Legislature(2019 - 2020)ADAMS ROOM 519
05/03/2019 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB96 | |
| HB102 | |
| HB131 | |
| Presentation: Appropriation Limit by Office of Management and Budget | |
| Recessed to the Call of the Chair: the Meeting Reconvened on Saturday, May 4, 2019 at 12:00 P.m. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 102 | TELECONFERENCED | |
| += | HB 49 | TELECONFERENCED | |
| += | HB 145 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 96 | TELECONFERENCED | |
| += | HB 131 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HOUSE BILL NO. 131
"An Act relating to an appropriation limit; relating
to the budget responsibilities of the governor; and
providing for an effective date."
2:56:14 PM
^PRESENTATION: APPROPRIATION LIMIT BY OFFICE OF MANAGEMENT
AND BUDGET
Co-Chair Wilson had asked for a comparison of spending. She
had been working with Vice-Chair Ortiz and his staff.
2:56:50 PM
ED KING, CHIEF ECONOMIST, OFFICE OF MANAGEMENT AND BUDGET,
introduced the PowerPoint presentation: " Comparison of
Various Appropriation Limit Proposals." He asked if the
committee wanted him to skip some of the introductory
slides if necessary.
Co-Chair Wilson remarked that the finance committee had
nowhere else to be.
Mr. King began with the graph on slide 2: "UGF Spending
History." The slide showed an illustration of the history
of spending and why a spending limit was important to the
governor. In 1977, when oil started flowing on the North
Slope, the revenues of the state increased dramatically as
did spending which generated a desire by the public to
introduce a spending limit within the constitution. In
1982, after a 264 percent increase in government spending
the people voted to limit the spending. Over the following
25 years spending was kept relatively in-check. The state
had 20 years where spending barely moved other than the
volatility in some of the revenues generated. The state had
fairly flat spending for 2 decades until 2005 when oil
prices started to escalate at a meteoric rate. The state
saw the 264+ percent increase in undesignated general funds
(UGF) spending reminiscent of what was seen in the 80s. It
brought to mind the question of whether the spending limit
was actually being effective. In both instances where there
was an increase in spending, there was a decrease in
spending. However, it was much quicker to increase spending
than to cut it back. In the current fiscal environment,
spending was far above what it was before the increase in
revenue was experienced.
Mr. King reviewed slide 3: "UGF Spending History and
Different Limits." He reported that the spending limit that
was currently in the constitution, the $2.5 billion that
grew with population and inflation represented by the
dotted black line, grew overtime regardless of whether the
government was actually growing or not. The limit continued
to grow based on the previous year's limit, not based on
the previous year's spending or revenues. It continued to
grow regardless of any circumstances occurring. He noted
the blue area represented agency operations, the red area
represented statewide items such as debt service and oil
tax credits, and the grey area represented the capital
budget. All three classifications of government spending
had increased over the period on the chart. He also
included a couple of other representations. The dotted line
in the middle represented what would have happened if the
one-half of inflation and population that was contemplated
in House Joint Resolution (HJR) 7 were to have been put
into place rather than the full consideration of population
and inflation. The rate of increase was about half as much.
The black dashed line below tracked actual spending which
was adjusting every year. It was the language that was in
the current constitutional amendment before both bodies. He
suggested that because the limit was adjusting to actual
spending, it never detached from what actual spending was.
When revenues increased, it would not have allowed the
increase to occur. Otherwise, it just tracked what actual
spending was, and when an increase occurred it stayed flat.
It showed what the spending would have looked like had the
provision already been in the constitution. It was
consistent with what it was in 2004 adjusted for inflation.
Mr. King also presented one other idea. He reported that
the red dashed line was representative of what the current
limit would have been if, instead of pegging the spending
to the high level of spending in the 80s, the base was
pegged to the level of spending before the increase in
revenues in 1982 and using the same language that was in
the constitution. He added that the 1975 spending adjusted
for full inflation and population would be right around
what agency operations were the previous year. It was about
$500 million or $600 million below the total budget because
of the other items. The way the limit was structured had
meaningful impacts on how the limit grew over time.
