SENATE FINANCE COMMITTEE March 4, 2015 9:12 a.m. 9:12:06 AM CALL TO ORDER Co-Chair Kelly called the Senate Finance Committee meeting to order at 9:12 a.m. MEMBERS PRESENT Senator Anna MacKinnon, Co-Chair Senator Pete Kelly, Co-Chair Senator Peter Micciche, Vice-Chair Senator Click Bishop Senator Mike Dunleavy Senator Lyman Hoffman Senator Donny Olson MEMBERS ABSENT None ALSO PRESENT Sheldon Fisher, Commissioner, Department of Administration; John Boucher, Deputy Commissioner, Department of Administration; Randall Hoffbeck, Commissioner, Department of Revenue; Dan DeBartolo, Director, Administrative Services Division, Department of Revenue; Jerry Burnett, Deputy Commissioner, Treasury Division, Department of Revenue; Doug Wooliver, Deputy Administrative Director, Alaska Court System. SUMMARY SB 27: APPROP: OPERATING BUDGET/LOANS/FUNDS SB 27 was HEARD and HELD in committee for further consideration. FY 16 BUDGET OVERVIEWS: DEPARTMENT OF ADMINISTRATION DEPARTMENT OF REVENUE ALASKA COURT SYSTEM 9:12:15 AM SENATE BILL NO. 27 "An Act making appropriations for the operating and loan program expenses of state government and for certain programs, capitalizing funds, making reappropriations, and 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." 9:13:18 AM ^OVERVIEW: FY 16 DEPARTMENT OF ADMINISTRATION SHELDON FISHER, COMMISSIONER, DEPARTMENT OF ADMINISTRATION, stated that he would address the previously issued questions from Senator Dunleavy as he reviewed the presentation. He turned to Slide 2, "DOA Mission and Organization." The slide provided the mission of the department: to provide consistent and efficient support to state agencies so that they may better serve Alaskans. He stated that a portion of the departments' efforts were spent serving the public, and a material portion was spent serving other state agencies. 9:14:15 AM Mr. Fisher moved to Slide 3, "DOA Services Across Alaska." He relayed that the department had a broad geographic reach across the state, driven primarily by the Division of Motor Vehicles, and somewhat by the Public Defenders Agency (PDA). 9:14:30 AM Mr. Fisher moved to Slide 4, "DOA Services to the Public." He noted that the undesignated general funds (UGF) associated with each division was shown on the slide. He said that as part of the 2015 Management Plan the department had approximately $88 million in UGF, $50 million of which was associated with PDA and the Office of Public Advocacy (OPA). He stated that those agencies had a constitutional mandate to provide certain services and were already stretched for resources. He furthered that both agencies had seen an increased workload over the past few years, which they had been managing with a flat budget; in the current budget exercise, substantial cuts had not been made in those agencies. He relayed that not cutting those agency budgets had resulted in disproportionate cuts spread across other agencies. He referred to the question as to whether the department should make cuts to PDA and OPA that corresponded with cuts that had been made to the Department of Law (DOL); internal discussions determined that it would be inappropriate to aggressively cut the departments at this time. He reiterated that the agencies had been administering their growing caseload with a flat budget, and added that as a result the backlog was growing. He warned that further cutting their budgets in FY 16 would lead to a greater cost to the state in term of ineffective assistance of counsel, and other challenges pertaining to court trials. He believed that funding for the two agencies needed to stay firmly intact. 9:17:26 AM Co-Chair MacKinnon asked whether Alaskans could request a public defender, or was it determined by income. Mr. Fisher replied that the court made the determination based on income level. 9:18:20 AM Mr. Fisher noted that the Division of Motor Vehicles was funded entirely by program receipts. He continued that the Division of Retirement and Benefits was funded with a modest amount of UGF. 9:18:45 AM Mr. Fisher moved to Slide 5, "DOA Services to the Public." He categorized the four agencies on the slide: Alaska Public Broadcasting Commission (APBC) & AIRRES Grants; Alaska Oil and Gas Conservation Commission (AOGCC); Violent Crimes Compensation Board (VCCB); Alaska Public Offices Commission (APOC), as quasi-independent agencies. He said that APBC was largely funded by UGF, but had no paid employees. He stated that AOGCC had no UGF in its budget but was funded by receipts from the industry. He related that VCCB received a portion of federal funding, and some funding from the Permanent Fund Dividend (PFD) Felon Fund, but no UGF. He stated that APOC was mostly funded with UGF. 9:19:47 AM Mr. Fisher continued to Slide 6, "DOA Services to State Agencies." He said that in the case of each agency, some UGF were used to subsidize and reduce the fee that would otherwise be charged to other agencies. He said that the Division of General Services (DGS) was responsible for administering leases, managing state owned buildings and the centralized portion of departmental purchasing. He continued with Enterprise Technology Services (ETS), which administered the centralized information technology (IT) functions for the state. He noted that the Division of Personnel and Labor Relations (DOPLR) managed the centralized human resources (HR) functions, as well as labor relations and contract bargaining. He spoke to the Department of Finance (DOF), which managed the statewide payroll system, financial audits, and various other systems of financial support. 