Legislature(2019 - 2020)SENATE FINANCE 532
02/26/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB20 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 20 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 26, 2019
9:01 a.m.
9:01:52 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 Lyman Hoffman
Senator Peter Micciche
Senator Donny Olson
Senator Mike Shower
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Senator
Cathy Giessel; Senator Gary Stevens; Senator Mia Costello;
Senator Chris Birch.
SUMMARY
SB 20 APPROP: OPERATING BUDGET/LOANS/FUNDS
SB 20 was HEARD and HELD in committee for further
consideration.
Co-Chair Stedman relayed that the day's meeting would by
comprised of a budget overview by the director of the
Legislative Finance Division (LFD). He reminded that LFD
was a non-partisan arm of the legislature that aided in
analyzing and working with budgets. The presentation would
be an overview of the governor's submitted budget. He
continued that LFD also worked with the legislature as it
put its budget together.
SENATE BILL NO. 20
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs; capitalizing funds; amending
appropriations; making appropriations under art. IX,
sec. 17(c), Constitution of the State of Alaska, from
the constitutional budget reserve fund; and providing
for an effective date."
9:03:27 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced himself and shared that he had a staff of
approximately six budget analysts and some Internet
Technology (IT) staff that gave support needed to run the
budget system that produced the part of the budget bills
for the legislature.
Mr. Teal reiterated that LFD was non-partisan, and provided
information primarily to the committee while also being
available to the full body for questions regarding fiscal
matters of any kind. He used the examples of past capital
budget projects and help with preparation of amendments to
appropriation bills. He had been in his current position
for about 20 years. He commented that he had never seen a
budget like the currently proposed governor's budget.
Mr. Teal remarked that it was known that the December 15th
budget submitted by the governor had been a placeholder,
and overviews prior to December 13th were primarily an
overview of the fiscal situation as neither LFD nor the
Office of Management and Budget (OMB) had a "real" budget
to consider. The timeline had delayed the start of the
budget analysis. He clarified that the committee had spent
more time and engaged in greater detail with the operating
budget than he could recall any time in the past. He did
not think it was necessary to go through specific budget
items that had already been reviewed by the committee and
OMB. He thought it was wise to consider some of the
policies and principles that drove some of the governor's
budget proposals.
9:06:24 AM
Mr. Teal discussed the presentation "Overview of the
Governor's FY20 Budget - Round 2" (copy on file).
Mr. Teal spoke to slide 2:
Governor Dunleavy said: My reality budget is based on
five guiding principles:
1. expenditures cannot exceed existing revenue;
2. the budget is built on core functions that impact a
majority of Alaskans;
3. maintaining and protecting our reserves;
4. the budget does not take additional funds from
Alaskans through taxes or the PFD;
5. it must be sustainable, predictable and affordable.
An Honest Budget: Fiscal Year 2020
https://gov.alaska.gov/an-honest-budget-2020/
Mr. Teal noted that the OMB website contained a video and
statement that accompanied the release of the budget, as
well as five guiding principles. He thought everyone knew
it was not possible to continue to use reserves.
Mr. Teal reviewed slide 3, "Real Per Capita Unrestricted
General Fund Revenue/Budget History," which showed a line
graph overlaid with a bar graph. He had used the graph in
January and noted that expenditures equaling revenue was
simply a mathematical relationship with policy
implications. He noted that the bars represented
expenditures at various times, and the green line graph
represented revenue. It was possible to see that in recent
years expenditures had exceeded revenues. The black portion
showed what happened when a percent of market value (POMV)
payout from the Permanent Fund Earnings Reserve Account
(ERA) was added to revenue.
Mr. Teal noted that the graph excluded Permanent Fund
Dividends (PFDs). He thought it was clear that revenues
were insufficient to fund the budget for a number of years
since FY 13. He questioned whether expenditures were too
high, or whether revenue was too low. He stated he would
let the committee be the judge. He recalled that the OMB
director had clearly posited that the expenditures must be
too high, but he thought the reverse could also be true. He
thought it was impossible to answer the question until the
entire budget was reviewed, and spending priorities were
determined.
9:09:35 AM
Mr. Teal returned to slide 2. He recalled that OMB Director
Donna Arduin had stated that the budget was built on core
functions and was built from the ground up. He stated that
the budget was not zero-based budgeting, and if it had been
there would have been analysis of fiscal impact and
background information to justify reductions and inclusions
in the budget. The director later clarified that it had not
been zero-based budgeting; but rather was "core-based
budgeting," and agencies had prioritized the services
offered. He thought many legislators shared his
disappointment in the lack of evaluation and analysis to
support the governor's proposals.
Mr. Teal continued his remarks. He thought the budget
shouldn't simply be a math problem; and that budgeting and
policy were inseparable. He thought one could not make good
budget decisions without full information. He asserted that
all budget cuts were not equal and recalled that when
budget cuts had been questioned the answer was to point out
the deficit.
Mr. Teal addressed the third bullet point on slide 2, and
thought maintaining and protecting the state's reserves was
probably a goal everyone shared. He noted that the budget
pulled $436 million from the Statutory Budget Reserve Fund
(SBR) and from other reserves. The FY 19 budget was
expected to pull less than $300 million from reserves. He
pointed out that the governor's budget claimed not to take
additional funds from Alaskans through taxes or the PFD. He
contended that the proposed governor's budget did not rely
on existing state revenue to balance the budget but pushed
costs on to municipalities and shifted revenue from
municipalities. Some, if not all the costs and revenues,
would be passed on to citizens.
