Legislature(2015 - 2016)HOUSE FINANCE 519
01/22/2015 01:30 PM House FINANCE
| Audio | Topic |
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| Start | |
| Overview of Alaska's Fiscal Situation: Legislative Finance Division | |
| 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 22, 2015
1:31 p.m.
1:31:44 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:31 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Helen Phillips, House Finance Committee Assistant,
Legislative Finance Division; David Teal, Director,
Legislative Finance Division; Representative Cathy Tilton;
Former Representative Mary Sattler.
SUMMARY
OVERVIEW OF ALASKA'S FISCAL SITUATION: LEGISLATIVE FINANCE
DIVISION
Co-Chair Neuman relayed that committee meetings would begin
on time. He introduced committee members. He introduced the
legislative finance committee staff.
1:33:13 PM
HELEN PHILLIPS, HOUSE FINANCE COMMITTEE ASSISTANT,
LEGISLATIVE FINANCE DIVISION, introduced staff. She
discussed items related to staff including hours and
committee coverage. She pointed out committee file
locations for members. She referred to microphones on the
committee table and pointed out reference materials in the
room.
1:36:05 PM
Ms. Phillips continued to discuss items pertaining to the
committee room and decorum. She relayed that she looked
forward to working with members during the session.
Co-Chair Neuman pointed to various logistics pertaining to
the committee including quorum and other. He communicated
that electronic devices were not allowed at the committee
table during meetings. He introduced his staff.
Co-Chair Thompson introduced his staff.
Co-Chair Neuman communicated that the governor's
supplemental budget was due on February 3, 2015; the
governor's operating budget amendments were due by February
18, 2015. He relayed that a budget subcommittee schedule
was forthcoming. He pointed to subcommittee closeout
deadlines; the target deadline was February 27, 2015. He
shared that currently the Office of the Governor was
working off of a draft operating budget; as updates were
made available, the committee would receive them from the
Office of Management and Budget or through the departments.
^OVERVIEW OF ALASKA'S FISCAL SITUATION: LEGISLATIVE FINANCE
DIVISION
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, asked
his staff to introduce themselves.
1:40:58 PM
Mr. Teal provided a PowerPoint presentation titled "An
Overview of Alaska's Fiscal Situation" dated January 22,
2015 (copy on file). He referred to a Legislative Finance
Division (LFD) document that had been provided to committee
members titled "The Fiscal Year 2016 Budget: Legislative
Fiscal Analyst's Overview of the Governor's Request" (copy
on file). He highlighted that low oil prices had caused low
revenue and corresponding deficits in Alaska.
Co-Chair Neuman communicated that committee members could
ask questions during the presentation.
Mr. Teal provided information about his presentation; the
handouts did not necessarily match the order in which he
would present the slides. He addressed slide 2 titled
"Figure 1. Unrestricted General Fund Revenue and Budget
History." He detailed that the chart depicted pertinent
data pertaining to Alaska's revenue and expenditures for
the past 39 years. He shared that much of the presentation
would convey the numbers on slide 2 in a way that was
easier to understand. He pointed out that revenue was
volatile due to oil price volatility. He noted that oil
production was fairly constantly declining, but it was
fairly predictable and was nowhere near as volatile as
price and revenue. He discussed the difficulty in
maintaining a stable budget with a volatile revenue stream.
He stressed that oil revenue equated to 90 percent of the
state's revenue stream. He discussed that during a period
of volatile revenue, building financial reserves during
high revenue periods, aided in budget stabilization. He
pointed to Figure 1 and noted that the state had been
fairly successful in employing the strategy over time.
1:45:49 PM
Mr. Teal moved to Figure 2a on slide 4 titled "Alaska
Unrestricted General Fund Revenue (Left Axis) and Average
ANS Price/bbl (Right Axis)." He reiterated that the state
had done a relatively good job of saving money when revenue
was high. He referred back to slide 2 and pointed to
savings that were shown in pink and titled "net fund
transfers." Figure 2a on slide 4 included both revenue and
price information. He noted the declining trend in revenue
from the peak of production at 2 million barrels per day in
1982 to about 500 thousand barrels per day at present. He
explained that price and production had impacted the
revenue decline. Price alone had driven the revenue
increase between approximately 2002 and 2006 under PPT
[Petroleum Production Tax]. He relayed that following 2006
it was less clear where revenue stemmed from due to the
impact of price production and the tax mechanism. He
planned to only address revenue. He noted there were high
prices and revenue in 2008, which continued to rise before
falling to an average of $76 in the current year and $66 in
the upcoming year. He pointed to a dotted line on the chart
that was meant to distinguish between the past and the
future revenue forecast. He noted that members may question
the forecast given that the current price of oil was
approximately $50/bbl. Future prices did not represent a
healthy rebound; prices were headed where they had never
been in the past. He cautioned members to avoid being
misled by the spot price of oil; the average 2015 price to
date was $85/bbl.