9:20:50 AM Mr. Fisher presented Slide 7, "DOA Services to State Agencies." He noted that the Division of Administrative Services (DAS) was consistent across agencies. The Division of Risk Management (DRM) administered the department's insurance policies and programs and was funded entirely from interagency transfers. He relayed that the budget for the Office of Administrative Hearings was largely inner- agency transfers, but included some GF. 9:21:31 AM Mr. Fisher explained Slide 8, "DOA Budget by Division," which was a diagram that highlighted the DOA budget by division; the GF only, FY 15 Management Plan was charted in the thousands. He pointed out to the committee that of the $88 million budget, $49 million had been associated with PDA and OPA. 9:22:00 AM Mr. Fisher presented Slide 9, "DOA Budget by Division," which organized by bar graph the percent of UGF changes in DOA divisions between the UGF FY2015 Management Plan and the FY2016 Governor Amended UGF totals. He noted that the budget for OPA and PDA had been held flat from year to year and costs had been spread across other divisions. He spoke of the request for information (RFI) that had been sent out by ETS with respect to maintenance and management of the State of Alaska Telecommunications System (SATS) and the Alaska Land Mobile Radio (ALMR) programs and the accepting of proposals. He stated that financial bids had not been sought for the RFI. He thought that combining the management of the two systems would improve efficiencies. 9:23:16 AM Mr. Fisher continued to Slide 10, "DOA Budget Change by Division," which showed the DOA budget change by division and ranked by percentage from highest to lowest. He pointed out to the committee that GF for ETS, general services, and personnel labor relations had been reduced by over 20 percent. 9:23:57 AM Mr. Fisher explained Slide 11, which contained a pie chart depicting the same percentages illustrated on Slide 10. 9:24:14 AM Mr. Fisher showed slide 12, "DOA All Funding Sources," which contained a bar graph focused on fund sources. He spoke to the question of forecasting reductions associated with changes in other departments. He reiterated that a substantial percentage of DOA services related to services that were provided to other state agencies. 9:25:15 AM Vice-Chair Micciche referred to Slide 10, and asked how Risk Management was funded. Mr. Fisher explained that the departments that took advantage of the insurance Risk Management provided paid for the service through an interagency transfer. Vice-Chair Micciche suggested that Risk Management was in a category by itself and was not charged through federal receipts. Mr. Fisher stated that he was not aware of any federal receipts that applied to Risk Management. He continued that the department actively worked to reduce insurance premiums and cuts costs wherever possible. 9:26:27 AM Mr. Fisher referred back to Slide 12, and the question of how the DOA budget interacted with other departmental budgets. He explained that as other departments shrank, their need for space reduced as well. He shared that when this occurred, the department would attempt to reorganize and move other groups into the space in order to maximize the benefit, while recognizing that sometimes the leases that the department entered into might be multi-year leases that limited flexibility within the fiscal year. 9:27:38 AM Mr. Fisher moved to Slide 13, "Position Changes By Division," which showed the headcount reductions contemplated by the amended budget. He spoke to the question of how to think about a vacancy factor. He related that vacancy factors were typical; if there were 100 position control numbers (PCN), and a vacancy factor of 5 percent were applied, the budget would only need to reflect funding for 95 PCNs. He said accompanying the vacancy factor was the need to recognize that there would be some attrition throughout the year. The positions would need to be filled slowly in order to achieve the vacancy factor. 9:28:39 AM Senator Dunleavy asked if the department had budgeted for PCNs at 95 or 100 percent. Mr. Fisher shared that OMB had mandated certain vacancy factors doe every department, which varied by the size of the organization. He stressed that cutting a vacant PCN had an effect due to the way that the vacancy factor was applied. 9:29:40 AM Senator Dunleavy restated the question. Mr. Fisher replied that in his example he had budget for 95 percent. He said that the actual vacancy factor varied depending on the size of the organization. 