Legislature(1997 - 1998)
01/27/1998 08:05 AM Senate FIN
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SENATE BILL NO. 230
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program; and providing for
an effective date."
OVERVIEW - FY99 OPERATING BUDGET
PRESENTED BY
OFFICE OF MANAGEMENT AND BUDGET
After calling the meeting to order, Co-Chair Pearce informed
the members of two appropriation bills, SB229 and SB230,
before them, which they could refer to during the upcoming
overview. She then introduced ANNALEE MCCONNELL, Director
of the Office of Management and Budget and invited her to
the table to give a presentation on the governor's proposed
FY99 operating budget.
Ms. McConnell started out by saying she planned to focus
today on the operating budget, saving the capital budget
overview for tomorrow. She did want to point out however,
the governor's overall budget projection and how it fits
into a five year plan. Early in this administration, the
governor announced his intentions for spending to "hold the
line" and the FY99 budget proposal reflects this.
There is one exception: funding for education. She
explained that enrollment increases in grades K-12 had been
absorbed in the first two budgets proposed by Governor
Knowles. However for this upcoming budget year, funding
will be necessary to accommodate these increases.
At this point, Senator Donley interjected with his
observation that the last two budgets did not hold the line
with the Legislature's plan of a $70 million reduction, and
in fact proposed increasing spending by $30 million. This
forced the Legislature to address cutting $100 million from
the governor's budget. Ms. McConnell explained that
spending plans drafted for the court system and the
Legislature were beyond the control of the executive branch.
Increases proposed for the court system budget therefore
accounted for the higher bottom line in the overall budget
request. At the same time, the governor's office hasn't
used, as a credit, reductions made by the legislature in
recent years. There were also some proposals introduced by
the Governor were not taken into account by the Legislature,
which would have resulted in further reductions.
Ms. McConnell attested to the tremendous effort made in the
last ten years to absorb costs associated with the rise in
Alaska's population and inflation. Other states have
considered their budgets as holding the line if they
increase in proportion to population rises. This state has
taken a tougher stance on that. She reported that the per
person dollar amount spend by the State of Alaska in this
proposed budget is $1470 less than what was spend in 1979.
At the same time, additional services are being provided and
agencies are being run more efficiently. One example of
this is the Longevity Program. She said she gives a great
deal of credit to both the Governor's Office and the
Legislature for these accomplishments.
Population increases are an important factor in Alaska.
Children and senior citizens account for the largest areas
of growth. These groups are also the most expensive to
serve. For children, there is the cost of education.
Alaska spends more per child for education than any other
state. Senior citizens incur more Medicare costs. Other
programs provided to seniors include the Longevity Bonus
Program and the Pioneers Homes.
One of the positives in absorbing population growth costs
has been better efficiency. By focusing on results, state
agencies are working towards this goal. Ms. McConnell cited
improvements to the Division of Motor Vehicles where
Services are being provided to the public electronically.
Drivers are now able to renew licenses via the Internet and
US mail, saving time and resources for both citizens and the
state.
An area the administration took on as a challenge when they
came into office was to control costs in two of the fastest
growing areas of the budget, WELFARE and MEDICAID. Ms.
McConnell attested that through their efforts and those of
the Legislature, we are starting to see some reduction in
the growth rate in the total number of cases. In doing
this, the two government branches need to look at the
investments they need to make, some of which are financial
and some being time and energy (i.e. legislation and
management changes.)
Ms. McConnell stated that two of her prime budget targets
are funding for the Department of Corrections and youth
detention and treatment facilities. She shared a comment
the Governor is fond of saying: "He would like to cut the
Dept. of Corrections budget - but cut it because we have
fewer prisoners." The only way to get control of this part
of the budget is to start way back and think about ways to
change prisoner's lives so they don't return to prison years
later.
She quoted studies that found the average education of
inmates is no further than the seventh grade. She argued
that because of this lack of schooling, these people are
unable to hold a job and have poor life skills. She
referred to efforts made in other states to combat this,
which have paid off. These have been improvements to the
quality of education early on, improved job training and
better family environments. She pointed out statistics that
show people who have been abused as children have a high
propensity to become abusers themselves. An alarming number
of detained youths and adults had been abused. Therefore
focusing in and making investments in areas like child abuse
prevention and education can really pay off. However, we
won't see these results in the FY99 budget. According to
Ms. McConnell, it's going to take a number of years.