Mr. Teal continued to speak to slide 2. He addressed bullet
5, which asserted that the budget must be "sustainable,
predictable, and affordable." He questioned how the budget
would be any more predictable if expenditures equaled
revenues while revenues were volatile. He wondered how the
legislature would respond to oil price fluctuations. He did
not see how simply setting expenditures equal to revenue
would make things more predictable.
9:13:17 AM
Mr. Teal displayed slide 4, "Traditional Budget Balancing
Tools":
1.Add revenue
2.Pull money from reserves
3.Reduce expenditures
Mr. Teal pondered whether he was too literal and understood
that people understood words differently. He thought it
seemed as though the governor took two of the traditional
budget balancing tools off the table and had said the $1.6
billion deficit would be filled without new revenue and
without pulling money from reserves. He suspected that many
people considered that the budget was balanced because the
governor cut $1.6 billion from spending. He mentioned cuts
to the Alaska Marine Highway System (AMHS), the University
of Alaska (UA), and the Senior Benefits Payment Program.
Mr. Teal showed slide 5, "Abbreviated Fiscal Summary--UGF
Only," which showed a table depicting a short fiscal
summary. He thought the summary helped to put the budget in
perspective. He suggested that a short fiscal summary was
all that was needed; and pointed out that LFD had no
technical issues with the OMB presentation of the budget
and the numbers all agreed. He stated that LFD and OMB
varied on presentation, and he thought it was important to
note that presentation of the budget mattered a great deal.
He used the example of depicting the PFD as "off-budget" as
the governor had wanted to do. He argued that when dealing
with the state's budget, the legislature should be aware of
all expenditures and all revenues. He thought PFDs should
be treated as a budgeted item. He pointed out the
difference in revenue between the 'FY19 MgtPlan' column and
the 'FY20 GovAmend' column as shown on the table.
Mr. Teal continued to address the fiscal summary table on
slide 5. He commented that the revenues were down by a
little over $200 million due to expected lower FY 19 oil
prices. He mentioned the drop in appropriations of about
$73 million in FY 20. He discussed the deficit shown on the
table, which was before consideration of the governor's
revenue measures. He mentioned the shift in petroleum
property tax of about $420 million from municipalities to
the state. There was another $28 million in shared taxes
that the state would retain instead of handing out to
communities. He recalled that in his previous overview
publication he had suggested that the governor would find
it very difficult to reduce agency operating costs, and he
may find he had to cut where the money was or shift costs
to local governments. He did not think the statement was
going too far out on a limb.
9:17:29 AM
Mr. Teal reviewed slide 6, "FY19 Management Plan to FY20
Governor' Amended Budget," which showed a table that
depicted agency operating budgets were in FY 19 in
comparison to proposed budgets for FY 20. The table
excluded Medicaid and K-12 education and showed that FY 19
appropriations were just over $2 billion. He noted that the
governor was proposing a 13 percent cut, which was roughly
$260 million. He pointed out that there had been campaign
statements that $200 million or more could be cut with no
impact on services, because agencies had funded but
unfilled positions and could achieve efficiencies and other
savings. He believed that cutting $200 million from agency
operations was a big stretch, and the governor had proposed
to cut $260 million. He had not foreseen a 41 percent cut
to the UA budget, or an end to the AMHS as the people in
coastal Alaska knew it. He stated that the detail on slide
6 was greater than he wanted to address in the meeting.
9:19:39 AM
Co-Chair von Imhof thought it was noticeable that the
Department of Education and Early Development (DEED) budget
did not include formula funding of $1 billion that was
payed to schools. She asked if the monies were paid from
General Funds (GF).
Co-Chair Stedman asked Mr. Teal to address the forward
funding mechanism from the previous year's budget in his
answer to Co-Chair von Imhof's question.
Mr. Teal relayed that the slide showed agency operations
and excluded Medicaid and K-12 education, which were big
programs with statutory formulas to allocate money. He had
taken the items off the slide because the rest of the
budget was what most people considered "day to day"
operating costs of state government.
Mr. Teal addressed Co-Chair Stedman's question about
education funding. He explained that the FY 20 funding of
between $1.2 and $1.3 billion was already appropriated and
could not be vetoed. The money was simply delayed and was
available to school districts beginning July 1, 2019. He
continued that in the governor's budget, it was proposed to
repeal the provision from the previous year; deleting not
only the formula money but an additional $30 million, to be
replaced with a pro-rated amount that was approximately a
cut of $300 million. Because the money was funded the
previous year, the legislature could reject the repeal, and
the money that was appropriated the previous year would
remain in the budget.
9:23:21 AM
Co-Chair von Imhof had gleaned that the legislature had the
liberty to pass the associated bill to repeal the formula
funding for FY 20, and instead put forward a new
appropriation. She asked if the same was true for Medicaid
funding.
Mr. Teal stated that there was a funding interplay with
Medicaid, but not in the same way. He detailed that the
education funding had passed with a delayed effective date,
but Medicaid funding had not. He thought there were
statutes and requests to reduce Medicaid funding. He viewed
the big formula programs as one of the areas where the
money was and thought the governor may not be able to find
the money that was needed (to cut) for day to day operating
costs.
Senator Hoffman referenced supplemental budget requests for
$20 million and $30 million. He asked what triggered the
distribution of the $20 million for FY 19 to be dispensed
to school districts.
