Legislature(2021 - 2022)SENATE FINANCE 532
04/25/2022 01:00 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Constitutional Budget Reserve Sweep/reverse Sweep | |
| 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
April 25, 2022
1:04 p.m.
1:04:11 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 1:04 p.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson
Senator Natasha von Imhof
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Neil Steininger, Director, Office of Management and Budget,
Office of the Governor; Alexei Painter, Director,
Legislative Finance Division; Megan Wallace, Director,
Legislative Legal Services, Alaska State Legislature; Kris
Curtis, Legislative Auditor, Alaska Division of Legislative
Audit.
SUMMARY
^CONSTITUTIONAL BUDGET RESERVE SWEEP/REVERSE SWEEP
1:04:32 PM
Co-Chair Stedman commented that the committee would have a
discussion on the Constitutional Budget Reserve (CBR),
which would also involve discussion of the reverse sweep.
He reminded that the CBR was the states main savings
account and required a three-quarter vote of both bodies to
access. He recounted that at the end of every fiscal year,
the account balances were removed from a long list of
accounts and went into the CBR, after which there was a
reversal on the first day of the fiscal year.
1:06:42 PM
NEIL STEININGER, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, discussed the presentation
Constitutional Budget Reserve Sweep - Senate Finance
Committee - April 25, 2022" (copy on file). He turned to
slide 2, "Sweep Guidelines":
The Constitutional Budget Reserve Fund and its
repayment "sweep" provision
The CBRF was established by constitutional amendment
in 1990 in article IX, section 17 of the Alaska
Constitution. There are four subsections to this
constitutional amendment:
(a) Revenue into the CBRF money received from the
termination of administrative and judicial proceedings
involving mineral revenues is deposited into the CBRF;
(b) Expenditures from the CBRF by majority vote only
if "the amount available for appropriation for a
fiscal year is less than the amount appropriated for
the previous fiscal year" and the appropriation is
limited to the amount necessary to make total
appropriations equal to the amount appropriated in the
prior year;
(c) Expenditures from the CBRF by a three-fourths vote
of the members of each house the Legislature can
appropriate from the fund for any public purpose if a
supermajority vote is obtained;
(d) Repayment requirement "If an appropriation is
made from the [CBRF], until the amount appropriated is
repaid, the amount of money in the general fund
available for appropriation at the end of each
succeeding fiscal year shall be deposited in the
[CBRF]. The legislature shall implement this
subsection by law."
Mr. Steininger highlighted that the repayment requirement
listed in item (d) on the slide was the primary reason that
the discussion was taking place. He explained that the
repayment requirement effectively said that should the
state spend funds from the CBR, so long as there was debt
to the CBR there was an obligation to pay back the funds.
The way the amendment enforced the obligation was by
creating a repayment provision that required that until the
state repaid the debt, any amount of money in the General
Fund that was available for appropriation at the end of
each fiscal year shall be deposited in to the CBR. The
amendment said the section shall be implemented by law. He
asserted that one reason for the hearing was that there was
nothing in law defining the subsection and the repayment
provision beyond the words highlighted in the presentation.
Co-Chair Stedman asked Mr. Steininger to highlight the
payment plan that would be required to repay the CBR,
including the interest rate.
Mr. Steininger recalled that the state had withdrawn well
over $12 billion from the CBR, but there was not an
established payment plan to payback the CBR nor were there
interest requirements on the payments. Because of Section B
and Section C, which defined how money was spent out of the
CBR, there was a three-quarters vote requirement to make
any payments out. When the repayment provisions were
triggered on an annual basis, in order to avoid the
emptying of the available-for-appropriation monies in the
General Fund from being moved into the CBR, it required a
three-quarters vote of the legislature to reverse the
action. He summarized that the repayment provision was what
was commonly known as the sweep, and the three-quarter
vote to reverse the action was commonly called the reverse
sweep.
1:10:53 PM
Mr. Steininger advanced to slide 3, "Test 1 - In the
General Fund":
?The first test of Section 17(d) requires 'swept'
money to be "in the general fund"
?"General fund" is not defined in the constitution or
statute
?Prior to 2019 No specific definition, determinations
based on accounting structure not law.
?2019 Attorney General opinion addresses definition.
General Fund is any fund populated by unrestricted
revenue outside a constitutionally dedicated fund.
2021 Superior Court opinion narrows definition.
Statute can define a fund as outside the general fund.
Mr. Steininger explained that the term "General Fund" had
been up to interpretation by the Division of Finance in its
recording of the states Comprehensive Annual Financial
Report (CAFR). He mentioned that the attorney general
opinion listed on the slide had somewhat expanded the view
of what the General Fund was beyond just accounting
structure and looked at how the fund could be defined.
Mr. Steininger noted that the Alaska Superior Court opinion
had specifically considered the Power Cost Equalization
(PCE) Fund, which was established outside the General Fund,
but also had implications for other funds that the state
managed and were statutorily defined as outside the General
Fund. Based on the court's opinion, as it applied test 1,
the Office of Management and Budget (OMB) looked at how a
fund was established in statute. He noted that the court's
opinion was not binding for further legal action, and the
opinion could change over time.
1:14:23 PM
Mr. Steininger showed slide 4, "Test 2 - Available for
Appropriation -2019":
?The second test of Section 17(d) requires 'swept'
money to be "available for appropriation"
?Unassigned or unobligated funds that may be
appropriated by the legislature for any purpose
?Funds available for appropriation include:
?Funds for which the legislature has retained the
power to appropriate and that are not available
to pay expenditures without further legislative
appropriation
?Funds with statutory designation on use but
require an appropriation for expenditure
?Funds not available for appropriation include
?Money in a fund that is already validly
appropriated to a particular purpose
?Federal or trust funds such that can only be
used for a specific stated purpose,
constitutionally permissible dedicated funds and
pension funds
?Donations for a specific purpose
?Funds that do not require appropriation for
expenditure
Mr. Steininger mentioned that there were a couple of funds
that did not require appropriation for expenditure. He used
the example of the Disaster Relief Fund, which the
Department of Military and Veterans Affairs could use to
spend for disasters at any time.
