Legislature(2013 - 2014)SENATE FINANCE 532
01/23/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB119 || SB120 || SB121 | |
| Fy15 Revenue Forecast: Department of Revenue | |
| Fy15 Budget Overview: Office of Management and Budget | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 120 | TELECONFERENCED | |
| *+ | SB 119 | TELECONFERENCED | |
| *+ | SB 121 | TELECONFERENCED | |
SENATE BILL NO. 119
"An Act making appropriations, including capital
appropriations and other appropriations; making
appropriations to capitalize funds."
SENATE BILL NO. 120
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs, capitalizing funds, and making
reappropriations; making appropriations under art. IX,
sec. 17(c), Constitution of the State of Alaska, from
the constitutional budget reserve fund."
SENATE BILL NO. 121
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program."
9:12:37 AM
^FY15 REVENUE FORECAST: DEPARTMENT OF REVENUE
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, (DOR)
displayed the PowerPoint presentation, "Fall 2013 Revenue
Forecast" (copy on file).
Commissioner Rodell looked at slide 3, "Unrestricted
Revenue Forecast 2012-2022." She explained that the slide
was intended to give a sense of FY 12 and FY 13 compared to
the forecast. She noted that oil prices had trended
downward over the two most recent fiscal years. She
remarked that oil production had declined from 579,000
barrels in FY 12 to 531,000 in FY 13. She stated that the
forecast production was 508,000 for FY 14. She shared that
lease expenditures in FY 12 and FY13 were approximately
$4.4 billion and $4.9 billion, so there was a slight
increase from FY 12 to FY 13. She stressed that there was a
significant increase in lease expenditures for FY 14 and FY
15. She remarked that unrestricted general fund (UGF)
revenues had declined. She explained that FY 12 had UGF
revenues of $9.4 billion, and dropped to $6.9 billion in FY
13. She explained that FY 14 UGF revenue was forecasted at
$4.9 billion, and was forecasted to remain $4.9 billion
over ten years. She stated that in FY 12 there was a
production tax value of $79.33, declined in FY 13 to
$67.76, and declined even further in FY 14 to $54.57.
9:15:43 AM
Senator Hoffman recalled a meeting in the previous year
when DOR had remarked that their predictions were too
optimistic. He liked that the department had overestimated
their numbers, because the predictions were historically
over-inflated. He felt that the current predictions beyond
2022 were too optimistic, because the U.S. was becoming
energy independent. He wondered if the optimistic numbers
were achievable. Commissioner Rodell replied that she had
the most confidence in the predictions through 2017. She
was focused on those numbers, because there were global and
internal analyses that looked at the near-term price
forecast. She remarked that inflation was a consideration,
and the chart reflected the up-trend due to inflation. She
understood that the estimate may be overly optimistic, but
felt that the near-term numbers were the most accurate.
Senator Hoffman understood that it was difficult to
determine the forecast, because the oil companies were
making the investment. He wondered when that production
would stabilize. Commissioner Rodell responded that
stabilization could occur in 2017 or 2018, because there
was a "ramp up" in activity. She remarked that DOR had
changed its methodology for production forecast, because
the recent forecast had been overly optimistic. She
explained that DOR made significant effort to decrease the
error rate of the forecasts. She stressed that the current
estimates were more conservative than in the past. She
stated that she had some slides in the presentation that
reflected that change.
Co-Chair Kelly asked Commissioner Rodell to present those
on-topic slides.
9:20:04 AM
Commissioner Rodell moved to slide 12, "Production History
and Forecast." She explained that, historically, Prudhoe
Bay was always the center of oil production for the state.
She looked at 2001; new fields came online and began
producing oil. During that time there was a leveling out of
production that came in on a daily basis. She felt that
same effect would occur in the future. She remarked that
there was additional production currently occurring outside
of Prudhoe Bay. She stated that the slide included
forecasts for non-Prudhoe Bay field production. She felt
that projecting activity outside of Prudhoe Bay was of
great value to Alaska.
Commissioner Rodell looked at slide 13, "ANS Oil Production
Forecast." She noted that 2005 showed a FY13 projection of
more than 800,000 barrels per day. This projection was
overly optimistic, because the current production was
approximately 500,000 barrels per day. She felt that the
forecast did not provide the most accurate information,
even as recently as fall 2011. She remarked that the fall
2011 forecast was significantly overstating the amount of
production versus what was actually true in FY13.
Commissioner Rodell discussed slide 14, "ANS Oil Production
Forecast."
Currently Producing:
-Oil from wells that are in production and
following typical reservoir engineering
optimization without major investment.
Under Development (UD):
-Oil from projects that will add incremental oil
to existing fields or will bring new fields into
production.
-Project must have senior management approval and
be allocated funds in the company's budget.
Under Evaluation (UE):
-Oil from projects that are likely to occur in
the future, but have not met the requirements of
the previous category.
-Requires that oil reserves are known and
recovery is technically possible with current
technology.
Under Development + Under Evaluation = "New Oil"
Commissioner Rodell highlighted slide 15, "ANS Oil
Production Forecast."
