Legislature(2009 - 2010)Anch LIO Rm 220
11/05/2009 09:00 AM House FINANCE
| Audio | Topic |
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| Start | |
| Workshops: Legislative Finance Division; Alaska Geographic Differential Study; Department of Law |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
November 5, 2009
9:02 a.m.
9:02:14 AM
CALL TO ORDER
Co-Chair Hawker called the House Finance Committee meeting
to order at 9:02 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas, Jr., Vice-Chair
Representative Allan Austerman
Representative Reggie Joule
Representative Mike Kelly
Representative Woodie Salmon
Representative Harry Crawford
MEMBERS ABSENT
Representative Anna Fairclough
Representative Les Gara
ALSO PRESENT
Representative Mike Doogan; Representative Nancy Dahlstrom;
Representative Paul Seaton; Representative Scott Kawasaki;
Senator Joe Thomas; David Teal, Director, Legislative
Finance; James Armstrong, Staff, Co-Chair Stoltze; Amanda
Ryder, Fiscal Analyst, Legislative Affairs, Legislative
Finance; Annette Kreitzer, Commissioner, Department of
Administration; Jim Calvin, McDowell Group, Juneau; Attorney
General, Dan Sullivan, Department of Law; Kevin Brooks,
Deputy Commissioner, Department of Administration.
PRESENT VIA TELECONFERENCE
Representative David Guttenberg
SUMMARY
^Workshops: Legislative Finance Division; Alaska Geographic
Differential Study; Department of Law
9:02:28 AM
Co-Chair Hawker observed that due to the impact of the world
oil market the state's finances have evolved from $1 billion
annual deficits to multi-billion dollar surpluses, which has
impacted the way the Legislative Finance Division summarizes
and reports to the legislature.
9:06:15 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE, provided members
with a handout entitled, House Finance Committee Work
Session - November 5, 2009 (copy on file). Mr. Teal began
with a brief update of the current fiscal situation. He
summarized page 1 of the handout, the FY 2010 General Fund
Revenue - Fiscal Sensitivity. He noted that the information
is on the Legislative Finance Division's website, which is
updated with each official forecast change. The slide shows
the spring forecast.
Mr. Teal stated that the final figures for FY 2009 are not
yet known. The certified annual financial report will not be
out for another four weeks. At the end of session the
Statutory Budget Reserve (SBR) draw was anticipated to be
approximately $950 million. No funds were taken from the
Constitutional Budget Reserve (CBR) because of the way the
appropriation bill was structured. The total of $1 million
in the SBR must be used before the CBR comes into play. The
current estimate is for a draw of something less than $500
million.
Co-Chair Hawker pointed out that the discussion referred to
FY 2009, not FY 2010.
Co-Chair Stoltze recalled when oil price charts were less
than $36 per barrel. Mr. Teal stated that there was no
reason to show higher prices back then. Co-Chair Stoltze
related that even at $36 dollars there was a bigger surplus,
which heightens the issue of production today.
Mr. Teal explained the lines on the sensitivity chart. The Y
axis is money in billions; oil price is on the X axis. The
horizontal line just above $3 billion is the FY 2010 budget.
The line that sweeps upward from left to right is revenue at
various oil prices. That line crosses at the $3.05 billion.
The break even oil price required is $57. The official
forecast is for $58.29, which yields a small surplus of
about $150 million.
Co-Chair Hawker noted that the chart refers to FY 2010. He
thought the average for FY 2010 so far was over $70. Mr.
Teal agreed that the amount was about $70 with volume about
4 percent, which is not unusual due to winter production
increases. Volume does not appear to be a major factor;
however, price is. The projected price is about $58.29, and
the actual price is about $70 year to date; at this rate the
surplus for FY 2010 would be $1.4 billion; at $75 the
surplus would be $2 billion.
9:12:35 AM
Mr. Teal turned to issues that would have an impact on
future budgets. He noted that education was not forward
funded last year. The amount to forward fund education is
$1.1 billion, which would cut into the surplus. Another
factor is that Alaska has had two years of low capital
budgets due to vetoes and veto threats, which may require
the capital budget to be "beefed up" through a supplemental
appropriation. He concluded that it would not be difficult
to spend the 1.4 billion surplus.
Vice-Chair Thomas reported that the Executive Director of
the Alaska Association of School Boards pointed out the lack
of forward funding for education.
Mr. Teal explained that the budget includes a reference to
Article 9, Section 17(b) of the constitution:
(b) If the amount available for appropriation for a
fiscal year is less than the amount appropriated for
the previous fiscal year, an appropriation may be made
from the budget reserve fund. However, the amount
appropriated from the fund under this subsection may
not exceed the amount necessary, when added to other
funds available for appropriation, to provide for total
appropriations equal to the amount of appropriations
made in the previous calendar year for the previous
fiscal year.
Mr. Teal related that the FY 2011 forecast is generally held
until the Governor's budget is released on December 15 and
that no information has been received from the Office of
Budget and Management (OMB) in regards to the FY 2011 budget
approach, but that a continuing conservative approach is
expected.
9:15:28 AM
Co-Chair Hawker mentioned that the Governor invited the
House leadership to a meeting; they received similar
information of a limited formula growth picture. Not
counting on Federal Medical Assistance Percentages (FMAP)
reverting back to the pre-stimulus rate, the Governor's
office is looking at a 40 million growth in formula
programs, which is inconsistent with the trend that was
established in past years. Ongoing actuarial valuations
include an increase in the retirement system contributions.
Co-Chair Hawker expected a continuation of the same level of
operations from the Governor's office.
Mr. Teal observed that FMAP was $75 million in 2010, which
was paid with federal stimulus money by reducing the match
rate. When and if the state reverts to the regular match in
2011 it will cost $75 million in general funds (GF). There
is also a $100 increase in the base student allocation
education rate, as well as some differentials and intensive
needs items scheduled to go into effect, which would amount
to another $50 million increase. Mr. Teal concluded that
there would be a minimum increase in the FY 2011 budget of
$125 million.
9:17:51 AM
Co-Chair Hawker agreed with the Governor that the federal
government would continue the beneficial FMAP rates due to
the overwhelming demand placed on the federal system by
several states; however, if that does not happen a plan is
in place to make an adjustment.
Representative Austerman asked for the FY 2011 dollar amount
expected for FMAP. Mr. Teal replied that FMAP would cost $75
million and K-12 education would be a little over $50
million. Co-Chair Hawker thought the Governor said it would
be $69 million. Mr. Teal suggested that Medicaid may
increase by $40 million. He concluded that there may be a
total increase by as much as $200 million. He agreed that
FMAP was very "iffy". Alaska, unlike other states, is not in
dire straits because it does not rely on income tax or sales
tax. He anticipated that Congress will feel extreme pressure
from other states. He thought there might also be a second
round of stimulus money because of huge state deficits.
9:21:28 AM
Mr. Teal turned to the fiscal summary format. Changes in the
state's fiscal situation have driven the alteration to the
summary. Drivers include changes in the fiscal situation,
how money is used, and attitudes about how and what should
be shown. He observed the simplicity of the FY 2005 Summary
of Appropriations. He noted that a little over $400 million
was put into the Public Education Fund in FY 2005 due to a
spike in oil prices. By FY 2007, general funds had jumped to
$3.5 billion. The division discovered complications with how
to deal with large supplemental and other appropriations
that cross fiscal years as well as with the definition of
savings. For instance, does putting money aside in one year
and spending it the next amount to "savings".
Co-Chair Hawker pointed out that savings still need to be
"appropriated" in order to be transferred to savings.
Appropriations do not therefore equate to spending. He
maintained that "moving money from one savings account to
another is not spending, even though we still have to
appropriate it."
Mr. Teal observed that by FY 2008 a savings category was
added to the fiscal summary as a result of legislative
action that deposited funds into the Public Education Fund
and the Alaska Housing Finance Corporation (AHFC) subsidiary
account, created the Capital Income Fund, and deposited
funds into the Constitutional Budget Reserve Fund (CBR),
which resulted in billions of dollars that had been
appropriated but not spent. He concluded that $4 billion was
set aside in addition to funds that went into the CBR. He
recalled concerns that the fiscal summary did not reflect
what it should.
9:25:56 AM
Co-Chair Hawker noted that the fiscal summary is not an
accounting document and is not part of the state's formal
reporting system; it is a working tool for the legislature
that attempts to summarize the budget on one page. Mr. Teal
pointed out the difficulty of summarizing the budget on one
page. The Legislative Finance Division (LFD) recognized the
deficiencies and revamped the fiscal summary, which was
presented to the Governor in FY 2009. As a result changes
made to the fiscal summary by LFD their summary no longer
tracked with that of the governor's Office of Management and
Budget (OMB). He explained that the new format by LFD added
agency operations, which he felt most people identified with
when thinking of the "budget". He added that better
accounting for supplemental appropriations were included due
to large surpluses. Savings were separated out. These
changes allowed a better vision of cash flow. He pointed to
line 45 of page 3, which showed that there was a pre-savings
deficit of $950 million in FY 2009. Post savings there was a
surplus of $104 million since $1,052.6 million was pulled
from the Public Education Fund.