1:49:09 PM
Mr. Teal stated that if the average price remained at its
current price, the average price for the year would be
around $75 or so. He reiterated that members may question
the forecast if they did not believe the price and revenue
forecast were overly optimistic. He noted that LFD relied
on the Department of Revenue (DOR) for forecast data. He
returned to Figure 1 on slide 2 and relayed that without
expenditure reductions or revenue enhancements the state
could experience deficits of $1 billion on an annual basis,
which included the price recovery incorporated in the DOR
forecast. He detailed that the growth in price that began
in approximately 2005 was not sustainable; expenditures had
gone from roughly $3 billion up to $6 billion in ten years'
time.
Mr. Teal pointed out that many people in the legislature
had known for years that the expenditure growth and
expenditure levels were not sustainable. He communicated
that if the growth was sustainable, the state would have
somewhere around $10 billion in revenue and expenditures,
which represented approximately twice the amount of current
revenue. He remarked that recognizing the situation had not
been enough to avoid it. He noted that despite reduced
expenditures subsequent to 2013, the state was still facing
deficits of $3.5 billion in both FY 15 and FY 16. He stated
that on the positive side the state had built huge reserves
during periods of high prices; however, it was burning
through the reserves rapidly. He pointed to the red bars
below the axis on Figure 1 (slide 2), which represented
withdrawals from savings; red bars above the axis
represented deposits into savings.
1:52:22 PM
Mr. Teal relayed that several slides broke the expenditure
chart into pieces in an effort to make it easier to
identify the problem and potential solutions. He moved to
slide 5 titled "Figure 3. Unrestricted General Fund Revenue
and Budget History Agency Operations." He detailed that the
chart could be thought of as the cost of running programs
and included formula programs (e.g. K-12 and Medicaid) and
non-formula programs (e.g. day-to-day operations). He
pointed out that spending had been fairly flat from the
mid-1980s to 2005. He relayed that operating costs had
increased with the dramatic increase in revenues beginning
in 2005; costs had nearly doubled since 2004. He compared
it to a trend that had occurred in the early 1980s; when
revenue had first begun to flow, the budget had increased
from $1 billion to $2 billion in a short period of time (as
shown on the chart).
Co-Chair Neuman referred to the 1983 and 1985 bars on slide
5. He commented on the growing population in Alaska in
relation to growth in operating costs. He asked if
population growth was included in the data. Mr. Teal
replied that he would address population in a subsequent
chart.
Co-Chair Neuman recognized former Representative Mary
Sattler in the audience.
Representative Gara observed that the 1983 and 1985
expenditures shown in Figure 3 were roughly the same. He
asked if the figures represented actual or inflation
adjusted dollars. Mr. Teal replied that the figures
represented nominal (actual) dollars.
Representative Gara asked for verification that spending
per resident had decreased during the [1983 and 1985]
timeframe especially in inflation adjusted dollars. He
remarked that some catchup had occurred to deal with the
decrease when the state's revenue began to increase.
1:55:58 PM
Mr. Teal agreed and noted that the information was shown in
the slide that included the population adjustment.
Mr. Teal continued to address Figure 3 on slide 5. He
disputed the notion that the driver of the increase had
resulted from formula programs. He detailed that non-
formula spending was growing at the same pace as formula
spending. He turned to a cost driver pie chart labeled
Figure 4 on slide 6. He relayed that the agency operations
increase from FY 06 to FY 15 was approximately $1.9
billion. He pointed to K-12 that was currently a $1.3
billion program, which accounted for $485 million of the
$1.9 billion growth (26 percent). He elaborated that the
growth rate of education was approximately 57 percent over
the period, which represented slower growth than that of
non-formula programs and far slower than Medicaid growth.
