Legislature(1997 - 1998)
01/17/1997 01:37 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 FINANCE COMMITTEE
January 17, 1997
1:37 P.M.
TAPE HFC 97-1, Side 1, #000 - end.
TAPE HFC 97-1, Side 2, #000 - end.
TAPE HFC 97-2, Side 1, #000 - 559.
CALL TO ORDER
Co-Chair Hanley called the House Finance Committee meeting
to order at 1:37 p.m.
PRESENT
Co-Chair Hanley Representative Kelly
Co-Chair Therriault
Representative Davies Representative Martin
Representative Davis
Representative Foster Representative Mulder
Representative Grussendorf
Representatives Kohring and Moses were absent from the
meeting.
ALSO PRESENT
Mike Greany, Director, Legislative Finance Division; Annalee
McConnell, Director, Office of Management and Budget, Office
of the Governor; Dan Spencer, Senior Analyst, Office of
Management and Budget, Office of the Governor; Wilson
Condon, Commissioner, Department of Revenue; Charles
Logsdon, Chief Petroleum Economist, Oil and Gas Division,
Department of Revenue; Bob Bartholomew, Deputy Director,
Income and Excise Audit Division, Department of Revenue.
SUMMARY
OVERVIEW: Governor's Spending Plan and Fiscal Gap
GOVERNOR'S SPENDING PLAN AND FISCAL GAP
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE provided
members with a copy of the Department's Revenue Forecast
(Attachment 1, copy in file). He noted that the first 3
pages of the attachment reflect FY 96 actual spending levels
and projections for FY 97 - 99 from the Fall Revenue
Forecast.
CHARLES LOGSDON, CHIEF PETROLEUM ECONOMIST, OIL AND GAS
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AUDIT DIVISION, DEPARTMENT OF REVENUE discussed Attachment
1. He explained that nominal dollars represent the amount
that comes into the State's treasury. Real dollars are
nominal dollars that have been adjusted for the rate of
inflation. The real dollar trend has declined since 1985.
He estimated that the real price of oil will stay the same
over the next 15 years. He suggested that nominal dollars
will drift up with inflation. He estimated that supply will
grow with demand and the future will be characterized by an
oil price of $16 real dollars a barrel. He observed that
there was a "price bubble" over the past year. He noted
that the price of oil rose when demand out ran supply last
spring. Oil prices remained high during the summer.
Inventories were lean going into the winter. Severe winter
weather has kept demand high. He estimated that oil prices
will return to $18 dollars a barrel by April as seasonal
demand ends and production increases.
Mr. Logsdon noted that the bubble increased FY 96 revenues
by an additional $55 million dollars. He estimated that FY
97 oil revenues will increase by $540 million dollars.
Revenue for FY 97 is currently $210 million dollars above
the spring estimate. He noted that the Futures Market
assumes that the price of oil will come down $5 dollars a
barrel in the next year.
Representative Martin observed that the Department stated in
its back-up that 85 percent of the State's income comes from
oil revenue. Mr. Logsdon explained that 85 percent of the
State's general fund income comes from oil revenues.
Co-Chair Therriault pointed out that increased investment is
based on expectations that the price will stay high into the
future. Mr. Logsdon noted that there are things that can be
done in the short term that can increase production. He
reiterated that oil prices over time will probably be close
to $16 real dollars a barrel.
Representative Kelly asked the significance of a $5 dollar a
barrel correction. Mr. Logsdon agreed that $5 dollars is a
significant correction. Representative Kelly asked if a $5
dollar correction could lead to a further "free fall" in
prices. Mr. Logsdon acknowledged that it could be the
result, but emphasized that an underlying core of solid
economic growth in the global economy exists. He did not
anticipate a "free fall" in oil prices.
Representative Davies pointed out that there was almost a $5
dollar correction in October, 1996. He referred to the
Cambridge Energy forecast. Mr. Logsdon noted that the
Cambridge forecast is primarily focused on demand growth as
the cause of higher oil prices. He noted that the
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Department of Revenue forecast is approximately .50 cents a
barrel lower for both FY 97 and FY 98 than the forecast by
Cambridge.
Commissioner Condon emphasized that the Department
anticipates a real price of $16 dollars a barrel over time.
He discussed volume. He noted that both British Petroleum
Exploration (Alaska) Incorporated and ARCO, Alaska,
Incorporated announced that they would make additional
investments in their Alaskan operations. He explained that
the Department's November revenue forecast did not include
projections based on these announcements. He stated that an
increase of 25,000 barrels a day in FY 99 would be expected
if BP and ARCO succeed in their objectives. Production
could increase to 300,000 barrels a day by the year 2005.
