures were the
root of the problem.
10:16:00 AM
Mr. Teal moved to the chart on slide 4, "Real Per Capita
Unrestricted General Fund Revenue/Budget History."
Adjustments had to be made when looking at an extended
period. The chart went back to FY 76. He mentioned starting
with the State of Alaska in 1978 making $25,000 per year.
Currently, he would not want to live on that amount. His
point was that numbers had to be adjusted for inflation and
a growing population. He reported that the state provided
services to more that twice the number of people as in the
1970s.
Mr. Teal reported having shown the graph on slide 4 to a
group of university students. They were surprised that
expenditures had not increased as they expected. They
concluded that the state was not spending any more
presently than historically. He referenced a chart the OMB
director had shown of the expenditures per capita in Alaska
and in other states. He looked at his chart as a more
valuable way of looking at expenditures.
Mr. Teal continued that expenditures had fallen in recent
years, particularly in capital and statewide spending. If
the legislature was looking to fix the deficit, the capital
budget (represented by the yellow bars) could not be cut
much more than it had been. The [light] blue bars
represented statewide expenses such as debt service which
could not be reduced. The operating budget was often the
focus of cuts and was represented by the dark blue bars.
Mr. Teal reported that the class could see the state's
expenditures had fallen in recent years and that they were
historically low. However, revenue per capita had fallen
even faster below historic lows. The class concluded that
the state did not have an expenditure problem but a revenue
problem. They asked why the legislature was not doing
something about revenue. His response to the students was
that the legislature had responded. He noted he was
finished with the slide and was open to questions.
Senator Wielechowski asked if the Permanent Fund Dividend
(PFD) and inflation proofing included in the chart on
slide 4. Mr. Teal responded that inflation was included but
the PFDs were not. He explained that it was difficult to
include because the fund source had changed over time and
people's view of the PFD as a government expenditure was
different currently than in the past.
10:21:21 AM
Senator Olson respected Mr. Teal's opinions based on his
experience. He wondered if the students had any ideas about
solving the state's fiscal crisis, especially around
revenues. Mr. Teal replied that they did, but he would wait
to respond. He was reluctant to talk about their
conclusions which border on political statements.
Senator Olson had been looking at slide 2 and slide 3. He
remarked that in studying the categories, the numbers were
off by about $1 billion. He noted other discrepancies and
asked for clarification. Mr. Teal remarked that the PFD
would not be in the fiscal summary, as it was neither a
revenue or an expenditure [according to the
administration]. The Legislative Finance Division showed
the PFD as a revenue and an expenditure. It increased
revenue by $1.9 billion and increased expenditures by $1.9
billion resulting in the same deficit of $1.6 billion.
Co-Chair Stedman invited Mr. Teal to continue to slide 5.
10:23:48 AM
Mr. Teal returned to slide 3. He did not have anything to
say about the expenditure line, as the legislature did not
have a budget worth discussing yet. However, on the revenue
side the dividends were listed. They were also listed on
the expenditure side. The dividends plus the share for
government totaled $2.9 billion, about $200 million more
than the previous year. He noted the state was down about
$200 million in revenue after considering the percent of
market value (POMV). He answered the question as to how the
state went from a surplus of $300 million to a surplus of
$1.6 billion. He highlighted the $300 million deficit in
FY 19 and added $200 million in expenditures along with
another $200 million in revenue losses. The amount totaled
$700 million. He commented that $700 million was much
different than $1.6 billion. He explained that for
dividends, the state spent $1 billion last year, and $1.9
billion was proposed for the current year resulting in a
reduction of $900 million in revenue. He added $900 million
to $700 million totaling $1.6 billion.