He communicated that K-12 accounted for 33 percent of the
budget in 2006 and currently accounted for approximately 30
percent. He stressed that K-12 was a driver due to its
large size, but not because it was growing quickly.
Medicaid accounted for $415 million of the $1.9 billion
growth. Together, K-12 and Medicaid accounted for close to
half of the operating budget growth. However, Medicaid's
share of the budget had increased from 11 percent in FY 06
to 15 percent in FY 15, which represented faster than
average growth (149 percent over the specified timeframe).
1:58:58 PM
Mr. Teal continued to address Medicaid growth. He stated
that when a large program like Medicaid grew quickly it
became a cost driver. The third driver of the $1.9 billion
increase was salaries and benefits, which totaled $350
million. He broke the component into three pieces. First,
negotiated salaries accounted for $150 million in general
funds (the total was double the amount when factoring in
all funds). Second, monthly health insurance costs had
increased from $800 per person in FY 06 to over $1,300 in
FY 15 (an annual increase of $6,500 per employee). He added
that the number of state employees had also increased by
2,000 during the time period; therefore, healthcare
insurance premiums had increased by approximately $75
million. Third, the state's contribution to retirement
costs (the amount paid to employees in payroll checks) had
increased from 11 percent to a cap of 22 percent, which
amounted to approximately $130 million from FY 06 to FY 15.
He summarized that K-12, Medicaid, and salaries accounted
for roughly two-thirds of the undesignated general fund
growth between FY 06 and FY 15. The remainder of the growth
was a result of various expenditures such as Village Public
Safety Officer positions, prisons, the Office of the
Governor, the legislature, oil and gas permitting, and
other (all items that fell into the nonformula category
that were associated with agency operations).
Representative Gara asked for verification that during the
ten-year period K-12 expenditures had risen by an average
of 2.6 percent per year for a total of 22.6 percent. Mr.
Teal replied that growth of 2 percent per year was not
sufficient to reach the 22.6 percent total over a ten-year
period.
Representative Gara remarked that during the ten-year
period the legislature had corrected what some people had
thought was a discriminatory education funding mechanism.
As a result the state had begun spending significantly more
on rural schools to correct the issue. He noted that the
increase also represented a catchup period due to
relatively flat education funding that occurred in the
preceding 15 years. He did not believe the statements were
controversial.
Mr. Teal agreed. He returned to Figure 3 and noted that it
may be pertinent to question how funding had remained flat
for 20 years. He believed the cost drivers provided some
answers to the question. The K-12 budget began at less than
$500 million in 1984 and was still less than $700 million
in 2004 (roughly 50 percent growth over a 20-year period).
2:03:58 PM
Representative Wilson wondered if there was a way to
determine how much federal requirements to programs in
various departments (e.g. the Department of Transportation
and Public Facilities and the Department of Environmental
Conservation) had contributed to agency operations growth
in the past ten years.
Mr. Teal agreed that there were federal mandates. He added
that many people referred to the requirements as unfunded
federal mandates. He acknowledged that the mandates were
driving state spending more in the future than in the past.
He noted that it did shed light on why the growth had
occurred; he planned to elaborate on the issue later in the
presentation. He addressed how funding could stay flat. He
shared that Medicaid had doubled during the 1990s from $64
million to $136 million; Medicaid was currently at $700
million. He stressed that the rate of increase for
healthcare costs had accelerated rapidly. He addressed
salaries as another driver of the cost increase; there had
been no negotiated salary increases in 11 of the 20 years
prior to FY 06. Additionally, there had been no retirement
cost increases in the past; the cost had been 11 percent
for many years. He communicated that there had been no
unfunded liability in the state retirement system until
2005. He noted that the time period on the chart was a time
of slow to negative growth due to the inflation and
population changes. He believed no one would argue that
there had not been unmet needs during the flat funded
period; for a period beginning in 2005 there had been
revenue to address some of the unmet needs.
2:06:53 PM
Mr. Teal addressed statewide operations, which included
operating costs that were not attributable to any single
agency (Figure 5, slide 7). He spoke to items including
debt service, which was essentially the entire amount of
statewide operating costs in years shown on the slide. He
detailed that the state had issued general obligation bonds
on a schedule referred to as the Prudhoe Bay curve that
were set to be paid off by 2000. While statewide costs had
been made up almost completely of debt service, it had been
small during the period [late 1990s]. Debt service had
begun growing because the state had issued general
obligation bonds.
