Legislature(1997 - 1998)
02/04/1998 01:45 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 325
"An Act making appropriations for the operating and
loan program expenses of state government, for certain
programs, and to capitalize funds, making
appropriations under art. IX, sec. 17c, Constitution of
the State of Alaska, from the constitutional budget
reserve fund; and providing for an effective date."
Ms. McConnell provided members with a 4 page handout from
the Office of Budget and Management, Attachment 1 (copy on
file). She compared the FY 79 general fund, capital and
operating budgets with the FY 99 proposed plan. She
observed that the State spent $1470 thousand dollars more
per Alaskan in FY 79 than in FY 99. She emphasized that
there are services today that did not exist in 1979, such as
the longevity bonus. The FY 95 budget was adjusted for
population and inflation. The FY 99 budget would be $2.9
billion dollars if it were adjusted for population and
inflation.
Representative Martin pointed out that approximately $700
million dollars have been put into "other funds." Ms.
McConnell clarified that her charts did not include other
funds.
Ms. McConnell stressed that growth in Medicare and welfare
programs has been arrested. She emphasized the need to
control the growth of correction programs. She maintained
that the State must "turn off the facet" of people coming
into the correction system. She stated that Smart Start and
Quality Education programs are the best ways to get at some
of the areas of the budget that continue to grow. She
maintained that an investment in these programs could reduce
state costs in the future.
Ms. McConnell noted that the Administration is not proposing
a cut to municipal assistance or revenue sharing.
Ms. McConnell stated that the Governor's decision to allow
growth in education was based on the status of the State's
reserve accounts and debt retirement. She referred to
Attachment 1. She observed that the draw down on the
Constitutional Budget Reserve Fund between FY 95 and FY 99
was less than anticipated by the Legislature. The four-year
total draw down was $449 million dollars. The Legislature
anticipated that the draw down would be $1606 million
dollars. The Legislature estimated that $409 million
dollars would be needed to make up the FY 97 deficit. Due
to increased oil prices, there was actually a $70 million
dollar surplus in FY 97. She observed that the Legislature
did not spend the FY 97 surplus. She added that the
Constitutional Budget Reserve Fund will earn approximately
$250 million dollars in interest for FY 99.
Ms. McConnell maintained that the state of Alaska can
weather a year of lower oil prices. She noted that oil
production has not dropped as predicted. She stressed that
state revenues are more diverse. Oil revenues account for
78 percent of the State's strictly general funds. Oil
revenues represent 33 percent of total funds. Investment
earnings represent 32 percent of total funds.
Ms. McConnell reviewed the spreadsheet titled, Projection
with Governor Knowles' FY 99 Initiatives and January Oil
Price Forecast for FY 99, contained in Attachment 1. She
clarified that line 14, which shows the draw on the
Constitutional Budget Reserve Fund, uses the January 98
projection. The spreadsheet includes the Governor's
proposed investments for FY 99. She explained that
increases for K - 12 education are shown on line six. She
added that increased enrollment; a one- percent foundation
formula increase and funding for the Governor's proposal for
Quality Education are included.
Ms. McConnell noted that formula programs were given a
modest increase of half of one percent. She added that
Longevity Bonus will be phased out. She observed that the
prison package was not included in the spreadsheet.
Ms. McConnell observed that the spreadsheet shows that the
Constitutional Budget Reserve Fund will be $3,001.4 billion
dollars by the year 2002. She emphasized that by the year
2002 other options will be available and other choices will
have to be made.
Ms. McConnell emphasized the need for the Administration and
Legislature to coordinate financial reporting.
Ms. McConnell referred to deferred maintenance. She stated
that the Governor recognizes the need to resolve the
deferred maintenance backlog.
Ms. McConnell discussed Results Based Budgeting. She noted
that the Executive Budget Summary includes departmental and
interdepartmental goals. Each department identifies key
performance measures and evaluates their growth. She
observed that the automative budget system has been designed
to incorporate performance measures.
Ms. McConnell explained that cost of living adjustments
(COLA) and retirement (PERS) adjustments were handled in the
front section of the bill.
Ms. McConnell observed that the general fund contribution
for debt service is down from $72.3 million in FY 98 to
$64.1 million dollars in FY 99. She noted that the
Legislature made a $5 million dollar deposit from the
Investment Loss and Trust Fund (ILTF). The tobacco tax
collected in FY 98 was deposited into the School
Construction Fund. This has reduced school debt
reimbursement by $16 million dollars. The total pay-out is
an increase from FY 98 to FY 99. However, the general fund
amount needed has been reduced.
Ms. McConnell acknowledged that the legislation needs some
technical adjustments. She stated that these will be
submitted as part of the Governor's budget amendment
package.
Co-Chair Hanley referred to the fiscal notes for the
correction plan. He observed that debt service, under the
correction plan, would be approximately $8 million dollars
starting in the year 2000. He asked if the Governor has a
plan for construction of a juvenile facility. Ms. McConnell
stated that the issue is being discussed.
In response to a question by Co-Chair Hanley, Ms. McConnell
acknowledged that the spreadsheet could be considered as an
update to the Administration's five-year plan.