These are reasons why the Knowles Administration has focused
so much attention on the Smart Start Initiative. Clear
goals have been set and results are being analyzed. For
example, a zero tolerance level has been set for child
abuse. No reports of harm are allowed to go uninvestigated.
This is an interdepartmental effort and also involves local
communities, non-profit groups, parents, schools, etc.
Ms. McConnell theorized that if we had made these kinds of
investments ten years ago, we would be looking at a very
different prison and youth detention budget now. She urged,
however that the focus be not on the past, but in the
future. We should be looking at what we can expect ten
years from now if we chose to make these kinds of changes
today. They won't give us immediate satisfaction with the
budget or constituents, but we will know that we're on the
right track to making those changes down the road. The
public would appreciate it if a plan were laid out. Even if
we don't get there in one fiscal year, it would be
beneficial if we could lie out a target for the next three
to five years. She suggested looking beyond one budget year
and referred to House Speaker Phillips' bill to move into a
two-year budget cycle.
Ms. McConnell talked about other investments proposed in
this budget, both the operating and capital side, to help
keep our ECONOMY healthy and maintain job stimulation. She
gave examples of WELFARE REFORM and "ALASKANIZING" THE
WORKFORCE. They don't all require new money, the Alaska
seafood industry being one area. Department commissioners
are being directed to find new ways to employ Alaskans
without requiring more funds.
Some of the investments the Administration has made are not
increases. For instance, this budget proposes holding the
line on MUNICIPAL ASSISTANCE and REVENUE SHARING. While it
doesn't propose a decrease in funding, many communities feel
resentful at having the burdens shifted to them and by not
taking away any more funding, this prevents more criticism.
Ms. McConnell shared that a number of circumstances have
changed in the last several years since the Long-Range
Financial Planning Commission did its projections. This
commission was a bi-partisan task force set up by the
Senate, House of Representatives and Governor's Office to
look at the status of Alaska's financial affairs. In 1995
they projected that the Capital Budget Reserve would be
depleted by early FY99 or FY00. At that time it looked like
there would be significant withdrawals every year, ranging
from $600 - $900 million each year. In fact we now have a
balance of $3.3 billion. This is the result of three
factors: one is unanticipated large court settlements,
second is the strong stock market resulting in higher
investment earnings and third we haven't drawn as much from
the fund as originally projected.
In 1995 we thought it would be necessary to draw $513
million from the CBR but because our financial situation was
better than anticipated due to high revenues, we only needed
to draw $22 million. In 1996 we thought we would need $379
million and we actually only needed $285 million. The most
dramatic year was the last fiscal year, FY97. The
Legislature and Administration agreed the expected amount
needed would be just over $400 million. However, at the end
of FY97 we had a $70 million surplus. Oil revenues were
much higher than anticipated and as a result we ended up
$480 million better than expected.
Ms. McConnell gave credit to the Administration and the
Legislature that neither proposed to spend that money. It
was recognized that although 1997 was a good year, there
certainly would be times when we wouldn't have such a good
year. Now that extra money is earning interest.
Over the past four years a total of $1.6 billion had been
anticipated as needing to be drawn from the CBR to balance
the budget. In reality, we needed less than $450 million.
According to Ms. McConnell, oil production forecasts are
looking better. We are not seeing the decline for 1999-2001
that had previously been projected. State Of Alaska
revenues are more diversified. In the past, oil made up
over 80 percent of the budget. The permanent fund is bigger
than anticipated and we have had significant deposits from
the earnings reserve account. In her opinion, the
Constitutional Budget Reserve is working exactly as intended
by the Legislature when it was created and proposed to the
voters. It has worked well to prevent annual spending of
any balloon earnings and at the same time, allow a cushion
for years where earnings are not as good as expected.
Co-Chair Pearce inquired as to the exact percentages of oil
related revenue in our budget. She was informed that 78% of
general funds and 32% of all funds totaled are from oil
related sources.