3:01:45 PM
Mr. King addressed slide 4: "Sources of UGF Spending
Growth." He explained that when he showed the graph of
escalated spending, much of the time the question arose
about how the state spent its money. The chart showed a
breakout of the different ways the state increased its
spending from 2005 to 2013 and where the cuts occurred in
the years that followed. He highlighted that a significant
amount of capital budget spending occurred and was
represented in grey. Other changes occurred including
changes to agency operations, the retirement system, and
oil tax credits which all contributed to the increase in
spending. He pointed to the black bars that represented
actual agency operations spending in 2005 continued over
time and adjusted for inflation. The red bar showed agency
operations that had grown more than inflation. It
represented real growth in operations. In 2013, the real
operations growth was $1.3 billion above what it would have
been in 2005. Since then, about half had been pulled back
out of the budget. The state was currently about $750
million above what inflation would have allowed.
Representative Josephson wondered why, relative to Mr.
King's previous comment about the $750 million above what
inflation would have allowed, he did not see anything so
large on the chart. He asked about the numbers.
Mr. King responded that the numbers were provided by the
Legislative Finance Division. He took the 2005 operations
and inflated it with actual inflation. The actual spending
was $750 million above that level.
Representative Josephson relayed that in oil tax credits
alone, Mr. King had $100 million and other statewide
growth. Public Employees' Retirement System (PERS) and
Teachers' Retirement System (TRS) were more substantial. He
asked how the numbers were backed out in deriving the $750
million difference.
Mr. King responded affirmatively. They were separated. The
$750 million was in addition to the PERS and TRS and the
oil tax credit contributions. The total increase in
spending was just over $1.2 billion above what an inflation
adjustment would have allowed.
Co-Chair Wilson asked committee members to hold their
questions until Mr. King finished his presentation.
Mr. King detailed the bar graph on slide 5: "UGF Revenue
and Expenditure History." He relayed that another question
that occurred had to do with revenue and response to
revenue. It was accurate that the legislature responded to
changes in revenues. On the chart he plotted the 5-year
average revenue against actual spending. He thought it
correlated well. It was a fact that the legislature was
responding to changes in revenues which was one of the
reasons the interest in a spending limit was so high. If
there was another increase in revenues in the future, the
governor did not want to see a substantial increase in
spending.
Co-Chair Wilson wondered if the legislature did not reduce
the budget by $750 million whether it would change the
spending cap proposed by the governor. She was trying to
determine the starting point and how it would change if the
legislature was not at the specified amount.
Mr. King explained that the governor's proposed
constitutional amendment took the previous 3 years of
budgets (actual appropriations) and reset the spending
limit for the following year. If the legislature spent
below the limit, the following year the limit would go
down.
Co-Chair Wilson asked for the reset amount for the first
year. Mr. King responded that if the spending limit went
into effect in the following year, the spending limit would
be slightly more than $5.3 billion which was more than the
body was contemplating spending. Therefore, the year after
that the limit would go down because the average would go
down. He would point out the transition period later in his
presentation.
Co-Chair Wilson asked if the average would continue to
decrease each year the state spent less. Mr. King replied,
"That's correct. The limit adjusts to the actual needs of
the government."
3:06:53 PM
Mr. King discussed the table on slide 6: "Limit Rules
Comparison." The chart showed a side-by-side comparison of
the different versions of the spending limit. It compared
the House and Senate versions of the statutory spending
limit as well as the House and Senate versions of the
constitutional spending limit put forward by the governor.
The current constitution spending limit rules were also
included. He broke out a few spending categories to show
how they were similar and how there were different. In all
the proposals federal funds and things that were not
included in the general fund were all excluded from the
cap.
Mr. King relayed another item excluded from the cap was
disaster relief and things that were part of the budget but
not considered spending. For example, transferring money
from one account to another without spending it or
duplicated funds, like interagency receipts or
reappropriations, were not considered spending.
Mr. King mentioned that general debt obligation service was
also excluded. Things that were included in the cap were
agency operations and capital projects. The bottom 5
categories listed on the chart were where the differences
could be seen in the version comparisons. Revenue bond debt
services was excluded in all the versions except for in the
current constitution. Other designated general funds were
excluded in the constitution and in both constitutional
amendments. However, it was excluded in the statutory
versions. In both HB 131 [Legislation introduced in 2019
regarding an appropriation limit] and its companion bill,
SB 104, the designated general funds lived outside the cap
which meant they could grow without limit. Whereas, in
House Joint Resolution (HJR) 7 [Legislation introduced in
2019 - Short Title: Const. Am: Approp. Limit; Reserve Fund]
and its companion bill, Senate Joint Resolution (SJR) 6,
they were included in the cap and part of the limitation.
School debt reimbursement was excluded in HB 131 because
the language indicated all debt service.