9:29:57 AM
REPRESENTATIVE MIKE DOOGAN asked if it takes an additional
appropriation to spend money moved to a separate savings
account. Mr. Teal replied that it does not take an
additional appropriation in all cases. He explained that the
Public Education Fund allows money to be withdrawn according
to the K-12 formula without appropriation. Money is
appropriated to the fund, but the funds flow out without
appropriation. The rest of the savings accounts require an
appropriation for any withdrawals. In response to a question
by Representative Doogan, Mr. Teal explained that the fiscal
summary shows the funding transfer to K-12 Education on line
11.
9:32:30 AM
Co-Chair Hawker put forth that it would be misleading to
leave out the education funds coming from savings since they
amount to more than a billion dollars in agency operations.
He pointed out that money comes out of savings and flows
into agency operations in line 11. He explained that there
would have been a positive number going into the fund had
the legislature taken funds from the CBR to replenish the
Public Education Fund, which would have resulted in a net
zero and a negative number in the CBR. Both transactions
would have occurred under the savings line. Any surplus
would have flowed back into the CBR.
9:34:03 AM
Mr. Teal summarized that the most important factors in a
fiscal or appropriation summary are:
· amount,
· flavor (federal funds, general funds or other funds),
· location (agency operations, fund caps, debt service,
or the capital budget),
· timing (fiscal year in which an appropriation becomes
effective), and
· purpose.
Mr. Teal observed that the amount is generally known. Flavor
refers to the category or group such as federal funds,
general funds or other funds. The flavor of funds is
complicated by transfers between funds and the need to
account for duplicated funding sources because once a fund
is capitalized (funds are put into a fund) the same funds
cannot be counted on the way out or they will be double
counted. Duplicated funds are hard to track and are always
categorized as "other funds". The focus of the House and
Senate Finance Committee co-chairs has been to reduce "other
funds" or at least explain and identify when they are
"general funds". The funds are counted on the way in, which
make them hard to count on the way out where they are really
spent.
Mr. Teal continued to explain that location refers to agency
operations, fund caps, debt service, or the capital budget.
Funds are created and then spent, creating a accounting
problem on the way out. Timing refers to the fiscal year in
which an appropriation becomes effective and is not a
problem. The purpose does not cause problems. Flavor and
location create the greatest problems; the biggest areas of
concern are reappropriations, fund transfers, and fund
categorization.
9:38:18 AM
Mr. Teal reviewed the history and difficulties of
reappropriations. He noted that reappropriations have not
always been accounted for since they are net zero
transactions. In 2000, the division began recording
appropriations from operating to operating reappropriations,
and operating to capital appropriations. Capital to capital
appropriations remained a problem since there is no record
of old capital projects that have been reappropriated or the
substitute project. This year (2009), the reappropriations
will be entered in the capital tracking system (TPS
reports). The new project side of reappropriations will be
recorded, which will allow digital searches. Non-legislative
reappropriations will be eliminated, but legislative
reappropriations will remain with a slight change in the
process. Legislative reappropriations allow funds to stay in
the district in which they were originally appropriated.
Guidelines for legislative reappropriations and repeals were
outlined on pages 4(a-c); LFD began implementation of these
guidelines for legislative repeals and reappropriations in
2009.
Mr. Teal highlighted his three main recommendations: moving
money in a current fiscal year should be done in the
supplemental bill, operating carry-forward and other
operating reappropriation should appear in the operating
bill (so that operating subcommittees can see the full
story), and the governor's capital projects should be
terminated without tying the money to a new project. The
legislature would review all new projects on an equal
footing, so that they compete equally with all other capital
projects. Reappropriations might not need to be examined,
which would be a major change.
9:42:41 AM
Co-Chair Hawker recalled last year's reappropriation
process, which he found excruciating and enlightening. The
process demonstrated that the division was not tracking the
oil and gas appropriations and reappropriations as well as
they should. He observed that there was not sufficient time
to make the change in guidelines during the past session.
9:44:44 AM
Mr. Teal observed that OMB has the guidelines but have not
yet committed to following them. The new guidelines would
require OMB to turn in a list of "dead projects" instead of
a list of money they would like to reappropriate. He
explained that if OMB turns in a list of $50 million in
projects that are going to be administratively terminated,
$50 million would be recorded in the fiscal summary as new
revenue and the capital projects to replace them would
compete with all other capital projects as new money. He
concluded that there would be a net zero if the entire $50
million is spent.
In response to a question by Representative Doogan, Mr. Teal
explained that the funds would show as revenue in the year
the project is terminated. Funds terminated on July 1, 2010
would be available for FY 2011; funds terminated on June 30,
2010 could be spent in the supplemental bill. Tracking would
not be difficult. The effective date of the appropriation
does not pose a problem. He reiterated that the terminated
projects would be recorded as "new" capital funds.
9:49:18 AM
Co-Chair Hawker explained that the intent is to handle
projects that have been sitting on the books for as much as
20 years.
Mr. Teal addressed page 9, line 4, which showed terminated
capital projects.
9:51:12 AM
JAMES ARMSTRONG, STAFF, CO-CHAIR STOLTZE, discussed the
reappropriation guidelines on page 4 (b) and asked if it
would be a separate entity on the district summary. Mr. Teal
offered to discuss the issue later in the presentation and
indicated that the division needed legislative directive.
Mr. Teal emphasized that it would be less confusing if the
governor submitted his reappropriation items in the way the
legislature wants to see them in the legislation but
acknowledged that the division could correctly account for
them if they were received before the budget closeouts
occur. Co-Chair Hawker noted the open communication between
the Legislative Finance Division and the Office of
Management and Budget.
Mr. Teal observed that the greatest effect will be in the
supplemental and operating legislation. He suggested that
the four finance co-chairmen request OMB to implement the
guidelines as soon as they are comfortable with them.
9:56:28 AM
Co-Chair Hawker expressed support for the work done by the
Legislative Finance Division and stressed that the intent is
to achieve consistency and an understandable product. Mr.
Teal added that it is a matter of simplicity and allowing
reappropriation projects to compete with new projects.
9:57:38 AM AT EASE
10:06:35 AM RECONVENED
Mr. Teal spoke to structure, which is an agency with an
appropriation and allocation. Fund capitalizations (fund
caps) are treated as a pseudo agency. Savings are put in a
separate category because they are not expenditures; this is
true of many of the fund caps. He pointed to page 3, which
showed the pre-savings cash-flow or deficit at -$950
million; this changed to a surplus post savings. The intent
is to eliminate confusion by renaming fund caps as
transfers. Each fund capitalization results in duplications
as funds are counted on the way in and on the way out. The
way out is where the money is really spent and where it
needs to be accounted.
10:09:56 AM
Mr. Teal provided an example of a fund capitalization. A
$300 million capital budget that includes $30 million in
spending to the Capital Income Fund would show a reduction
of $30 million plus a $30 million of other expense in the
capital budget. In the new system the funds would show as a
transfer and be counted on the way out (where they are being
spent). The capital budget would show $30 million in general
funds (rather than "other" funds). Under the current system,
the funds going into the Capital Income Fund were general
funds, but they were categorized as "other funds" when they
were spent since general funds cannot be duplicated.
10:13:56 AM
Co-Chair Hawker stressed the need for simplification,
understandability, and truth in budgeting. Mr. Teal added
that it is simply a different way of presenting the material
in an improved format.
10:16:05 AM
In response to a question by Representative Salmon, Mr. Teal
explained that the new legislative guidelines for
reappropriations affect the administration. Legislative
reappropriations for each representative remain the same.
10:18:09 AM
Mr. Teal gave a further example of a fund capitalization. He
observed that $20 million in general funds is appropriated
to the Debt Retirement Fund for 2003 series B bonds; another
appropriation is made from the Debt Retirement Fund for the
State Bond Committee to pay the debt service. He suggested
that a single appropriation could be made from the general
fund to the State Bond Committee. There would be one direct
appropriation without fund capitalization or duplication.
Co-Chair Hawker pointed out that there could be some issues
with accounting problems surrounding debt compliance but
felt that technical problems can be solved. Mr. Teal agreed.
Mr. Teal spoke to the pseudo agency "transfers", which are
not added in to any reports. He reviewed page 5b. Agency
budgets for statewide transfers do not change. Non-additive
fund transfers are excluded from the sum of the
appropriations so that the transfers can be accounted where
the expenditure occurs rather than as a fund capitalization.