Mr. Teal highlighted a breakdown of the costs in Figure 6,
slide 8. The bottom portion of the bars on the chart
represented state debt service (shown in black). He relayed
that the state currently spent $230 million in general
funds on debt service (the cost had doubled since FY 00);
the figure had been $0.00 in FY 00 and roughly $100
thousand in FY 06. However, the growth had been slow in
comparison to the increase in state assistance to
retirement. Retirement costs skyrocketed when the state had
lost substantial funds in the stock market in the early
2000s and again in 2008 and 2009. The unfunded liability
would have driven rates to levels that municipalities could
not afford; therefore rates for municipalities had been
capped at 22 percent (the state paid the costs above 22
percent). He noted that there was also a cap for the
Teachers' Retirement System (TRS) at a different rate. He
detailed that the unfunded liability had been $18 million
in 2006. The state had expected the cost to climb to
approximately $75 million, and to begin declining. Instead,
rates had continued to climb to a peak of $634 million per
year in 2014; the liability would have been over $700
million in 2015 or over $1 billion if the state had
followed the recommendations of the Alaska Retirement
Management Board. However, $3 billion from the CBR had been
used to pay down some of the debt in 2014. He noted that
without the deposit the unfunded liability would have
continued to increase towards $1.2 billion per year.
2:10:36 PM
Co-Chair Neuman asked about expectations if the chart was
extended to represent future years.
Mr. Teal replied that if the legislature had not passed
legislation the prior year (HB 385) the trend would have
continued upward to approximately $1.2 billion. With the
deposit the cost had declined to $260 million in FY 16.
Without the adoption of HB 385 the FY 16 deficit would be
$750 million to $1 billion higher; the state would be
facing a deficit of $4.3 billion or more instead of a $3.6
billion deficit. He relayed that there was a tremendous
payoff for contributing substantial funds to the unfunded
liability; the state was saving $750 million or more
annually for a deposit of approximately $2.3 billion.
Mr. Teal addressed the fund capitalizations category shown
in green in Figure 6; the capitalizations had been $0.00 in
FY 06 and FY 07. He detailed that it was not until FY 08
and FY 09 that the amounts had grown tremendously. Oil and
gas tax credits (shown in red) reached $625 million in FY
15 and were projected to be approximately $700 in FY 16.
2:12:53 PM
Mr. Teal highlighted capital budget spending on slide 9,
Figure 7. He pointed out that the spending followed the
revenue curve; capital budgets tended to be higher when
revenue was higher. Likewise, when revenue disappeared so
did the capital budget. He reasoned that looking at where
growth had occurred in the past may help the legislature to
unwind some of the growth. Additionally, he focused on the
past partly because some individuals blamed the legislature
for the current fiscal situation. He returned to cost
drivers (shown on slide 6). He noted that the legislature
was not responsible for negotiating salaries. He looked at
$75 million in healthcare costs, plus Medicaid growth of
$415 million and stressed that the costs were not unique to
Alaska. He relayed that every state struggled with
healthcare costs and with determining how to deal with the
increasing costs of Medicaid. He referred to annual
retirement costs of $130 million built into the payroll in
addition to the $260 million in state assistance and
emphasized that the legislature did not control the stock
market. The state was paying $400 million per year to make
up for stock market losses. He noted that total cost of the
items he had just covered was over $1.5 billion.
Representative Munoz addressed Figure 6 and asked if the
$700 million FY 16 [oil and gas] tax credit reflected any
credits paid off under Alaska's Clear and Equitable Share
(ACES).
Mr. Teal replied that the chart may reflect the data;
however, LFD did not receive enough detail from DOR to know
whether the credits were carry forward or where they were
going. He communicated that there were two types of tax
credits. First, there were credits that large producers
could take that was deducted from the revenue owed by
producers. He likened the credit to deductions taken by
individual tax payers on their personal income tax paid to
the federal government. However, the credit referenced on
slide 8 was a purchasable credit for small producers or
others who lacked the revenue stream to take a tax credit.
The parties were issued a certificate of credit that could
be sold to another party (typically a major producer) for
sale to the state. He explained that the two credits were
very different; the large producer credits reduced revenue
whereas the small purchasable credits did not. He
elaborated that the small credits took an appropriation to
purchase the credits, which had increased to $700 million.