Mr. Teal provided an explanation of the POMV. He elaborated
that Senate Bill (SB) 26 [Legislation passed in 2018] set
up the Permanent Fund endowment type of fund. However, it
was not strictly an endowment fund because only the
earnings from the earnings reserve account (ERA) could be
spent. The principle of the Permanent Fund could not be
touched. In a regular endowment, the principle could be
used if needed and paid back over time. He suggested that
there was no difference in the two models if the ERA
contained money. However, a payout could not be made if the
ERA ran out of money. The state's current model reflected a
separation of principle from earnings. The legislature
chose a sustainable payout rate of 5.25 percent in the
first year and dropping to 5 percent after that. He
suggested that without a POMV payment of $2.9 billion, the
state deficit would be higher by an additional $1 billion.
He detailed that out of the $2.9 billion, $1.9 billion went
to PFDs with a net gain of $1 billion into the general
fund. He elaborated that SB 26 read that once the PFD
payment was calculated the government received what was
left. He concluded that without the POMV, the state deficit
would be $1 billion higher, and the state would be at a
$2.6 billion deficit, comparable to the previous several
years. There was not a real change to the state's
circumstances other than using revenue from the Permanent
Fund to reduce dividends.
10:28:31 AM
Senator Shower asked whether the numbers reflected
inflation proofing and repayment back into the
Constitutional Budget Reserve (CBR). Mr. Teal responded
that inflation proofing was considered an intra fund
transfer going from one account in the Permanent Fund to
another account in the Permanent Fund. The Legislative
Finance Division considered the transfer off budget. In
other words, it was not considered an expense and was not
treated as revenue. He responded to Senator Shower's
question about repayment into the CBR. The numbers did not
reflect a repayment of the CBR. He explained that the
constitution required a repayment at the end of each year.
The repayment occurred if there was any excess left in the
general fund or subaccount in the form of a sweep into the
CBR. He relayed that when the state had a deficit there was
no money to be swept in the general fund. There were
subaccounts in the general fund. Typically, the legislature
followed the constitution and the money was swept. There
was a provision in one of the appropriation bills that
stated that the sweep was reversed placing money back into
several sub funds in the general fund. He concluded that no
money was going to the CBR and inflation proofing was not
counted.
Co-Chair Stedman directed Mr. Teal to continue.
10:30:13 AM
Mr. Teal continued to discuss slide 3. He specified that
given the sequence of events where dividends were paid out
and the rest was kept for government expenditures, it was
easy to recognize the importance of the split between
dividends and the general fund. The split was critical to
the state's fiscal situation. Every dollar paid as
dividends was a dollar that did not wind up in the general
fund as revenue. A dollar missing from general fund revenue
was a dollar added to the deficit. He remarked that to be
fair, the opposite was true: every dollar spent on
government services was a dollar that could not be spent on
dividends. He summarized that the competition between
dividends and government services created a huge fiscal
problem for legislators. The state would have a surplus of
$300 million if dividends were not paid out at all. If $1.9
million was paid out in dividends, there would be a deficit
of $1.6 billion for FY 20.
Mr. Teal continued that there were several people including
some legislators that do not think much of having a
deficit. The state has had deficits year-after-year with no
apparent ill effects. He posed the question as to why
everyone was suddenly so concerned about deficits. He
suggested that the fiscal impacts of deficits had been
hidden by the legislature's ability to draw money from the
CBR. The Constitutional Budget Reserve started out with
about $15 billion. The effect of year-after-year deficits
had drained the fund down to about $2 billion. He feared
that people did not understand that deficits were a
significant problem, because the state no longer had
reserves. Budgets would have to balance because they could
no longer be filled with savings.
Mr. Teal queried about being out of reserves. The
Constitutional Budget Reserve account had an approximate
balance of $2 billion. The amount was just enough to cover
PFDs but not enough to fill a deficit if the state did not
have a POMV payout. Legislators could opt to use the CBR to
fill the deficit one more year. However, the Constitutional
Budget Reserve would no longer be a shock absorber. Revenue
could fall by several hundred million dollars with a drop
in oil prices. In such circumstances, most states would
have to call a special session to address such a change in
revenue. They would have to revisit the subcommittee
process looking for areas to make cuts. Alaska's CBR
allowed the legislature to fill the deficit without
reconvening. He thought the account was a necessary shock
absorber given the volatility of state revenues.