Senator Torgerson wanted to know if, with regard to the oil
tax dispute monies, we are on target for $270 million
deposits into the CBR. Ms. McConnell answered that she
thought so but added the caveat that we never know the
timing of receipt of the funds. Adjustments will need to be
made throughout the year to account for various disputes as
they work their way through the court system. This budget
packet only shows $10.4 million because this is what was
actually received to date. She didn't want to create the
expectation that we would actually get all the funds by June
30. She stressed the timing issues for these settlements
are the toughest to predict. Her solution is to spread the
amounts out over several years and recognize that over a
five-year period you would see the same total.
Senator Donley spoke of efforts for improvement of Alaska
hire in the seafood industry. He referred to a budget and
audit report the committee received indicating the
Administration hasn't invoked the same Alaskan hire
requirements in the oil industry resulting decrease in
Alaskans hired to work in the oil fields. His question was
if the increases in the seafood industry would offset the
loss of jobs in the oil industry. Ms. McConnell said she
would get an answer back to him.
Senator Sharp visited the issue of holding the line on
capital matching grants and not shifting the burden for
municipalities. He advised that the legislature last year
approved $20 million, and this year's governor's proposal is
only $15 million. He actually sees a 25% reduction from
last year. Ms. McConnell agreed that the capital budget
maintains the same level of general funds as requested last
year and that the Legislature granted the $15 million plus
added another $5 million of AHFC funds. Communities will
receive $20 million more for school districts for quality
education. This is in addition to funding for enrollment
increases.
Co-Chair Pearce asked if there is going to be another PERS
dividend that will also benefit communities? Ms. McConnell
advised that there is a PERS reduction that varies by
communities. Some will see an increase and some will have a
decrease. Most of the school districts will go back to what
they were a year ago. They saw a dip last year, but it
should go back up. Ms. McConnell directed the committees'
attention to the portion of the handout that shows the COLA
and PERS rate adjustments. Reductions are to be made to
police and executive branch employees. The University will
have an increase.
Senator Adams followed up with an inquiry of the effect of
reductions to municipalities and school districts on
revenues to the State. It results in a net reduction of the
total, answered Ms. McConnell. She referred again to the
handouts, showing the different areas with different
reductions.
At this point, Ms. McConnell moved onto the next portion of
her presentation: PROJECTION WITH GOVERNOR KNOWLES FY00
INITIATIVES AND JANUARY OIL PRICE FORECAST FOR FY99. She
turned to a spreadsheet showing forecasts if the Governor's
proposed investments were approved by the Legislature. She
said the spreadsheet was created because she wanted to know,
and be able to show the Legislature and the public, if these
investments are responsible by the year 2002.
In explaining this spreadsheet and what its results show,
Ms. McConnell gave the following details. By taking the
fall forecast (what the budget development process is based
on for the out years, 2000-2002) and integrating the
possibility of oil prices remaining stagnant at around
$15/barrel, her office came up with a blended annual average
of $16.48/barrel. The CBR earnings figure has been updated
from $269 million and is now up to $285 million because the
market was better than what was used for earlier
projections. This year's budget has $70 million carried
from the surplus from last year, which was unexpected.
There was also $5 million from the Investment Loss Trust
Fund that was used to partially fund COLA increases last
year. Also there are the FY98 and FY99 budgets as proposed
by the Governor with supplementals included. If the
preceding information is gathered and we held those budgets
and didn't provide for increases or decreases for agency
operations, the spreadsheet shows us the following:
For education, Ms. McConnell incorporated all of the effects
of the Governor's proposed quality education legislation in
addition to the enrollment increase, an estimated 1.5-%.
The proposed budget plan, therefore shows a one percent
increase every year which is to help maintain some ability
for school districts to keep pace with inflation. This also
includes the $20 million and $4 million in adjustments to
the foundation formula as proposed by the Governor.
Other formula programs show a one-half percent growth in
total, but some of our programs are actually going down.
The Longevity Bonus program with its phase-out program, and
a reduction in the caseload for temporary assistance for
needy families are some examples. While there will still be
need for growth in some areas, like Medicaid, she projected
an overall growth at one-half percent.