This will allow the elimination of duplicated codes, as seen
on page 6a and 6b. Page 6c demonstrates the duplicated codes
that would remain. There would be a major improvement in
simplicity, categorization of funds (general, federal or
other), and location of reporting where the money was spent.
10:22:05 AM
Mr. Teal emphasized that general funds that are spent will
show as general funds. He maintained that nothing is
changing in the terms of what is being spent. The system is
set up and the division is ready for implementation.
Co-Chair Hawker recalled the complication of past budgets
that tried to explain the connection between various funds.
Mr. Teal interjected that the current fiscal summary is
confusing and can be made far more useful with these
changes. He noted that OMB's initial reaction was positive.
He expressed the hope that OMB would implement the new
system.
10:25:44 AM
Co-Chair Hawker acknowledged that there could be some
transition issues but expressed the desire to work with OMB
for clarification.
Mr. Teal referred to page 7a, which shows current fund
capitalization and noted that page 7b shows that the
Disaster Relief Fund would be the sole remaining fund
capitalization. He noted that money flows out of the
Disaster Relief Fund without further appropriation so there
would be no duplication.
Mr. Teal reviewed page 8, savings. There are designated,
undesignated savings and transfers.
10:28:32 AM
Mr. Teal discussed fund categories and stressed that the
intent is to provide better budget information. Fund
categories are general, federal, or other. In 2005, there
was $1 billion in other funds in a $2.3 general fund budget.
Other funds are currently $1.25 billion; the general fund
budget up to $2.4 billion.
10:31:33 AM
Mr. Teal explained that other funds do not get the same
scrutiny that general funds receive. He asserted that other
funds are often really are general funds, as seen in the
transfers. The Permanent Fund is the only fund created by
the Alaska State Constitution that is separate from the
General Fund. Many have argued that there are only two
categories of funds: federal and general. The Department of
Law and the Division of Legislative Audit agree with this
interpretation. However, the finance chairmen have
instructed finance sub-committees to look at other funds.
Mr. Teal maintained that other funds do count. The lack of
scrutiny of other funds is one of the big drivers in the
funding categorization process initiated by the co-chairs.
All four co-chairs have expressed a desire to straighten out
the issue of other funds and to categorize where the money
really belongs. The level of discretion that the legislature
has in spending money creates the basis for categorization.
General funds are discretionary.
10:36:00 AM
Mr. Teal continued that the categorization is not an
arbitrary decision on the part of LFD. Rules apply to the
categorization of funds. The official name for general funds
is "unrestricted general funds". When the legislature
designates a use for an appropriation the funds are no
longer unrestricted. He concluded that everything that has a
designation does not have to be categorized as other; it
could be categorized as restricted (or designated) general
funds. The division chose to call these funds designated
general funds since "restricted" has a different meaning in
accounting terminology.
10:38:36 AM
Mr. Teal analyzed the fiscal summary on page 9. The summary
shows little change in the unrestricted general fund line;
the change occurs between other funds and designated general
funds. There was a $700 million move from other funds to
designated general fund.
Co-Chair Hawker elaborated that the $700 million coming out
of other funds is state money that can be spent in any way
with legislative approval and support of the governor. He
spoke of the practice of taking funds "off budget".
Co-Chair Hawker observed that the Senate Finance Committee
has taken an different approach and expressed the desire to
come to an agreement for clarity.
10:42:34 AM
Mr. Teal observed that the Senate utilizes a category
designated as "flex funds", which are any funds that spend
like general funds.
10:45:11 AM
Mr. Teal stated that all four co-chairs understand the
impact and have expressed support for the new process.
Representative Austerman asked what percentage of other
funds can be redirected to the new designations. Mr. Teal
noted that $750 million is being redirected. The remaining
other funds would be approximately $500 million, and are
trust funds and bond funds that do not have discretion.
Mr. Teal explained that the same thing happened with the
capital appropriations. The general fund portion would go
from $173 million to $266 million. He emphasized that the
capital portion is still being worked on and that there will
not be as large a jump as the summary on page 9 shows.
10:47:15 AM
Mr. Teal observed that the general fund budget in FY 2011
appears to increase by $750 million, but pointed out that
this would disappear once the FY 2010 budget is presented in
the same manner.
Co-Chair Hawker emphasized the importance of acceptance by
both sides of the political aisle. Governor Parnell
expressed strong receptivity, and is concerned about bad
politics and poor presentation of the governor's budget.
Representative Kelly advised that the changes be made to
previous budgets for better comparison.
10:51:10 AM
Mr. Teal spoke to participation by OMB and acknowledged the
difficulty of converting during preparation of the budget.
He stated that LFD can make the conversion and stressed that
it is important that the budget be converted before it goes
into finance operating subcommittees.
Mr. Teal elaborated that conversions of past budgets would
be time consuming and that LFD would work on the process
next interim. He thought budget comparisons older than 10
years would be irrelevant.
10:54:49 AM
Mr. Teal continued to discuss the fund code book and the
necessary of rewriting the codes.
Representative Austerman commented that a list regarding
certain acronyms would be helpful to understand the proposed
classification.
Mr. Teal concluded that the transfers are at the bottom of
the fiscal summary and are excluded from the totals. The
Permanent Fund remains a separate category. He noted that
page 10 shows the impact agency by agency.
10:58:19 AM AT EASE
11:09:19 AM RECONVENED
Co-Chair Hawker referred to page 11a, and noted that OMB was
involved in discussions regarding fund codes. Mr. Teal
interjected that the intent is to improve reporting through
reclassifying fund codes. He discussed page 11a. The column
"Current Group" refers to the current classification. He
clarified that RLF is used for Revolving Loan Fund. There
are federal revolving loan funds and general fund revolving
loan funds. The intent is to have subgroups that can cross
the main group to report on all revolving loan funds. Notes
are used to explain why a particular fund group was
categorized. There is also a column called "eliminate". Most
of the items identified for elimination were slid to the
back of the spreadsheet. The statute column references the
need for statutory change for the reclassification to occur.
Column P is structure and subcommittee. An "x" usually means
that the item has been moved to transfers. An "s" indicates
that the subcommittee needs to address the item. The
methodology used was to list codes in a group and then
identify anything that moved to the group.
11:13:45 AM
In response to a question by Representative Crawford, Mr.
Teal explained that a code has not been created for the
Statutory Budget Reserve (SBR), since it has never been
used. He estimated that $500 million would have to be drawn
from the SBR and that a code would be created. Co-Chair
Hawker added that funds from the SBR require a legislative
majority and signature by the governor. Mr. Teal
acknowledged that other codes would have to be added.
11:15:58 AM
Mr. Teal discussed codes for federal receipts. Funds must be
federal to receive a federal designation. Lines 18 to 29 of
page 11a are existing federal codes without modification.
New federal codes were created for the Election, Clean Water
and Drinking Water funds.
11:18:58 AM
Mr. Teal illustrated how the Alaska Clean Water Revolving
Loan Fund was reclassified from "other" to "federal". He
stressed the difficulty of categorizing the fund, which
appears to be composed of state and federal funds. The fund
was capitalized with federal funds ($10 million). The state
fulfills its required federal match through the sale of
bonds ($2 million). A portion of the money leaves the fund
as an appropriation for administrative costs ($1 million),
and a portion is used for loans (also without
appropriation). A trace of the funds shows that the money in
the fund can be used for three purposes: making loans,
administrative costs, and to pay debt service. Money is
taken from the fund to pay off the bonds that were issued
($2 million). He concluded that the state funds cancel and
the federal funds remain ($9 million after a $1 million
reduction in administrative costs) and therefore the fund is
capitalized with federal funds and can be designated as
federal. He concluded that there were no great changes in
federal receipts.
11:23:14 AM
Mr. Teal turned to unrestricted general fund as shown on
page 11a, which are state revenues with no statutory
destination. Three codes remained as general funds. The
Constitutional Budget Reserve Fund (CBR) was moved to this
category. Appropriations from the CBR are open-ended.
General funds are appropriated and if the revenue is
insufficient then the CBR is used to "backfill". He
explained that the CBR is not appropriated by a fund code or
amount; it is used to backfill a general fund appropriation.
Under the new system any funds spent from the CBR will show
as general funds. Management fees are taken out of the CBR
by a three-quarter vote, which creates a liability from the
CBR and must be swept back from the general fund to restore
the CBR. He suggested that a logical conclusion may be that
management fees should be appropriated directly from the
general fund. This item was flagged with an "s" since the
subcommittee may want to consider the issue.
