Legislature(2011 - 2012)HOUSE FINANCE 519
01/20/2011 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview of the Governor's Fy12 Proposed Budget | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 20, 2011
1:32 p.m.
1:32:47 PM
CALL TO ORDER
Co-Chair Thomas called the House Finance Committee meeting
to order at 1:32 p.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
Representative Reggie Joule
ALSO PRESENT
David Teal, Director Legislative Finance Division;
Representative Alan Austerman; Doug Gardner, Director,
Legislative Legal and Research Services.
PRESENT VIA TELECONFERENCE
None
SUMMARY
^Overview of the Governor's FY12 Proposed Budget
1:32:57 PM
DOUG GARDNER, DIRECTOR, LEGISLATIVE LEGAL and RESEARCH
SERVICES introduced the legal document drafting staff.
1:37:03 PM
Co-Chair Thomas stated that the Legislative Finance
Division staff would be a useful tool and resource for the
House Finance Committee (HFC) members during the course of
the legislative session.
1:38:13 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced the Legislative Finance Division (LFD) Staff.
1:40:45 PM
Mr. Teal presented a PowerPoint: "FY12 Budget Overview"
(copy on file). He began with slide 2: "Four Elements of
Budgeting." He stated that revenue had been a part of the
budget in years prior, but a deficit had persisted in the
1990s. Budget discussions during the time of the deficit
primarily pertained to appropriations. The budget was so
unbalanced at the time of the deficit, there was little
discussion related to balancing the budget. In 2005, oil
prices rose, so revenue began to have an influence on
budget discussions. Reserves were met and some debts were
paid, because of the impact of revenue. Revenue influence
also brought increased capital spending. He stated that the
purpose for the budget reserves was for future planning and
spending. He stressed the importance of a discussion about
maintaining the reserve funds.
1:43:21 PM
Mr. Teal discussed slide 3: "Revenue Sources." The pie
chart displayed the Department of Revenue (DOR) fall
forecast of 2010, showing projected earnings for FY12. He
remarked that the chart was accurate, but the money
displayed did not represent potential for appropriations.
The total revenue shown was $13.3 billion, but the
governor's budget was only $11 million. The $3.5 million
represented in the pie chart under investment related
mostly to investment revenue from the Permanent Fund (PF)
and Constitutional Budget Reserve Fund (CBR). Approximately
$500 million of the $3.5 billion in investments would be
available for legislative appropriations. Oil revenue was
45 percent of the budget; non-oil revenue was 7 percent of
the budget; and federal revenue was 22 percent of the
budget.
1:45:33 PM
Mr. Teal presented slide 4: "Revenue and Appropriations."
He stated that money was categorized based on the degree of
legislative spending discretion; therefore revenue and
appropriations were in the same categories: Unrestricted
General Funds (UGF), Designated General Funds (DGF), other
state funds, and federal receipts.
Mr. Teal explained slide 5: "Federal Receipts." The federal
receipts typically had specific requirements pertaining to
spending, so the legislature would have very little
discretion in the appropriation process. Federal receipts
frequently require state matching funds, and would be split
fairly evenly into thirds: Capital Budget, formula
programs, and agency operations.
1:46:32 PM
Mr. Teal discussed slide 6: "Other State Funds." The year
prior, LFD presented a "Before Budget Clarification
Project." In the project, "other state funds" represented
approximately $3 billion. Currently the other funds held
about $500 million. There would be limited discretion in
how the other funds could be spent. The other funds
included international airport revenue, state corporation
receipts, trusts, and dedicated funds. Even though limited
discretion would be required when appropriating the other
state funds, the legislature could decide where and how the
money would be appropriated within the specific "other
fund" categories.
Representative Neuman wondered how the other state funds
decreased to $300 million from $500 billion. Mr. Teal
replied that the change was due to LFD simplifying
definitions.
1:50:54 PM
Mr. Teal continued with slide 7: "Designated General
Funds." The designated general funds included university
receipts, Alaska Marine Highway (AMHS) receipts, and other
service fees charged by agencies. The legislature typically
follows statutory guidelines, because the law prohibited
spending program receipts outside the program that
generated the receipt.
Mr. Teal discussed slide 8: "Unrestricted General Funds."
The UGF revenue was mostly derived from oil revenue (88
percent). The legislature has complete discretion in
appropriating UGF. The UGF was typically referenced as the
measure of state spending, and was used to calculate the
fiscal surplus or deficit.
1:52:50 PM
Mr. Teal displayed slide 9: "Revenue Sources-Degree of
Discretion." He stated that the PF is not included in the
UGF, because PF earnings are excluded from revenue. The PF
is excluded from appropriations, because it is excluded
from revenue.