Mr. King elaborated that in the working draft version K of
SB 104 there was a provision that specifically included
school debt reimbursement. In HJR 7 and SJR 6 they were
included in the cap by necessity. The Public Employees'
Retirement System (PERS) and TRS contributions were
included because they were not considered to be actual debt
of the state even though they were an obligation of the
state. He pointed out that there was some ambiguity in the
current version of HB 131 that came up because in SB 104
language was included to specifically exclude PERS and TRS
contributions which raised the question whether it was
otherwise included. Lastly, in the constitutional
provisions Permanent Fund Dividends were excluded from the
cap. In the statutory proposals the Permanent Fund
Dividends were under the cap.
3:10:28 PM
Mr. King continued to slide 7: "Limit Rules Comparison."
The 3 moving pieces of the bills included the base limit.
The current version of the bill had a $5 billion limit. The
senate version increased the limit to $6 billion. The
governor's proposed constitutional limit in both bodies
used an adjusting average every year and reset to a 3-year
average. The current constitution had a $2.5 billion base
and was based on 1982. The others were based on 2020.
Mr. King relayed that in terms of how the limit changed
over time, the version in front of the committee had a
5-year average inflation adjustment. He pointed out that
the language indicated that the amount did not grow over
time -the last 5 years of inflation was pegged to the $5
billion. In the Senate's committee substitute the language
was changed to the 5-year average since 2020. The average
was adjusting based on the 5-year average of inflation
allowing the rate to grow at the rate of inflation. In the
governor's original proposal, the escalation rule was
one-half of the prior year's inflation and population
growth, but it was capped at 2 percent. If there was high
inflation or population in a year, it would not be able to
grow more than 2 percent.
Mr. King continued that in the Senate's version of the bill
currently in the Senate Finance Committee it was changed to
the average of the previous 5 years of inflation and was
tied to the average of the 3 previous years of
appropriations. The current constitution allowed a full
rate of inflation and population growth year-after-year. It
allowed the rate to grow based on inflation. The exception
applicable to the capital budget was that the limit could
be broken for capital projects. In the version before the
committee there was no exception. In the Senate's version
and committee substitute included a 5 percent kicker above
the limit. He indicated that in the governor's proposal
there was no exception. However, in the Senate's substitute
a 10 percent deviation was allowed if funds were available.
The current constitution stated that although there was a
limit, it could be broken with a super majority of the
legislature.
Co-Chair Wilson asked for clarity about capital projects
and exceptions to the capital budget cap. Mr. King relayed
that in the current version the term "Capital Improvement"
which was interpreted as brick and mortar. The provisions
in the Senate's version of the constitutional amendment
contained the same language. From a statutory perspective
it was difficult to interpret because the legislature had
the authority to appropriate and could include anything it
wanted to. He noted that for the constitution it would
depend on how the court interpreted the phrase, "Capital
improvement." He asserted that just because it was in the
capital budget did not mean it qualified.
Mr. King talked about the spending trend reflected on
slide 8: "UGF Spending Trend." The slide showed the growth
rate of the budget since 2000. From 2004 to 2013 the budget
grew about 14 percent per year. The 15-year average rate of
growth of the budget was 4.6 percent, much higher than the
rate of inflation. He conveyed that when looking forward on
how the limit was changing and how government spending
could be expected to change, there was some historical
context that might be reasonable to assume.
3:15:03 PM
Mr. King turned to the graph on slide 9: "Revenues, Target
Budget (4 percent growth), and HB 131 Spending Limit ($5
billion plus inflation)." The slide showed the target
budget at a 4 percent growth rate which was represented by
the black bars. The red dashed line showed the spending
limit in HB 131 of $5 billion. If the budget target
exceeded the budget limit, it would not allow it to grow.
Mr. King continued that with a budget growth of 4 percent
and a spending limit of less than 4 percent, they would
eventually converge. The stacked bar showed how items were
paid. The bottom portion of the bars (shown in black)
represented UGF revenues, mostly oil revenues. The
remainder of the stack (denoted in green, green hashes, and
purple combined) represented the percent of market value
(POMV). The green portion of the bar was what was left over
after deducting the statutory PFD. The top area [including
the purple and green hashed portions of the bar]
represented the PFD calculation. The green hashed bar
represented what should have been given to the people as
part of their PFD but was diverted for government spending.
He reported that the limit could be distributed to the
people only above what the government was spending and
below because the limit included the PFD. In other words,
any amount more than the PFD could not be distributed. Even
if there were enough revenues to pay a larger PFD, the
legislature was prohibited to do so because the law did not
allow it.