1:17:02 PM
Senator Wilson asked about the example of funds
appropriated for a particular purpose.
Mr. Steininger used the example of a capital project and
mentioned there were General Fund dollars that provided a
state match for highway programs. The projects generally
took several years to complete, and once the money had been
appropriated, it was considered obligated or assigned
in the state accounting system. Since the funds were spent
for a purpose, it was not considered available for
appropriation for the purpose of the CBR sweep.
Senator Wilson asked about reappropriations and mentioned
funds that were leftover and requests for reappropriation.
Mr. Steininger explained that effectively a reappropriation
was reducing a prior year appropriation and creating a new
appropriation in a future year in the same amount. The
money was validly appropriated and could be spent by the
administration in execution of the appropriation. While the
legislature could always reduce an appropriation, it did
not make the appropriation less valid until the action
happened.
Senator Hoffman mentioned the administration's sweep of the
PCE Fund. He shared that he had always considered the fund
unsweepable and reminded that he had been chair of the
House Finance Committee when the resolution establishing
the fund was written. He asked if the 5 percent earnings
from the PCE Fund (that was distributed for a specific
purpose in state law) was sweepable.
Mr. Steininger stated that per the superior court decision,
the entire balance of the PCE Fund would not be subject to
the sweep. The monies that went to the PCE Program or any
of the other energy programs and community assistance that
flowed out of the fund would not be subject to the issue of
the sweep.
1:20:42 PM
Mr. Steininger referenced slide 5, "Sweep Balances and
Timeline":
?Unobligated balance at midnight on June 30th
?Cash balance less:
?Continuing appropriations capital projects
?Unavailable balances donations, federal funds,
obligated balances
?Obligated balances can include assigned
balances, recently referred to as the "scoop"
?GASB 54 "An appropriation of existing fund
balance to eliminate a projected budgetary
deficit in the subsequent year's budget in
an amount no greater than the projected
excess of expected expenditures over
expected revenues satisfies the criteria to
be classified as an assignment of fund
balance."
?Sweep transactions held until end of following fiscal
year
Mr. Steininger described that the slide was a description
of how the state mechanically implemented the two tests
described in previous slides. He discussed working with the
Division of Finance to determine fund balances, closing
accounting statements over two months, and completion of
the CAFR before it moved to the Division of Legislative
Audit for review. He noted that generally speaking the
audit was completed around March, and while the sweep took
place on June 30, there were no audited balances until the
CAFR audit was complete. He recounted that the
administration was waiting until June to allow for remedy
prior to transferring dollars. There were active proposals
in the legislature and other considerations before actually
liquidating investments and transferring the funds in the
sweep.
Mr. Steininger noted that there were additional factors
considered when looking at the balance to be swept. He
listed looking at capital projects, unavailable balances,
and assignment of balances that had been validly
appropriated prior to June 30. He cited the Governmental
Accounting Standards Board (GASB) Rule 54, which spoke to
determination of the balance of a fund, which allowed for
looking at valid appropriations signed into law while
requiring a certain fund balance. He summarized that when
the appropriation bill was signed into law prior to June 30
of the previous year, the administration was able to count
the appropriations as valid assignments against funds,
which avoided negative operational impacts as a result of
the sweep, however at the close of the fiscal year (barring
legislative action) only projected revenues would be
available in the funds.
1:24:58 PM
Co-Chair Stedman thought Mr. Steininger had mentioned
"remedies," and asked him to elaborate.
Mr. Steininger explained that the governors budget
released on December 15 had not addressed the sweep itself.
Rather, OMB had changed fund sources for sweep-impacted
programs to spend from UGF. Several budget amendments in
both bodies would alter things and move money into some of
the funds. There were a couple of bills that would address
the sweepability of some of the funds that funded a
considerable number of programs. Because there was current
policy discussion in the legislature regarding specific
funds, the administration felt it was prudent to delay
transferring money into the CBR until seeing if there was a
remedy from the legislature with a three-quarters vote to
move the monies out of the CBR.
Mr. Steininger continued that on paper the dollars were
currently in the CBR. He mentioned that there was a due-
to/due-from list in the CAFR which showed funds that were
due to the CBR from the individual funds. From a
treasury/cash management perspective, the administration
had yet to liquidate the investments were waiting to see
the outcome of the legislative session.
Co-Chair Stedman summarized that in FY 22, there was not a
successful vote of the legislature to reverse the sweep, so
the legislature could take action to have reverse sweep
language in the appropriation bill before the close of
business on June 30.
Mr. Steinigner agreed.
Co-Chair Stedman asked if the governor had put forth a
reverse sweep in the appropriation language for FY 22.
Mr. Steininger answered in the negative and explained that
the programs were funded with UGF to avoid programmatic
impacts from the sweep.
Co-Chair Stedman asked if Mr. Steininger would say that not
doing the reverse sweep would get messy. He asked about the
purpose of the delay.
Mr. Steininger explained that the purpose of the delay was
to make the financial transaction, which required the CAFR
to be completed and finalized through an audit in order to
know the actual balances available to be swept, which had
not happened until March of the current year. Because there
were live proposals in the legislature that would undo the
action, the executive branch felt it was prudent not to
liquidate investments if it did not have to. If there was
nothing to reverse the sweep and the governor's budget was
enacted as written, at the close of the fiscal year the
administration would have to liquidate the investments, and
transfer the monies into the CBR to be managed based on the
CBRs asset allocation. He reiterated that the governors
office was waiting to see what happened in the legislature.