Co-Chair Hanley noted that there is still a fiscal gap.
Ms. McConnell acknowledged that there is still a fiscal gap.
She maintained that there will be choices to make in the
future. She noted that there has been discussion regarding
a ten-year plan.
Co-Chair Hanley noted that the Governor has deviated from
his commitment to close the fiscal gap. He observed that
the Governor's plan contains increased spending and an
increased fiscal gap. He stressed that the Governor has
been committed to closing the fiscal gap over the past three
years. He noted that the Governor has stated that it is not
appropriate to spend our children's inheritance and that we
need to put "Alaska on a strict but healthy financial diet."
Co-Chair Hanley questioned why the Governor's commitment to
close the fiscal gap has changed.
Ms. McConnell emphasized that the spreadsheet represents a
projection of the current fiscal situation. She reiterated
that there are a whole host of choices that can still be
made. She noted that one choice is to not draw any money
from the Constitutional Budget Reserve Fund. She added that
another choice is to continue to draw from the
Constitutional Budget Reserve Fund, in lieu of other choices
such as taxes. She asserted that there have been
adjustments by the Administration and the Majority to what
"we are laying out on the table right now, from what there
was a couple of years ago." She stressed that the overall
philosophy of providing stable services and a stable fiscal
environment has not changed. She asserted that the choices
vary from year to year depending on what is realistic, or
what appears to be warranted given the situation. She
maintained that when taxes were proposed no one thought that
the Constitutional Budget Reserve Fund would be in as good a
position as it is now.
Co-Chair Therriault questioned if the Governor's change in
policy is the result of the health of the Constitutional
Budget Reserve Fund. He noted that the Governor stated as
recently as January 16, 1997 that, "First, we must close the
budget gap and balance our budget."
Ms. McConnell compared the Governor's position to someone
who is told that they will loose their job in three months.
She stressed that a person who is informed that they will
loose their job in three months might make some tough
choices. If that person later finds out that they have
another job they may make different choices.
Ms. McConnell emphasized that revenue options such as motor
fuel tax increases or an Alaska credit income tax still
exist. She stressed that implications must reflect the
effect of decisions in terms of services.
Co-Chair Therriault referred to a letter by the Department
of Revenue dated October 21, 1997, regarding the Fall 1997
Revenue Forecast. He observed that the "mill is closing and
the mill is not coming back." He noted that according to
Commissioner Condon, new oil production will not pay the
state treasury at the same rate as Prudhoe Bay oil. He
noted that under the Governor's projection the principle of
the Constitutional Budget Reserve Fund would be reduced
beginning in the year 2001. He stressed that the Majority's
plan would use the intervening time to fill the fiscal gap.
He expressed concern that the Constitutional Budget Reserve
Fund would drop rapidly after the year 2001. He emphasized
that oil production will also decline.
Ms. McConnell reiterated that reforms in welfare and
Medicaid have reduced state spending. She maintained that
state spending can be reduced through increased education
levels. The average Alaskan inmate has a seventh grade
education. Statistics show that abusers are often abused as
children. She maintained that "it is a cycle we've got to
break." She stated that it makes sense to spend $11 million
dollars for prevention programs. She asserted that these
programs will control significant costs in the out years.
Co-Chair Therriault expressed concern that "no decline in
'99" would be used to lull citizens into a false sense of
security. He noted that the deficit is real and it is
projected to grow.
Ms. McConnell explained that that "no decline in '99" does
not mean that "perpetually" there will be no decline. She
maintained that the one-time use of the Medicaid savings
would not break the budget. She asserted that it is a wise
investment. She stated that the State's circumstances have
changed and the window of opportunity is farther out than we
used to think it was. She maintained that we are not at the
point of falling off a cliff. She acknowledged that the
level of Prudhoe Bay oil will not remain the same.
Representative Mulder asked if the Governor is committed to
closing the fiscal gap.
Ms. McConnell replied that the Governor is committed to
closing the fiscal gap. She stated that the question is how
and when. She observed that the Administration disagrees
with the Legislative Majority on the level of budget cuts.
Representative Mulder observed that the Governor's plan
would draw from the Constitutional Budget Reserve Fund. He
asked how "can we be saying that we're closing the gap, when
this gap remains huge."
Ms. McConnell alleged that the Majority's and the
Administration's plans both use the Constitutional Budget
Reserve Fund.
Representative Mulder maintained that the difference is that
the Majority focuses on the interest income of the
Constitutional Budget Reserve Fund. The Majority's plan
would only utilize interest earnings to balance the budget.
Ms. McConnell maintained that the Majority's plan would need
to be adjusted for revenues.
(Tape Change, HFC 98 - 18, Side 1)
Representative Mulder stressed that the Majority would like
to spend more money on Alaska's needs, but he stressed that
you cannot spend money that is not there. He emphasized
that the fiscal gap cannot be increased for the future, just
because the Constitutional Budget Reserve Fund balance is
better than anticipated.