"Currently Producing" oil was not risked
-Engineering assessment based on actual
production data
The "New Oil" portion of the Forecast was adjusted for
risks
-Accounts for uncertainty in subsurface
conditions and risk of delay
The "Under Evaluation" portion of the Forecast was
risked at a greater rate than "Under Development"
-Accounts for greater uncertainty in subsurface
conditions and higher risk of delay
Commissioner Rodell looked at slide 16, "ANS Oil Production
- Actuals and Forecast." She remarked that the barrels
would be added into the production forecast, once there was
greater confidence that they would actually be produced.
Commissioner Rodell discussed slide 17, "ANS Oil Production
- Actuals and Forecast." In order to establish the new
methodology, DOR examined its own recent practices. She
explained that the slide reflected the decline rates that
occurred annually starting in 2006. She stated that the
department looked over the past seven years, and continued
the pattern reflected in the black dotted line. She
explained that the black dotted line was used as a starting
point for determining the forecast. She pointed out that
the bottom grey dotted line was a projection if there was
no new oil. The top dotted line was based on old
methodology. She explained that using the new methodology,
with risk factoring, was reflected in the solid black line.
9:25:00 AM
Commissioner Rodell highlighted slide 18, "North Slope
Production Forecast." The slide showed what was currently
producing, and how it would decline. It showed what new oil
was from the legacy fields, and would not be eligible for
the Alaska Production Act tax credits. She remarked that a
significant portion of new oil would continue to come from
the legacy fields. She pointed out that the brown area
represented what DOR forecasted to be eligible for the tax
credit. The green area was upside potential, which was seen
as production that would occur if everything happened
exactly as forecasted.
Senator Hoffman remarked that there was still a gradual
decline, and wondered why there was no stabilization in the
forecast. He specifically wondered when there would be an
increase in revenue. Commissioner Rodell replied that DOR
did not look 10 years into the future, so she did not know
if or when there would be an increase in production
revenue.
Senator Hoffman wondered if that increase in revenue and
production would ever occur. Commissioner Rodell replied
that she did not know.
9:28:16 AM
RECESS
9:41:10 AM
RECONVENED
9:42:18 AM
Commissioner Rodell highlighted slide 5, "Fall 2013
Highlights."
Oil price and production levels have been reduced
relative to the 2013 Spring Forecast.
Correspondingly, unrestricted revenues have been
revised down from the Spring 2013 Forecast.
Revenue impacts largely due to changes in oil price,
production, lease expenditures, and tariffs.
Substantial (~$10 billion) increase in spending on the
North Slope over the next 10 years.
Oil companies project increased North Slope production
following the increased activity.
-DOR continues to prudently assess future
production and the forecast is not intended as a
comprehensive assessment of all the potential
activity or projects under evaluation.
State investment earnings are strong.
Commissioner Rodell looked at slide 6, "General Fund
Unrestricted Oil Revenues." She explained that there were
four components of petroleum revenue that DOR forecasts.
She noted that royalty, corporate income tax, and property
tax were all relatively stable. She stressed that
production tax had the most significant decline. She
explained that the lease expenditures would continue to
have an effect in the near-term on the production tax
forecast, because of the net tax system.
Commissioner Rodell discussed slide 7, "General Fund
Unrestricted Other Revenues." She explained there other
revenue tax types that were important to the Alaska General
Fund (GF). She stressed that the revenues on the slide were
not as important as the petroleum revenue, but contributed
significant amounts of revenue to the state. She remarked
that the forecast of $86 million was roughly up 15 percent
for FY 14. She reported that the estimate would be closer
to $100 million with three months of additional earnings
from when the forecast was set in October.
9:45:33 AM
Commissioner Rodell highlighted slide 8, "Total Revenue
Forecast - FY 13, 14, and 15." She remarked that the total
state revenue from FY 13 actuals was $15.8 billion. The
forecasted revenue for FY 14 was $12.8 billion, and the
forecasted revenue for FY 15 was $12.3 billion.
Commissioner Rodell discussed slide 9, "General Fund
Unrestricted Revenue Price Sensitivity FY 2014-2016." She
understood that the price sensitivity of the forecast was
always of interest to the committee. She explained that the
slide showed much less volatility in revenues due to
changes in price. She expressed that she would like to work
with the committee to examine how changes in production
affect the Unrestricted General Fund (UGF). She felt that
DOR had stabilized the forecast: at $100 per barrel there
would be $4 billion in UGF revenue. Alaska would receive an
additional approximately $1 billion of the cost per barrel
increased by $10. Alaska would still continue to generate
significant revenue, even if the cost per barrel decreased.
This was because there was not much effect on volatility as
the price declines.
Commissioner Rodell looked at slide 10, "Fall 2013 Total
Revenue Forecast." She stated that the graphic displayed a
picture of what had occurred over the ten year history and
the ten year forecast. She noted that 2004 showed an actual
production of roughly 974,000 barrels per day, and
production had decreased to 531,000 barrels per day in the
current day. The forecast showed that the decline would
stabilize, and she believed that there would be
approximately $500,000 for the next two fiscal years.