Mr. Teal discussed slides 10 and 11: "Part one of the State
of Alaska Fiscal Summary-FY11 and FY12." He pointed out the
categories of funding: unrestricted, designated, other,
federal, and total. He also noted the four categories
related to the fiscal summary: Revenue, operations,
statewide operations, and capital. He remarked that revenue
was about $300 million more than FY11; however GF spending
was up by about $400 million. Agency operations held at
about $167 million, and he noted a 3.8 percent increase
from FY11. The statewide operations were up $122 million,
which was an 11.5 percent increase from FY11. The capital
had a $112 million increase, or an 18.4 percent from FY11.
He noted a cash-flow deficit of $25 million. He stated that
the governor had requested a transfer of a net of $310
million out of savings, giving a surplus of $284 million.
He stated that the summary showed a deficit in FY11, but
that the deficit could be inaccurate.
1:56:06 PM
Representative Doogan wondered why a cash-flow deficit of
$25 million would represent a higher actual deficit. Mr.
Teal replied that on a cash flow basis, the revenue
supports a budget equal to the amount of revenue. The
governor submitted a budget that would spend $25 million
more than the expected FY12 revenue. However, withdrawing
money from savings accounts results in a deficit.
Representative Doogan asked why the governor asked for $25
million, rather than $310 million. Mr. Teal responded that
unspent money from the governor's budget was put into a
reserve account. A surplus may seem larger than the cash
flow supports because there could be a consolidation of
reserves.
Representative Doogan felt that the governor was moving
around unnecessary money, creating a larger budget than was
needed. Mr. Teal guessed that the governor's budget might
be motivated by potential oil tax reform. He alleged that
the governor may have made the state seem more affluent,
because the governor hoped to reduce oil taxes. If the
state seemed to be in a surplus, then the chance to lower
taxes would be greater. He advised the committee to
consider motives when examining budget requests.
2:00:58 PM
Representative Gara wondered whether there was actually a
$150 million deficit, based strictly on cash flow. Mr. Teal
felt further discussion was required.
Representative Gara queried the specific definition of
"deficit." Mr. Teal clarified the definition of cash flow.
On a cash-flow basis, deficits and surpluses are calculated
based strictly on revenue and appropriations.
In response to a comment from Representative Neuman, Mr.
Teal stated that LFD would track the governor's amendments
to the budget. The fiscal summary shown in slide 10 was the
governor's current budget proposal.
2:06:07 PM
Vice-Chair Fairclough stated the importance of
understanding the difference between deficit spending and a
balanced budget.
Mr. Teal discussed slide 12: "Fiscal Summary Key Points."
He stated the FY12 revenue would be $328 million above FY11
revenue, but spending is $400 million higher. Agency
operations would be up $167 million (3.8 percent),
statewide spending would be up $122 million (11.5 percent),
and capital spending would be up $112 million (18.4
percent). There would be a cash-flow deficit of $25
million, but in fiscal terms the $25 million would be a
rounding error. The governor would remove a net of $310
million from savings accounts, but the FY11 surplus would
still remain uncertain. Typically, the Legislature
withholds supplemental budget decisions until March.
2:10:02 PM
Mr. Teal presented slide 13: "Reserves-the Third Element of
Budgeting." Alaska has reserves unlike any other state.
Excluding the PF, which cannot be spent, Alaska had over
$14 billion in reserves. Some funds would be difficult to
access due to extensive restrictions: the permanent fund,
the employee retirement accounts (Public Employee
Retirement System [PERS] and Teachers Retirement System
[TRS]) and the CBR. There is no disagreement on accessible
cash of about $1.5 billion.
Mr. Teal discussed slide 14: "Part two of the State of
Alaska Fiscal Summary-FY11 and FY12." He stated that the PF
would be difficult to access for political reasons, and the
CBR would require a three quarter majority vote to access.
Some of the designated savings were lumped into the GF.
Some of the designated savings would not be considered
savings, because while they are continually spent every
year, the funds are refilled each year to accommodate the
spending.
Mr. Teal addressed slide 15: "The Value of Reserves."
Reserves allow comfort and flexibility. There was language
in the budget that withdraws money from the CBR to
compensate for possible overspending.
Vice-Chair Fairclough wondered why the projected surplus
money was not focused towards paying the unfunded liability
pension. Mr. Teal acknowledged her concern, but stated that
if the liability was paid off it would use most of the
reserves to do so. The pension liability was long-term,
based on future earnings and assumptions, such as death
rate and health-insurance costs. The money is not currently
owed, but it simply assumed to be owed. He called it a
"soft liability."