Mr. King continued to explain that in all the cases he was
presenting, there was revenue exceeding the limit, which
meant there was money available to pay a greater PFD.
However, the legislature was prohibited to do so. The only
way to pay a PFD (if the PFD was under the limit) would be
to decrease government spending. Even with more revenues
from additional taxes, the limit would not change.
Therefore, a larger dividend could not be paid even if a
tax was raised. The difficulty of including the PFD under
the limit was that it inserted conflict with the PFD and
government spending with no other options of revenue.
Revenues more than what the legislature was allowed to
spend were above the line. Therefore, the money stayed in
the bank rather than being distributed.
Representative Josephson thought he heard Mr. King saying
that under the new proposed bill, the legislature would be
hemming in its capacity to pay a larger dividend because
the state could raise revenue above the red line but not
spend it on a dividend. He wondered if he understood
correctly. Mr. King responded that he was correct. The
legislature could not spend the excess money on anything
under the cap including larger government or larger PFDs.
The limit was not actually limiting government growth, it
was only limiting the legislature's ability to pay the PFD.
Representative Josephson was struck by some irony because
the administration also hemmed in expenditures by not
allowing any real discussion of other revenue. Mr. King
responded that the governor's proposed spending limit did
not include the PFD. Therefore, the PFD was unlimited. It
would prevent the government from growing, which the limit
was intended to do. By implication, it meant the state
could raise more revenues but could not spend them. He did
not follow the representative's question.
Co-Chair Wilson suggested that in HB 131, by including the
dividend in the cap with the intention of keeping spending
down, it might have the opposite effect. The dividend might
get squished rather than reducing spending. She supposed
that the government could increase its revenues, but the
legislature would still be limited to how much it could
spend with a spending limit in place based on the average
spending for the previous 3 years and inflation. In other
words, it was not about how much revenue was generated, it
was about the limit in spending.
Mr. King added that if the legislature wanted to raise
government spending by raising new revenues, it could be
done under the limit. However, to do so, a tax would have
to be implemented, and because the PFD was under the limit,
it crowded out the PFD. As a result, people would end up
getting both a tax and a cut to their PFD because of the
PFD being under the limit.
Co-Chair Wilson asked about what should be inside the cap
and what should be outside the cap. She wondered whether
there would be more pressure on how much the legislature
was spending if the PFD was outside of the cap. Mr. King
responded that if the PFD was outside of the cap, the cap
would only apply to spending. The limit would only be
controlling government spending - it was not controlling
the PFD and how much was being distributed. It would be up
to the legislature to decide or the people to decide if
they wanted to put it in the constitution.
3:22:25 PM
Mr. King continued to slide 10: "Revenues, Target Budget (4
percent growth), and HB 131 Spending Limit ($6 billion plus
inflation)." He relayed that in the Senate's committee
substitute version of the bill the spending limit was
increased to $6 billion which was reflected on the slide.
Because there was room under the limit, the legislature
could raise more revenues and grow government without
cutting the PFD further. He pointed out that the spending
limit was not limiting anything. It was hovering above the
spending limits. If the intent was to limit government
spending, it was not working the way it was intended.
Co-Chair Wilson did not think the charts reflected where
the state wanted to go. She thought perhaps the PFD should
be kept outside of the spending cap. Mr. King responded
that she was correct in that the consequence of putting the
PFD inside the cap was that it competed for the other
budget. He pointed out that the statutory calculation for
the PFD was represented in purple and the hashed portion.
The hash was the portion of what should be the PFD that was
being diverted to government to get to the spending target.
Vice-Chair Johnston asked if the chart reflected the
current POMV. Mr. King replied that the green, hashed, and
purple bars added together was the POMV. The green was left
over after removing the statutory PFD.
Vice-Chair Johnston clarified that the green, hashed, and
purple equaled the POMV. Mr. King responded, "That is
correct."
Co-Chair Wilson noted the chart was very helpful.
Mr. King highlighted that the chart showed the distribution
of money from the POMV that was going in each direction.
The green was about a third of the total bar. Therefore,
two-thirds was the calculated POMV and one-third was what
was left over from the POMV after the PFD payment. If the
calculation were to change to 50 percent of the POMV, it
would not change the numbers, just the colors of the bar.
The green would go higher, and the hash would turn green.
It did not change anything. The same amount of PFD would be
paid.
Co-Chair Wilson referred to the governor's proposed budget.