Representative Davies pointed out that the Constitutional
Budget Reserve Fund will continue to grow until the year
2001. He acknowledged that the principle will be drawn on
during that time. He stressed that there are other tools
that need to be addressed. He questioned how deferred
maintenance fits into the Majority's plan.
Representative Mulder reiterated his concern that there will
be a $500 thousand dollar fiscal gap by the year 2001.
Ms. McConnell alleged that it would take a $300 million
dollar budget cut to keep the Majority's plan at the same
level. She maintained that it makes sense to make
investments in quality education, juvenile crime and child
abuse. She stressed that the Governor's plan would not put
the state of Alaska in jeopardy "of falling off the
financial cliff in the year 2002." She stressed that there
are lots of choices still available to deal with the fiscal
gap.
Co-Chair Hanley expressed frustration with the level of the
Governor's rhetoric regarding the need to close the fiscal
gap. He emphasized that the Governor reiterated his
commitment numerous times in previous years. He quoted a
statement by Governor Knowles attached to the May 1996
Longevity Bonus check.
"Legislators left Juneau without performing their most
basic responsibility, passing a balanced budget. The
result is a gapping $400 million dollar hole in the
budget and cuts to vital programs including medical
services for the elderly, such as eyeglasses, hearing
aides and dental care. Alaskans deserve better. I am
urging lawmakers to adopt my safe landing budget plan
that balances the budget in three years and also
protects your services."
Co-Chair Hanley stressed that the definition of budget
discipline, according to the Governor's statements, has been
closing the fiscal gap. He reiterated that the Governor has
changed his position. He stated that he was more impressed
with the Governor's plan when he included an Alaska credit
income tax to offset increased spending. He viewed the
Governor's plan as an increase in spending; a change from
his previous three year commitment to close the fiscal gap;
and the elimination of revenue measures to offset increases.
Ms. McConnell reiterated that the Governor's plan as
presented by the spreadsheet is a projection of the current
budget and the Governor's current legislative proposals.
She stressed that the projection does not make choices
regarding future revenues and expenditures or foreclose new
choices. She maintained that the choice for an income tax
does not need to be made at this time.
Ms. McConnell stated that the implication of budget cuts on
services should be addressed.
In response to a question by Representative Kelly, Ms.
McConnell explained that there is an increase in the total
debt service for 1998. She observed that because of the $5
million dollar ILTC deposit and the collected tobacco tax
the general fund amount has been reduced.
Representative Grussendorf stressed that the extent of the
"fiscal gap" is dependent on which revenue sources are
considered. He maintained that the original purpose of the
Permanent Fund was to fill the fiscal gap. He maintained
that other revenue sources should be considered. He stated
that the Constitutional Budget Reserve Fund was established
to help with the fiscal gap. He noted that the State's
revenue portfolio is broad. He maintained that problems
will be compounded in the future if some of the State's
revenue sources are not used. He maintained that
investments in Smart Start and education would save money in
the long run. He asserted that the revenue gap is self-
imposed.
Co-Chair Therriault asked if the spreadsheet's projection
for longevity bonus factored in the Governor's plan to
change the program to needs based. Ms. McConnell clarified
that the projection is based on the current statute.
Co-Chair Therriault noted that Governor stated in a letter
to the House and Senate Finance Committees on April 4, 1997,
that the "budget gap-closing plan still requires $100
million in cuts over three years."
Ms. McConnell maintained that there have been more than a
$100 million dollars in cuts over the last three years. She
recalled that the Governor's commitment when he took office
was to "hold the line, but for education." She observed
that the Governor accepted the recommendation of the Long
Range Planning Commission for $100 million dollars in cuts
over three years.
Co-Chair Therriault thought that the additional federal
contribution for Medicaid should be used to fund K - 12
education increases. He observed that the Governor plans to
spend this money on Smart Start. He noted that Smart Start
is composed of new programs or additions to new programs.
He observed that the Governor has used the K - 12 funding
shortage as justification for more spending. He maintained
that the highest priority for general fund spending is to
meet the K - 12 obligation. He stated that the disagreement
is over new or expanded programs for Smart Start. He
asserted that the K - 12 obligation would be met.
Ms. McConnell stressed that Congress did not give the state
of Alaska a 60/40 split to pay for K - 12 education. She
stated that Congress did not approved a change in the
formula to meet state expenses for education. The formula
was changed because the state of Alaska demonstrated that
medical care is more expansive in Alaska than in other
states. Congress reevaluates the spilt in three years. She
noted that it would be difficult for Alaska's congressional
leaders to argue to continue the increase if Alaska uses the
funds as a way to cut the budget. She asserted that the
state of Alaska would be in a better position to argue the
higher share if it is used for things that directly relate
to the wellbeing of children. She stressed that Alaska is a
rich state with huge reserves.
Representative Davies observed that the 1999 draw from the
Constitutional Budget Reserve Fund is $268 million dollars.
Representative Moses emphasized that the Legislature cannot
continue to cut the budget without the addition of any
taxes. He stressed that deferred maintenance should have
been taken care of every year. He observed that the
priority has been to cut the budget without taxes.
HB 327 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting adjourned at 3:40 p.m.
House Finance Committee 1 2/04/98
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