State revenues would be approximately $1.9 billion dollars
for the fiscal years 1999 -2005 if additional investments
are made.
Commissioner Condon discussed the economic effect of the tax
exemption for gasohol on state revenues. Co-Chair Hanley
gave a brief history of the gasohol tax exemption. He noted
that there are a number of companies that sell gasohol all
year. In response to a question by Co-Chair Hanley,
Commissioner Condon noted that the state loses approximately
$8 million dollars in revenues from the exemption.
BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT
DIVISION, DEPARTMENT OF REVENUE stated that gasohol sales
are primarily in Anchorage. He explained that there is a
cost to producers for the additive. Producers receive a .13
cent tax break (.8 cents from state and .5 cents from
federal tax).
ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGEMENT AND
BUDGET, OFFICE OF THE GOVERNOR provided members with copies
of the Executive Budget Summary, July 1997 - June 1998
(Attachment 2, copy on file). She discussed educational
funding. She stressed that the State is not able to
maintain the same level of nominal dollars for school
funding. She noted that increased enrollment costs have
been incorporated into the budget. She acknowledged public
and legislative concern regarding the distribution of
funding and the quality of education. She noted that the
Board of Education has proposed a rewrite of the foundation
formula that incorporates the concept of tying additional
future funding to a demonstration of forward progress in
regards to quality standards in education. Standards for
teachers, administrators and students would be applied. She
stressed that the proposal is in the development stage.
(Tape Change, HFC 97-1, Side 2)
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Ms. McConnell emphasized that revamping how the quality of
education is tied to its funding will require a great deal
of discussion with the Legislature and the public. The
Governor's proposed budget was based on the current
foundation formula with the inclusion of enrollment
increases and the acknowledgement that additional work will
take place on a new foundation formula proposal.
Ms. McConnell stressed that the Governor is committed to a
three year reduction of $100 million dollars. She noted
that if education is funded at the proposed level this year,
there will be greater cuts in the following year. She
acknowledged that a public vote will probably be necessary
for the creation of an endowment.
Ms. McConnell maintained that the past two budgets have
shown reductions. She noted the difficulty of absorbing
inflation. She stressed that per capita spending continues
to drop from 1979. She emphasized that the budget rose from
$821.6 million dollars to $2.256.5 billion dollars from 1979
- 1980.
Ms. McConnell stated that the Governor's fiscal plan is
based on absorbing inflation and some modest continued
budget reductions in nominal dollars and increased revenues
from a tobacco tax. She explained that a $1 dollar a pack
tobacco tax would net just under $40 million dollars in the
first year and $44 million dollars in subsequent years. She
stressed that the revenue projections took into account a
reduction in consumption.
Ms. McConnell acknowledged that there is a difference in
opinion between the Administration and the legislative
majority, in regards to the level of reductions which are
necessary for FY 98. She maintained that the Administration
favors a more modest level of cuts. The Administration
recommends reductions of $100 million dollars over the next
three years. She stressed that the State's plan can include
increases in revenue as well as reductions in expenditures.
She stated that the Administration is sensitive to the
impact on services and the State's economy.
Ms. McConnell observed that the Governor's proposed budget
absorbs $40 million dollars in increases that include $12.4
million dollars for additional education enrollment. There
was also a $2.6 million dollar increase in pupil
transportation and single site schools. Other areas of
growth were in the Department of Health & Social Services.
There was a net increase of $15.3 million dollars in non-
education formula programs. She stressed that the
Administration is attempting to apply cost control to these
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fast growing areas. She added that inflation increases were
also felt in health insurance premiums. There was a $2.8
million dollar increase in personnel costs for the
University of Alaska and a $6.4 million dollar increase for
the General Government Unit. She noted that inflationary
costs for fuel and supplies were also absorbed within the
agencies.
Ms. McConnell discussed spending priorities in regards to
crime. She noted that the Governor's proposed budget funds
a number of program recommendations from the Youth and
Justice Commission. Some are expansions of existing
programs and some are new efforts that the Commission
believes will assist high risk juveniles. Additional
resources were also allocated for village public safety
officers and domestic violence programs.
Ms. McConnell referred to programs relating to economic
development and job creation. She noted that the industries
that would benefit are funding many of these programs. She
stressed the need to identify increases that effect the
fiscal gap and those that do not effect the fiscal gap.