9:30:07 AM Co-Chair MacKinnon referred to the negative PCN changes on Slide 13, she asked whether the number represented people or positions. Mr. Fisher replied that it varied throughout the chart. He said that if there was not a note written into the far right-hand column for the division, then the position was vacant. He observed that the majority of the 15 positions reduced positions had been vacant. He felt that the impact was real when the vacancy factor was applied. Co-Chair MacKinnon said that the state required other communities to perform a termination study to understand the impact of reducing either positions, or people. She asked whether reducing positions would affect the state's ability to meet its obligations under the retirement system formula and whether the administration would support elimination of the termination studies. She queried the state's responsibility, as compared to the responsibility of municipalities, of the debt within the state's retirement system, and whether the reductions would impact future calculations on termination studies of local communities. Mr. Fisher responded that when agencies or political subdivisions eliminated an entire class, a termination study was required. He said that the cuts that had been made to date would not implicate the need for a termination study by the state. He thought that it was unlikely that there would be a requirement that the department perform a termination study. He furthered that the elimination of termination studies was under consideration and an approach was being sought that would eliminate the need for the studies while protecting the system. He felt that the administration recognized that termination studies had, at times, gotten in the way of good business decisions at the municipal level, and that a balance between rational decision making and the sustainability of the system needed to be struck. 9:34:17 AM Co-Chair MacKinnon reiterated her question pertaining to the responsibility of local municipalities for the overall debt of the retirement system. JOHN BOUCHER, DEPUTY COMMISSIONER, DEPARTMENT OF ADMINISTRATION, explained that the breakdown was roughly 60/40. He said that it varied from year to year because it was allocated on the payroll at the time; as the payroll shifted the number could change. Co-Chair MacKinnon wondered whether payment was being shifted onto smaller communities. She asked for further explanation regarding the elimination of job classes triggering a termination study. Mr. Fisher understood that an entire job classification had to be eliminated before a termination study was required. Mr. Boucher added that it was unusual to require termination studies for job classes with minimal positions. 9:36:52 AM Mr. Fisher moved to Slide 14, which showed that the department had no FY 16 capital budget requests. He shared that the department had $3 million in deferred maintenance in the Public Building Fund. 9:37:28 AM Co-Chair MacKinnon asked for an update on the Integration Resource Information System (IRIS) project, and whether it was on schedule. Mr. Fisher stated that the current projection was that the project would go live in July of 2015. He said that the project was on target. Co-Chair MacKinnon asked whether simulated models were being run in expectation of Medicaid expansion. Mr. Fisher explained that he was very cognizant failed implementations that had happened in the past. He assured the committee that extensive testing and modeling was underway. He expressed optimism that the project would be smoothly executed. 9:39:28 AM Mr. Fisher explained slide 15, "Core Initiatives and Challenges": Personnel Costs Savings  •Wage Negotiations - remain competitive and balanced  •Improve employee productivity    Mr. Fisher asserted that having a motivated, engaged, effective workforce was a critical asset to the state.   Co-Chair Kelly said that he had heard complaints that the business community had experienced trouble retaining employees because everyone wanted a state job. He thought that perhaps the state was too competitive and was paying employees more than the market preferred. Mr. Fisher intuited that the state started by paying employees below the market average, but had a steeper growth in the outer years, which resulted in above market wages in some cases. He though that the numbers varied depending on the class of employee; highly skilled people were paid below market. He felt that it was important to be fair to the state and to employees. Co-Chair Kelly shared that when he worked for the university he saw employees leaving not for the private sector, but for other governmental agencies. He felt that the private sector was having difficulty keeping up with the wages that the state could offer employees. 9:43:21 AM Vice-Chair Micciche asked if there was a plan for re- evaluating the continuous COLA increase. Commissioner Fisher stated that DOA was continuing to examine all of the pay structures in order to assess where the state was compared to the market. Vice-Chair Micciche noted that there did not seem to be a salary cap for state employees at the higher pay levels. Commissioner Fisher thought that the issue could be examined. Vice-Chair Micciche asked about the results of a recently completed salary study. Commissioner Fisher relayed that the last salary study occurred in 2009. He said he would share the findings with the committee. 