Ms. McConnell noted that the POWER COST EQUALIZATION number
shown on the spreadsheet is simply the general fund number.
There is a Governor's task force underway to make some
recommendations about the future of PCE because we will not
have enough in the fund a year from now to make payments to
help equalize power rates across the State.
The GENERAL OBLIGATION DEBT will be totally paid off by the
year 2000. Only $3 million is required to make this year's
payment. She pointed out the LEASE FINANCING program that
has allowed for things like the Palmer Fire Facility and the
Anchorage Health Lab. This is still at a very modest $16
million debt service level for existing lease/purchase
facilities. There are more proposals on the table that are
not included here. Senator Adams asked if the Bank of
America building lease/purchase is included in these
figures. Ms. McConnell answered yes; that everything
approved by the Legislature to date is included.
The SCHOOL DEBT REIMBURSEMENT program will have a declining
obligation for schools already qualified. We will see some
increase in the year 2000 and then back down in 2001 and
2002. She cautioned that these numbers do change as
information is received from the schools. The timing on
bond sales is under local control rather than state control.
In the spring, when the Legislature is getting ready to pass
the budget, you will be provided with the most recent
updates received from the school districts. The currently
projection is $44.8 million. This also takes into account
revenues the Legislature deposited from ILTS into the debt
fund and tobacco taxes collected in FY98 that will be going
towards new school construction. This will reduce the
amount needed from the general fund to fully meet
obligations.
For the capital budget, OMB has proposed $92.3 million in
general fund. Ms McConnell acknowledged that there are
concerns about continuing to fund at that level and that it
has been difficult to meet needs statewide. The loans
budget will be at about $17 million. She told the committee
that she would address these issues in more detail during
tomorrow's meeting.
According to her figures, the CBR will still be right around
$3 billion in the year 2002. None of these projections will
affect the Permanent Fund. She anticipates having over $29
billion in the fund by the year 2002. The Governor opposes
any changes to the Permanent Fund without a vote of the
people and these proposals reflect that.
TAPE 8 Side B
Ms. McConnell said that by looking at all the factors, the
Knowles Administration feels this budget packet is very
responsible and in fact less expensive if we make these
investments now. This is not just financially, with cost
decreases for Department of Corrections and programs for
troubled kids, but also because it is the right thing to do.
She counseled the committee to work out a system of using
the November forecasts for the development and early
discussions of the budget and the spring forecast for the
final action.
Ms. McConnell said there are still many options for the
future. Absorbing inflation can no longer be handled at the
current rate. She spoke of deferred maintenance needs which
simply builds up.
Several things the Administration and the Legislature can
agree on include showing the budget plans in a similar
layout. This has helped the public to compare the two. We
can work to agree on a way to handle the oil-forecasting
period, how to show the CBR interest earnings, and listing
the amounts of cuts taken. Another would be how to treat
the F-map changes. For example, what would happen if
congress agreed to pick up more Medicaid expenses bringing
Alaska more in line with the other states? This
Administration proposes to use that money for Smart Start.
She said it would also be helpful to understand how the
Legislature's deferred maintenance finance plan fits in with
the Majority plan.
Part three of the OMB's presentation concerned PERFORMANCE
MEASURES. Ms. McConnell gave a short history of the program
started four years ago where each department gave the
Legislature four to five key performance measures. The
intent wasn't to give details on every single aspect of
state government, but to focus in on a handful of the most
important areas in each department. The goal was to obtain
a way to track the work done and see if progress is being
made in these key areas. Last year's packet included a
status report on progress made and target achievements.
This year, we have included an updated report.
Something new in this year's budget packet is the approach
to PERFORMANCE BUDGETING. She referred to presentations
made by Mark Freeman and Craig Holt that focus on base line
indicators for major priority areas like jobs and economic
development, children and education. The intent is to
determine key indicators that would tell all of us (i.e.,
Administration, Legislature, public) if we are focusing on
the right approach and if we are making progress. She gave
examples in the area of education.
Ms. McConnell also spoke about the AUTOMATED BUDGET SYSTEM.