1:29:30 PM
Co-Chair Stedman recalled from conversation the previous
year that there was an opportunity cost of $30 million to
$40 million per year.
Mr. Steininger affirmed that there was some opportunity
cost in the different management between some of the funds,
which was a big part of the reason that OMB had held on
liquidating the assets. If there was material action on any
of the funds from any existing legislative proposals, the
administration did not want to have taken an unnecessary
loss on investments by hastily executing the sweep.
Senator Hoffman asked if Mr. Steininger could list the
disruptions to programs that were a result of not having
the reverse sweep take place. He referenced a 2-page
document entitled "Sweepable Funds" (copy on file). He
thought there were 40 or 50 programs, and he asked about
the disruption to the citizens of the state.
Mr. Steininger relayed that that uncertainty was created as
a result of discussions around the sweep. The assignment of
appropriated balances allowed for payment of scholarship
programs without a material disruption to people of the
state. He cited longer term impacts of having to evaluate
how the revenue in some of the funds interacted with the
programs, and that there would be impacts from a financial
management perspective. He summarized that the
administration was seeking to avoid the operational impacts
that would impact Alaskans, and that the impacts were more
on the side of accounting and budget management.
Senator Hoffman commented that since 1990 until the
previous year, the reverse sweep had been automatic. He
felt one of the big issues had been the administration's
determination that the PCE Fund was sweepable. He thought
the determination was the biggest factor in not getting the
reverse sweep. He thought the court case was strong in
saying the PCE Fund should not be swept. He thought future
legislatures needed to look back to the original purpose of
the sweep, and revert to an automatic reverse sweep.
Senator Hoffman continued his comments. He emphasized that
there was a reason for the reverse sweep and thought the
reasoning for the recent lack of reverse sweep was not in
line with the original intent.
1:33:57 PM
Senator Wilson asked if the executive branch had worked
with the Department of Law to analyze any potential legal
issues regarding use of tracking of funds for their
intended purposes.
Mr. Steininger relayed that the governors office had
structured its budget to ensure that the intent of the
programs could be executed using General Funds. He
continued that in determining the balance to be swept, the
office reviewed to ensure that a fund did not include
donations or monies that did not have a restriction. He
thought the administration had done its due diligence to
ensure that there were not legal issues being created.
Senator Wilson used the example of using funds from the
Cruise Ship Head Tax. He asked if there was a way to track
some of the separate funds that had special uses.
Mr. Steininger used the Tobacco Tax as an example, which
flowed into a DGF fund. The revenues would still flow into
a designated fund, which would be tracked in the budget.
The difference was that the amount in the budget would only
be the amount that was projected to be collected in the
following year. For items such as the Tobacco Tax, the
governors office had to adjust the budget in December to
only utilize the fund only up the amount it expected to
collect in FY 23. In order to ensure the program was not
harmed by the accounting issue, the budget used UGF for the
remainder to fund the programs.
1:37:31 PM
Senator Wilson mentioned that there was a position or two
in the Department of Administration that would be utilized
for managing some of the funds discussed by Mr. Steininger.
He asked if the administration would be submitting a
supplemental and if the positions would be eliminated in
the case that there was no sweep.
Mr. Steininger affirmed the administration had accounted
for the use of the funds in the Department of Revenue (DOR)
as it put together the projection of the revenues that
would become available for the next year. He affirmed that
it should not take any supplementals for the positions.
Senator Wilson clarified that he was not referencing the
use of the fund, but rather the management of the funds. He
noted that the Higher Education Fund was managed by DOR. He
asked if investment officers would still be needed if the
funds were swept.
Mr. Steininger noted that the investment managers also
invested the CBR, and there were still assets under
management at the Treasury. He did not see the sweep action
having a material impact on a workload such that it would
reduce the need for staff. He pointed out that investment
managers would still be managing the cash whether it was in
the CBR or in the Higher Education Fund.
Senator Hoffman raised the subject of what was validly
appropriated. He asked if funds that were encumbered for a
particular purpose were not subject to the sweep. He
considered funds that were encumbered to be appropriated.
Mr. Steininger noted that the term "encumbrance" could have
a very specific meaning within accounting. He relayed that
obligated balances were money that had been appropriated,
while an encumbrance would be an assignment of an
appropriated balance.
Senator Hoffman asked under what scenario did the
administration classify encumbrances as a valid
appropriation and not subject to the sweep.
Mr. Steininger relayed that for a department to load a
valid encumbrance in the accounting system, it needed to
have an appropriation which to encumber against. Such an
item would be a valid appropriation that would not be
considered a sweepable portion of the fund.
1:41:41 PM
Co-Chair Stedman interpreted that Mr. Steininger was
indicating that with the delay after the financial
statements had come to conclusion, it would be a mess to
liquidate the assets and move them to the CBR, and the
administration would prefer not to do the move unless it
was required, hoping that the legislature would implement a
reverse sweep in the FY 22 supplemental budget.
Mr. Steininger did not think the administration had a
strong position on the matter. He asserted that it was most
concerned about ensuring that the underlying programs were
funded and continued. He affirmed that the administration
was holding and waiting to see the action of the
legislature.
Co-Chair Stedman reminded that Mr. Steiningers predecessor
at OMB had advocated not to do a reverse sweep, and to then
transfer the PCE Fund and the Higher Education Trust Fund
over to the CBR, which he thought had started the large
number of issues being considered currently. He mentioned
that other testifiers, including the directors of the
Legislative Finance Division and Legislative Legal
Services, as well as the legislative auditor might have a
different opinion as to how the transactions should have
taken place the previous June.