Mr. Teal noted that the amount of credits purchased by the
state exceeded the production tax revenue by roughly $100
million in FY 15 and $300 million in FY 16 (projected). He
did not know if the credits would be on an annual basis. He
elaborated that if the state issued a credit for something
like $50 million, a company could turn it in during the
current year, the upcoming year, or the year after. He
detailed that there was no way to earn interest on a credit
until it was turned in and purchased. He questioned why a
company would hold on to a credit when it could turn it in
and invest the money. He reiterated that LFD did not
receive enough detail from DOR to know precisely who the
credits were issued to, what they were for, and where they
were for. He explained that many of the credits were Cook
Inlet credits as opposed to North Slope credits. He
deferred the question to DOR for further detail.
2:18:32 PM
Co-Chair Neuman noted that DOR and Department of Natural
Resources would be present the following week to address
the committee. He remarked that the committee could
potentially have additional meetings pertaining to tax
credits if necessary.
Representative Munoz believed $350 million in credits had
been paid off under ACES when the state had transitioned to
the current tax regime under SB 21 in 2013. She thought it
would be helpful to know where the credits were reflected
currently and in future years.
Mr. Teal relayed that the projection for future credits was
not a continuation of $700 million per year; the DOR
Revenue Sources Book showed the figure dropping to $250
million per year after FY 17. The figures were high, but he
did not know the precise reason. He turned to Figure 8 on
slide 10 that showed per capita unrestricted general fund
revenue and budget history adjusted for inflation. He
remarked that population had grown and inflation increases
had occurred. He pointed to a clear downtrend from 1983 to
1999. The state's current real per capita expenditures was
less than the state spent in the 1980s; it was more than
the state had spent in the 1990s. He reminded the committee
that the chart included the $1.5 billion in retirement
costs and salary increases (things that had not occurred in
the flat midsection of the chart). He added that the
downward trend would have continued if the $1.5 billion was
subtracted.
Co-Chair Neuman referred to the agency operations portion
of the bars in the chart on slide 10 (shown in blue). He
remarked that the component included state personnel costs.
He observed that if the state were to eliminate all of its
employees it would impact the budget deficit by $1.4
billion. He remarked that the state agency operations had
become fairly efficient. He pointed to costs of around
$9,200 per state employee in the early to mid-1980s; the
cost was currently $7,200, which represented a downward
trend in agency operation costs.
2:22:24 PM
Representative Gara noted that the bulk of the Medicaid
expenditure increases were due to people moving into Alaska
and an increased number of individuals on Medicaid. He
asked for an explanation of net fund transfers shown on the
chart (Figure 8) especially related to 2008.
Mr. Teal explained that the net fund transfer (shown in
red) represented a deposit to savings. He pointed out that
when the state spent more than it had the net transfer was
shown in red below the $0.00 axis. He highlighted the $2
billion to $3.5 billion deficits [in 2015 through 2017]. He
relayed that the $1.5 billion in "hard to avoid costs" was
half of the $3 billion increase that had occurred since
2005. He referred to looking at the capital budget as
another potential area for cost reduction and noted that
some individuals may believe some of the past capital
budget spending may have been wasteful. He pointed out that
approximately $4 billion of the $10 billion in general
funds appropriated to the capital budget during the 10-year
period had not yet been spent. He stated that as the
projects rolled out they would supplement the smaller
capital budgets in the future. He elaborated that a very
low capital budget in the current year would not stop the
capital budget spending due to the $4 billion backlog.
2:25:38 PM
Mr. Teal believed the critical question was not about who
was to blame for the debt, but focused on what the state
could or should do about the fiscal gap. He communicated
that there had not been much the legislature could do about
many of the expenditures that had occurred. The pertinent
question was whether it was possible to cut the state's way
out of debt.
Mr. Teal addressed slide 11, Figure 9 titled "UGF
Revenue/Budget (Oil at $60/bbl)(No Growth Scenario)." He
stated that quick action was necessary if the legislature
believed that oil prices would remain low. Under the
scenario on slide 11 the fiscal gap remained at $3 billion
to $3.5 billion per year. He stressed that reserves would
vanish rapidly at $60 per barrel oil; the legislature would
have no choice but to balance the budget. He addressed the
possibility of a rebound in oil prices on slide 12 titled
"UGF Revenue/Budget (DOR Forecast)(No Expenditure Growth
Scenario)." He relayed that reserves would last
substantially longer, but the problem would not really be
solved; there would still be an annual deficit of $1
billion per year. He questioned whether it was possible to
cut the state's way out of deficit, how much needed to be
cut, and where the cuts could be taken. He addressed
potential cuts to the capital budget and relayed that the
governor's proposed capital budget was about as lean as it
had ever been. He noted that of the $106 million capital
budget, almost everything was leveraged money (including
federal matching funds). He communicated that there was not
much of anything that people would consider to be "cutable"
without losing money in addition to the general funds.