Commissioner Rodell looked at slide 20, "Alaska North Slope
Crude West Coast Price." She remarked that there were many
activities that affected the global oil market. She pointed
out of few of the activities that affected the price of oil
in FY 12 and FY 13: supply disruptions in Yemen, Syria, and
South Sudan; Syria used chemical weapons; and the threat of
regional warfare in the Middle Ease in response to the use
of chemical weapons from Syria.
Commissioner Rodell highlighted slide 21, "Key Oil Price
Drivers."
Supply and Demand
There are two main factors to monitor.
-Global spare capacity, since it is both a
reflection of supply and demand. In other
words, the Organization of Petroleum
Exporting Countries (OPEC) spare capacity
(flipping a switch) is key.
-Cost of developing new oil supply.
Department is developing a probability and
statistical model incorporating spare capacity
and cost of developing new supply to help
forecast ANS prices in the future.
9:50:27 AM
Senator Hoffman wondered how the efforts of the United
States to become energy independent and the transportation
costs of importing oil affected ANS pricing. Commissioner
Rodell responded that the price of oil would stay
relatively low compared to recent years. She furthered that
Oil Producing and Exporting Countries (OPEC) was hoping to
keep the price of oil around $100 per barrel.
Commissioner Rodell discussed slide 22, "Price Forecast
Methodology."
Price Forecasting Session
Held a day long oil price forecasting session on
October 1, 2013.
Speakers provided insight into oil markets,
probability and analysis, modeling, and financial
aspects of commodity markets.
39 participants from state government, academia
and the private sector.
-DOR, DNR, DOL, OMB, University, Legislative
Finance and outside participants.
Participants were asked to forecast real ANS
prices for the West Coast.
-Real prices were converted to nominal using
a 2.5 percent inflation assumption.
Median price path was chosen for each time
period.
Commissioner Rodell highlighted slide 23, "Historical ANS
West Coast FY Oil Price Bands, Annual Average and Official
FY 2013 Forecast." The slide showed the actual average
price that was used and converted into revenue. She pointed
out 2009, when there was global unrest the average price
was $68.34 per barrel. She remarked that over the course of
the entire year in 2009, the price ranged from under $40
per barrel to as high as $130 per barrel. She remarked that
the price range narrowed as the global economy was
steadying. She looked at 2013, and noted that there was
very little price volatility.
9:55:26 AM
Commissioner Rodell looked at slide 26, "Contributors of
Changes in FY 2014 Revenue Forecast." She explained that
the average production tax value per barrel was reduced by
$9.23. She furthered the slide displayed a simplified
calculation, and did not represent any actual company
value, and assumed a 12.5 percent royalty.
Commissioner Rodell highlighted slide 27, "Contributors of
Changes in FY 2015 Revenue Forecast." She noted that the
average production tax value per barrel in this slide was
reduced by $14.90. She explained that it was a simplified
calculation, and did not represent any actual company
value. It also assumed 12.5 percent royalty.
Senator Dunleavy queried the reasoning for the increase in
lease expenditures. Commissioner Rodell responded with
slide 28, "North Slope Lease Expenditure Forecast Change,
CAPEX." She stated that there was an expected increase in
activity and drilling in capital expenditure forecasts. She
remarked that FY 14 had an increase and FY 15 had an even
greater increase in deductible lease expenditures of $1
billion.
9:59:40 AM
Co-Chair Kelly surmised that the increase in capital
expenses was not reflected in the current revenue
forecasts. Commissioner Rodell replied that some of it was
included, but not all of it.
Co-Chair Kelly wondered if he could receive forecasts with
all of the capital expenses included. Commissioner Rodell
agreed to provide that information.
Commissioner Rodell looked at slide 29, "North Slope Lease
Expenditure Forecast Change, OPEX." She stated that the
slide showed a significant increase in operating expenses
versus the capital expenditures in 2014. She explained that
the companies were building staff, which is why there was
low capital expenditures in 2014 but there was increased in
2015.
Co-Chair Kelly introduced the staff of the Senate Finance
Committee.
10:04:10 AM
Co-Chair Meyer recalled the governor stating that $105 per
barrel was the crossover price between ACES and the More
Production Act. He understood that the price of oil was
low, as more oil was produced. He felt that Alaska was more
attractive to investors as oil prices continue to decrease.
He remarked that the increase in expenditures was accurate,
because the oil companies were announcing new projects. He
stressed that the intent of the passage of the More
Production Act was get more production. He wondered if
Commissioner Rodell agreed that the $105 per barrel was the
crossover point to the More Production Act. Commissioner
Rodell replied that she believed that it was still the
crossover point. She stated that she had no further
information, but shared that DOR was continually evaluating
the projection.
Co-Chair Meyer felt that there had been historically
accurate production forecasts, which included potential
offshore development. Commissioner Rodell understood that
there were many opportunities for companies to develop in
Alaska, which DOR did not include in the production
forecasts.