She asked for clarification as to how the bars would
change. Mr. King responded that the specific graphic did
not contain the 3-year adjustment. The chart included the
statutory provision allowing growth with inflation. He
relayed that if the budget was cut further to what the
governor proposed, the black line would shift down. It
would mean that the hashmark, instead of being diverted to
government, would turn purple and would go to the people of
Alaska.
Co-Chair Wilson suggested that even though the 5-year
average was not accounted for in the chart, 202 would be
part of the average and the numbers would continue to reset
the spending cap down a certain percentage for the
following year. Mr. King responded that if the base could
readjust to spending like in the constitutional amendment
proposal, her statement would be true. House Bill 131 did
not adjust for the spending level.
Representative Josephson asked for clarity around what the
chart would look like if the governor's intensions were
achieved. Mr. King responded that the governor intended for
the legislature to pay the full PFD and the budget would
have to be moved down to the green to do so.
Representative Josephson suggested neither body [House or
Senate] could come close to what was being proposed. He
asked why the bill was a practical path forward.
Co-Chair Wilson commented that it was not about how
practical the proposal was, rather, it was about what the
bills did. The committee was trying to learn what the bills
did. She thought that it was an entirely different policy
discussion as to why the legislature spent more money than
it needed to. She asked Mr. King to continue to the
following slide.
3:28:17 PM
Mr. King presented scenario 1 on slide 11: "Randomly
Generated Scenario 1." He indicated that in looking at
spending limits under static conditions where there were
nice smooth lines, projections were flat, and everything
appeared easy. It was not how reality worked. He thought it
was important to look at what circumstances were created
when volatility was introduced. The following 2 slides were
reflective of the computer randomly generating an oil
price, oil production level, investment return level, and
inflation level. It looked at what happened under the
different provisions when volatility could occur. The slide
showed one scenario showing 2 provisions. He could not show
the line on the same chart because when there were
different impacts on the savings accounts, there were also
different impacts on investment returns.
He relayed that in the scenario oil prices spiked up and
down and up again, as well as investment returns jumping
around. Under the $5 billion limit, there were small PFD's
that went away over time. There were enough revenues to pay
a larger PFD, but the limit would not allow it. On the
right the limit was a $6 billion. However, the limit was
not limiting anything unless oil prices went up or
investment returns went up significantly. When it limited
something, it limited the PFD. Unless the body was willing
to reduce the black line further, they could pay a larger
PFD. However, that was not what the limit was doing.
Mr. King moved to the second scenario on slide 12:
"Randomly Generated Scenario 2." The slide showed another
scenario where the oil prices were different as well as
investment returns. He highlighted that the limit was
restricting the PFD distributions, although there was
revenue to pay for them. On the righthand chart showed the
$6 billion which only limited in high revenue years. He
pointed out that there was something interesting that
happened in a couple of the scenarios where the
distribution of the POMV got what was left over after the
PFD calculation got very small in some circumstances. He
thought it was worth paying attention to.
3:30:57 PM
Vice-Chair Johnston needed to know how Mr. King was
modeling the scenarios. She wondered if the operational
budget was growing in his examples.
Mr. King responded that the model was setting the 2020
number at the level the legislature was proposing. It
started at the level of proposed spending by the
legislature. Each year the budget attempted to grow at a
rate of 4 percent - slightly lower than the historic rate.
The model indicated to try to grow the government at 4
percent if allowed. Once the budget ran up against the
limit, it was not allowed to grow, therefore the limit was
controlled. On the left it showed the $5 billion limit and
that government growth was limited in 2027. On the right,
because of the higher limit, the growth could continue
causing smaller investment returns. More outflow of money
being taken from the savings accounts lead to smaller
returns.
Vice-Chair Johnston was concerned with the modeling of the
revenue. She wondered how he reached the revenue amounts.
Mr. King explained that the model was calculating what the
anticipated royalty and tax payments would be from oil
companies by allowing the oil price and production levels
to be randomly generated within the distribution he
defined. It was between $40 to $120 and bounced around. In
the production world there were three cases: high, low, and
medium. He used them as parameters. There was a
distribution the computer could select within the confines
of production projections. For investment returns, it
figured out what was being spent. If there were excess
revenues, the savings rules were followed. The savings
accounts received a return on their asset levels based on
the defined distribution - the historic performance of a
particular fund. The actual POMV beginning in 2022 was 5
percent of the total fund value. The combination of the 4
components made up the entire POMV which was calculated in
the way SB 26 [Legislation passed in 2018 regarding an
appropriation limit, the Permanent Fund, the Permanent Fund
Dividend, and the Permanent Fund Earnings] contemplated.