11:26:37 AM
Mr. Teal informed that the Investment Loss Trust Fund was
also designated for subcommittee review, since it is simply
revenue. There was never any fund source available other
than strictly, unrestricted general fund cash, similar to
Alaska Housing Finance Corporation (AHFC) dividends or the
Alaska Municipal Bond Bank or the Alaska Industrial
Development and Export Authority dividends. Codes and where
dividends are spent can be tracked, but the "bottom line is
those dividends can be spent for anything you want and
should be classified as unrestricted general funds".
11:27:47 AM
Mr. Teal turned to miscellaneous earnings, which will need
to be split between general funds and other bonds that are
not general obligation bonds.
Mr. Teal observed that most of the changes occurred as other
funds were reclassified to designated general funds as shown
on page 11b. Sub-groups were used. The first list refers to
revolving loan funds. He pointed out that the loans
themselves are not appropriated. Only the administrative
costs are appropriated. The administrative costs could be
paid as a dividend from the revolving loan fund to the
general fund. However, most revolving loan fund statutes
allow for payment of statutory costs. Co-Chair Hawker
reiterated that it is a choice of the legislature and
governor how funds are spent.
11:29:11 AM
Mr. Teal referred to the Commercial Fishing Revolving Loan
Fund on line 58, which has an "x" and "s" under the note
column. He explained that the legislature appropriated $1.3
million from the fund for costs other than administration,
since the fund has sufficient capitalization to pull money
from it. These funds have been used to pay for non-
administrative costs in the Department of Fish and Game. He
observed that the change to general fund designation would
eliminate this need, since funds were taken from the
revolving loan fund to protect general funds. He suggested
the subcommittee may want to look at this item since it is
being used outside of its current statutory designation. The
Bulk Fuel Bridge Loan Fund was flagged for legislative
review because it has a zero interest rate; therefore,
paying for administrative costs from the loan reduces the
funds available.
11:31:36 AM
In response to a question by Representative Crawford, Mr.
Teal explained that the School Fund, Fishermen's Fund and
Public Trust Fund are dedicated funds that were previously
designated as other. There are several ways a fund can be
dedicated: though the Alaska State Constitution, in federal
law, or grandfathered in because they pre-existed the
constitution. These three funds were grandfathered in
because they pre-existed; however, a grandfathered fund does
not have to be a dedicated fund. The legislature has the
ability to change the use of the fund at anytime for any
purpose. Representative Hawker emphasized legislative
discretion over the spending of the fund source.
11:34:07 AM
Mr. Teal observed that the Special Vehicle Rental Receipts
need to be split to differentiate between boats and
snowmobiles in response to federal regulations (boats are
dedicated, snowmobiles are not).
Co-Chair Stoltze expressed the concern proper tracking
occurs so that the rights of snowmobile users can be
protected. Co-Chair Hawker and Mr. Teal assured him that
proper tracking can and would be done.
11:37:29 AM
Mr. Teal expressed that the intent is not to get rid of fund
codes but to correctly categorize the existing codes.
In response to a previous question by Representative
Crawford, Mr. Teal explained that the Public School Trust
Fund gets a certain percentage of the revenues derived from
the payment of cigarette taxes, fees and penalties in
licensing. The restriction on use is constitutionally
dedicated to rehabilitation, construction, repair,
insurance, and cost of school facilities. Approximately $25
million a year goes into the fund. The Public School Trust
Fund is the balance of the Public School Permanent Fund on
July 1978 plus one-half of one percent of receipts derived
from the management of state land. These funds may not be
appropriated for purpose other than the state public school
program. Mr. Teal noted that there are also three statutes
setting up school construction funds that are duplicates.
11:40:14 AM
Co-Chair Stoltze asked whether there was still a code for
the school tax. Mr. Teal explained that once the use or
source of a dedicated fund is broken, funds cannot be
returned as dedicated.
Mr. Teal compared the University of Alaska to the Alaska
Marine Highway System, which sells tickets and provides a
service. An argument can also be made that the university is
more like AHFC and other state corporations, which were left
in the other category. He observed that it did not really
matter which category was used, since a designated general
fund code cannot be used outside the program that designates
the income. Mr. Teal continued that one way to view
designated general funds is that while the legislature can
they should not break the designation.
11:43:23 AM
Mr. Teal observed problems with the uninsurance employment
tax related, which flows to the federal government without
appropriation. Co-Chair Hawker agreed that there were
hundreds of millions unaccounted for in the appropriations
in terms of the uninsurance employment tax.
Mr. Teal spoke to receipts support services and asserted
that the code needs to be split into three pieces: non-
regulated fees that are unrelated to the cost of running the
program, regulated fees that are unrelated to the cost of
running the program, and regulatory fees equal to the cost
of running the program. Co-Chair Hawker commented that LFD
would lead the subcommittee through the discussion.
11:45:29 AM
Mr. Armstrong asked what happens if the House and Senate
give an appropriation different designations. Mr. Teal
observed that items could be rectified in conference
committee, but hoped that the classification system would
not be political. Co-Chair Hawker suggested that hours have
been spent on the discussion.
Representative Kelly thought fund code changes made sense
but cautioned that agencies need to be assisted. Co-Chair
Hawker agreed.
11:48:58 AM
Mr. Teal addressed the Permanent Fund - page 12 (a-e), which
is a reclassification of a billion and a half dollars to
general fund since the Earnings Reserve Account is available
for legislative appropriation. The $1.5 billion in the
Earnings Reserve Account are dividends that now count as
general fund expenditures, and inflation proofing, which is
also a general fund expenditure. He added that $7 million of
the permanent fund corporate receipts are used for agency
operations in the departments of law, revenue, and natural
resources. These expenditures will now show up as general
funds, which means there is no real reason to use the
Earnings Reserve Account instead of general funds. He
observed that permanent fund corporate receipts are being
used to support an agency that did not generate the
receipts. Alaska Statutes 37.05.145 prohibits this practice.
11:52:48 AM
Mr. Teal reviewed the subgroups that remain in the other
category on 11d: dedicated funds (federal or forced by the
US Constitution), trust funds (retirement), bond funds
(AHFC), and corporate receipts.
11:54:50 AM
Vice-Chair Thomas clarified comments regarding halibut
IFQ's. He noted that fishers have lost over 54 to 55 percent
of their halibut IFQ's, which equates to $20 million a year
in Southeast Alaska's economy. Ninety percent of the IFQ's
are owned by residents of SE Alaska, most of them rural.
11:57:38 AM AT EASE
1:09:58 PM RECONVENED
Co-Chair Hawker observed that there was confusion in the
previous budget cycle regarding university funding because
the budget submitted by the governor was not in line with
the proposals of the Board of Regents. The intent of the
Board of Regents is to work with the Office of the Governor
to bring forth a budget to the legislature. The Board of
Regents will establish a three-member liaison team to enable
better communication with the legislature.
1:17:39 PM
Senator Joe Thomas and Mr. Teal reviewed the Senate Finance
Committee's workshop with the university (10/14/09 and
10/15/09). Senator Thomas felt that the meeting was
beneficial. Mr. Teal concurred and added that the there was
honest discussion. The university considers itself to be an
important priority and maintains that there is a rigorous
process of evaluating campus needs. The Board of Regents
indicated that they felt the legislature should approve its
request [without change]. He stressed that the Board of
Regents needs to understand that the legislature deals with
the university's budget as submitted by the governor. It is
not a reduction of the university's budget if the governor's
submission is fully funded (instead of the budget presented
by the Board of Regents in their Redbook.) Mr. Teal
acknowledged that the university monitors a statewide
program but disagreed that it is uniquely special. He
observed that Senator Johnny Ellis agreed with this
assessment and pointed out that the legislature has the
statewide prospective and must balance the priorities of all
agencies including the university.
1:23:08 PM
Mr. Teal reported that the university was not going to
submit a large capital budget as they had in the past. The
university intends to submit a request including one
building and some deferred maintenance needs. He noted that
Senator Ellis felt that the university's capital budget
request was a demand and that they would not accept funding
outside of their request. He recalled that Senator Ellis
suggested that the university should rethink their capital
budget strategy.
1:24:59 PM
Mr. Teal observed that there was also a brief discussion of
future general fund requirements. He noted that Senator
Stedman raised the point that in the past five years the
university's unrestricted general fund portion has increased
from 42 to 46 percent. The Board of Regents reported that
the intent was to reduce this amount and that they would
turn this ratio around. However, discussions with university
budget staff indicated that they are not likely to reduce
their general fund amount.
Mr. Teal continued to relate the conversations at the
meeting involving fixed costs. The desire of Senator Stedman
was for the Legislative Finance Division and the University
of Alaska to agree on the presentation of fixed costs or
base budget. He assumed that the Redbook procedures would
continue as they have in the past.