Co-Chair Meyer remarked that companies were still
experimenting with the potential for heavy oil. He stressed
that there was potential for exploration in Alaska, but
understood that DOR could not include that potential in the
forecasts. Commissioner Rodell agreed, and stressed that
DOR must provide the best estimate of revenue based on
current knowledge. She stressed that Alaska was AAA-rated
for investors, because the revenue forecast was taken very
seriously. She did not want to give the misperception that
Alaska was misleading, or creating an environment in the
near-term that was unrealistic. She stressed that 90
percent of Alaska's revenue depended on the oil production
tax, it was important to be conservative and forthright
with the revenue forecast.
Co-Chair Meyer remarked that some oil companies are
reluctant to explore for oil, because they feel that they
may discover gas instead of oil.
10:09:25 AM
Commissioner Rodell discussed the presentation, "State of
Alaska, An Update on the State's Savings Accounts" (copy on
file). She stated that the presentation was intended to
provide a sense of the performance of the state's savings
accounts. She shared that the equity markets had been very
good to everyone who had investments in the equity markets
in calendar year 2013. She stated that the Dow Jones
Industrial was up over 25 percent over the year, so the
state realized the benefit of that through its equity
investments.
Commissioner Rodell displayed slide 3, "General Fund and
other non-segregated investments (GeFONSI)." She stressed
that she hoped to work with the committee to examine
information from the Federal Reserve related to
quantitative easing. She shared that there were DOR staff
that were examining the state's asset allocations and its
exposure to the bond market. As interest rates increase,
the bond prices decrease, to the mark to market value of
the investments would also decrease. She stressed that
there needed to be an examination of the time horizons of
the reserve draws, and what can be done to mediate that
issue. She explained that GeFONSI provided the day-to-day
cash for the operations of the state. She stated that it
had a moderate risk profile, with a short to intermediate
investment horizon, because of the liquidity requirements
of the state. She explained that on December 21, 2012 there
was a balance of $11.8 billion, and on December 21, 2013
there was a balance $5.76 billion. She explained that the
statutory budget reserve (SBR) was removed from the GF, and
created its own asset allocation. The SBR was now invested
independently from the GF.
Senator Hoffman queried the justification of moving the
SBR. Commissioner Rodell replied that DOR felt that given
the size of the balances in the GF, the SBR needed to be
allowed to invest in a slightly longer time horizon.
Senator Hoffman remarked that SBR was still considered GF
to be spent by the legislature, and felt that excluding the
SBR did not give a true picture of the GF balance.
Commissioner Rodell remarked that the SBR was still at the
discretion of the legislature, but had its own page.
10:14:21 AM
Commissioner Rodell highlighted slide 4, "Constitutional
Budget Reserve Fund (main and sub)." She explained the
slide divided the CBR between the main fund and the sub
fund. She stated that the sub fund was determined to have a
longer time horizon, and take a higher risk profile. She
stressed that the sub fund would receive the true benefit
of the equity investments that the CBR sub fund made. She
remarked that the state increased the value of the sub fund
by almost $700 million. She furthered that the majority of
the main fund was in treasury bills and bonds.
Commissioner Rodell looked at slide 5, "Power Cost
Equalization Fund." She explained that statute required the
Power Cost Equalization (FCE) to target a 7 percent return
rate, therefore there was an 80 percent allocation to
equities. She stressed that the allocation was of great
benefit over the year prior, because the fund increased
from $787.5 million to $937.3 million at the end of
December 2013.
Co-Chair Meyer looked at slide 4, and noted that the
governor had suggested withdrawing $3 billion from the CBR
for a cash infusion into the unfunded liability. He
wondered if the $3 billion would come from the main fund or
sub fund. Commissioner Rodell responded that the trust
funds had an asset allocation that was different than the
sub fund. She remarked that the sub fund did not perform as
well as PERS and TRS by comparison. She explained that
there would be an examination of the investments in both
the main and sub funds; examine the asset allocation for
PERS and TRS; and move it from either fund. This would
result in rebalance between the sub and main funds.
Co-Chair Meyer looked at the PCE fund, and felt that it had
done substantially better than some of the other funds.
Commissioner Rodell agreed, and explained that statute
required the PCE to achieve 7 percent.
10:19:58 AM
Co-Chair Meyer wondered if the PCE was too large. He
remarked that PCE was working as intended Commissioner
Rodell responded that it was one of the first years that
did not require a GF contribution to the PCE.
Senator Hoffman recalled that the previous year's market
was considerably different than current markets. He
remarked that the previous year's presentation showed a
loss in the PCE fund, because of the higher required return
of 7 percent. He stressed that the state was fortunate to
have a robust market in 2013.
Co-Chair Meyer quipped that he was merely looking for more
money for the capital budget.
Vice-Chair Fairclough stressed that the market was
constantly readjusting, and Alaska was "riding on top of
the budget" to Alaska's benefit. She stressed that there
should be less risk to the state. She felt that the fund
should lower the rate of return, so the investors were not
forced to invest in more risky proposals.