Mr. Teal addressed "Hard to Cut" items in the operating
budget in Figure 11 (slide 13). The figure listed debt
service, retirement assistance, production tax credits, K-
12 formula, and Medicaid for a total of $3.2 billion. He
reminded the committee that current revenue was $2.2
billion. He elaborated that [to cut the state's way out of
deficit] the legislature would have to cut $1 billion from
the hard to cut items and eliminate everything else. He
stressed that there was no payroll associated with the
items on slide 13. He reiterated that the items included
retirement assistance, debt service, payments to
businesses, grants to individuals, and payments to bond
holders and trust accounts. He stated that if the items
were cut, the legislature would also need to cut all state
employees funded with general funds in addition to cutting
the $1 billion from the items on slide 13. He stated that
mathematically it was not feasible to cut the state's way
out of the deficit. He noted that it did not mean that no
reductions were possible and that none should be attempted.
He concluded that balancing the budget was not an easy
feat.
2:29:49 PM
Mr. Teal relayed that beginning in 2008 LFD had been
preparing for the day that expenditures would be more
critically examined than they had been in the preceding 10
years. The division had worked with the legislature on
several fronts and the legislature had taken the lead on
several items. Items included a 2008 fund reclassification
project, 10-year look-back graphs, and models (e.g. oil
price forecasts and the reserve burn). More recent items
included an indirect expenditure report and legislation
passed in recent years (HB 30) required audits of agencies
to determine places to cut. He relayed that there had been
consideration of breaking the capital budget down into
pieces to show detail such as which items required federal
match, which were job producers, which were grants to
municipalities and nonprofits, and other in order to make
it easier to focus on reductions. He stated that the
reclassification and redesign of the fiscal summary
provided consistent data. He believed there had been a time
when legislators and others could not understand the
spending (e.g. general fund spending, receipts, and other);
he believed the problem had been rectified. He communicated
that the legislature could rely on the fiscal summary to
help determine what kind of money and how much was being
spent. He elaborated that the model could be of great
assistance in the development of a logical, defensible, and
long-term spending plan; it could be used by the
legislature to set annual targets for operating budget
reductions. The goal would be to set some level of reserves
and to determine upfront that reserves would be maintained,
for example, at $6 billion out by 2022. With the goal in
mind, it would be possible to determine what cuts needed to
be made and what revenue enhancements were necessary to
meet the desired level of reserves.
Mr. Teal referred back to slide 12, Figure 10. He believed
that unfortunately, balancing the budget on the expenditure
side would mean cutting $3.6 billion from the governor's
budget. He noted that it would be an understatement to say
that cuts at that magnitude would be difficult; he believed
they would be unachievable. He relayed that only $1.3
billion would be saved even if all state employees were
terminated. He opined that given the reality, it was
prudent to consider revenue enhancements. He reasoned that
the state could hope for oil prices to recover, but Figure
2a that showed the DOR forecast with $1 billion deficits
was optimistic (slide 4). He returned to slide 12, Figure
10a, which illustrated that even with the forecast, the
state could expect deficits of $1 billion or more (without
expenditure reductions or revenue enhancements). He
communicated that the longer the large deficits persisted,
the lower the reserve balances would become, and the level
of necessary changes become more drastic.
2:34:55 PM
Mr. Teal relayed that he did not intend to discuss
additional revenue options during the presentation. He
highlighted income tax; sales tax; property tax; oil taxes
and credits; Permanent Fund Dividend caps, reductions, or
triggers; financial strategies such as collateralization or
borrowing; healthcare provider taxes, motor fuel taxes; and
other. He noted that there was no shortage of options on
the revenue producing side. He discussed that the governor
had stated that he did not intend to consider revenue
enhancements until expenditures had been reduced. He knew
many legislators agreed with the strategy. He understood
the sentiment, but contended that much of the spending had
been unavoidable. He did not believe the state had
overspent, but that the problem pertained to revenue, which
was too sensitive to prices. He reasoned that if oil prices
remained at current levels, savings would be eliminated. He
hoped he was wrong, but in the current environment it was
necessary to hope for the best, but to plan for the worst.