1:27:02 PM
Mr. Teal noted that the topic of a public building fund was
not brought up during the workshop, but that he had
discussions regarding the creation of a fund with Kit Duke,
Associate Vice President of building facilities. He observed
that the Public Building Fund has seven buildings and eighty
million dollars of deferred maintenance. The university has
400 buildings and $800 million in deferred maintenance. The
university has a huge problem with deferred maintenance.
Co-Chair Hawker added that the governor has made it clear
that he is contemplating a mechanism to address the backlog
of deferred maintenance. He agreed that the meeting with the
university was honest and blunt. He suggested elevating
university funding as a priority of the entire House Finance
Committee.
1:31:26 PM
Co-Chair Stoltze recalled being offended by the university's
attitude about the capital budget. He stressed the
inappropriateness of politics in the process. Co-Chair
Hawker suggested that the proposed liaison team would help
improve communication.
Representative Joule suggested that the legislature not
ignore past work on deferred maintenance, which identified a
billion dollars of deferred maintenance throughout the
state, not just in the university system. He wanted to
refocus efforts to determine the deferred cost of new
buildings or laws.
1:37:41 PM
Representative Kelly commented that he came away from the
university meetings with a hopeful attitude. Mr. Teal
indicated that progress was made even if there was no
agreement. He recalled disagreements in the previous year
regarding maintenance costs for the new science building. A
[university] public building fund would solve such problems.
Representative Kelly reiterated that he was hopeful.
1:41:25 PM
Mr. Teal defined the proposed fiscal note system. The
administration prepares the fiscal note, which is
electronically stored. The division is working to streamline
the process. Fiscal notes would be reported as a data
transaction in the budget system in order to track versions
of the legislation and the associated costs.
Co-Chair Hawker observed that fiscal notes are funded
through the adoption by the conference committee on the
operating budget. The process would allow electronic
transfer of information.
1:44:48 PM
Mr. Teal gave an update on capital projects procedure.
Legislative reappropriations are going to require full
backup. The list of contacts will need to be updated on any
project that was submitted in the previous year. Group
emails will be available. The exchange of data should
improve and be more streamlined.
1:46:41 PM
Mr. Armstrong suggested that reappropriations be segregated
out in the reporting process as seen on page 4b of the
handout, so that the funds do not count against a
legislator's district if they are transferred to another
district. He gave a hypothetical example. Mr. Teal thought
it would be easy to do. Co-Chair Hawker agreed.
Vice-Chair Thomas observed that previously approved capital
projects were recently funded with economic stimulus funds.
He expressed concern that these projects are not double
charged. He also brought up frustrations surrounding
projects that are delayed by a failure to obtain necessary
permits. He suggested project requests indicate if a permit
is needed and if so if it is on hand. Co-Chair Stoltze
agreed.
1:50:23 PM
Mr. Teal stressed that the state's reporting system is very
powerful and maintained that Alaska is very open and honest
in comparison to other states. The state of Alaska does not
sweep capital funding under the rug.
Representative Joule wondered how capital projects get
"typed" and assigned to districts. He objected to the
assignment of the Dalton Highway to his district and argued
that it is a statewide expense. Co-Chair Stoltze agreed that
there is difficulty in the assignment of capital projects.
Mr. Teal related that the Legislative Finance Division tries
to improve the process. The Legislative Finance Division is
unbiased, but must know the legislature's wishes for
groupings and reporting.
1:55:41 PM
Vice-Chair Thomas agreed with Representative Joule's
comments. He gave an example of a statewide project that was
charged to his district.
1:57:20 PM
Co-Chair Hawker explained that subcommittees work
independently but require a final summary document that
should be structurally similar. There is a proposal to have
a subcommittee management worksheet. He asked for staff
feedback.
AMANDA RYDER, FISCAL ANALYST, LEGISLATIVE AFFAIRS,
LEGISLATIVE FINANCE, described the qualities in the
worksheet on page 13a. She stated that the transactions will
be able to be read clearly due to new formatting. She
expressed excitement with the new spreadsheet and discussed
various ways in which it will streamline information. The
new spreadsheet will allow staff to run "what if" scenarios.
The base spreadsheet will contain the governor's budget
transactions as a starting point. Any difference between the
governor's budget and the subcommittee's recommendation will
be highlighted in green. Staff will only input data into the
blue cells.
2:03:08 PM
Ms. Ryder shared that the spreadsheet changes are not set in
stone and she hoped that the committee would give the
department its feedback. She continued to explain the
various qualities of the new spreadsheet.
2:04:50 PM
Ms. Ryder explained that the governor amendments will also
be highlighted in green. She explained that the division
will enter the information into the subcommittee reports to
make sure that the LFD reports match; any item that does not
match will show in red. Co-Chair Hawker added that the color
coding has been added to make the spreadsheet easier to
read, audit and review.
Ms. Ryder stressed that the color coding in the spreadsheet
provides a tool to quickly notice discrepancies. The
spreadsheet also allows subcommittee members to annotate
their decisions.
2:09:21 PM RECESSED
2:16:12 PM RECONVENED
ANNETTE KREITZER, COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, discussed the challenges facing her
department. She said the recruitment and retention of
employees has been the biggest challenge. She observed that
the geographical differential study came out of Governor
Palin's appointed of an executive working group to address
recruitment and retention. She noted that $400 thousand was
appropriated in 2008 for a geographical differential study,
which would be in addition to any merit increases or cost of
living allowance (COLA) adjustments. She noted the
difficulty of implementing major initiatives during the 90
day legislative session.
2:18:23 PM
Vice-Chair Thomas inquired the total cost of implementation.
Commissioner Kreitzer acknowledged that there would be a
total cost for implementation of the legislature if the
governor were to accept the report as written; however, the
goal of the hearing was only to provide background. She
noted that the department is in the middle of union
negotiations. Commissioner Kreitzer observed that the report
has been on the department's website.
2:21:35 PM
JIM CALVIN, MCDOWELL GROUP, JUNEAU, provided background
information on the study, which is the most comprehensive
overview of the cost of living allowance in Alaska since the
1985 geographic study (also done by the McDowell Group). He
referred to a handout entitled, "Alaska Geographic
Differential Study - 2008" (copy on file). He related that
McDowell worked with EcoNorthwest (data management) and GMA
Research, Bellview, which did the urban telephone research.
The McDowell group did the rural surveying, which is more
complicated. All of the research was done in fall of 2008
(October through December). The final report was provided to
the administration in April 2009.
2:24:06 PM
Mr. Calvin described the study's methodology. He explained
that 2,547 randomly selected households in 74 Alaskan
communities were surveyed. There were fifty questions in the
survey regarding household spending patterns in order to
understand the shape of household budgets in different
communities throughout Alaska.
Co-Chair Hawker asked if they received good voluntary
compliance. Mr. Calvin replied that people were very
receptive to talking about their household budgets.
Mr. Calvin noted that they surveyed 634 stores throughout 58
communities collecting data on a household market basket of
approximately 200 items.
2:27:05 PM
Mr. Calvin explained that the basic modeling used the
household survey and shape of the market basket to determine
the importance of the following items: housing,
transportation, and food. The price information allows a
differential for specific items.
2:28:04 PM
Representative Paul Seaton asked how rural communities were
surveyed. Mr. Calvin reported that people were asked where
they bought their groceries. Groceries bought in neighboring
large cities were accounted for in the cost analysis.
2:28:56 PM
Representative Nancy Dahlstrom asked if subsistence was
taken into account. Mr. Calvin explained that the focus was
on the cash economy but that subsistence actives were
captured through the cost of tools associated with
subsistence.
2:30:35 PM
Mr. Calvin continued to discuss the methodology in measuring
the differentials. Communities were aggregated into eighteen
geographic pools or sample blocks that are generally similar
in terms of size of population, transportation
infrastructure access, and geographic location within the
state. Anchorage was used as the base community and given a
differential of one. All costs are relative to Anchorage.
Co-Chair Stoltze wondered how fuel costs were estimated.
2:32:21 PM
Mr. Calvin clarified that the household surveys captured how
much gas is spent on fuel. The cost of fuel compared to
Anchorage is used to create a differential. How much is
bought is as important as the relative cost.
Mr. Calvin referred to the profile on page 17 of the study,
which shows the factors that went into determining a cost
differential (copy on file). Each profile contains the
population of the community and number of state employees.
Fairbanks' cost differential came in at 1.03. Housing is a
little bit less expense in Fairbanks but food and
transportation is a little higher. The Parks/Elliott/Steese
Highways community was significantly lower.
Representative Crawford observed that Anchorage, Fairbanks,
and MatSu were pooled together and there is an eight percent
difference between these communities.
2:35:23 PM
Mr. Calvin clarified that Anchorage was calculated by itself
and offered to provide more information on the pooling later
in the presentation.