Commissioner Rodell highlighted slide 6, "Public School
Trust Fund (Principal and Income accounts)." She stated
that the Public School Trust Fund had an allocation of 58
percent to the broad market, 27 percent domestic equity,
and 15 percent international equity. She explained that the
fund had a lower allocation to the equity markets, and the
fund increased from just under $500 million to $536.7
million by the end of December 2013. The fund had an actual
rate in FY 13 of 8.19 percent. She felt that the slide was
a good illustration between the PCE with an 80 percent
allocation to equity; versus the Public School Trust with
an allocation of approximately 40 percent to equities.
Commissioner Rodell looked at slide 7, "PERS and TRS." She
remarked that PERS and TERS was allowed to have a much
broader asset allocation and touch on more markets than the
CBR. She remarked that domestic equity was approximately 26
percent and global equity was approximately 25 percent. She
added that PERS and TRS was able to put money into real
assets like timber land and farm land.
10:26:19 AM
Commissioner Rodell highlighted slide 8, "APFC." She stated
that PERS and TRS did slightly better than Alaska Permanent
Fund Corporation (APFC). She explained that it was due to
different long term investment goals, and the need to
achieve different rates. The APFC's goal was achieve a real
rate of return of 5 percent, and it had exceeded that goal.
Commissioner Rodell discussed slide 10, "FY 2014 Investment
Revenue Forecast." She remarked that the forecast showed an
increase in investment income of over $100 million in UGF.
She stated that the restricted funds in GF saw an increase
of $7.7 million. She announced that the CBR saw an increase
of $823 million. With the addition of the other funds and
APFC, the total restricted amount was $4.8 billion. She
stressed that the market had been very good to the state
over the previous year.
Co-Chair Meyer surmised that the PERS and TRS fund relied
on an 8 percent return over a 30 year period, but noticed
that the PCE fund had an "unrealistic" expectation of 8
percent. He queried the difference. Commissioner Rodell
responded that PCE had a statutory requirement to achieve 7
percent without regard to inflation. She remarked that it
was a very aggressive rate of return. She stated that PERS
and TRS had a different time horizon. It assumed 8 percent,
including an inflation factor, so a real return should be
slightly less than 8 percent for achievement. She stressed
that the actuary used that outline to value the fund, to
determine the available benefits over thirty years.
Co-Chair Meyer wondered if the annual $500 million request
for the unfunded liability would increase, if the re rate
of return on the PERS and TRS was not met. Commissioner
Rodell responded in the affirmative, and furthered that the
goal of the $500 million annual request was to keep that
number the same annually. She stressed that the liability
would adjust based on investment returns. She remarked that
there could be years where the liability increases or
decreases. She felt that intention with the governor's
proposal was to create some budget certainty.
10:31:57 AM
AT EASE
10:45:29 AM
RECONVENED
10:46:07 AM
^FY15 BUDGET OVERVIEW: OFFICE OF MANAGEMENT and BUDGET
KAREN REHFELD, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
(OMB), OFFICE OF THE GOVERNOR, discussed the PowerPoint
presentation, "FY 2015 Budget Overview, Senate Finance
Committee" (copy on file). She stated that there were three
budget bills for the operating, capital, and mental health
budgets.
Ms. Rehfeld highlighted slide 2, "Budget Vision." She
stated that Governor Parnell was very optimistic about
Alaska's future. She remarked that Alaska's economy was
growing, and provided many opportunities for Alaskans. She
felt that the effort of the legislature had worked to put
Alaska's finances in order. She felt that Alaska had solid
a solid financial footing, strong bond ratings, and felt
that the branches of Alaska's government were working well
together to sustain the financial energy.
Ms. Rehfeld discussed slide 3, "Budget Principles."
Four principles to guide FY2015 budget
-Live within our means
-Focus on constitutional priorities
-Fix what we have
-Finish what we started
10:50:04 AM
Ms. Rehfeld looked at slide 4, "FY2014/FY2015 Budgets: Big
Picture." She remarked that the governor and the
legislature had worked very closely the previous year to
set a spending target. She pointed out that the previous
year's budget was over $1 billion less than the previous
fiscal year. She stated that the current budget request had
reduced the pressure on the GF by over $1 billion. She
stressed that less revenue meant less spending. She stated
that OMB had asked the departments to carefully evaluate
their core services, and only request funds that would not
require additions to the budget. She stressed that OMB was
looking at different ways to decrease overhead, be more
efficient, and focus on Alaska's priorities. She pointed
out that the savings account would need to be accessed in
the current and following fiscal years in order balance the
need to provide essential services and the short-term
revenue picture. She felt that the state would see a
turnaround in resource production in the near future.