Mr. Teal stated there was no trigger; the money was simply
available to school districts on July 1, 2019. The governor
had chosen to say that the funds were "not distributed" and
would withhold the funds until the legislature took some
action on the money. He thought any trigger was a policy
call rather than anything having to do with the
availability of the money.
9:26:20 AM
Co-Chair Stedman asked about the latest date that the funds
could be distributed to communities.
Mr. Teal thought it was expected that the funds would be
distributed along with education formula funding beginning
July 1. He did not know exactly what happened, but for some
reason the administration had withheld the $20 million,
saying it would use the funds for "true-up" money with the
revised student count. He emphasized that the funds had to
go out before June 30, and he did now know why one would
withhold the funds until that time. It was possible for
school districts to balance the books after the fact, but
he thought school districts would feel more comfortable
knowing the money was coming.
Senator Wielechowski discussed the timing in which school
district funds were historically released. He asked if Mr.
Teal had seen a situation in which a governor had refused
to release funds or waited until June 30.
Mr. Teal thought there may have been instances in which
funds had been withheld. He referenced the 1987 Alaska
Supreme Court case of State vs. Fairbanks North Star
Borough; after former Governor Bill Sheffield had withheld
education funding when oil prices fell. The court had ruled
that the governor could not withhold appropriated funds and
must distribute funds as appropriated. He did not think the
ruling addressed timing during the fiscal year; he thought
logically the funds should go out in order to be spent.
9:29:44 AM
Senator Shower reminded that there were constitutional
statutory obligations, as well as other items that the
legislature chose to spend money on. He asked if LFD
considered all the obligations that were required in
addition to spending choices. He asked if the governor was
required to spend all money appropriated by the
legislature.
Mr. Teal stated that the governor did not have to spend all
the funds if there were good reasons that it could not be
spent. He used the example of the Village Public Safety
Officer (VPSO) program; which had remaining funds after
offering funds to grantees and fully funding. There was no
requirement for the governor to spend remaining funds.
Conversely, if the funds could be spent the governor could
not unilaterally withhold the money. The funds must be
spent as the legislature appropriated it.
9:31:49 AM
Senator Shower asked if Mr. Teal had considered
constitutional statutory obligations when analyzing the
budget.
Mr. Teal stated that LFD considered the statutory
obligations and mentioned debt service and retirement costs
and things that affected the state's credit rating. For
many years, people had tried to break the budget into
mandatory versus discretionary expenditures, hoping to
control spending. He thought there had always been a
problem; and that although education funding was a
constitutionally mandated function of state government,
nothing stated how much was required to appropriate. There
was nothing in law to say whether funding was adequate or
inadequate, and the matter could only be addressed by a
lawsuit. He thought it was highly likely that there would
be a lawsuit if the cut in the governor's proposed budget
were to pass. He stated that it was difficult to break out
"mandatory" items that did not specify funding levels.
Senator Wielechowski addressed the Base Student Allocation
(BSA) and asked if there was any precedent for not funding
to the level provided for in statute.
Mr. Teal stated that there was a provision in statute that
stated that if under-funding occurred, the state would pro-
rate education funding. He did not think the situation had
occurred intentionally but recalled that more than ten to
fifteen years ago there had been a dollar amount
appropriated. In recent years the appropriation for
education had been "the amount necessary to fund the
formula." He stated that there had been no pro-rating; but
it may have happened years ago that there was not enough to
fund the full formula.
9:35:16 AM
Senator Micciche wanted to clarify Mr. Teal's last remarks
for the public. He thought that budget requests submitted
by the school districts could be up to $20 million, and a
$20 million appropriation was the current "law of the
land"; but the governor was not breaking the law unless the
funding was not provided by June 30th, 2019 unless the
legislature changed existing law.
Mr. Teal answered in the affirmative.
Mr. Teal offered to review the largest of the proposed cuts
in the governor's FY 20 budget. He addressed slide 6, and
pointed out a $30 million reduction to the Department of
Corrections (DOC), due in part to substitution of Permanent
Fund money from convicted criminals. When there was an
increase in PFDs as there was the previous year, more of
the funds were available. The primary reason for the
reduction was the expectation that the state would be
sending 500 prisoners out of state, which would result in
savings. He wanted to know the criteria for identifying out
of state prisoners and where they would be located.
Additionally, he queried the amount of transportation costs
as well as costs of the psychiatric and physical exams that
would be needed. He questioned costs to move prisoners for
resulting consolidation efforts. He thought there were a
number of things that were important to know to back up the
proposal.
Mr. Teal continued to address slide 6. He had done an
abbreviated analysis and would not be surprised to see a
supplemental request of $7 million from DOC.
Mr. Teal discussed a proposed an $87 million cut to various
programs in Department of Health and Social Services
(DHSS). He thought Pioneer Homes might appear to be
unharmed but thought people were aware that there were
major reductions to the UGF portion of the budget to be
replaced with program receipts. He reiterated that the
agency had not provided data that LFD would need to fully
evaluate the proposed cuts.
Mr. Teal spoke to large cuts in behavioral health,
temporary assistance programs, adult public assistance,
tribal assistance, and senior benefits. He summarized that
there were a number of social services programs other than
Medicaid that were substantially reduced in the governor's
proposed budget.