2:16:07 PM
Co-Chair Thomas remarked that the unfunded liability
pension was an important issue that warranted discussion.
Co-Chair Stoltze felt the unfunded liability pension should
not be referred to as a "soft liability," but rather an
"unpredictable liability." He stated that there was
uncertainty in the obligation.
Vice-Chair Fairclough wondered if it would be better to pay
the liability sooner, in order to avoid escalating interest
rates. Mr. Teal responded that paying off an interested
liability debt from a fund that is accruing interest would
force the state to lose the interest earnings from the CBR.
He remarked that if the state paid off all of the debts in
PERS the state would be paying off other employers' debts.
The state could pay off the debt, but the question is
whether or not the state should pay off the debt. He
encouraged further discussion regarding debt payments.
2:21:00 PM
Representative Gara asked whether the PERS/TRS settlement
with Mercer was reflected in FY11 revenue or FY12 revenue.
Mr. Teal replied that the retirement system has a time lag.
For example, the rates of FY12 were based on the June 2009
valuation; that valuation carried forward losses from 2008.
Because of the lag, the Mercer settlement money was not
reflected in FY12. The Mercer settlement would not count
for two more years.
Representative Guttenberg reiterated the importance of
further discussion regarding debt payment.
2:22:54 PM
Co-Chair Thomas furthered that a more extensive overview
would eventually occur in the session. Co-Chair Stoltze
agreed.
Mr. Teal presented slides 16 and 17: "FY2011 Unrestricted
General Fund Revenue - Fiscal Sensitivity." The chart
showed what happens to revenue when the price of oil
changes. Expenditures would not waiver, because they were
not based on the price of oil. The revenue was dependent on
the price of oil, and it is an upward curve because it is a
progressive tax. The breakeven point on the graph was the
point where expenditures are equal to the price of oil. In
FY11, the budget was $3.5 billion and the breakeven point
was 77 dollars per barrel. The forecast price for oil was
78 dollars per barrel, which would give the UGF a surplus
of $50 million before transfers.
2:26:00 PM
Co-Chair Stoltze queried the fiscal impact of the recent
brief shutdown of the oil pipeline. Mr. Teal replied that
the graph presented in slide 16 was a simplified
representation, and the margin of error was about $100
million. The chart was based on an annual average price,
but profitability was measured monthly. The state gets more
revenue if oil was to sell at 60 dollars per barrel one
month and the next month at 80 dollars per barrel than it
would if oil were 70 dollars per barrel a month for two
months. This is because there would be higher tax revenue
at higher oil prices. There would be a deficit of about
$1.6 billion, if oil were to fall to 60 dollars per barrel.
Co-Chair Stoltze remarked that the state cannot anticipate
oil price fluctuations.
2:28:54 PM
Mr. Teal continued with slide 17: "FY2012 Unrestricted
General Fund Revenue-Fiscal Sensitivity." The chart
displayed the upward shift in expenditures from FY11, by
approximately $400 million. He remarked that the $27
million fiscal gap would disappear if the price of oil was
w25 cents higher than was projected. The charts represented
rough estimates and generalizations.
Mr. Teal displayed slide 18: "Key Points." A one-dollar
change in oil prices would produce a $100 million change in
revenue. Declining oil production, additional tax credits
and/or declining profitability shifts the revenue curve
downward, so reserves could vanish very quickly.
Mr. Teal discussed slide 19: "FY11/12 General Fund - Fiscal
Sensitivity Overlay," representing the FY11/12 revenue. A
higher expenditure curve with a lower revenue curve makes
for a higher breakeven cost: 83 dollars per barrel. The
breakeven price in FY10 was about 64 dollars per barrel.
2:32:31 PM
Representative Neuman assumed the drop in production was
about five percent. Mr. Teal responded with slide 20: "Why
the Revenue Curve Shifts Downward Over Time." Typically, a
revenue curve would shift downward because of a decline in
production, but the forecast for FY12 was up one percent.
The change from FY10 to FY11 was more than the change from
FY11 to FY12. Even though the production forecast was up
one percent, the curve still turns downward. The revenue
curve shifts downward if the nontransferable tax credits
were increased. The downward revenue curve may also be
because of lower profitability. Profitability was affected
by higher production costs with less oil. Less profit per
barrel would cause the revenue curve to shift downward,
making the breakeven price of oil higher.
2:36:33 PM
In response to a question by Representative Doogan, Mr.
Teal said that according to the chart on slide 19, the
revenue curve would shift downward if tax rates were lower.