Mr. Calvin observed that Glennallen, Delta Junction, and Tok
all have highway access, which is critically important for
the cost of living calculation. The cost of housing is
significantly lower than Anchorage, but the cost of
clothing, food and transportation is higher. Blended
together the cost of living is not dramatically higher than
Anchorage.
Mr. Calvin observed that the first significant difference
occurs in the roadless interior pool of Fort Yukon, Galena,
and McGrath, which have high housing and food costs across
the board of 1.31. Juneau has higher housing and food costs
than Anchorage and has a differential of 1.11.
2:37:14 PM
Vice-Chair Thomas wondered about the difference in income
levels throughout the state. He expressed concern for basing
the differentials on the price of housing. He shared several
observations he felt should be considered when the surveys
were conducted such as income.
2:39:38 PM
Mr. Calvin acknowledged the difficulties in conducting a
survey in Alaska. Household income can be determined but the
challenge is in the comparison since households vary. The
market basket focuses on what is available in rural areas.
The key issue is housing.
2:41:41 PM
Vice-Chair Thomas maintained that there would be a
difference between professional communities versus a more
working class community.
2:42:51 PM
Co-Chair Stoltze thought that the discussion on geographical
differentials was necessary in order to truly understand the
issues. He expressed a desire for a conclusion of the cost
differential issues.
2:44:00 PM
Vice-Chair Thomas agreed and noted that cost differential
changes take years to implement. Co-Chair Hawker
acknowledged that the cost differential issue is one of
three top issues in the state along with subsistence, and
abortion. Mr. Calvin emphasized the complexity and challenge
of cost of living research in the state of Alaska.
2:44:52 PM
Mr. Calvin continued with his presentation and noted that
higher costs in Juneau for housing (15 percent), food (3
percent) and transportation (9 percent).
Mr. Calvin observed that Ketchikan and Sitka were initially
grouped together because they are similar in terms of
population and geography, but further analysis discovered
that they are quite different and suggested that they be
split apart. There were much lower costs in the southeast
mid-size communities of Craig, Haines, Klawock, Metlakatla,
Petersburg, and Wrangell. Transportation costs are somewhat
higher but not significant since these communities have the
benefit of ferry service. Their cost differential was 1.05.
Mr. Calvin reviewed the southeast small communities of Elfin
Cover, Gustavus, Hoonah, Pelican, Skagway, Tenakee Springs,
and Yakutat. He acknowledged that there is a size and
quality issue in housing, but the housing available is
significantly lower. He concluded that the cost of living is
about equal to Anchorage (1.02). He emphasized that
Anchorage is not a cheap place to live primarily due to
housing costs.
Mr. Calvin observed that the Matsu Borough was split into
different communities, but it is the lowest cost area in
Alaska (0.95). Housing is less expensive in Matsu than
Anchorage.
Mr. Calvin addressed other areas in the state. The Kenai
Peninsula was similar to Anchorage at 1.01. Prince William
Sound was 1.08, but Valdez and Whittier are quite different
and he suggested that they be split. Kodiak came in at 1.12.
The Arctic region of Barrow, Kotzebue and Nome had a high
cost of living differential of 1.48 due to high housing and
utility costs, along with high food and transportation
costs. Bethel and Dillingham were at 1.49 but might be
better split.
2:47:33 PM
Mr. Calvin continued discussing other areas of the state. He
observed that the Aleutian region of Adak, Cod Bay, King
Cove, Sand Point, Unalaska and Dutch Harbor were at 1.50
with high housing and transportation costs. Southwest small
communities are the smallest communities of Alaska and had a
differential of 1.44. He noted in some cases communities of
sufficient size were isolated. Barrow was 1.50, Bethel was
1.53, and Dillingham was 1.37 (even though it was grouped
with Bethel in the study). Cordova was 1.13 and Valdez was
1.08. Homer was on par with the Kenai Peninsula Borough
analysis. Ketchikan and Sitka were grouped together, but
they found that they are quite different. Ketchikan had a
differential of 1.04 and Sitka was 1.07. Unalaska and Dutch
Harbor were the highest in the state at 1.58, which was
higher than some of the smaller surrounding communities in
the region.
2:49:39 PM
Mr. Calvin shared that it was informative to examine the
changes in differentials from 1985. In some areas, such as
Ketchikan and Prince of Wales Island, there has been no
change over the last 23 years. Wrangell and Petersburg are
up slightly from .98 to 1.04. Sitka is way up from 1.01 to
1.17 due to housing costs. Juneau is up from 1.03 to 1.11
due to housing. Valdez and Cordova are slightly down. There
was virtually no change in Icy Straight, Palmer, Wasilla,
Kenai, Cook Inlet and Fairbanks. Seward is up slightly from
1.0 to 1.03. Kodiak is up from 1.06 to 1.12. Aleutians are
up significantly. Areas on the road system did not increase
much, while off the road system and remote communities had
significant change. Bristol Bay is up from 1.29 to 1.37.
Bethel is up from 1.39 to 1.53. Yukon Kuskokwim shows a drop
but he pointed out that it was the result of a small sample
size. Barrow, Nome and Kotzebue were up slightly.
Mr. Calvin discussed factors that influence the change in
the cost of living differentials. He observed increases in
Juneau and Sitka. Urban areas have seen a growth in the
retail environment, which has caused a downward pressure on
the cost of living over the last 23 years. Rural communities
have not benefited in the same way. Increased fuel costs
have been a factor in rural areas.
2:52:58 PM
Co-Chair Stoltze wondered about the labor pool and free
marked factor as far as the employment situation in
different communities. Mr. Calvin explained that employment
situations are not factored in except to pool similar
communities together.
Representative Doogan questioned if the affect of taxes on
the communities in the study were taken into account. Mr.
Calvin noted that the tax burden was captured.
Representative Kelly felt that the survey was conducted at a
poor time economically. Mr. Calvin acknowledged that fuel
prices were exceptionally high and trending down while they
were in the field. Steps were taken to test how the price of
oil would change the differentials between communities
statewide. The price of fuel did not change the
differentials between Fairbanks and Anchorage, since they
are in the "same boat" in relation to cost. Fuel costs did
have some affect in rural areas. In areas with high
differentials (1.45 - 1.50) a one-third reduction in fuel
prices could lower the differential slightly (by .02).
2:57:43 PM
Mr. Calvin discussed the recommendations. He concluded that
it makes sense to depart from a plan that is based strictly
on election district boundaries and to group communities in
terms of economics, social characteristics, location, and
infrastructure. The program administrative costs need to be
considered. He acknowledged that there is some uncertainty
in the differentials. He emphasized that it also makes sense
to aggregate into geographical differential pools.
2:59:10 PM
Co-Chair Hawker questioned if the methodology that
incorporated the housing costs in communities was consistent
with the 1985 study. Mr. Calvin stated that the
methodologies have been consistent. He observed that it is
not possible to take the average quality home in Anchorage
to Dillingham and price it.
In response to a question by Representative Kelly, Mr.
Calvin acknowledged that the 1985 study was the target of
consternation among many groups and the subject of
discussion concerning its methodology. He concluded that the
1985 study "stood the test of time". The first month of
their 2009 project was spent on design to address these
critically important issues. He felt that the methodology
was strong.
3:01:54 PM
Mr. Calvin discussed statistically based geographical
differential pools based on communities that are generally
similar in terms of their cost of living. They were grouped
together for an administratively functional plan for
applying differentials to wages as one methodology. The
state was split into five geographical pools (GDP).
· Anchorage, Fairbanks, Delta/Tok, Glennallen, KPB, Mat-
Su, Parks/Elliott/Steese, Small & Mid-size SE - .95 to
1.05, weighted average of 1.0
· Cordova, Juneau, Kodiak, Sitka, Valdez - 1.08 to 1.17,
weighted average of 1.11
· Dillingham, Nome, Roadless Interior - 1.31 to 1.39,
weighted average of 1.37
· Barrow, Bethel, SW Small commities - 1.44 to 1.53,
weighted average of 1.50
· Kotzebue, Unalaska/Dutch Harbor - 1.58 to 1.61,
weighted average of 1.60
Mr. Calvin explained that the weighted average represents
the number of state employees. He acknowledged the challenge
of keeping like communities together but observed that the
program would be easier to administer than one with 30
differentials. The grouping also acknowledges the ratio for
error in survey research. An aggregate approach provides a
range not a single value, without a scientifically based
number of districts. He concluded that there were natural
breaks that allowed Alaska to be broken into five districts.
3:06:03 PM
Representative Dahlstrom wondered about the out-of-state
firms that had helped with the study. She wondered if there
had been a competitive bid process. Mr. Calvin explained
that they chose firms that they had established
relationships with and they trusted and were familiar with
the quality of their work. The McDowell Group did not do a
competitive bid process.