3:35:07 PM
Vice-Chair Johnston asked Mr. King if he was basing the
revenue on a consistent forecast derived from based on the
most recent revenue forecast other than the POMV. Mr. King
indicated that he was using all the current laws and the
revenue forecast as the baseline forecast defining the
random distribution. The model was a scenario randomly
generated within the distributions. The purpose was to show
what volatility might do. Vice-Chair Johnston would be
interested in doing additional modeling with Mr. King's
tool.
Co-Chair Wilson mentioned there was an assumed growth rate
of 4 percent. She thought it would be interesting to see a
model reflecting other growth rates such as 1 percent, 2
percent, or 3 percent. She wondered if the purple was on
the bottom and fulfilled first. She thought the modeling
showed the PFD getting squished rather than government
growth which was not necessarily the intent of the
committee. She thought some other modeling would be nice.
Mr. King explained that the bars represented revenues
rather than expenditures. The chart reflected the statutory
calculated PFD, not what the legislature actually paid as
the PFD. There was no paying the PFD first.
Co-Chair Wilson thought what he was saying was that the
amount spent on government was going up 4 percent per year
which was why the purple bar ended in 2025. She believed
Mr. King was assuming the state's spending would not
decrease. She wondered if the graph would change
significantly if the state reduced its spending by 2
percent.
Mr. King tried to explain that it would not change the
graph. The red line would remain the same. The only thing
that would be different was the black line. At any point,
the legislature could reduce the budget and increase the
PFD.
Co-Chair Wilson thought the graphs made the legislature
appear to be considering the PFD last. She wanted the
public to know that the exercise was about deciding whether
the PFD should be inside or outside a cap. Based on the
graph she did not think the PFD should be inside the cap.
She wanted to see the state control its spending. If the
legislature could not reduce spending on its own, she
wondered how to force the spending. She did not want the
dividend to be the looser. She emphasized trying to
understand what was included in a spending cap and what was
not. She wondered if the administration had considered all
factors before coming up with their idea.
Mr. King was not suggesting what future legislatures might
do. He was showing that if the legislature continued to
grow at the rate it had over the previous 15 years, there
would be consequences. The consequence was putting the PFD
under the limit. It forced the legislature to make the
decision. If budget growth could be restricted, a person
could get a larger PFD. However, it had not been the
tendency. If a certain PFD amount was designated, by
necessity the level of spending would be constrained. The
current budget was not drafted accordingly.
Representative Knopp thought Mr. King had stated that
limiting budget growth would determine the size of the PFD.
He asked if the statement was accurate that the size of the
PFD was determined by rate of return on investments. Mr.
King explained that under HB 131 if the PFD was within the
limit, there was only so much money to spend. Every dollar
that was spent on government was a dollar that could not be
spent on the PFD and vice versa. He suggested that by
including the PFD under the limit, the PFD would be limited
by how much was spent on government.
3:40:58 PM
Representative Knopp returned to slides 8 and 9. He noted
Mr. King spoke of 15 year averages and showed a growth of
4.6 percent. He asked what rate of growth Mr. King
recommended under HB 131. He quoted AS 37.05.540 regarding
appropriation limits. He wondered why the existing
appropriation limit was not working.
Mr. King thought Representative Knopp had referenced the
statute relating to the statutory limit associated
exclusively with the Alaska Mental Health Trust. The
current constitutional spending limit allowed the limit to
increase by the rate of inflation and population which was
less than the 4.6 percent average growth through the
previous 1.5 decades. The proposal by the governor was to
cut the rate in half - half of population and half of
inflation. The Senate suggested that a 5-year average
inflation rate was more appropriate with no consideration
of population. It would be up to policy makers to decide
what was appropriate. The idea was that some limit must be
in place if the legislature wanted to have a limit.
Representative Josephson pointed to the lavender bar on the
right of slide 12 of the presentation. He asked if the bar
represented unfunded Permanent Fund Dividends. Mr. King
responded that it was money available for distribution for
the PFD but was unable to be distributed because of the
limit in place. With $100 oil in the current year, there
was were high oil revenues. There were enough revenues to
pay a larger PFD, but the limit would not allow it because
the PFD was under the limit.
Representative Josephson thought under the current random
scenario Mr. King was projecting the dividend outlay to be
about $4 billion. In other words, people would receive a
$6000 check. For a family of four they would receive
$24,000. Mr. King answered that the randomly generated
scenario generated a dividend as large as the
representative had suggested.