At any given price of oil, there is less revenue to the
state. The downward shift would move at a given level of
expenditures from point B to point D. The combination of
increasing expenditures and decreasing revenue moves the
breakeven point from point A to point D.
Representative Doogan wondered what might happen if
production increased. Mr. Teal replied that if the
production increased, the curve would shift upward if
production increased and downward if production decreased.
Representative Doogan queried the breakeven points on the
chart from slide 19. Mr. Teal pointed out the increase in
breakeven point from 64 dollars per barrel in FY10 to the
breakeven point of 77 dollars per barrel in FY11, which had
a 4 percent reduction in the production cost. Slide 19
showed an increase of only 6 dollars per barrel from FY11
to FY12.
2:40:32 PM
Co-Chair Stoltze remarked that revenue projections seemed
to overlook functionality of the oil pipeline. He stressed
the importance of holding discussions related to oil.
Representative Gara wondered whether the opening of the
Nikiachuck oil field had an impact on the projections. Mr.
Teal replied that DOR projected years of production
increases, and remarked that his own comments on oil taxes
were based on the effect of the tax on the revenue curve.
Vice-Chair Fairclough sited other oil fields listed in the
Fall 2010 Revenue Sources Book, which were optimistic for
production.
2:44:26 PM
Mr. Teal showed slide 21: "Why Expenditures Shift Upward
Over Time." Formula programs like K-12 education and
Medicaid increase every year, and seem to have an
inexhaustible demand. Incremental budget processes and
simply reviewing the increments ultimately increases the
budget. Debt service and tax credits were consequences of
past legislation, so therefore would have an impact on
expenditures.
Mr. Teal discussed slide 22: "State Assistance to
Retirement." The current payment toward PERS and TRS was
less than $400 million per year, with a projected growth of
up to $1.4 billion year in 2029. He pointed out that in
2030 there would be a substantial drop to just over $600
million. He encouraged further discussion regarding
retirement payments.
Mr. Teal displayed slide 23: "The Fourth Element of
Budgeting-A Plan." The governor's FY12 budget was balanced,
and reserves were sufficient to handle basic circumstances.
The governor's budget seemed to encourage production. Mr.
Teal encouraged the legislature to consider short term
gains and decreases in revenue, and note that the tax
structure does not guarantee steady cash-flow. There would
be a guaranteed downward shift in revenue, and the
legislature must decide if there could be sufficient
reserve funds.
2:49:59 PM
Mr. Teal discussed slides 24 and 25: "Unrestricted General
Fund Revenue/Budget History." Appropriations were fairly
even from about 1993 to 2004 because there was little
money. When revenue expanded, so did expenditures.
Mr. Teal showed slide 26: "Growth in Agency Operating
Budgets." He stated that projections were based on a
constant capital budget of $500 million. He felt $500
million was a reasonable expectation of capital spending.
Statewide operating costs were currently about $1.2
billion, with added retirement costs included. Agency
operations were difficult to predict, but they were
projected to increase at a rate of 7.6 percent each year.
The agency operations predictions were based on the growth
from FY06 to FY11. The Department of Health and Social
Services and the Department of Education and Early
Development accounted for 52 percent of the growth in the
operating budget. Restraining the growth of the Operating
Budget is difficult, because more than half the growth was
in Medicaid and K-12 education. The revenue curve would
shift downward and the combination would require reserve
spending, if oil production projections could not meet
expectations, oil tax rates were not reduced, and
expenditure growth was difficult to control.
2:55:25 PM
Mr. Teal displayed slide 27: "Wrap Up." The fiscal
situation was expected to be strong for FY12, because of a
balanced budget and solid reserves. After 2012, there would
be inevitable downward shifts in the oil revenue curve,
upward shifts in the oil expenditure curve, and the
retirement system unfunded liability would require greater
payments. This combination would deplete the reserves
rapidly. He pointed out that the reserves had been built up
since 2005.
Co-Chair Thomas stated that some in the media project $150
per barrel for FY13.
Co-Chair Stoltze stated a responsibility was placed on the
state to decide how oil revenue is spent.
2:58:50 PM
Vice-Chair Fairclough commented that she was familiar with
the economic forecast, and that Alaska had a fairly stable
economic situation compared to other states.
Representative Neuman expressed concern that Alaska's
revenue was strictly relying on a single source of income:
oil.
ADJOURNMENT
The meeting was adjourned at 3:02 PM
| Document Name | Date/Time | Subjects |
|---|---|---|
| 1 20 11 HFC LFD Overview (2).pdf |
HFIN 1/20/2011 1:30:00 PM |