This is fully functional on the capital side and underway as
a pilot program on the operating side. This was designed to
incorporate a real analysis of the trends, performance
measures, anticipated results and how the budget can reflect
these priorities.
She championed the idea of Results Based Budgeting, saying
it would make many improvements to the state system. She
stressed the need for the executive branch and legislative
branch to work together even though there are some places
where they will disagree. However, some of the goals are
very similar for both branches. To start the process, we
should work to establish a vocabulary, agree to an approach
and determine the key areas to try first.
Ms. McConnell said the Administration would like to have
sessions with the Legislature to set these guidelines and to
focus on a couple key areas to test the ideas. She realized
that many issues cross department lines but assured the
committee that workgroups have already been set up
consisting of representation from all affected groups.
These groups are willing to give presentations to the
committee if requested. She expressed a desire to allow
departments to work directly with the committee.
Co-Chair Pearce informed Ms. McConnell of a group consisting
of staff from both co-chair's offices and Senator Parnell's
office that have been working on a mock set-up using
Department of Natural Resources. Once they have completed
this work, they will bring their findings, both good and
bad, back to the co-chairs to determine which direction
should be taken. The committee plans to work with OMB to
build on this concept. She listed other areas where
legislators are breaking down issues and setting missions
and goals.
Ms. McConnell said OMB is doing mock-ups for commerce and
revenue and would be interested in feedback from the
committee. It would be helpful to know the committee's
comments regarding her department's presentations. She is
hoping that by testing this out in two areas and looking at
other states, we can have better results than just by using
a cookie cutter approach.
At this point of the meeting, Co-Chair Pearce opened the
floor to questions. Conversations ensued regarding
specifics in education, public safety, federal funding, the
Smart Start program and the status of Welfare to Work.
After a fifteen-minute break from 9:45 to 10:00, Ms.
McConnell continued.
She made comments as to the layout of the proposed budget
packet. The cost of living increase is shown in the front
part of the packet rather than broken down by each
department. The total cost of $9.2 million dollars is
broken down by funding sources later in the packet. She
gave details as to those breakdowns.
Debt service is this year is $64.1 million down from $72.3
last year. A couple factors that influence this include the
$5 million investment loss trust fund that was in the fund
that reduces the amount of new general funds needed to
appropriate in 1999. Another is on the school debt
reimbursement side.
Funding for SCHOOL PROJECTS will come from the Tobacco Tax.
Revenues from this tax have been revised down from earlier
estimates because of the inability to accurately project
future receipts. This is due to a certain amount of
stockpiling of tobacco products by consumers before the tax
took effect. OMB anticipates this event resulted in fewer
taxes being paid during the first quarter of the program,
but that the income generated will level out once stockpiles
are depleted which will enable them to better project future
revenues.
Answering a question by Senator Adams, Ms. McConnell
estimated the revenue from this tax would be $16 million
this year for the school fund. The committee requested it
be provided with the actual figures collected in this first
quarter and upcoming quarters, as they become available.
She highlighted a technical glitch that may actually become
helpful in the future. The automated system allows for
tracking all numbers. These numbers were inadvertently
included in this handout. She noted the advantage to having
these numbers printed in the back of the budget packet for
easy referral and suggested they could keep them in future
budget publications.
She pointed out another change, the documentation of
supplemental appropriations. This year the supplemental
requests are shifted into the main portion of the budget.
This doesn't change the total dollar amount.
This budget packet continues the AHFC dividend at the $50
million rate according to the agreement worked out between
the AHFC and the Department of Revenue. This is to keep it
off the credit watch and prevent any negative signals
changes might send to the bond market.
In summary, Ms. McConnell stressed the importance of looking
at the budget in the context of several years. She feels
this budget packet is responsible and maintains a very
healthy CBR. It takes into account the possibility of oil
prices dropping further than anticipated. The executive
branch is continuing to look for efficiencies and
improvements in service that will help deal with population
increases and inflation. She reiterated her desire for
continued joint efforts of OMB and the Legislature to find
better ways to manage state government.
Co-Chair Pearce asked if there were any large lawsuits
pending that may affect the amount of funds available. Ms.
McConnell didn't know for certain, but is expecting an
update from the Department of Law that she would pass along.
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