Senator Wilson asked if the administration was supportive
or not supportive of a sweep.
Mr. Steininger asserted that the administration did not
have a strong position on the matter. He highlighted that
there were negative consequences to liquidating the assets,
such as investment earning losses. He asserted that the
administration wanted to ensure and had been working to
ensure that the programs themselves were funded and
continued, which had taken a considerable amount of review
over the previous summer. He reiterated that the
administration did not have a strong stance on the matter
but saw it as an issue for the legislature to decide on the
structure of funds and how they were appropriated in the
budget.
Co-Chair Stedman used the analogy of starting a house fire
and not caring whether the fire department was called.
Senator Wilson asked if the administration would like to
lean towards enacting the new policies or if it would like
to go back to the failure of a sweep. He thought it was
peculiar that the administration did not have a strong
position on the issue, when there were millions of dollars
in lost opportunity and the situation was an accounting
nightmare.
1:46:11 PM
Co-Chair Bishop commented that the current situation was a
result of putting monetary policy in the constitution and
then not having necessary votes. He mentioned lost
opportunity costs, and the cost of obtaining a three-
quarters vote.
Mr. Steininger wanted to add more specificity to his
comments regarding support for the sweep versus the reverse
sweep. He added that the administration had a bill to
address the Alaska Marine Highway System (AMHS) Fund, in
order to structure it in a way that would make it not
subject to the sweep. He asserted that the administration
considered the operations of state government, and what was
required to make it successful.
Mr. Steininger emphasized that the administration looked at
each individual fund to determine in which programs does
the inherent operation of the program depend on a fund that
would not get swept. After consideration, the
administration had put forward the bill to remove the AMHS
Fund from being subject to the sweep, since the operation
of AMHS and its stability was intertwined. Some of the
other funds were not necessarily tied to the operation of
the program itself, and could be funded with General Funds,
or in a combination of current year revenue collections and
General Funds. He thought the matter was not a one-size-
fits-all question. He emphasized looking at the matter on a
program-by-program basis.
Co-Chair Stedman thought every fall the administration put
a budget together, before which it scrubbed accounts to
take out excess liquidity. Then the legislature spent time
going over the accounts and looking for balances that could
be moved to the General Fund. He emphasized that the funds
did not have excessive cash cushions. He thought the
accounts had been reviewed every year that he could recall.
He thought there was some misconception that there was
excess liquidity in the accounts, which was not the case.
1:50:52 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
discussed a presentation, "CBR Sweep in FY23 Budget" (copy
on file). He relayed that he would speak about the CBR
sweep in the FY 23 budget in the governors version and the
versions passed by the other body as well as the version
currently in the Senate Finance Committee.
He turned to slide 2, "Budget Changes in FY23 in Response
to Failure of FY22 Reverse Sweep":
? Governor's budget included $33.6 million of fund
changes from sweepable funds to UGF to reduce the
impact of the sweep.
The largest of these is the $21.8 million of
fund changes from the Higher Education Fund.
The House and Senate Finance budgets adopt all
of these fund changes, except that the House did
not accept the fund change from the Higher
Education Fund.
? House and Senate Finance budgets also shift the
timing of deposits into Oil and Hazardous Release
funds to avoid sweep.
Mr. Painter summarized that the change to the Higher
Education Fund removed all funds and replaced them with
General Funds. Other funds with ongoing sources of revenue
just removed the amounts in excess of projected revenue in
FY 23 and replaced it with UGF. He noted that the budget in
front of the committee contained a number of fund source
changes to mitigate the impact of the sweep. He summarized
that the combined items, the actual impact of not having a
reverse sweep in the current years budget would be
minimal, although there were some funds that could still be
affected.
Mr. Painter referenced slide 3, "House Budget's Handling of
Swept Funds":
The House budget recapitalizes all swept funds in
FY22 from the general fund (not the CBR).
? However, only the Higher Education Fund is used in
FY23 in the House budget, so for the most part the
House budget does not rely on the sweep.
? The reverse sweep vote in the House failed, so as it
stands now, all those funds would again be swept to
the CBR.
? Based on the "scoop" or assignment interpretation,
the Higher Education Fund appropriations would still
flow out in FY23 but the remainder of the funds would
be swept.
Mr. Painter commented that the other body had approached
the swept funds in a very different way than had the Senate
or the administration.
1:55:13 PM
Mr. Painter advanced to slide 4, "Other Funds that Could Be
Impacted by the FY22 Sweep":
? Alaska Marine Highway System Fund not used in the
FY22 budget in an effort to save up a balance for the
future. Absent any changes, the FY22 revenue into the
fund will be swept.
? Alaska Capital Income Fund revenue to the fund is
volatile because it is based on earnings of the
Permanent Fund. Possible that a balance will sweep in
FY22 because the Permanent Fund's realized income is
currently trending above the forecast.
? The fund changes proposed by the Governor are based
on projected revenue. If revenue to these funds falls
short of projections, supplemental appropriations may
be needed. If revenue exceeds projections, balances
may sweep.
Mr. Painter used the example of the Capital Income Fund
(CIF) as a fund with a volatile balance. He explained that
the CIF came from realized earnings of the Permanent Fund
on the Amerada-Hess deposit, after which the funds were
designated for deferred maintenance. Currently the
Permanent Fund was a little ahead in projections for
realizing income, and if materialized there would be more
revenue in the CIF than in the budget and would result in
fund sweeping at the end of FY 22. He summarized that in
the post-sweep world, if the legislature wanted to keep
using DGF, it would create issues in the budget.