Ms. Rehfeld highlighted slide 5, "Alaska's Reserve
Accounts." The purpose of the slide was to show how the
savings accounts had grown over a period of time, from FY
02 to FY 15. She pointed out that the reserve accounts had
grown from approximately $2 billion to $16 billion. She
remarked that higher oil prices made it possible to put
more money into the savings accounts. Maintaining and
managing the reserves were keys to the long range annual
fiscal plan. She felt that the reserves could be used
wisely to address the short term budget dilemmas. She added
that the reserves could also be used to invest differently
to cover the cost of the pension unfunded liability.
Senator Hoffman wondered if the $11.3 billion FY 15
projection reflected the three areas the governor discussed
as priorities. He asked specifically if the $3 billion
unfunded liability was taken from the savings account. He
also wondered if there was a budget for the state's
spending on the proposed gas line. He further asked if the
proposal included the governor's education funding
intentions. If those items were not included, he queried
the funding number that would include all of those
priorities. Ms. Rehfeld responded that the projection
reflected the transfer of $3 billion from the CBR into the
retirement trust funds. She stated that the governor spoke
about two separate pieces which included the gas line and
the potential for the education funding package, but were
not incorporated in the December numbers. She stressed that
bills regarding those issues had not been introduced with
accompanying fiscal notes. She furthered that there would
be adjustments to the overall budget, depending on where
the spending lined up at the end of the legislative
session. She explained that the chart showed the governor's
December 15 budget as proposed and the impact on the
reserves. She felt that $11.3 billion was a strong reserve
account for the end of FY 15.
Vice-Chair Fairclough looked at the issue of transferring
$3 billion to the Arm Board, and its current rate of
return, which was better than past years. She noted that
the 8 percent rate of return required a historical
examination over 30 years, to determine how the real
numbers would be affected. She felt that moving $3 billion
over to a management tool, based on only one year's rate of
return was not historically high. Ms. Rehfeld stated that
Vice-Chair Fairclough made a good point regarding the Arm
Board's historic rates of return.
10:55:22 AM
Ms. Rehfeld discussed slide 6, "FY2015 Budget by Fund
Source." She stated that the next few slides were designed
to provide some context into the total budget with all
three budget bills combined. She announced that the total
request for all funds for FY 15 was $12.4 billion. She
reported that the chart showed that the UGF budget of $5.64
billion was just slightly over 50 percent of the total
budget. She explained that the $3.11 billion of federal
funds was 23 percent of the budget. She announced that the
$2.15 billion in the permanent fund component for dividends
and inflation proofing was 15 percent of the budget.
Designated GF of $868.4 million was 7 percent of the total
budget. She announced that $600.6 million of other state
funds was approximately 4 percent of the total budget. She
pointed out that other state funds included a transfer of
$3 billion from the CBR to the Retirement Trust Funds was a
component of the other state funds line item. She stressed
that the item was outlining the removal of money from one
fund and moving it to another fund. She stressed that the
fiscal summary included a net-out, but restated that moving
the funds was reflected in that particular component.
Ms. Rehfeld addressed slide 7, "FY2015 Budget by Category."
She remarked that the total budget request was $12.4
billion, and the chart outlined the categories of the
proposed funding. She looked at the left-hand side of the
pie chart. She explained that the red and pink portions
were the areas of the budget that were considered non-
discretionary. She stated that the blue portions of the pie
chart were more discretionary funds, so the reductions in
governor spending would be focused on those blue areas. She
looked at the dark red portion, which was the K-12 Formula,
which included the school funding formula. She explained
that the school funding formula was based on the current
statutory student allocation of $5,680 per student. She
furthered that the formula also included transportation
expenditures. She stressed that the budget fully funded the
current statutory entitlement, and forward funded education
in the budget. She remarked that the budget also included
the $25 million that was technically outside the school
funding formula for utility and energy related costs. She
looked at the darkest pink area of the chart that
represented other formula programs with $2.02 billion,
which was for Medicaid, public assistance, and power cost
equalization. She looked at the statewide appropriations
portion of the chart which contained $3.88 billion that was
direct payment for the unfunded liability. She furthered
that the statewide appropriations also included the $450
million tax credit, which included debt service payments
and community revenue sharing. She restated that the
permanent fund budget of $2.15 billion would be used for
inflation proofing and dividends. She remarked that the
state agency operations budget related to the 14 state
departments, UA, the legislative branch, and the judicial
branch. She noted that the portions of the chart titled
"Agency Nonformula and other funds" and "Agency Nonformula
Unrestricted GF" totaled $4.3 billion. She stressed that
$2.26 billion in Agency Nonformula funds was UGF, and
remarked that much of the legislative attention was on that
portion of the budget.
11:00:03 AM
Ms. Rehfeld looked at slide 8," FY2015 UGF Spend: $5.6
Billion." She stressed that the governor and the
legislature had worked together very well on fiscal issues
and fiscal discipline. The chart showed that the previous
year's spending target reduced the GF spending by over $1
billion. She added that the FY 15 proposal included an
additional reduction of $1.3 billion. She recognized that
there would be a downward pressure on GF spending, and
reducing the state operating budget. She felt very
optimistic about the potential shift in resource
production, because of recent changes in the tax structure.