9:40:05 AM
Mr. Teal continued to discuss proposed reductions on slide
6. He pointed out a proposed $57 million reduction to the
Department of Transportation and Public Facilities,
primarily for the AMHS. The system was only funded through
October, which did not leave many options. He thought if
the marine consultant had findings other than shutting the
system down, there were no funds to implement other
options. He mentioned the University of another example of
zero impact on total GF, but there was a 41 percent
reduction in UGF. He mentioned the UA president's testimony
that the UGF cut was to "real money," while the ability to
offset the cuts with tuition was "fantasy money."
Senator Micciche understood the reason and logic behind
slide 6; but thought it provided a danger of
misunderstanding. He wondered if there could be a slide
which listed other reductions. He thought there would be a
significant misunderstanding of the impacts of the budget
document if only looking at slide 6.
Co-Chair Stedman asked if Senator Micciche was asking for
LFD to combine slide 6 and slide 7 to give the public a
better understanding of the impacts of the proposed budget.
Senator Micciche answered in the affirmative.
Co-Chair Stedman stated he would work with Mr. Teal to
procure the information.
Senator Wielechowski addressed the proposed cut to AMHS. He
noted that the ferry system had stopped taking reservations
after September 30, 2019. He asked if it was possible for
the governor to unilaterally stop the ferry system when the
legislature was the appropriating body.
Mr. Teal stated that the governor had told AMHS to stop the
reservations on after September 30, 2019. If the
legislature appropriated money to the AMHS, the governor
was obligated to spend it to run the AMHS. He thought the
governor did not want the funds.
9:43:52 AM
Senator Hoffman stated the governor could also veto any
proposed funding.
Senator Hoffman asked about the Department of Public Safety
(DPS). He asked Mr. Teal to expound on the proposed $3.2
million reduction. He wanted a synopsis of how each piece
of the governor's proposed legislation would affect the
budget if passed.
Mr. Teal addressed Co-Chair Stedman's point about changing
slide 6 to include more information. He stated that such a
slide was posted on the LFD website, and it was possible to
observe the changes in revenue.
Mr. Teal addressed the proposed $3.2 million cut to DPS,
most of which ($3 million) was to the VPSO program. He was
not sure about the placement of the rest of the proposed
reduction.
9:46:24 AM
Co-Chair von Imhof looked at Executive Branch-wide
Appropriations for $23 million. She understood that the
administration had lump-summed salary increases from all
state employees. She asked for Mr. Teal to comment.
Mr. Teal advanced to slide 9, which showed the $23 million
Co-Chair von Imhof had referenced. He informed that the
governor had decided to consolidate all salary adjustments
in one area, and to allocate them later. He had requested
for OMB to provide LFD with greater detail with the normal
breakdown by location and expected to get the information
later in the week. He thought subcommittees were expected
to incorporate all the salary adjustment funds into the
agencies themselves.
Co-Chair Stedman asked members to hold questions pertaining
to slides later in the presentation.
Mr. Teal thought the matter would be addressed in the
subcommittee process.
Senator Wielechowski asked about the DHSS budget and the $1
million per month contract issued to Wellpath Recovery
Solutions. He did not think the legislature had ever
appropriated the funds and wondered where the money came
from.
Mr. Teal stated that the legislature had appropriated funds
for the Alaska Psychiatric Institute (API). He stated that
the decision to go to a contract may be opposed by
bargaining units but the executive branch had the freedom
to move money within line items. If it chose to fulfill
responsibilities at API or anywhere else by contracting
instead of hiring employees, it was allowed.
9:50:14 AM
Senator Shower asked if Mr. Teal had communicated with AMHS
to determine if the system had plans operating past October
1,2019.
Mr. Teal had not heard of any other plans. He believed that
OMB had communicated that the agency had hired a marine
consultant to look into the matter. He did not know of any
other option than shutdown as there was no funding to run
the coastal runs under the proposed budget. He thought the
ferry run from Bellingham, Washington; to Juneau in the
summer was profitable and could continue to run under the
proposed budget scenario. There were program receipts in
the proposed budget, but no subsidy for the smaller coastal
runs.
Co-Chair Stedman stated that DOT would be coming to the
committee, including airports and AMHS.
Senator Wilson asked if Mr. Teal had obtained program
priority listing from OMB that listed some reasons for the
proposed reductions.
Mr. Teal answered in the negative.
Senator Wilson asked when the information would be
available.
Co-Chair Stedman hoped that the prioritization information
would come forward during the subcommittee process as
promised by OMB.
Mr. Teal qualified that agencies had set priorities, but he
was not aware of justification for the proposed cuts. He
thought such decisions about discretionary spending were
difficult for the legislature to make without information
from the executive branch. He thought the administration
would be providing more of such information in the current
year. He thought by the time the subcommittee process was
underway, agencies would likely be asked to provide impact
statements by program to outline what the proposed cuts
would do to programs.
9:54:47 AM
Mr. Teal referenced slide 7, "Filling a $1.6 Billion
Deficit," which showed a data table. He thought the
preceding agency overviews had provided good information
for the committee to start its subcommittee work. He
referenced blogs and media that had referenced LFD. He
stated that the point of the slide showing what $1.6
billion in cuts would look like was to show that agency
budgets were not good hunting ground for finding $1.6
billion in cuts. He thought the governor's budget proved
the point by proposing only about $260 million in cuts,
many of them unvetted.