Mr. Painter continued his remarks. He thought it was
possible that the Permanent Fund would realize more money,
and some would be swept into the CBR, or the fund could
underperform expectations and the appropriations could be
partially hollow. He noted that there could be greater
impacts to certain funds over others. He suggested that the
governor had fund changes that in theory balanced the
funds, but there was variability in designated tax
collections that could result in a sweep or a supplemental
budget item. He used the example of the Technical
Vocational Education Program (TVEP) Fund to illustrate a
situation which had ongoing supplemental requests each year
to adjust the fund output for programs. The matter caused
confusion in the budget process and resulted in uncertainty
for the fund recipients.
Mr. Painter continued his remarks. He qualified that if the
state was not relying on fund balances, there was much
uncertainty relying on year-to-year revenue through the
designated funds. He thought the constitutional language
might be envisioning putting all the revenue into the
General Fund and spending out of one big pot, but pointed
out that was not how the state budgeted. He thought if the
state did not have the ability to carry forward funds from
one year to another, it created some budgetary tension and
difficulty as was being seen currently.
1:59:16 PM
Co-Chair Stedman asked for Mr. Painter to discuss the
timing of a reverse sweep and three-quarters vote needed to
access the CBR. He thought some years there were several
votes. He asked when the vote might be critical and when it
might be just an exercise.
Mr. Painter explained that when there was CBR language in
the bill, such as in the House operating budget, the House
would vote on it and even if the vote failed, the
Conference Committee could add the CBR section back into
the bill. If the Conference Committee budget came forward
with a CBR vote, the version was critical and the CBR
portion could not be put back if the vote failed. He
summarized that the votes taken before Conference Committee
did not really have a large practical application, as the
provision would have to be voted on in Conference
Committee.
Co-Chair Stedman considered if the Senate failed to vote on
a CBR provision before bringing the provision up for a vote
for the Conference Committee.
Mr. Painter answered in the affirmative. He thought the
Legislative Legal Division could better address adding a
CBR section in the Conference Committee that had not been
included in either body.
Co-Chair Stedman thought the addition had been made many
times.
2:02:10 PM
MEGAN WALLACE, DIRECTOR, LEGISLATIVE LEGAL SERVICES, ALASKA
STATE LEGISLATURE, relayed that she would discuss the legal
background of the sweep and delve into a couple of recent
court cases that touched on the issues and how the cases
influenced the interpretation of the timing of the sweep
and what was sweepable.
Ms. Wallace explained that there was a two-part test to
determine if a fund was sweepable as mentioned by Mr.
Painter. The test was to determine if the money in a fund
was in the General Fund and whether or not it was available
for appropriation. She explained that up until the current
year, there was only one court case that touched on the
CBR, which was Hickel v. Cowper [a 1994 Alaska Supreme
Court case which had addressed the meaning of "available
for appropriation."]. The case interpreted what available
for appropriation meant in the context of the statute that
allowed the legislature to withdraw monies from the CBR
with a simple majority vote.
Ms. Wallace continued to address the Hickel v. Cowper case.
She relayed that the court went through the analysis for
the first time to determine what funds were available for
appropriation as the term was used in the constitution. The
court held that funds that may be used for state
expenditures without further legislative appropriation were
not available for appropriation. Therefore, if the funds
were not available for appropriation, they were not subject
to the sweep.
Ms. Wallace continued her comments. She cited that the
Alaska Supreme Court said that funds that require future
appropriation to be expended were considered available for
appropriation and thus were subject to the sweep. There
were two cases in the previous year that related to sweep
issues. She mentioned the case involving the PCE Fund that
was referenced by Mr. Steininger [AFN v. Dunleavy], which
was decided in August of 2021 by the Alaska Superior Court
and was not appealed by the administration. The second case
involved the Higher Education Investment Fund [Short v.
Dunleavy]. The Alaska Superior Court handed down a decision
in February 2022, and the case was currently under active
appeal in the Alaska Supreme Court.
Ms. Wallace explained that the first case, AFN v. Dunleavy,
focused on the first part of the sweepability test, which
was whether or not the PCE Endowment Fund was in the
General Fund. The court had held that the fund was
available for appropriation, but that the fund was not in
the General Fund. The court held that the department was
permanently enjoined from sweeping the PCE Endowment Fund.
Since the ruling was not appealed, the fund would not be
swept.
2:06:08 PM
Ms. Wallace continued to discuss the cases. The court, in
issuing the AFN v. Dunleavy decision, had a lengthy
discussion on the legislatures power to establish separate
funds outside the General Fund. The court noted that the
legislature had done so in a number of other cases and had
indeed created separate funds that were outside the General
Fund. She referenced Footnote 77 of the AFN v. Dunleavy
case, in which the Superior Court of Alaska noted that the
legislature had the power to establish funds outside the
General Fund and specifically noted examples where it had
been done. One of the funds noted by the court was the
Statutory Budget Reserve (SBR) Fund, which was established
as a separate fund in the state treasury. Based on the
analysis in the Superior Court decision, the Legislative
Legal Division had previously advised that the SBR would
likely be considered outside the General Fund and not
subject to the sweep.
Ms. Wallace concurred with Mr. Steininger that reliance on
the AFN v. Dunleavy opinion for funds other than the PCE
Endowment Fund was subject to change or further challenge,
as the case holding was only specific to the PCE Fund.
Based on the analysis in the opinion and the fact that the
case was not appealed, it was persuasive to the position of
Legislative Legal in advising the legislature as to what
decisions would come from other courts if the issue was
further litigated.