2:37:23 PM
Co-Chair Neuman discussed a realistic timeframe within
which to address the $3.5 billion deficit. He noted that it
was impossible to know what the deficit could be in the
upcoming year. He stated that potentially under the best
circumstances the deficit could be reduced in five years,
which equated to a 20 percent reduction per year ($750
million in the current year). He did not believe it was
possible to make $750 million in reductions in operating
expenditures alone. He mentioned other potential methods of
saving including basic agency reductions, efficiencies, and
new revenues. He noted that the new revenues could include
items such as park fees, licenses, and other. He hoped
there would be increased revenues coming from expanded
economic opportunities, royalties, corporate and production
tax, economic development expansion, and other. He had
asked the departments to help the legislature develop a
three to five year vision for each department. He relayed
that the departments were committed to working with the
legislature on the effort. He believed everyone had a good
understanding of the current fiscal situation. He opined
that the committee would have the ability to address the
issues impacting all regions of the state.
2:40:45 PM
Co-Chair Thompson referred to an LFD Indirect Spending
Report provided to committee members earlier in the week.
He elaborated that the report was a result of legislation
passed the prior session (HB 306). An in-depth report had
been done through DOR related to the state's tax credits
and reduced fees. He added that the report included
recommendations on existing tax credits (e.g. whether a
credit had outlived its usefulness, had not met legislative
intent, how much a credit cost, and other). He noted that
the credits equated to millions of dollars in reduced fees
and tax credits. Credits were offered for taxes on fish,
education, small businesses, and other. He stressed that
small increments added together equated to large
increments. He asked members to review the document.
Representative Wilson noted that if the state was a private
business it would not be able to wait to address
reductions. She reasoned that a budget represented a
maximum amount provided to agencies and not necessarily an
amount they had to spend. She believed it would be
beneficial to look at the current budget to prevent some of
the cuts in the future from being as major.
Mr. Teal replied that the state was currently in the middle
of the fiscal year [FY 15], which would make it difficult
for agencies to respond and achieve any real savings by the
end of the current fiscal year. He noted that it would be
possible to reduce positions in the supplemental budget if
those positions would be eliminated in the FY 16 budget.
Representative Wilson understood a plan was needed and that
it would not be possible to reduce the deficit in one large
chunk. She referred to Mr. Teal's examples highlighting how
long reserves would last under two scenarios (slides 11 and
12). She wondered if the state should plan for the worst-
case scenario to prevent it from getting into a situation
where there would be no savings left to use.
Mr. Teal answered that the legislature had to balance the
issue. He referenced charts in the presentation that would
help them to weigh the decision. He stated that the
legislature could wait to address any revenue enhancements;
however, he believed taking two years to look at
expenditure reductions with the knowledge that the budget
could not be reduced sufficiently to fill the gap was a
waste of time. He stressed that it took significant time to
implement changes such as an income tax. He stated that it
may be necessary to wait until FY 17 to begin an income
tax, which would mean revenue from the tax would not be
received until FY 18.
Co-Chair Neuman stated that he and Co-Chair Thompson
intended to take a conservative approach related to the
price of oil. He remarked that if the price of oil
increased there were savings that would need to be
replenished.
2:46:01 PM
Vice-Chair Saddler pointed to Figure 1 and noted that there
had been times in the past when there had been less revenue
available than forecasts had projected. He observed that
the state had dealt with the issue somehow. He asked how
the state had handled the issue historically and how things
were different at present.
Mr. Teal responded that the Constitutional Budget Reserve
(CBR) had been created in 1981. He believed the
establishment of the reserve had represented wisdom and
foresight. He detailed that the fund had allowed the years
where it had been possible to spend more than the state
had; reserves had been built up when possible and had been
spent in times of declining revenue. He observed that it
was not as simple as letting numerous employees go and
shutting down programs in one year and then hiring them
back and restarting programs if revenue rebounded the next
year. He stated that government was a very "slow to respond
beast." He communicated that the state's reliance on oil as
its primary revenue generator and the volatility of oil
prices made it impossible for the state to respond. He
remarked on the difficulty of budgeting with such volatile
revenue and relayed that having reserves was the solution.