Representative Josephson surmised that under the current
formula, the state was on a track to pay a family of four
$24,000 in dividends in 10 years. Mr. King responded that
he was not showing an actual projection of future events.
It showed one possibility of many outcomes. In the
particular year there was a 25 percent return which
generated the exceedingly high PFD calculation. However,
the POMV number had not caught up because of the lag in the
averaging. There was a high PFD calculation, even though
other scenarios would generate a smaller number because of
smaller returns. He was not suggesting what would happen,
but it was a possible outcome.
Representative Knopp had spoken to the LFD director who
affirmed what he thought: AS 37.05 did not refer to the
Alaska Mental health Trust appropriation. Section B
outlined what was exempt from the cap. It also discussed
the level of appropriation. He wanted Mr. King to look at
the existing statute. He was wondering why the cap was not
working.
3:45:32 PM
Mr. King moved to slide 13 and reviewed the House and
Senate joint resolutions put forward by the governor and
changed by the Senate. In the original provision there was
an allowed escalation of one-half of inflation and
population with a maximum of 2 percent. The 2 percent limit
did not actually kick in in the baseline projections. It
was just half of inflation and population. The Senate
adjusted it to a 5-year average adjusted for inflation
without a consideration of population. It grew slightly
more but not excessively. He highlighted that, because of
the 3-year averaging, there was a period where the state
was spending less than the limit which required the limit
to be adjusted downward. In either case, there was a period
of transition before the growth trend kicked in.
Mr. King looked at slide 14: "Comparison of No Limit to HJR
7 / SJR 6 Limit." He explained that because the PFD was not
under the limit there were no hashes. He clarified that he
was only looking at revenue. The black line represented the
target budget. The dotted line showed what the 4 percent
budget growth would look like. He continued that the red
dotted line represented what SJR 6 growth would look like
without consideration of spending. If the state were to
spend to the limit every year, there would be a very small
growth rate. The dashed line showed the adjusting rate down
to the actual amount. In FY 20 he expected actual spending
to be below the calculated spending limit which would
trigger a reduction in the limit. It trended down to a
level similar to FY 05 and grew at the same rate. The chart
showed the baseline projection of revenues projected to the
10-year mark. It was also the Alaska Permanent Fund
Corporation's projection of earnings.
Mr. King explained that the green and the purple combined
equaled the POMV. The purple was the calculated amount for
the PFD. He pointed out there was a decrease in revenue in
the near term. As new infrastructure was being developed
there would be an increase in out years once it came into
production. Anything under the black line needed to be
funded somehow. He suggested that because there were not
enough revenues, there was a shortfall between the black
line and the green bar that needed to be addressed. He
offered that because the PFD was not under the limit, it
could be addressed through taxes, savings draws, budget
cuts, or through the PFD. If the state were to use the PFD,
everything above the line would be distributed as the PFD.
By comparing the different lines, the potential impacts
could be seen showing how much of the funds would get
diverted from the PFD calculation to government and how
much could be distributed. If budget cuts were made, there
would be a larger PFD payout. Eventually, without a limit
there would not be enough revenues to fund the call for
cash.
Co-Chair Wilson asked what percentage decrease in the
operating/capital budgets would be needed to maintain a
full PFD and keep the state under the red line. Mr. King
answered that cuts would have to be greater than what was
being proposed. He thought an additional $500 million to
$600 million would have to be cut from the budget.
3:49:55 PM
Co-Chair Wilson asked if they would have to take out $2.1
billion in FY 20. Mr. King replied that the state would
have approximately $3.8 billion in revenues to spend on UGF
and designated general funds (DGF). It was another several
hundred million below what was being proposed.
Co-Chair Wilson noted the black dotted line representing
the budget growing at 4 percent. She asked if the
anticipated growth rate was 2 percent per year in the
Administration's proposal for SJR 6. Mr. King replied the
anticipated growth rate was just under 1 percent which was
what the limit allowed.
Co-Chair Wilson noted the state had just signed contracts
reflecting a range of zero to over 4 percent plus 7 percent
for public safety. The contracts did not include steps. She
assumed the number of employees would have to be reduced
rather than looking at salary reductions. Mr. King
suggested that the legislature would have to find
efficiencies or reductions.
Co-Chair Wilson rebutted that the legislature was not being
discussed. She was talking about the administration. She
was trying to figure out how the administration would apply
a spending cap based on a 1 percent growth rate when
contracts were currently being signed and without
legislation that would reduce the rate to 1 percent. The
governor had offered legislation that would increase the
rate to 1.7 percent. The numbers in her head did not work.