She remarked that there would be some difficult decisions
in the next couple of years, but felt that the current
budget was very responsible as it related to the current
revenue picture. She remarked that over the years there had
been very healthy capital budgets, with remaining funds
from previous appropriated projects that would be available
to continue work on those efforts.
Co-Chair Kelly wondered if there was a number on the
capital budget dollars that had yet to be spent. Ms.
Rehfeld responded that the current numbers needed to be
updated, but she stated that the recent prepared numbers
reflected $6 billion that had yet to be spent with various
projects yet to come online. She stated that there was
anticipated federal authorization for some projects.
Co-Chair Kelly surmised that $6 billion was previously
appropriated funds that needed to be spent. Ms. Rehfeld
replied that $6 billion was the amount in spring 2014, and
stressed that the recent updates had not yet been released.
Co-Chair Meyer surmised that there were some bonds that had
not yet been sold. Ms. Rehfeld responded that there were
some bond-funded projects that had not moved forward for
various reasons.
Co-Chair Meyer understood that there was a 5-year window
for use of capital funds.
JOHN BOUCHER, SENIOR ECONOMIST, OFFICE OF MANAGEMENT AND
BUDGET, OFFICE OF THE GOVERNOR, responded that he was not
certain about the timeframe, but remarked that there could
be tax consequences because of the earnings. He stressed
that the department was carefully managing how they were
rolling out the most recent bond issues based upon some of
the discussed issues.
Ms. Rehfeld furthered that once the bonds were sold, there
were some time horizons that required use of the funds. She
announced that DOR would know more about that issue.
11:05:17 AM
Senator Hoffman noted that the unfunded liability was
included in the draw-down of the reserve accounts. He felt
that the spending chart did not show the $3 billion as
expenditure. He felt that the UGF spending would be more in
the neighborhood of $8.6 billion with the unfunded
liability inclusion. He furthered that there were large
issues, including education and the gas line. He expressed
concern related to the use of the savings account, and
stressed that the energy costs should be addressed for all
Alaskans. Ms. Rehfeld clarified that the proposal for the
unfunded liability was moving $3 billion from the CBR.
Slide 8 only referred to UGF, so the transfer on the fiscal
summary would be considered "other funds." She agreed that
OMB was concerned about the use of the savings accounts,
and OMB was annually preparing its ten-year plan released
on December 12, 2013. She noted scenarios where OMB had
built in some potential midrange production numbers, and
OMB had also examined some different price indicators. The
legislature needed to impose fiscal discipline on the
annual UGF spending for maximizing deliverance of public
service and minimizing the draw on reserves, as OMB
prepared the state's projected use of the savings accounts.
Ms. Rehfeld displayed slide 9, "FY2015 General Fund Budget
by Category." She remarked that the slide was similar to
slide 8, but focused solely on the GF budget. She felt it
was important to understand the categories of the $5.64
billion in UGF funding. She remarked that the red colored
areas of the pie related to non-discretionary funds; and
the blue colored areas related to discretionary funds.
Co-Chair Kelly handed the gavel to Co-Chair Meyer.
11:10:30 AM
Ms. Rehfeld highlighted slide 10, "State Assistance
payments." She stressed that the retirement unfunded
liability was a very serious issue. She announced that it
was the single largest cost-driver in the operating budget.
She stressed that if it was not addressed, it would have a
negative impact for future generations. She shared that the
legislature, governor, and Arm Board had worked very
diligently on this issue. Over the previous seven years,
the state had paid over $3.3 billion in direct assistance
payments to help address the unfunded liability. She
stressed that the payments had been a relief to
municipalities and school districts. She stressed that
there was an almost $12 billion unfunded liability. She
explained that the black bars on the chart showed the
escalating cost of the assistance payments, based on the
current methodology of level percent of pay. Over a period
of time to 2032, the stated will have spent $15.2 billion.
The governor had proposal was highlighted by the blue bars.
She noted that there was a $3 billion for the current
fiscal year, and then the annual payment would be capped at
$500 million. The result would be extending three years
beyond the current methodology, but would cost the state $2
billion less than the current level percent of pay. She
stressed that the goals of OMB were the same as the
legislature: to be able to manage the annual cost of the
program; meet the obligations to the retirees; preserve the
health of the trust funds; and to not leave this problem to
the next generation.
11:14:27 AM
Co-Chair Meyer felt that the $3 billion would be considered
spending. Ms. Rehfeld responded that the transfer was
leverage the use of the existing savings, to maximize the
benefit of the funds that were already in the savings
account. She remarked that the result would take the
pressure off the annual recurring revenue from the UGF.
Co-Chair Meyer stressed that if CBR money was considered
UGF money, and could be used toward roads, schools, etc.,
it should be considered spending. He wondered why the funds
needed to be deposited in the trust, rather than set aside
in a reserve or escrow account. He agreed that the issue
should not be held off for the next generation, but did not
want to spend too much and deny that generation possible
education funding. Ms. Rehfeld agreed, and stated that a
three quarter vote of the legislature allowed the use of
the CBR for any item the legislature might choose. She
explained that the governor proposed a single item, but did
not request the funding for any other purpose.