3:07:13 PM
Vice-Chair Thomas asked if state employees included
teachers. Mr. Calvin replied no. Vice-Chair Thomas expressed
concern for out migration of workers in rural areas.
Annette Kreitzer stressed that the governor has not
recommended implementation of the system. The purpose of the
meeting was to provide information.
3:09:41 PM
KEVIN BROOKS, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, stated that the department is satisfied with
the work done by the McDowell Group. He observed that the
focus was on the executive branch but that the research
could be applied to school districts. He referred to page 5
of the differential study. He provided members with a chart
indicating the full and part time employee count by location
(copy on file).
3:11:25 PM
Mr. Brooks clarified that the employee count was derived
from the employee's employment location. Co-Chair Stoltze
observed that employee work place location versus residence
would affect the Matsu. Ms. Kreitzer clarified that the
study is not based on the numbers in the employee count.
Mr. Brooks stated that the employee numbers were pulled from
OMB budget data for 2010. The focus was on the top 20
communities in terms of employee count. Each of the five GDP
was color coded.
3:13:13 PM
Mr. Brooks also provided members with a chart demonstrating
employee count by bargaining unit and location. He observed
that each of the bargaining contracts address geographical
differentials. Some locations have as many as four different
geographical differentials in a single city. He mentioned
the geographic difference percentages of the different
bargaining units. He observed that the data used for these
differentials is 20 years old in some cases.
Ms. Kreitzer pointed out the differences among communities
and bargaining units. She noted that arbitration is also a
contributing factor.
Mr. Brooks concurred and pointed to correction officers in
Juneau and Ketchikan and their supervisors. He concluded
that geographical differentials are complicated to
administer and that the goal is to achieve consistency
across bargaining units.
3:17:34 PM
Representative Doogan asked if the intent is to not only
equalize the cost of living in contracts but to also
equalize the other pieces in contracts. He observed that one
bargaining unit might negotiate a higher differential in
exchange for less time off than another.
Ms. Kreitzer commented that the goal is to achieve fair
contracts.
Representative Seaton commented on the Fairbanks
differential between different covered employees. There is a
ten percent variation between various bargaining units, but
there is also a 10 percent variation between different
cities.
3:20:19 PM
Ms. Kreitzer clarified that she did not want to get into the
specifics of their intention. The purpose is to provide the
underlying methodology. Representative Seaton clarified that
he was speaking to the statistical basis for the variance
and whether it is accepted in one format but not another.
Mr. Brooks commented that the statistical analysis allowed a
range of numbers. He stressed that the differential is based
on the relative difference of the cost of living between
Anchorage and other communities.
3:23:01 PM
Representative Joule informed about the state employees in
his district. Most state employees in his district have
transferred in to the district. He pointed out that high
geographical differentials allow for greater retirement in
terms of an employee's three high years. He expressed
concern that motivation for increased retirement does not
always translate to a benefit for the area. Ms. Kreitzer
acknowledged the issue but pointed out that the study does
not represent a change from current practices. She
emphasized that the intent is to hire locally.
3:27:18 PM
Representative Kelly addressed the issue of raising pay
levels where there is high unemployment.
Mr. Calvin observed that the heart of the economic situation
is how does cost of living and pay differentials relate to
supply and demand for labor in a community and how does it
disjoint the economic environment to have a handful of high
paying jobs where there may not be qualified people or where
it would be an inducement to pull people in temporarily.
3:30:42 PM
Ms. Kreitzer informed that the cost of implementing the
study as presented would be $35 million including benefits.
The impact on the unfunded liability for retirement and
benefits would be $3.8 million the first year. The impact on
the unfunded liability is $50 million over 25 years.
Vice-Chair Thomas asked about the effect on private industry
in small communities. Ms. Kreitzer acknowledged that there
are a lot of policy implications.
3:32:58 PM
Mr. Brooks clarified that no one would see a fifty percent
increase in pay. Any increase would be incremental.
Geographical differentials already exist and would only be
updated.
Representative Dahlstrom asked for the definition of a
confidential employee. Ms. Kreitzer responded that they are
employees that generally work for the Division of Personnel
on labor relations.
3:35:23 PM
Ms. Kreitzer reiterated that it would cost $35 million to
implement the geographical differentials as presented in the
study.
AT EASE 3:36:22 PM
RECONVENED 3:47:56 PM
ATTORNEY GENERAL, DAN SULLIVAN, DEPARTMENT OF LAW (DOL),
introduced his staff. He addressed the strategic direction
of the Department of Law, which is focused on engagement
with the legislature, and different elements of Alaskan
society. He stressed the importance of being more proactive
on litigation such as in the endangered species listing.
3:53:52 PM
Commissioner Sullivan observed that the four core functions
of the Department of Law are: protecting the safety and
physical wellbeing of Alaskans, fostering the conditions for
economic opportunity and responsible development and use of
the state's natural resources, protecting the fiscal
integrity of the state, and promoting and defending good
governments.
Commissioner Sullivan observed that criminal issues
including child, consumer, environmental protection takes up
67 percent of DOL's budget. The department helps to shape
the broader economic environment in Alaska, such as the
department's support in the Kensington mine case. The
department protects the fiscal health of the state by
assuring payment of taxes and royalties, recovery of money
owed to the state, and defending monetary claims against the
state. Protecting the state's fiscal integrity accounts for
19 percent of the department's budget. Promoting and
defending good governance includes ethic issues, Indian law
issues, elections and initiatives, legislation, and public
record requests.
3:57:47 PM
Commissioner Sullivan felt DOL was a good return on the
state's investment. The state received $560 million in
claims and judgments as a result of the department's
efforts, which represents $6 dollars on every $1 dollar
spent on the department or a 35 to 1 ratio if only the civil
division is considered.
Commissioner Sullivan touched briefly on four issues: cruise
ship tax litigation, Mercer Case, Carlson Case, and
permanent fund loss accounting.
Co-Chair Hawker observed that any confidential material
would be discussed in executive conference.
4:00:59 PM
Commissioner Sullivan began with the cruise ship head tax
issue. He had an opportunity to testify before the House
Judiciary Committee. The Parnell Administration has great
respect for the cruise ship industry and the tourism
industry, but he stressed that DOL is defending the suit
diligently as is their statutory duty. The economic benefits
are clear as are the impacts of one million visitors a year
to a state with a population of 700 thousand. He noted that
state communities have spent funds to provide services and
build infrastructure. He observed that law allows the user
of services to pay their fair share under the U.S.
Constitution when local communities provide significant
infrastructure and services to hosted travelers, whether in
or out of state. The cruise ship industry complaint focuses
on the violations of the U.S. Constitution in relation to
the Tonnage Clause, Commerce Clause and the Transportation
Security Act and is seeking to declare the tax
unconstitutional and enjoin collection of the tax in cost
and fees. He reiterated that there is a well established
principle that passengers can be required to pay a fair
share for required facilities and services. The question is
to what degree the $46 per passenger tax is roughly
calibrated to cover the cost to state and local communities.
The department is undergoing a study on the issue
4:05:20 PM
Co-Chair Hawker noted the issue of documenting that
maintaining ports and harbors is only a small portion of the
cost of hosting cruise ship passengers. Commissioner
Sullivan agreed and explained that the law allows services
in the areas where there are large numbers of passengers.
Representative Austerman asked if there is similarity with
the Carlson case in terms of a ratio of how much the state
pays versus the fees charged.
Commissioner Sullivan stated that one of the concerns with
the Carlson case is the way in which the judgment and
interest on judgment continued to accrue. There is some
similarity.
4:08:31 PM
Representative Austerman observed that the focus of the
Carlson case is how much the state was paying to provide
services versus the percentage charged to out of state
applicants.
Commissioner Sullivan explained that the cruise ship head
tax is more of a cost analysis and connection of tax to the
costs and services provided.
Co-Chair Hawker asked if the current operating budget
supports work for these cases or if additional funds would
be requested for litigation costs. Commissioner Sullivan
replied that he is working through the budget process with
the governor.
4:10:46 PM
Commissioner Sullivan discussed the Mercer case. Mercer was
the actuary for the public and teacher retirement systems
since 1974. A 2002 audit recommended a number of changes to
the modeling by Mercer. The recommendations by the audit
firm were largely adopted by the Public Employees'
Retirement System (PERS) and Teachers' Retirement System
(TRS) boards. Mercer made changes based on the audit
recommendations. In 2003, Mercer advised that PERS and TERS
were unfunded to the total amount of $4.4 billion. Of this
amount, $1.3 billion was a result of correcting the errors
identified by the auditors in relation to Mercer's health
cost modeling. An additional $500 million in unfunded
liability was discovered as the result of coding errors. In
2005, there was legislation enacted to close the PERS and
TRS defined benefit plans to new participants. Defined
contribution plans were created for new PERS and TRS
employees. In 2006, the Department of Law investigated the
work of Mercer and concluded that there was a basis for
cause of action for negligence in the case. The Wall Street
firm of Paul Weiss was retained on a contingency fee basis.