Ms. Wallace addressed the mechanics of the sweep, and how
and when the sweep took place. She recounted that it had
historically been the advice of her office that funds
subject to the sweep were swept on June 30 as a matter of
law and a matter of operation of the constitution. Because
appropriations for the upcoming fiscal year did not take
effect until July 1, any balance of a sweepable fund as of
June 30 was swept. She continued that appropriations that
were to take effect on July 1, if swept, would essentially
be left hollow or without funding.
2:09:39 PM
Ms. Wallace referenced an Attorney General's opinion the
previous year took a different position than the
Legislative Legal Division. She explained that the opinion
that relied on a sentence from the Hickel v. Cowper case
that stated that "monies which had already been committed
by the legislature to some purpose should not be counted as
available. The attorney general had advised in a written
opinion that it was legally defensible to not sweep the
upcoming FY 22 funds appropriated in the budget that had
passed but had not yet taken effect. The governor had
relied on the opinion and ordered that the FY 22
appropriations not be swept. The appropriations for the
upcoming fiscal year were expended even though the sweep
occurred on June 30, and the appropriations had not yet
taken effect.
Ms. Wallace highlighted that the attorneys interpretation
of Hickel v. Cowper was a new interpretation and one that
had not been previously taken by prior administrations or
legal departments, as well as LFD or the audit division.
She mentioned the Short v. Dunleavy case, which related to
the Higher Education Investment Fund, and had originated
because the administration had deemed the fund to be
sweepable. While the FY 22 appropriations from the fund
were allowed to go forward and be expended so that the
program was not impact, the balance of the fund was due to
be swept at the end of June. There was a legal challenge to
the position by the administration by a group of plaintiffs
that had argued to the court that the fund should not be
sweepable. There had been a Superior Court decision in
February of 2022 that held that the Higher Education
Investment Fund was sweepable. In the case, the court also
said that while the fund was available for appropriation
and subject to the sweep, the FY 22 appropriations made out
of the fund should not be swept because the money was no
longer available for appropriation because it could be
expended without further legislative action. The decision
in the Superior Court was appealed immediately by the
plaintiffs on an expedited basis and was actively before
the Alaska Supreme Court on an expedited briefing schedule.
The case had been briefed and was due for oral argument by
May 3.
2:13:35 PM
Ms. Wallace recounted that the parties in the case had
requested a decision by May 4, but the court did not commit
to providing a decision by the requested date. The Superior
Court touched on the issue of whether or not it was ok to
"scoop" or payout an upcoming appropriation whether or not
they had taken effect. She noted that the court had not
specifically adopted the validly committed argument. The
court had taken a different analysis and said that
essentially once the legislature passed the budget and the
appropriations were enacted, even without taking effect the
monies could eventually be spent without further
legislative action. She questioned whether the Supreme
Court would address the issue, and whether it would agree.
She shared that part of the uncertainty would involve
whatever the Alaska Supreme Court ruled on the issue.
2:15:05 PM
Senator von Imhof thanked Ms. Wallace for her narrative.
She asked for something in writing.
Ms. Wallace agreed to provide the information.
Senator von Imhof recalled Ms. Wallace mentioning funds
expended and passed by the legislature from a sweepable
fund, such as the Higher Education Endowment Fund. She
asked Ms. Wallace to reiterate the information about an
opinion.
Ms. Wallace shared that she had referred to an opinion
authored by the attorney general (copy on file). On August
25, 2021, Attorney General Treg Taylor had issued an
opinion to the governor that indicated based on the Hickel
v. Cowper case, once the legislature had validly committed
funds, it would be legally defensible to pay out the
appropriations for the FY 22 budget and sweep the blance of
the fund afterward. After the opinion was issued, there
were letters signed by the governor that indicated that in
reliance of the opinion, he would direct OMB and the
department to pay out the FY 22 appropriations and sweep
the balance of the funds.
Senator von Imhof thought Ms. Wallace had indicated that
the attorney generals opinion was a diversion from
previous opinions.
Ms. Wallace stated that to her knowledge, the opinion was
the first time the attorney general or the administration
had taken the position or reached the interpretation. She
noted that FY 22 was the first time in a very long time
that the legislature failed to enact the reverse sweep. She
thought of the reason that there may not have been much
legal analysis on the issue was because the topic had not
been at the forefront of the budget discussion in prior
years.
2:18:30 PM
Senator Wielechowski asked if there was anything in the
legislative history of the 1990 legislature that
demonstrated a knowledge of a distinction among funds in
the General Fund versus not in the General Fund. He
wondered if there was discussion of the topic when the
constitutional amendment was being proposed.
Ms. Wallace did not recall whether there was specific
discussion on the issue. With respect to the sweep and the
provision in Article IX, Section 17 (d), it was her
recollection that the legislative history was not as robust
as that of other provisions.
Senator Wielechowski was trying to determine the intent
when the amendment was created, and whether it was a simple
as the legislature choosing which funds it wanted swept and
which funds it did not. He thought that the Superior Court
had indicated so. He asked Ms. Wallace to opine.
Ms. Wallace noted that the constitutional provision
specifically stated that the legislature shall provide some
guidelines on how to carry out the provision. When Hickel
v. Cowper was decided in the 1990s, the court touched on
the issue in saying that while the legislature had some
discretion to set policy and create rules, it had to do so
within the framework of the provision. She acknowledged
that her answer was vague and suggested it was dependent
upon how far the legislature went in terms of defining what
was and was not sweepable.
Senator Wielechowski recalled that the previous year the
governor had an interpretation about funds being validly
committed (pre-midnight June 30), and the funds could be
shielded from being swept. He asked if Ms. Wallace had a
position on whether the governors interpretation was
accurate.
Ms. Wallace reiterated that her office had held the opinion
that the sweep occurs on June 30 at midnight, and that any
monies remaining in the funds would be swept at midnight.