Co-Chair Meyer handed the gavel to Co-Chair Kelly.
Co-Chair Meyer wondered if the fund was unhealthy. Ms.
Rehfeld replied that the fund had and AAA rating.
Co-Chair Meyer remarked that Alaska was one of four states
that had accounted for medical unfunded liability, so it
looked much worse than other states. Ms. Rehfeld agreed and
furthered that it was how the unfunded liability was
calculated.
11:19:32 AM
Vice-Chair Fairclough remarked that there was already a
payment method to pay off the unfunded liability, and as
long as the payments were met, Alaska would be viewed in
good standing. She wondered if a subaccount were to flatten
the payments to draw interest, the rating agencies would
still apply a remarkable rating. Ms. Rehfeld agreed and
furthered that it was one of several approaches that had
been considered.
Co-Chair Kelly felt that the issue was important, and
pointed out that it was probably the largest issue facing
the legislature in the operating budget.
Vice-Chair Fairclough stressed that one of the measurement
tools that she will be examining was what was left in the
fund. She remarked that the Arm Board was responsible for
the health of the people that were promised benefits. She
stressed that her votes would be in line with that
responsibility.
Senator Hoffman agreed that there should be further
examination of the unfunded liability issue. He remarked
that there had been various proposals about creating a
reserve account. The Arm Board had opposed that proposal;
because it did not reflect what they felt was the true
liability. He remarked that the proposal would be
considered a loan, so the state would get the funds
returned.
Vice-Chair Fairclough stressed that she was concerned about
what would be leftover in the fund after a $3 billion
investment. She understood that the Arm Board needed to be
sure that there was cash flow to make their annual payments
to beneficiaries' health needs. She wanted to know what the
cash flow would look like after the $3 billion infusion.
11:24:01 AM
Co-Chair Kelly stressed that there had been conversations
regarding the unfunded liability, and hoped that Ms.
Rehfeld would communicate to the governor that the
legislature supported a healthy retirement system.
Senator Bishop stressed that lowering the cost of energy in
rural Alaska was another important issue in maintaining a
healthy cash fund.
Ms. Rehfeld discussed slide 11, "Spending Controls."
Maximize efficiency/Rein, in operating spending
Improve/Streamline Business Processes
Regulations Review- AO 266
Enhance technology
Lower cost of purchasing
Reduce footprint/cost of office space
Deleted 150 vacant positions
Ms. Rehfeld looked at slide 12, "Budget Priorities."
Focus on Administration's strategic investment
priorities
Education
Resources and Energy
Public Safety
Transportation/Infrastructure
Military Support
Ms. Rehfeld displayed slide 13, "FY2015 Budget- Another
Perspective." She remarked that the chart reflected that 60
percent of Alaska's budget benefitted communities and
organizations through grants, direct payments, and capital
project funding.
11:29:49 AM
Co-Chair Kelly thanked Ms. Rehfeld for her work at OMB. He
stated that it was rare for the governor to present a
budget that contained a reduction. He understood that the
reduction was difficult, because there were over a billion
requests that OMB needed to filter in order to draft a
budget. He felt that Alaskans would want to reduce the
government agencies even more than the current budget
request. Ms. Rehfeld agreed that OMB had worked hard to
develop the proposed budget. She remarked that,
historically, there were far more state department requests
that what was included in the budget. She stated that there
were not an overwhelming number of requests that were
considered for the current budget, because OMB encouraged
the departments to limit the requests to significant areas
of problem or concern in their individual budgets. She
pointed out that there was an actual reduction in the
agency operations portion of the budget. She understood
that the statewide portion of the budget that included the
unfunded liability payment or shifts in the tax credits
were big picture inclusions. She restated that the agency
budget was a reduction. She asserted that the following
year's budget would include more reductions that the
current year.
Co-Chair Kelly commented that the previous year's budget
halted a default expansion of government. He felt that
there needed to be a reduction of funding for state
agencies.
Co-Chair Kelly handed the gavel to Vice-Chair Fairclough.
Senator Hoffman asked for a report on the revenue sharing
program. Ms. Rehfeld indicated that she would provide that
information.
SB 119 was HEARD and HELD in committee for further
consideration
SB 120 was HEARD and HELD in committee for further
consideration.
SB 121 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Fall 2013 Forecast Presentation Senate Finance Jan 23 2014 (2).pdf |
SFIN 1/23/2014 9:00:00 AM |
SB 120 |
| FY2015_2 page_Cost_Driver_Budget_Priorities_for _Finance_Committees_1-23-14.pdf |
SFIN 1/23/2014 9:00:00 AM |
SB 120 |
| KJR Budget Overview for SFC Final 01 22 2014.pdf |
SFIN 1/23/2014 9:00:00 AM |
SB 120 |
| State Savings Accounts Update Senate Finance Jan 23 2014.pdf |
SFIN 1/23/2014 9:00:00 AM |
SB 120 |