Vice-Chair Saddler asked whether there was an objective
measure for the amount of reserves maintained in the CBR or
other reserve fund.
Mr. Teal answered that no rule had been established; Alaska
was in unchartered territory in comparison to other states.
He elaborated that when other states had recessions their
revenue dropped by 5 to 10 percent, which threw their
entire state government into chaos; their responses to
declining revenue included furloughs and reductions to
items like K-12 funding. The other states had to respond
immediately due to a lack of reserves. He stated that the
prudent level of reserves depended on volatility. He
remarked that if a state had a very steady source of
revenue it was possible to function with a small reserve;
however, reserves needed to be high when the revenue stream
was volatile. He relayed that at one time Alaska had
approximately half of all of the reserve balances of all 50
states. He communicated that the National Conference of
State Legislatures (NCSL) had removed the state from
reserve charts because it distorted the numbers. He shared
that some states did not maintain a surplus of revenue due
to the belief that a surplus was not what state government
was about. For example, some states refunded income tax in
the event of a surplus. He discussed that the state
prepared a budget every year based on the needs of
Alaskans; revenue was secondary. He stressed that the
reserves needed to be large, but he did not have a figure.
2:51:44 PM
Vice-Chair Saddler spoke to the accuracy of the DOR
forecasting method. He wondered if recent changes had made
the forecast more reliable.
Co-Chair Neuman replied that DOR could address the issue
during its presentation to the committee the following
week.
Mr. Teal elaborated on his prior statement that previously
the state had considered the revenue forecast, but had not
responded to it. He stated that it had become necessary to
strongly consider the forecast. He disputed that state
budgeted with such a large and optimistic forecast; the
state budgeted based on need. He noted that a "band" was
created to address what would happen if revenue failed to
come in. He pointed to sensitivity charts on slide 12 that
showed what would occur if oil prices did not live up to
projections. He elaborated that in FY 15 the charts had
used oil prices as low as $90/bbl. He believed there was
not a forecaster in the world who would have foreseen the
decline in price. He advised the committee that a forecast
could not be anything more than an educated guess.
Representative Pruitt referred to items the presentation
classified as hard to cut (slide 13). He observed that
three of the items had end dates sometime in the future. He
wondered how much debt service was outstanding and the
timeframe it would take to pay it off.
Mr. Teal answered that most all of the debt issued was
subsequent to 2005 (i.e. 2010, 2013, and 2015); most of the
issuances were for 20 years. The debt service would
decline, but the state was looking at debt into the 2030s.
Co-Chair Thompson recalled that the legislature had infused
the unfunded retirement liability with $3 billion the prior
year. He pointed to projections the prior year that future
annual payments would be $400 million. He referred to an
increment of $260 million for FY 16. He wondered if the
lower figure was a result of the 18 percent interest the
retirement fund had made in the last year.
Mr. Teal replied that with retirement assistance, it was
not possible to know "where it was going." He elaborated
that in addition to depositing funds, HB 385 [legislation
that increased funding of the retirement liability in 2014]
had removed time lags, changed the amortization method, and
other. He relayed that LFD had predicted the annual payment
would be approximately $350 million; however, there had
been good returns in the past year. He detailed that the
former methodology had been that the rate determination was
always three years behind. Additionally, there was a five-
year smoothing calculation.
Mr. Teal explained that there had been many attempts in the
formula to make retirement contributions steady. He noted
that it made sense when dealing with employers who did not
want a payment rate to go up and down. The determination
that municipalities were responsible for paying 22 percent
was "rock steady" and would be for years to come. He
communicated that the state did not really care about the
volatility so the stabilizers had been removed to respond
better to market earnings. He agreed that returns in the
prior year had been positive, which had reduced the
anticipated payment from $350 million to $260 million.
However, poor returns would create additional or new debt,
but the formula would pay off the debt over a 25-year
period. He relayed that a loss of $1 billion would have an
impact, but it would not be massive. He did not expect the
payment to jump around by $100 million. He believed there
would be a slow increase in the payment rather than a slow
decline.
Co-Chair Neuman discussed the schedule for the following
day.
ADJOURNMENT
2:58:24 PM
The meeting was adjourned at 2:58 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 1 22 15 HFC -LFD-Fiscal Overview.pdf |
HFIN 1/22/2015 1:30:00 PM |
HFC Fiscal Overview |