A complaint was filed in December 2007. The complaint
alleged professional negligence, malpractice, breach of
contract, negligent misrepresentation, and unfair trade
practices, alleging damages of $1.8 billion. There has been
extensive discovery. The complaint was amended in May to add
fraud and punitive damages claims when the actuaries
testified under oath that they discovered an error in the FY
02 PERS valuation that if corrected would have increased the
PERS unfunded liability $1 billion. The error was not
corrected. Mercer representatives further testified under
oath that they falsified the FY 03 PERS valuation to conceal
the error and reduce the PERS unfunded liability by $1
billion. A motion to dismiss was filed and argued in Juneau.
The trial was moved to July from March. The state intends to
take case to trial and win.
4:14:48 PM
Co-Chair Hawker pointed out the seriousness of alleging
fraud and an intent to deceive. Commissioner Sullivan agreed
and noted that their NY firm also agreed. Co-Chair Hawker
understood that the allegation was not made lightly. He
commended DOL for the hard work.
Commissioner Sullivan credited his co-workers with the hard
work. He stated that he would continue to press forward and
was disappointed in the delay of the trial.
4:17:42 PM
Commissioner Sullivan discussed the Carlson case and the
significant developments in the case. The case has been
under litigation for 25 years. The case has been before the
Alaska Supreme Court four times. The original suit was a
class action that claimed out of state fisherman were
discriminated against based on the Commerce Clause of the
U.S. Constitution and the Privileges and Immunity Clause due
to the differential in the permits and crew licensing fees
for instate and out of state fisherman. The state received a
setback on the third time the case went before the court.
The court ruled that the interest accrued on the case would
be 11 percent quarterly compounded back to the original
judgment. The state's primary liability is the interest due
to this ruling. Last spring was the last time the case went
to the Alaska Supreme Court. The overall judgment was
reduced by 50 percent, but the total liability is still
significant. The interest on the case is $20 thousand a day.
Refunds would cost $68.3 million, which would have been $93
million if they had not been reduced. The plaintiff's
attorney is asking for $21 million but has only spent $250
thousand. There has not been a final judgment; a judgment is
expected in January. An accounting firm is reviewing the
numbers.
4:23:00 PM
Co-Chair Hawker asked if there is any ability or mechanism
to stop the accrual of interest on the damage award.
Commissioner Sullivan was reluctant to discuss options
publically.
Co-Chair Stoltze asked if there were other settlements that
might accrue interest. He also observed that the tourists
and non-residence are paying toward the building of a fish
hatchery in Fairbanks.
4:25:54 PM
Commissioner Sullivan observed that it would be worthwhile
to work with the legislature to prevent similar results in
other cases.
4:27:18 PM
Commissioner Sullivan highlighted the issue of the permanent
fund realized losses in FY 09 of $2.5 billion; of this
amount, $2.2 billion was attributable to realized investment
loss and principle, the remaining $300 million was
attributable to realized investment loss in the Earnings
Reserve Account. The issue is whether booking a $2.2 billion
loss from the principle and earnings reserve accounts
requires legislative authorization because it reduces the
balance of the Earnings Reserve Account, which is subject to
appropriation. This issue is not in litigation. The
department is making recommendations to the governor.
4:30:53 PM
Co-Chair Hawker noted that there are executive policy calls
involved.
Mr. Teal pointed out that how the losses are accounted
affects the legislature's power of appropriation. He
suggested that it may be appropriate to consider statutory
changes. From the fiscal prospective, $2.5 billion missing
from the Earnings Reserve Account could result in a cap on
dividends. Dividends are capped by the amount of statutory
income and the qualifier that they cannot exceed 50 percent
of the amount in the Earnings Reserve Account. The Earnings
Reserve Account is now at $400 million dollars instead of $3
billion dollars since the losses were attributed to this
account.
Co-Chair Stoltze stressed that there are policy issues
involved.
Mr. Teal noted that a lower reserve balance also affects the
17b draw or legislative appropriation from the CBR.
4:35:30 PM
Mr. Teal observed that FY 2010 revenues are $2.7 billion
lower than 2009. This creates the basis for the amount that
would be drawn from the Constitutional Budget Reserve
Account. The draw also includes the amount available for
appropriations, which includes the balance of the Earning
Reserve Account. Subtract the $400 million and the draw
becomes $2.3 billion. If the balance were $3 billion instead
of a half a billion, the potential 17b CBR draw would "fold"
substantially. Other revenue increases would also affect the
draw. He observed that FY 2010 revenues may only be half a
billion lower than FY 2009. The Earnings Reserve Account may
also recover a billion dollars of the realized loss in FY
2010, which would reduce the 17b draw to zero. He could not
predict the end point. He acknowledged that the Permanent
Fund Division has a different opinion.
4:37:56 PM
Co-Chair Stoltze asked if the intent was to make
recommendations or investment advice regarding the fund's
board of trustees. He asked if more oversight would be
advantageous. Mr. Teal did not have a recommendation; he had
no investment advice. His intent was to clear-up the
statutory treatment whether an appropriation is needed to
move funds from the Earnings Reserve Account to principle.
Co-Chair Hawker added that the statutory oversight is vested
with the Legislative Budget and Audit Committee.
4:40:52 PM
Representative Seaton recalled that the Permanent Fund
Corporation was allowed to increase their alternative
investments from 5 to 15 percent. The legislature has no way
of knowing how the alternative investments are made. He
opined that Co-Chair Stoltze's question was valid as there
is so much potential exposure to derivatives.
Co-Chair Hawker encouraged review of guidelines for these
funds. He appreciated the diversion to illustrate the
complexity of the issue.
Commissioner Sullivan acknowledged the complexity of the
issue and noted that DOL has not been looked at the broader
issue.
4:43:48 PM
Representative Austerman suggested the need for a full day
committee to address the issue of where the state of Alaska
wants to be in fifteen years in regards to finances and if
the House Finance Committee should lead the discussion. He
noted that last year's budget was not sustainable. He
maintained that the legislature is not looking at the 30,000
foot level in regards to a long term vision. He opined that
the House Finance Committee should be the driving force to
form a statewide vision.
4:47:44 PM
Co-Chair Hawker referred to HB 125, which was passed in a
previous session. The legislation requires departments to
create a 10 year plan. He agreed with Representative
Austerman. Discussion ensued regarding timing for more
discussions on the issue. Representative Kelly requested
material about other states or countries that have
benefitted from this type of vision or plan and stressed the
importance of leadership by the executive branch.
4:51:16 PM
Representative Austerman observed that some work has
occurred in the House Finance Commerce and Economic
Development Subcommittee. Some other states have employed
private sector groups for commerce and economic development.
Co-Chair Stoltze advised that in the absence of more
pressing legislative issues, there would be time for
discussions during the legislative session. Representative
Joule agreed on the importance of long-range review that
follows across departments.
4:55:43 PM
Co-Chair Hawker MOVED to convene an executive session under
Uniform Rule 22(b)(1) for discussion of matters, the
immediate knowledge of which would adversely affect the
finances of a government unit. There being NO OBJECTION, it
was so ordered.
4:56:03 PM Executive Session
ADJOURNMENT
The meeting was adjourned at 5:45 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Alaska GDS 2008 Final.pdf |
HFIN 11/5/2009 9:00:00 AM |
Geo Differentials |
| background.pdf |
HFIN 11/5/2009 9:00:00 AM |
Geographical Differentials |
| HFC Agenda Nov 09 Final.docx |
HFIN 11/4/2009 9:00:00 AM HFIN 11/5/2009 9:00:00 AM |
|
| BudgetedWages.pdf |
HFIN 11/5/2009 9:00:00 AM |
Geographical Differentials |
| EmployeeCountLocation.pdf |
HFIN 11/5/2009 9:00:00 AM |
Geographical Differentials |
| Letter090506.pdf |
HFIN 11/5/2009 9:00:00 AM |
Geographical Differentials |
| timeline.pdf |
HFIN 11/5/2009 9:00:00 AM |
Geographical Differentials |
| geoDiffChart.pdf |
HFIN 11/5/2009 9:00:00 AM |
|
| McDowell Group GDS Presentation 2009.ppt |
HFIN 11/5/2009 9:00:00 AM |
Geographical Differentials |
| Legislative Finance Division presentation.pdf |
HFIN 11/5/2009 9:00:00 AM |
LFD Workshop |