9:45:39 AM Commissioner Fisher returned to Slide 15: Reduction of Unfunded Liability  •Health Care Spend - continue to bend the cost curve      Procurement Savings - Lower costs for what we already  buy  •IRIS - updated core statewide administrative systems    Information Technology (IT) - Improved services and  cost    Improve Facility Management  •Utilization of Space - better use our space  Commissioner Fisher spoke to the Unfair Labor Practice that had been filed against the state with respect to the implementation of Universal Space Standards. He said that a number of space standards had been implemented, but work had paused because the administration needed to determine what the government would look like moving forward and did not want to spend money on spaces that would have to be rebuilt in the future. He said that the pause had provided the opportunity to review the situation with the bargaining unit that had filed the claim, which questioned whether the state was even achieving cost savings, and the administration had agreed to examine the dozen completed projects in order to determine any achieved cost savings. He added that he had received grievances from other commissioners and was attempting to address those concerns. He asserted that in a world where the state had a bottom line, saving on space was necessary. 9:48:26 AM AT EASE 9:49:16 AM RECONVENED Senator Dunleavy asked about consolidation of insurance plans and whether the administration had looked that the cost savings of consolidating teacher health care plans. Commissioner Fisher replied that the Hay Group had done an estimate in 2013, and the results had indicated a range of potential savings of $22 million to $33 million. He understood that the savings were largely driven by a difference between the employee contributions made in the teacher plans, versus what the state applied. He stated that some school districts had managed effectively and efficiently, and to move to a state plan would increase the costs to those districts. He added that for other districts the move could reduce costs. He said that the administration would be supportive of any political subdivision that found it beneficial to function under Alaska Care. 9:51:15 AM Senator Dunleavy asked what role the teacher bargaining unit played in collecting premiums, and were the premiums remitted to the provider or maintained within the financial accounts of the bargaining unit. Commissioner Fisher understood that the bargaining until collected the premiums, which stayed within the health trust. 9:51:41 AM Vice-Chair Micciche referred to Slide 4. He queried the $2.3 million UGF expense for retirement and benefits stating that, the UGF cost for managing pension funds should be zero; generally revenue charged the retirement system for costs. Commissioner Fisher explained that the number related largely to two closed retirement systems that had the need for ongoing support, and was not related to PERS and TRS. He added that a modest amount of those funds was associated with actuarial studies that could be required to support legislation and other things that could not be charges to the trust. 9:52:55 AM Co-Chair MacKinnon asked how many retirees were being managed in the closed plans. Commissioner Fisher replied that he would get back to the committee on the numbers. Co-Chair MacKinnon considered that if the number were under 100, $2 million seemed exorbanent. Commissioner Fisher thought that the $2 million was for management and a portion of the benefits that the retirees revived. 9:53:44 AM AT EASE 9:54:19 AM RECONVENED 9:54:28 AM Co-Chair Kelly noted that the department had received a list of questions from Senator Dunleavy's office for subcommittee purposes. He said that the responses would be distributed to member's offices. 9:54:50 AM Senator Dunleavy asked when the answers could be expected. Commissioner Fisher thought within the next week. 9:55:17 AM AT EASE 9:57:00 AM RECONVENED ^OVERVIEW: FY 16 DEPARTMENT OF REVENUE 9:57:25 AM Co-Chair Kelly requested, for the purpose of time, that the organizational and philosophy slides be skipped 9:58:07 AM RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE, briefly overviewed Slide 2: Alaska Department of Revenue  The Department of Revenue mission is to collect, distribute and invest funds for public purposes Programs, Authorities, and Corporations  Tax Division Treasury Division Permanent Fund Dividend Division Child Support Services Division Alaska Housing Finance Corporation Alaska Permanent Fund Corporation Alaska Mental Health Trust Authority Alaska Municipal Bond Bank Authority Commissioner Hoffbeck related that the department also oversaw: unclaimed property, investments, cash management, debt management, administrative services, criminal investigation unit, and the film office. 9:58:31 AM Commissioner Hoffbeck moved to Slide 3, "Major Department Accomplishments in 2014": Collections and Enforcement  taxes on time Tax Revenue Management System (TRMS). This is an integrated system for all taxpayers to use for filing and paying their taxes online. It is scheduled to be fully implemented in early 2016. Support Division collects $3.88. qualified staff, and a growing caseload, the percentage of child support cases with orders increased to the target goal of 93.5%. Department-high 39 Child Support cases for prosecution. This is up from 35 in FY 13, and 21 in FY 12.