Mr. Teal thought slide 6 left a question of how to balance
the budget if it was not through cutting agency budgets. He
continued that slide 7 explained how the reductions added
up to $1.6 billion. The slide showed non-formula cuts to
agencies, as well as DEED and HESS. He thought it was worth
mentioning that when the OMB director was in committee, she
had stated that local governments also contributed to
education. He clarified that local government did
contribute to education through mandatory contributions
based on property tax values - which would not be affected
by state funding. He explained that there were also
voluntary contributions to education by local governments.
He noted that voluntary contributions had a cap, which was
23 percent of "basic need."
9:58:36 AM
Mr. Teal continued to address slide 7 and education
funding. He explained that if state funding was cut by 25
percent, then the cap on voluntary contributions also went
down by 25 percent. For cities that were already funding to
the cap (such as Anchorage or Juneau), a cut to state funds
would also cause a cut to local contributions. He noted
that areas such as Mat-Su did not fund to the cap and would
not lose local funds in such a scenario. There were other
complications such as the state not reimbursement school
debt, which would result in less money to spend. He
summarized that school funding was not as simple as "if you
lose state funding, local governments would step up and pay
more."
10:00:00 AM
Mr. Teal continued to address slide 7. He asserted that the
cuts had been anticipated in some areas and were consistent
with the governor's opinion that the state spent too much
money. He discussed cost shifts to local government. He
mentioned shifting debt service reimbursement onto local
governments. He stated that there were some shifts that did
not save the state money and brought in state revenue. He
used the Petroleum Property Tax as an example. Under the
governor's proposal, local governments would no longer have
a share of the funds. He reminded that school debt
reimbursement would not be paid to local governments under
the governor's proposal. The impact on local governments
would be $106 million, $68 million of which was UGF.
Mr. Teal continued to discuss cost shifts in the proposed
budget. He cited some debt service that was proposed to be
shifted on to municipalities or cooperatives that the state
would no longer be reimbursing. He recounted that the
governor suggested he had not wanted to use reserves, yet
the budget pulled $172 million from the SBR, and pulled
$264 million from reserves held by state corporations. He
thought it was complicated since the governor crossed
fiscal years with the appropriation.
10:03:05 AM
Mr. Teal explained that the governor had proposed to cut
$249 million from Medicaid but restored much of the money
in a way that was less than transparent. He discussed the
steps of appropriation from reserve funds in FY 19. The
funds were available in FY 19 and allowed to carry forward
in the subsequent two years. Using the money was contingent
upon approval of waivers and other items from Centers for
Medicare and Medicaid (CMS). He thought it was highly
unlikely that the approvals would come during the next
fiscal year; and saw the use of reserves to be nearly
certain. If the CMS approval did not come, the state would
have a supplemental appropriation of $70 million or more if
the governor's proposals were followed.
Mr. Teal stated that LFD's recommendation was to not use
the budget reserves. He asserted that it was possible to
reduce the $172 million in FY 20, but it was likely to
increase the supplemental budget by the same amount. He
discussed adding money to Medicaid if it was known the
program was underfunded. The $260 million in Alaska
Industrial Development and Export Authority (AIDEA)
receipts were spent directly, $84 million of which was
spent in FY 19 to make for a shortage, and the funds were
to go into the account used to purchase oil tax credit
certificates. The $84 million in FY 19 was to make up for a
shortage. He discussed $27 million that had been
appropriated for debt service (but not used, since bonds
were not issued) which could be repurposed to purchase
credits.
10:07:03 AM
Mr. Teal continued to discuss the use of reserves as listed
on slide 7. He thought it was possible to ignore the legal
and credit rating issues of taking money from AIDEA and
just focus on transparency. He stated that excess cash held
by state corporations was reserves, and the source of the
reserves was the UGF that was used to capitalize the
corporation. As with terminated loan programs, LFD
preferred to see any recovery of the capitalization of loan
funds simply go back to the GF and be spent as GF so the
funds were shown in the budget as both revenue and
expenditure.
Mr. Teal noted that as the budget appeared, AIDEA revenue
did not appear in the budget as revenue or UGF spending but
was simply invisible money. He commented that less than
half of the $1.6 billion deficit was filled by expenditure
reductions. He asserted that there were revenue and reserve
actions that were unexpected given the five principals
outlined by the governor. He thought it could be argued
that the governor (if following his asserted principals)
should submit another bill that did not: cross fiscal
years, use reserves, shift costs to local governments, or
propose cuts that the legislature did not wish to
implement. He would be shocked if amendments addressed the
issues.
Mr. Teal thought OMB had suggested that if the legislature
did not accept the governor's proposals, it needed to find
alternative reductions because the budget had to be
balanced. He pondered how the legislature would balance the
budget if it didn't like the tax changes, use of reserves,
and reductions proposed in the governor's budget. He
addressed the possibility of revenue measures. He thought
it was proven that cutting agency expenditures was
difficult. He thought there might be room for savings in
state-wide items, but it was not enough to balance the
budget. He discussed other items such as PFD cuts, and
discussed the difficulty of various solutions. He thought
there needed to be strong supporting justifications for any
proposals by the legislature.
10:12:12 AM
Mr. Teal considered the lack of justification for the
governor's proposed budget and had wondered if the budget
had been designed to create chaos. He mentioned the sixteen
bills associated with the proposed budget, which hadn't
been seen yet. There had been no analysis of the effect of
the proposed bills. He suggested that it would take time to
see how the legislation meshed with the budget. He wondered
if there was hope on the governor's part that the
legislature would not have the time to evaluate the full
proposal and come up with alternatives. He questioned
whether the chaos-creating budget was a mechanism to force
a necessary conversation.