Ms. McConnell reiterated that revenues are $100 million
dollars greater than estimated for the current fiscal year.
This surplus will be automatically returned to the
Constitutional Budget Reserve Fund. She observed that the
estimated fiscal gap for FY 98 will be reduced from $370 to
$270 million dollars if oil prices remain steady.
Ms. McConnell noted that there is a $12.1 million dollar
reduction in the amount needed for debt service in FY 98.
This is the result of some bonds being paid and an
anticipation that there is $5.9 million dollars in balances
in debt service funds that can be applied to FY 98 payments.
This assumes that all the school bonds that are being
proposed will occur. She noted that there are additional
schools waiting for available debt service dollars.
Ms. McConnell discussed the format of the FY 97 - FY 98
budget plan. She noted that total funds are indicated.
Representative Martin noted the need to identify duplicated
expenditures. Ms. McConnell agreed that there is some
duplication between the front and back sections of the
budget. She stressed that the automatized budget system
which is under design by the Office of Management and Budget
will simplify the process. She noted that key program areas
are broken into total funds.
Ms. McConnell stated that the current plan estimates $17
million dollars in supplementals. She emphasized that there
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are certain items that the legislature indicated should be
funded through supplementals. She noted that funding for
disasters, fires, the Public Defender Agency, the Office of
Public Advocacy and leases have been partially funded
through supplementals in the past few years. She added that
judgments and claims have also been included in
supplementals. She stated that there are no major
judgements or claims pending.
Ms. McConnell noted that the plan incorporates a $100
million dollar capital budget component. This would be in
addition to the Alaska Housing Finance Corporation's (AHFC)
capital budget.
Ms. McConnell explained that the Governor's plan does not
include revised programs approved by the Legislative Budget
and Audit Committee. She noted that the fiscal gap is not
affected by program receipts.
Co-Chair Therriault provided members with a memorandum from
Mike Greany, Director, Legislative Finance Division to the
Legislative Budget and Audit Committee, dated October 14,
1996 (Attachment 3 copy on file). He expressed concern that
Ms. McConnell, elected to delegate authority to agency
commissioners. He maintained that legislative access will
be limited by the delegation of authority to commissioners
in regards to the shifting of funds. Ms. McConnell argued
that money cannot be moved within appropriations. She
stressed that the intent is to increase efficiency. She
stated that all transactions that are brought before the
Legislative Budget and Audit Committee, RSA's over $100.0
thousand dollars and any change in the grants line will
still be reviewed by the Office of Management and Budget.
She maintained that the system has not been abused and that
there is unnecessary paper work involved. She stressed that
the authority is revokable. She added that a report will be
generated quarterly in the AKSAS System. The report is
available to the Legislative Finance Division.
Representative Mulder reiterated concern that legislative
access will be lessened.
Representative Therriault questioned Ms. McConnell's
authority to delegate this function. Ms. McConnell assured
him that there is authority within statutes to delegate the
function. She emphasized that she retains responsibility
for any functions delegated.
MIKE GREANY, DIRECTOR, LEGISLATIVE FINANCE DIVISION observed
that the Division ran a report on allocation transfers
approved by commissioners and found an agency had
inappropriately transferred money between appropriation
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lines. He expressed concern with the transfer of the review
function from the Office of Management and Budget to the
agencies. He stressed that the AKSAS system is difficult to
access. He assured members that the Legislative Finance
Division will continue to review these actions periodically.
Ms. McConnell emphasized that the Office of Management and
Budget is working toward a more user friendly reporting
system.
Ms. McConnell stressed that the Legislature indicated that
some items should only be partially funded. Accordingly,
disasters, fires, the Public Defender Agency, the Office of
Public Advocacy and leases did not receive full funding in
the proposed budget. She emphasized that the intent is that
the remaining funding will be contained in a supplemental.
Ms. McConnell recounted that the Administration proposed
that some items be transferred from the capital budget to
the operating budget in FY 97. She noted that the
Administration has not proposed any new transfers to the
operating budget from the capital budget in the FY 98 plan.
Ms. McConnell reviewed performance measures as contained in
Attachment 2. She stressed that FY 97 is only halfway over.
She emphasized that the automatized budget system will
enhance the Administration's ability to track the level of
service to the level of appropriation.
Representative Martin questioned the State's level of
flexibility in relationship to federal block grants. Ms.