Further, that the appropriations that took effect on July 1
(even thought others might argue the monies were validly
committed) should be swept. The Superior Court (regarding
the Higher Education Investment Fund) concurred with the
administration to the extent that it agreed that the FY 22
appropriations could be paid out. The court did not adopt
the validly committed argument, and she did not think it
appeared to be a settled issue.
Senator Wielechowski thought it appeared that there were
several capital projects that had not been validly
appropriated because the funds had been swept. He asked if
Ms. Wallace was familiar with the projects or the issue he
referred to.
Ms. Wallace thought Senator Wielechowski had referenced
some capital appropriations that were funded out of funds
that would have been swept if there was not a reverse sweep
passed. She did not specifically recall the fund sources
and deferred to the LFD director.
2:23:36 PM
Senator von Imhof referenced the list from LFD of sweepable
and non-sweepable funds. She found it interesting that the
SBR was listed in the list of non-sweepable funds. She
thought Ms. Wallace had mentioned that it was possible to
change statute or institute laws within the framework of
the constitution to make more of the funds non-sweepable.
She asked if there had been a study that examined sweepable
and non-sweepable funds that determined the specific
characteristics that put them on each list. She asked if
there was a path identified for steps the legislature could
take to make (within the framework of the constitution) as
many funds as possible non-sweepable.
Ms. Wallace did not think there was currently a document
that went one step further to explain reasoning for why
funds were listed as sweepable or not. She thought an
analysis could be done on why a fund was sweepable and
whether there was a legislative option to change the
designation of a fund. She continued that there were
several pieces of pending legislation that attempted to do
so in certain instances. She emphasized that while the AFN
v. Dunleavy Superior Court decision was lengthy and
detailed, and analyzed why the legislature had the power to
create separate funds outside the General Fund, it was not
an issue that had been taken to the Alaska Supreme Court.
While there were legislative options, she could not
guarantee that such changes would not be subject to later
challenge.
Senator Wielechowski referenced the funds that the Supreme
Court said were already appropriated in Hickel v. Cowper.
He asked when the governor's veto authority expired on the
funds.
Ms. Wallace stated that the governors veto authority
expired either within the time frame that the governor had
to exercise his line-item power. The timeline would be
dependent upon when the legislature transmitted the bill,
but the time frame was finite.
2:28:33 PM
KRIS CURTIS, LEGISLATIVE AUDITOR, ALASKA DIVISION OF
LEGISLATIVE AUDIT, stated that her role in testifying was
to present how the sweep and reverse sweep (or scoop) was
presented in the states financial statements for FY 21.
Co-Chair Stedman asked Ms. Curtis to discuss her
background.
Ms. Curtis explained that she was the legislative auditor,
which was a constitutional position, and statute gave the
position the authority to carry out the post-audit function
of conducting the states financial statement audit and the
state federal compliance audit. The Legislative Audit
Division (LAD) also conducted special audits at the request
of the Legislative Budget and Audit Committee. Each year,
the division received a draft set of financial statements
from the Division of Finance and began the audit. She
continued that at the end of the audit, the auditor would
produce an opinion as to whether the financial statements
were free of material misstatement.
Ms. Curtis relayed that because of the guidance by the
attorney general, it was determined that there were fund
balances that were appropriated for FY 22, effective July
1, 2021, that were funded by sub-funds of the General Fund
that were going to be swept because the reverse sweep did
not occur. The appropriations were potentially hollow and
would not be funded. Based on the guidance of the attorney
general, it was determined that because the operating bill
was signed (she thought on June 30) the appropriations were
validly committed and the funds would not be swept. She
cited that the draft financial statements had $108.6
million of funds assigned for 20 sub funds.
Ms. Curtis continued that based on guidance from the
Legislative Legal Department, LAD had thought it was more
persuasive to conclude that because the effective date was
July 1, the funds would not be available to assign because
the funds would be swept. She cited AS 01.10.070 (f) (3) of
the statutes that defined the effective date, which
addressed when the bill was applicable. The division had
produced an audit adjustment, which it provided to the
Division of Finance, and the audit was not posted. She
summarized that LAD believed there was a misstatement in
the financial statements, mainly related to the General
Fund balance sheet. The balance sheet showed $108.6 million
was considered assigned, while LAD considered the funds
should be unassigned and swept.
2:32:24 PM
Co-Chair Stedman asked about the significance of accurate
financial statements.
Ms. Curtis explained that she had issued a qualified
opinion and did not believe the financial statements were
free of material misstatement. Rather, she believed that
there was a $108.6 million misstatement.
Senator von Imhof asked if it could mean greater interest
rates if outside entities such as creditors realized the
state had a material misstatement.
Ms. Curtis informed that the state had qualifications since
FY 18 or FY 19. She thought it was hard to tell how the
qualification affected the states debt rating, since there
were so many other factors affecting the rating. She argued
that it was prudent to have clean financial statements and
was sure the executive branch would argue that there was
not a misstatement. She described the situation as an
impasse.
Co-Chair Bishop asked if the difference of opinion
jeopardized federal funding coming into the state.
Ms. Curtis did not think the difference of opinion would
have any effect on federal funding.
2:34:07 PM
Senator Wilson asked how Ms. Curtis recommended fixing the
impasse.
Ms. Curtis thought the biggest material misstatement
related to Federal Energy Regulatory Commission (FERC)
decisions and additional revenue to the state, and whether
the revenue was deposited to the CBR or the General Fund.
It had been discussed at previous Legislative Budget and
Audit meetings that there was a different constitutional
interpretation based on behalf of the Legislative Legal
Division and the attorney general. She thought the
disagreement would have to be resolved by the courts.