Mr. Teal continued that the revenue stream had become
significantly less volatile with a POMV payout. He noted
that more money was available with a POMV payout than the
traditional structured payout as seen on slide 3. The state
received more money from the POMV payout of $2.9 billion
than it received from oil revenues [in FY 20]. The percent
of market value payout was determined in advance and was a
known number providing more confidence in a revenue stream.
Mr. Teal suggested that the ERA could also be viewed as a
source of reserves. Both chairs were on record that they
did not intend to have the ERA go the way of the CBR
account being used in a period of 5 years - going from $15
billion down to $2 billion.
10:36:07 AM
Mr. Teal continued that his interpretation of the remarks
of the co-chairs was that the ERA would not be available to
fill deficits. He explained that drawing more than the
sustainable amount was the equivalent of eating a seed
corn. The fewer kernels available to plant, the lower the
harvest would be. Taking money beyond the planned draw
would reduce the seed corn or principle. He continued that
with a lower market value of the Permanent Fund, the lower
the earnings would be. Lower earnings would lead to lower
dividend payments, a lower balance, and a lower payout from
the POMV. As the payouts declined, without lowering
expenditures, the deficits would increase. Larger deficits
would lead to unplanned draws in the following year to fill
the deficits. He thought the legislature would end up in a
death spiral.
Mr. Teal explained that although it seemed like it would
take a long time to use the ERA, it did not. The model by
LFD showed that the ERA would be empty by FY 28. The danger
of having an empty ERA would result in no dividends and no
payout for services. He furthered that without a payout
additional cuts would have to be made in the amount of
approximately $2 billion. He reiterated that without
reserves only the 2 standard deficit filling tools would be
available - raising revenues or cutting expenditures. Taxes
were not currently an option. Therefore, cutting $1.6
billion in expenditures from the budget appeared to be the
next course.
10:39:32 AM
Mr. Teal discussed slide 5, "Balancing the FY 20 Budget by
Reducing Expenditure Items (Small to Large)." The slide
provided some perspective on the size of a $1.6 billion
reduction. He pointed to the blue bars on the graph which
represented Governor Walker's budget containing a $1.6
billion deficit. If the legislature were to fill the
deficit by eliminating all general funds in the smallest
expenditure items including PFDs, statewide items, agency
items, and capital items, UGF would be eliminated in all
the agencies. He reported that when the university students
looked at the chart, they were surprised to find out that
the state spent 37 percent of its revenues for PFDs. The
payout of dividends was the largest expenditure the state
had and far outweighed what the state spent on education.
The students commented that the legislature thought
dividends were more important than education. He continued
to discuss the student's comments about dividend payouts
compared to education and other state services.
Mr. Teal reported being curious about the governor's budget
proposal in terms of dividends, services, and revenues. He
reiterated that the legislature would have to make policy
decisions and LFD could provide information, including his
model, that could be used to help with the process. The
Legislative Finance Division was available to help with the
normal analysis subcommittee work as the legislature moved
through the budget process. He hoped the legislature would
have a short and productive session.
Co-Chair Stedman thanked Mr. Teal for his presentation. The
committee would invite LFD back after the governor's budget
was released. He reviewed the agenda for the following day.
ADJOURNMENT
10:45:12 AM
The meeting was adjourned at 10:45 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012319 OMB presentation to SFIN.pdf |
SFIN 1/23/2019 9:00:00 AM |
Operating Budget |
| 012319 CORRECTED SFC FY20 Overview.pdf |
SFIN 1/23/2019 9:00:00 AM |
Operating Budget |
| 012319 1.23.19 OMB Response.pdf |
SFIN 1/23/2019 9:00:00 AM |
SB 20 |