10:14:45 AM
Senator Micciche referenced slide 7 and the school debt
reimbursement. He referenced the Kasayulie v. State of
Alaska court case [a court case settled in 1999 that held
that education is a fundamental right and the state system
of funding school facilities was racially dissimilatory
against Alaska Natives, in violation of the federal Civil
Rights Act] and asked if capital was part of the local
school contribution cap. He asked if the school debt
reimbursement line also impact the DEED local reduction.
Mr. Teal answered in the negative. He understood that the
school debt reimbursement bill reduced the payments to
municipalities; while the Kasuyulie case revolved around
the state requirements to provide rural schools, which was
done with the Regional Educational Attendance Area (REAA)
Fund. The fund was based upon the amount of money that went
to school debt and putting a proportionate amount toward
rural schools. The formula broke when school debt
reimbursement to local governments went to zero, and the
deposits for rural schools would also go to zero. There was
a provision in the bill that said the state would put money
toward rural schools anyway. He thought Kasuylie issue
should be addressed.
Mr. Teal continued to address Senator Micciche's question.
He thought if Anchorage implemented a sales tax, it could
increase voluntary local contributions if the sales tax
more than offset the loss of school debt reimbursement.
Senator Micciche asked why there wouldn't be a reverse
lawsuit if urban schools were disadvantage with the
administration paying the cost for the rural schools.
Co-Chair Stedman stated that the legislation being
discussed may or may not go forward. He was sure the
subject of the Kasuyulie case and its implications would be
raised when discussing school debt reimbursement when DEED
was before the committee.
10:17:46 AM
Senator Bishop thought there was much to discuss. He asked
if the use of AIDEA revenues would be recurring.
Mr. Teal did not think the use of AIDEA revenues could be
ongoing. There was a report produced that stated AIDEA had
substantial cash reserves; and the budget would take a bit
more than half, so there could be no continuation. He had
heard discussion in the House pertaining to reducing AIDEA
reserves. He explained that that AIDEA was an economic
development engine and helped finance economic development
in the state. He had heard testimony that there were banks
to lend funds; but noted that AIDEA was often a participant
in the project funding. Without AIDEA funding, a lot of
capital to fund private development was removed. Even
taking the amount of reserves being proposed, it could
affect the money available for private sector development.
Senator Bishop stated that Mr. Teal had already addressed
his follow-up question and he hoped the public had been
listening.
Senator Shower asked Mr. Teal for LFD to list a breakdown
of sources of DGF to get an idea what was required.
Co-Chair Stedman asked if Senator Shower wanted a breakdown
of AIDEA funds.
Senator Shower reiterated that he wanted a list of DGF
funds.
Mr. Teal offered to follow up with Senator Shower to get
the requested information.
10:20:46 AM
Co-Chair von Imhof asked if Mr. Teal could talk about the
interplay of the SBR and how it had been utilized as listed
on slide 7. She thought it looked as though it was
incorporated under HESS, and then it was added again. She
asked how the math worked.
Co-Chair Stedman asked for an explanation of the SBR and
reasoning for the use of the funds.
Mr. Teal explained that the SBR was intended to be used as
a shock absorber and was similar to the CBR. The difference
was the CBR required a supermajority vote to spend while
the SBR required a simple majority vote. He noted that the
proposed cuts to DHSS totaled over $300 million. He had
reduced the amount by $172 million under the "Reductions in
Agency Operations" category on slide 7, because the amount
was listed in another place. He thought it was more
appropriate to list the funds were a use of reserves. He
thought Co-Chair von Imhof made a good point. He explained
that the numbers worked out, and the slide could have just
as well had shown that DHSS had cut $300 million. If the
reserves had been shown as savings, it would not have
appeared as using reserves. He had tried to make the point
that despite the claim that the governor wanted to maintain
the reserves, he was in fact using them.
Senator Hoffman thought the numbers only worked for one
year. He asked what funds would be left in the SBR after
the expenditure of $172 million.
Mr. Teal stated that there would be zero funds left.
Senator Hoffman reiterated his point that the numbers only
worked for one year.
10:24:34 AM
Mr. Teal reviewed slide 8:
Are people aware that:
1. Dividends consume 37% of revenue?
2. The proposed FY20 UGF budget is $123 million (2%)
below the FY19 UGF budget?
3. Reductions to agency operating budgets address only
$650 million of the $1.6 billion deficit?
4. The remainder of the deficit is filled by shifting
costs to local government or draining reserves?
5. The impact of the proposed cuts to the operating
budget is greater than the 350 positions shown in the
OMB overview? Add 600 AMHS, 1,300 UA, and 3,000 school
district employees to get over 5,000 jobs.
Mr. Teal explained that the slide was aimed at the
conversation that was being caused by the budget proposal
and listed some questions he did not think people were
aware of. He thought it was astonishing that the state
could spend over one-third of all available money on PFDs.
Co-Chair Stedman informed that the dividend being discussed
was the statutory formula driven amount.
Mr. Teal answered in the affirmative and clarified that the
dividend amount budgeted by the governor was $1.9 billion.