Senator Wielechowski asked if there were any capital
projects that should have been swept on June 30 (under Ms.
Curtis interpretation) that were subsequently funded.
Ms. Curtis answered in the affirmative, and stated that as
of June 30, $108.6 million in funds were carved out and not
swept. She could not comment on what appropriations were
funded with the monies.
Senator von Imhof thought Ms. Curtis had mentioned that the
governor had signed the previous years budget on June 30,
which was the eve of the sweep. She referenced the attorney
generals opinion and asked what would have happened if the
governor had signed the budget on July 3or July 4.
Ms. Curtis thought that based on her understanding of the
logic, the funds would have swept as of June 30, since the
budget was not signed and enacted.
Senator von Imhof asked if the governor had signed the
budget on June 30 the previous year, on the eve of the
sweep.
Ms. Curtis answered yes, and continued that in the
governors view, the funds were validly committed or
assigned before the sweep. If the budget would have been
signed on July 4, she thought the sweep would already have
taken place.
Senator von Imhof commented on the convenience of the
timing.
Co-Chair Stedman thought it was clear that not having a
reverse sweep was a mess if the matter was not rectified.
2:38:04 PM
AT EASE
2:39:26 PM
RECONVENED
Co-Chair Stedman asked for Mr. Steininger to come back to
the table.
Co-Chair Stedman asked Mr. Steininger about the
hypothetical question of whether the budget legislation
being signed on July 3 or July 4 would affect the mechanics
of the sweep.
Mr. Steininger answered in the affirmative. He referenced
the Governmental Accounting Standards Board (GASB) rule of
thumb that defined what could be considered to be assigned,
and required the bill be signed into law as a validly
enacted appropriation prior to the close of the fiscal
year. He continued that had the budget been signed on July
4 or July 5 after the start of the fiscal year, there would
have been several budgetary complications that had arisen.
He continued that if the administration had signed the
budget after the start of the fiscal year, there would have
been a period without a validly enacted budget. He
contended that the governor and OMB ensured the budget was
signed prior to the start of the fiscal year to ensure that
government operations could continue in addition to
resolving the assigned balance issue.
2:41:28 PM
Senator Wielechowski recalled that the previous year there
had been a failed three-quarter vote which had included the
Higher Education Fund. He asked if his recollection was
correct.
Mr. Steininger answered yes," that the Higher Education
Fund was included.
Senator Wielechowski asked if it was the administrations
position was that because there was no valid three-quarter
vote, the funds should be swept.
Mr. Steininger mentioned that the advice from the
Department of Law was that the Higher Education Fund was
subject to the sweep.
Co-Chair Stedman asked if there was anything else that was
funded with the failed three-quarter vote.
Mr. Steininger recalled that there were a number of
appropriations from Alcohol Tax revenue, Tobacco Tax
revenue, and other state programs where current year
revenues would not have been sufficient to meet
obligations. He referenced the PCE Fund, and the previous
belief that it was subject to the sweep.
Senator Wielechowski thought there were a couple of
projects that the governor had added to fund capital
projects in the Matanuska-Susitna Valley, which he thought
were funded by the three-quarter vote.
Mr. Steininger affirmed that there were a number of capital
projects funded by the SBR. He noted that the issue of the
assignment of balances did not relate to why the projects
were able to be executed upon.
Senator Wielechowski asked if Mr. Steininger was
referencing the CBR.
Mr. Steininger affirmed that he was referencing the SBR in
relation to the funds. He continued that CBR funds would
not have gone forward without a three-quarter vote, and he
was discussing appropriation of funds subject to the sweep.
He added that the capital projects he thought Senator
Wielechowski was referencing were funded by the SBR. He
referenced the AFN v. Dunleavy case, which determined the
SBR was not sweepable because it was created outside of the
General Fund.
Senator Wielechowski asked if Mr. Steininger was indicating
that there were no projects funded through the CBR the
previous year.
Mr. Steininger wanted to check the records but affirmed
that the administration had not executed any appropriations
directly from the CBR, because it had not had the legal
authority to do so.
2:44:30 PM
Senator Wielechowski asked if there were capital projects
funded through the CBR, if the projects would have been
invalidated since the funding had been swept on July 1.
Mr. Steininger stated that if a project was funded directly
from the CBR, it would not be an issue related to the sweep
but rather would be an issue related to the access
provisions of the CBR that required a three-quarters vote
for the appropriation to be valid. He added that the CBR
was not itself a sweepable fund, but rather was a fund into
which funds were swept.
Co-Chair Stedman noted that the committee would relay the
meetings conversation on to the Legislative Budget and
Audit Committee, most likely for further action to clarify
what was sweepable and what was legally defensible.
Co-Chair Stedman discussed the agenda for the following
day.
ADJOURNMENT
2:46:27 PM
The meeting was adjourned at 2:46 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 042522 SFIN CBR Sweep in FY23 Budget.pdf |
SFIN 4/25/2022 1:00:00 PM |
|
| 042522 OMB CBR Sweep SFIN.pdf |
SFIN 4/25/2022 1:00:00 PM |
|
| 042522 GF Group List by Sweepable and Non-Sweepable 2.1.22.pdf |
SFIN 4/25/2022 1:00:00 PM |
|
| 042522 FY21 Funds Assigned Sweep-Scoop Kris Curtis.pdf |
SFIN 4/25/2022 1:00:00 PM |
|
| 042522 2021-08-25-AG Opinion Memo-to-GOV-re-Appropriations-from-Funds-Swept-into-CBR.pdf |
SFIN 4/25/2022 1:00:00 PM |
|
| 042522 Wallace testimony April 25 sweep scoop.pdf |
SFIN 4/25/2022 1:00:00 PM |