She wondered how many positions would have to be reduced to
stay within the 1 percent growth rate based on the
administration's spending limit.
Mr. King responded that it was a significant challenge. He
did not have the answers. There were no easy answers.
Co-Chair Wilson asked who might be able to answer her
question. She was not trying to figure out the numbers. She
wanted further clarification. Mr. King replied that he
would have to get back with the representative with an
answer. He offered that presently the governor put forward
a proposal and it would go through a process. The
administration was willing to have a conversation about
what the right numbers should be. Co-Chair Wilson thought
it was important to know where the numbers came from and
what levers were used. She wanted to understand what had
changed to get the numbers right.
3:55:09 PM
Vice-Chair Ortiz asked Mr. King if he thought that any
constitutional change would require a spending cap. Once
things were put in the constitution it became more
difficult to adjust. He wondered if things like
inflationary rates should be taken into consideration.
There had not been significant inflation in the past
several years. He noted the employment rate of the nation
had dropped below 4 percent. He asked Mr. King if he agreed
that lowering unemployment rates was a significant
inflation causation. He thought inflation could increase up
to 6 percent or 7 percent in a few years.
Mr. King responded that the inflation rate was something
the Federal Reserve tracked and tried to control. They had
done a great job. The expectations for inflation were in
the range of 2 percent to 2.5 percent for the next decade
or more based on the federal target. Vice-Chair Ortiz was
correct that there were things beyond their control, and
anything was possible.
Vice-Chair Ortiz made the point that if something was going
to be placed in the constitution a consideration should be
made. Mr. King indicated that if something was to be placed
in a document that was rigid, there needed to be a
mechanism that would adjust to things like inflation or the
rate of spending to allow for flexibility. A fixed number
was currently in the constitution and allowed it to be
detached for the actual needs of government. Co-Chair
Wilson comment, "Rigid but flexible. Those two items go
together."
Vice-Chair Johnston thought the current federal
administration was hoping for 4 percent inflation to come
close to preventing the nation's debt from growing. She
referred to page 6 regarding what was included and not
included. In HJR 7 version A agency operations, capital
projects, and PERS and TRS contributions were included. She
wondered what modeling was used in contract negotiations.
She suggested that if the legislature was going to look at
agency operations, it should first look at what modeling
was being done. She also noted that when doing the modeling
for HJR 7, Mr. King included PERS and TRS contributions.
She suggested that he would have to include the ARM Board
and the cost of downsizing government. She suggested that
as Mr. King was modeling all levers needed to be presented.
The cost of downsizing government should also be included,
as it would be part of the levers. She did not think the
legislature was getting a full picture including cost
drivers and levers.
Co-Chair Wilson was going to work with Mr. King about the
levers. She wanted to move the bill through committee in
the current year, if possible. She thanked Mr. King for
being in the meeting.
Co-Chair Wilson indicated that she would be recessing the
meeting in anticipation of receiving the crime bill.
^RECESSED TO THE CALL OF THE CHAIR: THE MEETING RECONVENED
ON SATURDAY, MAY 4, 2019 AT 12:00 P.M.
4:01:09 PM
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 102 Sponsor Statement Version U.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
| HB 102. Sectional Version U.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
| HB 102.Backup Support Letter Enterprise.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
| HB 102 Public Testimony.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
| HB 96 Amendment 2 Wilson .pdf |
HFIN 5/3/2019 1:30:00 PM SHSS 2/12/2020 1:30:00 PM |
HB 96 |
| HB 96 Amendment 1 Josephson.pdf |
HFIN 5/3/2019 1:30:00 PM SHSS 2/12/2020 1:30:00 PM |
HB 96 |
| HB 102 Opposition Letter.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
| HB 131 Spending Limit Comparison.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 131 |
| HB 49 CS WORKDRAFT FINv.E.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB 49 v.E CS FIN Sectional Summary.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB 102 Opposition Comptia.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 102 |
| HB 49 HB 49 Public Testimony Pkt 3.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB 49 Public Testimony Pkt 2.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB 49 DRAFT Fiscal Note Packet.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB 49 Public Testimony PKT 4.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB049CS(FIN)-DPS-PT-DRAFT 05-04-19.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB 49 HB 49 Public Testimony Pkt 3.pdf |
HFIN 5/3/2019 1:30:00 PM |
HB 49 |
| HB 96 Amendment 3 Knopp.pdf |
HFIN 5/3/2019 1:30:00 PM SHSS 2/12/2020 1:30:00 PM |
HB 96 |