Mr. Teal continued to discuss slide 8. He wanted to mention
the economic impact of the proposed cuts. He recalled that
the OMB director and others had referenced position counts
and estimating the job losses totaling 150; which had not
included significant job losses from AMHS, the University,
and school districts, which he estimated to add up to 5,000
jobs. He thought the Institute of Social and Economic
Research (ISER), Department of Labor and Workforce
Development, and OMB economists would talk more about the
indirect effects of the proposed cuts; and that it would be
an interesting discussion. He considered government to
include state, local, and school districts.
Co-Chair Stedman thought it was highly likely that the
committee would begin the discussion the following week.
10:28:11 AM
Mr. Teal continued to discuss slide 8. He did not have any
answers to the questions posed on slide 8 and did not know
what the governor's intentions were. He pondered how
flexible the governor's principals were, specifically
regarding the PFD. He considered the forthcoming budget
bills proposed by the governor, and hoped there was time to
analyze each bill. He hoped that the governor would
prioritize the bills, and thought governors typically
focused on a few bills. He thought there was a fairly weak
understanding of where the budget would take the state, and
whether the budget proposal would stand up to scrutiny once
there was time for analysis.
Senator Wielechowski referenced oil tax credits, which
according to the Revenue Sources Book consumed $1.9 billion
in FY 20. He asked how LFD defined revenue, and if
corporate earnings and earnings from the Permanent Fund
were included in the calculation.
Mr. Teal relayed that LFD looked at revenue in the
governor's budget proposal primarily as the two tax
changes; including the Petroleum Property Tax, which
required legislation and would generate about $420 million.
There was another $28 million in shared taxes that did not
require legislation to change, that was currently spent by
distributing funds to local governments.
Senator Wielechowski clarified that he had been referring
to the first point on the slide that had stated that
dividends consumed 37 percent of revenue.
Mr. Teal stated that the first bullet included the
traditional oil revenue and the entire POMV payout.
10:31:57 AM
Senator Wilson addressed the fifth bullet on slide 8 and
asserted that it was not known if the UA system or school
districts would cut the jobs as described by Mr. Teal. He
suggested that the amount of the cut was known, but
agencies and districts could restructure in any way to
handle any reduction. He thought it was possible to frame
the conversation in many ways and suggested that sometimes
the information was framed in the most drastic way for
shock and appeal.
Mr. Teal stated that Senator Wilson was correct in that it
was not known how many jobs would be lost. He relayed that
LFD was using a "rule of thumb" to equate approximately
$100,000 per job. He continued Senator Wilson had been
correct in stating it was possible to restructure; however,
he had simply translated dollar cuts into positions using
the calculation.
10:33:36 AM
Senator Olson realized that Mr. Teal was not a policy
analyst, and spoke to his experience in his role as budget
analyst. He assumed that Mr. Teal agreed that the proposed
budget was the most unrealistic that he had ever seen. He
asked how crippling the proposed budget was to the state.
He mentioned the proposed cuts to DHSS, which would affect
the vaccine control program, and jeopardize public health.
He mentioned students and faculty leaving the UA system due
to funding uncertainty. He discussed the issue of the
Petroleum Property Tax funding shift, which he thought was
affecting the bonding rating of the North Slope Borough. He
thought the borough might have bonds called in early. He
referenced the proposed cuts to AMHS. He asked how
unrealistic the budget was and if Mr. Teal had ever seen
another budget like it.
Mr. Teal had never seen a budget like that proposed by the
governor. He looked at the proposed budget as not
unrealistic in budgetary terms, as the cuts could be made
and the revenue measures could be adopted. He thought the
unrealistic factor was any expectation that there was
enough time for the legislature to really consider the
budget proposal, especially considering the fact that the
information was not available. He thought the proposed
budget was a case of biting off more than anyone could
chew. There were many proposals, and the proposals were not
vetted.
Mr. Teal continued to respond to Senator Olson. He thought
an unrealistic workload had been thrust upon the
legislature. He thought the legislature would have a
difficult time even if the proposal came with a budget
analysis. He found it was completely unrealistic that the
legislature would be able to complete an analysis of the
proposed budget and make decisions in a regular session.
10:37:41 AM
Senator Micciche referenced the second bullet on slide 8,
which referenced a two percent reduction in UGF, while
slide 6 showed a 13 percent reduction. He referenced
Senator Shower's earlier comments and wanted clarification
of how the reduction might impact Alaskans. He asked if Mr.
Teal would provide the information.
Mr. Teal explained that the difference in the numbers
reflected the 13 percent reduction in agency operating
costs listed on slide 6, which did not include formula
funding. He returned to slide 8 and noted that the 2
percent cut referenced on slide 8 was for all UGF,
including formula cuts, the capital budget, and fund
transfers. He stated that at the fiscal summary level,
there was a 2 percent reduction.
Senator Micciche noted that the UA budget showed almost no
reduction, while there was a huge shift to DGF. He thought
it was important to separate out the funding so that
Alaskans could see the impacts.
Senator Bishop referenced Mr. Teal's earlier comment about
an unrealistic workload on the legislature and thought
there was also an unrealistic workload on the
administration.
10:40:08 AM
Senator Shower discussed position reductions. He thought
there was a mixture of discussion on positions versus jobs.
He reported that the commissioner-designee had informed
that there were 3,100 budgeted but unfilled positions. He
discussed the PFD. He discussed DGF versus UGF, and thought
it was important to discuss all fund sources to provide
clarity for the public.