McConnell stressed that there is a tremendous amount of
change occurring in regards to federal requirements. She
noted that the plan anticipates a savings in welfare
assistance payments. She stressed that savings are tied to
job training and child care.
Co-Chair Hanley emphasized the need to make sure that all
parties agree on spending levels for comparisons.
(Tape Change, HFC 97-2, Side 1)
Representative Davies noted differences between page 6 of
the Legislative Finance Division's Budget Overview and page
12 of the Executive Budget Summary (copies on file).
Co-Chair Hanley noted that reduction scenarios will be
considered. Ms. McConnell stressed that reductions need to
be reviewed in light of impacts.
Co-Chair Hanley asked if the Governor is proposing education
endowment legislation. Ms. McConnell stated that the
State's education needs must be addressed and ideas reviewed
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prior to the introduction of legislation.
Co-Chair Hanley asked if the Board of Education has proposed
a foundation formula rewrite. Ms. McConnell stated that the
rewrite is still in discussion.
Co-Chair Hanley pointed out that the Governor's spending
plan takes credit for the reduction of $8 million dollars in
Longevity Bonus payments. He questioned the decision not to
include the $12 million dollar [education incentive]
increase.
Ms. McConnell explained that the Board of Education had not
finished it's work on a foundation formula rewrite when the
plan was finalized. She emphasized that a rewrite of the
foundation formula will require a broad discussion. She
maintained that this is a major change of how the State
looks at the biggest part of its entire budget. She noted
that there was little negative reaction from seniors in
regards to the reduction in the Longevity Bonus program.
In response to a question by Co-Chair Therriault, Ms.
McConnell noted that the Retirement Incentive Program (RIP)
has only been in effect since July 1, 1996. She explained
that the estimated $5 million dollar reduction applied to
the Governor's initial proposal. She noted that the Office
of Management and Budget will discuss the issue in detail in
the Senate Finance Committee on January 20, 1997. She
stressed that the Administration has followed strict
criteria for demonstrating savings.
Representative Davies questioned the Administration's
position regarding deferred maintenance. He acknowledged
the Administration's intent to develop a six year capital
plan. Ms. McConnell replied that the Governor has been in
discussions with the Legislature regarding deferred
maintenance. She reiterated the need to develop a six year
plan. She noted that State's capital needs must be
determined along with a capital appropriation plan.
Co-Chair Hanley emphasized that the FY 96 appropriation
level was increased by $15 million dollars due to the
Miller's Reach fire. He stressed that this increase should
not be part of the baseline spending level for FY 96. Ms.
McConnell maintained that the numbers sometimes get in the
way of determining if the State is moving toward a
sustainable level of funding, over the long term. She
emphasized that the focus should be on the impact to
services. She questioned if the State is at the right level
of services and can the State afford to pay for the services
being offered. She maintained that Alaska is not a poor
state. She acknowledged that the State has not matched its
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income and long term expenditures. She alleged that what is
happening in per capita spending in today's spending makes a
better measure for the public.
Co-Chair Hanley acknowledged that statistics are easy to
manipulate. He noted that Alaska has the highest per capita
spending of any state. He observed that it would be
interesting to compare the current per capita spending to
1978. Ms. McConnell pointed out that there is no other
state that provides as many services on a central basis as
Alaska. She noted that functions performed by the Alaska
Court System and Department of Public Safety are often
administered on the county level in other states. She
emphasized the difficulty to compare Alaska to other states.
She noted the need to engage in conversation with the public
regarding the level of essential services and which services
can be user supported.
In response to a question by Representative Davis, Ms.
McConnell noted that the Department of Health & Social
Services generated numbers regarding the reduction of
consumption used in the fiscal note accompanying the tobacco
tax legislation.
Representative Davis questioned the effect of increased fees
at the pioneer homes. Ms. McConnell did not have the
statistics in question. She observed that pioneer homes are
in the second year of a seven year plan. She emphasized
that the plan still allows entry for those that cannot
afford the fee.
Representative Davies emphasized that the budget is a
complex social plan that has lots of ramifications that must
be summarized. He maintained that the budget should take
into account the impact of inflation. He stressed that
there should be recognition of where the budget is in
relationship to the fiscal gap. He added that agreement
must be reached in regards to program receipts. He
suggested that the budget contain a separate category called
"extra ordinary items" for expenditures such as the Miller
Reach fire. Co-Chair Hanley noted that the Mental Health
Trust Authority appropriation was identified as an extra
ordinary item.
ADJOURNMENT
The meeting adjourned at 3:44 p.m.
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