Mr. Teal thought that it was important to consider all
kinds of funding, and understand that it was not all the
same. He described UGF as "real money," and stated that DGF
turned into real money if it could be collected. He
addressed the classification of dividends as DGF. There was
a time when the ERA had a designated purpose to pay
dividends and inflation proofing. The account was not used
for government, and the classification of the account had
been argued for many years. He noted that the constitution
and budgeting defined that the ERA was UGF and could be
spent at any time for any purpose. The state did not
classify the ERA as UGF as dividends were considered to be
"below the line." The dividends were on the fiscal summary,
but not rolled into any totals; which changed under SB 26
[legislation passed in 2018 establishing a POMV draw from
the Earnings Reserve Account of the Permanent Fund].
Mr. Teal continued to address Senator Shower's question. He
thought that as soon as there was a payout from the ERA
that could be used for general government purposes, the ERA
was clearly identified as UGF revenue and any spending from
it (including dividends) became UGF revenue. He mentioned
the relationship between dividends and revenue. If there
was $3 billion in payout, one could pay dividends and the
remainder went to the General Fund. He asserted that the
amount paid for dividends was a choice to make. He thought
it was simply impossible to continue to call dividends DGF.
The funds were not designated any longer, and the amount
that went to UGF was affected by the amount of the
dividends. He thought many people believed that changing
the accounting of the Permanent Fund was the reason for the
deficit; but it had nothing to do with it.
10:45:18 AM
Mr. Teal showed slide 9, "A Comparison of the FY19 Budget
with the Governor's Amended FY20 Budget Request (UGF
only)," which showed a bar graph. He thought that even
though there was about $1 billion of the deficit filled by
reserves or new revenue, the takeaway should be that the
$650 million in proposed cuts fell as anticipated. He
pointed out small changes in funding for agencies on the
right-hand side of the graph and noted that the cuts hit
the big money programs as anticipated. The larger cuts were
also larger percentage reductions.
Mr. Teal thought it was not a surprise that the governor
cut where the money was; in areas many people would agree
were core services. He referenced a remark by United States
Senator Lisa Murkowski that stated core services were
education, healthcare, and access to transportation; and
stated that the proposed budget hit the core services hard.
Co-Chair von Imhof considered Mr. Teal's comments about the
dividend being considered UGF. She asked about the
percentage of the dividend within the entire UGF spend.
Mr. Teal stated that if one followed the proposed budget,
the percentage was exactly the same because there was no
deficit and no surplus, so revenue and expenditures were
equal. The dividend showed to be 37 percent of revenue and
37 percent of expenditures.
Co-Chair von Imhof had considered what was allocated as UGF
spend only was about $3.5 billion for all agencies. If the
state was spending $1.9 billion to pay a $3,000 PFD; it
would be equivalent to 54 percent of the agency spending.
Mr. Teal thought Co-Chair von Imhof had posed a valid
number. He stated that LFD had included dividend spending
as part of the total.
10:49:32 AM
Senator Wielechowski agreed with Senator Shower and had
never viewed the ERA as UGF. He asked if the PFD was in the
governor's FY 20 amended budget.
Mr. Teal thought the governor had an interesting definition
of the budget, and had said or implied the dividend was not
in the budget. He stated the dividend was in SB 23, an
appropriation bill for the dividend, which he thought would
be before the committee soon. He looked at the budget as
not simply the operating bill; but rather as the full
fiscal plan to include all revenue measures, any associated
bills, fiscal notes, and all appropriations. He thought it
made no difference which bill an appropriation was in - it
was still an expenditure. He argued that the governor's
budget included all appropriation bills, including SB 23,
which appropriated the $1.9 billion for dividends.
Senator Wielechowski mentioned an appropriation bill
seeking the back-payment of dividends. He observed that the
appropriation was not listed in the chart on the slide.
Mr. Teal stated that the back payments would not use FY 20
money; and would be used in FY 21, FY 22, and FY 23. The
chart was limited to FY 20.
Co-Chair Stedman thanked Mr. Teal for the presentation and
asked if he had final comments.
10:52:26 AM
Mr. Teal pointed out that there was no language in the bill
addressing a draw from the CBR.
Mr. Teal reiterated that the CBR was not mentioned in the
operating budget. He thought some might argue that none was
necessary because there was no deficit. He pointed out that
the budget was passed as proposed, there would be a $20
million surplus. A decline of even 50 cents in the price of
oil would cause a deficit, and there would be no automatic
way to fill a deficit and would necessitate a special
session to address a revenue shortfall. He knew many states
addressed revenue shortfalls with a special session, but he
considered it to be inefficient. He reminded that the state
had the most volatile revenue stream in the country and
could not count on accurate projections.
Mr. Teal thought a second issue was that there was no
reverse sweep. He explained that at the end of every year,
any liability to the CBR was filled by any remaining funds
in the General Fund and sub funds were swept in to the CBR.
The reverse sweep provision was in the budget every year
and returned all the money swept from the sub funds. If the
reverse sweep did not happen, the funding for the sub funds
was lost. He recalled that even in years with a
controversial supermajority vote, the "reverse sweep" vote
was not controversial. Rather, the practice avoided
terrible accounting issues. He thought the committee might
want to address the matter when it considered a committee
substitute for the bill.
SB 20 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
10:56:49 AM
The meeting was adjourned at 10:56 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2 26 19 SFC FY20 Overview round 2.pdf |
SFIN 2/26/2019 9:00:00 AM |
SB 20 |