Legislature(2015 - 2016)HOUSE FINANCE 519
01/20/2016 01:30 PM House FINANCE
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| Audio | Topic |
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| Start | |
| Fy17 Governor's Budget & Fiscal Summary: 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 20, 2016
1:33 p.m.
1:33:06 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:33 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 David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Lacey
Sanders, Fiscal Analyst, Legislative Finance Division;
Kelly Cunningham, Fiscal Analyst, Legislative Finance
Division; Danith Watts, Fiscal Analyst, Legislative Finance
Division; Amanda Ryder, Fiscal Analyst, Legislative Finance
Division; Representative Cathy Tilton, Representative
Daniel Ortiz, Representative Andy Josephson, Representative
Adam Wool, Senator Pete Kelly, Senator Mia Costello.
SUMMARY
FY17 GOVERNOR'S BUDGET & FISCAL SUMMARY: LEGISLATIVE
FINANCE DIVISION
Co-Chair Neuman reviewed the schedule for the current
meeting.
^FY17 GOVERNOR'S BUDGET & FISCAL SUMMARY: LEGISLATIVE
FINANCE DIVISION
1:34:13 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced himself and invited his staff to introduce
themselves.
LACEY SANDERS, FISCAL ANALYST, LEGISLATIVE FINANCE
DIVISION, introduced herself.
KELLY CUNNINGHAM, FISCAL ANALYST, LEGISLATIVE FINANCE
DIVISION, introduced herself.
DANITH WATTS, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION,
introduced herself.
AMANDA RYDER, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION,
introduced herself.
Mr. Teal introduced the PowerPoint presentation: "Overview
of the FY17 Budget" (copy on file). He turned to slide 2:
"Unrestricted General Fund Revenue/ Budget History ($
millions)." He indicated that the chart was a familiar one.
He thought it was the best introduction to the budget
because by providing a 40 year history of state spending
and revenue it provided some perspective to the FY 17
budget. He explained that the chart showed revenue depicted
in the green background and agency budgets in dark blue.
Statewide items such as debt service, retirement
assistance, and fund capitalization were shown in light
blue. He continued that the capital budget was shown in
yellow, the red bars above the line represented surplus,
and the red bars below the line depicted deficits. One of
the take-a-ways from the chart was that spending correlated
with revenue. In other words, the budget was flat when the
state did not have any money, and when it did have money it
spent it. In recent years after 2005 the state had
exceptional increases in revenue. There were also increases
in expenditures. The increases and expenditures were not
just capital. Typically, when there was extra funding it
went towards capital projects. The first things that were
reduced when money was tighter was the capital budget. The
operating budget increased rapidly as well. He reported
that the state went from a budget of $2.5 billion to $7.8
billion by FY 13. It did not seem bad at the time because
there were surpluses in every year despite the enormous
increase in spending. Revenue began to decline in FY 13.
The decline was not seen until FY 14. The response to a
declining budget in FY 13 was a smaller capital budget.
Co-Chair Neuman asked about slide 2 and about agency
operations. He wondered if the budget was adjusted for
inflation. Mr. Teal replied that and adjustment for
inflation could be seen in the next slide.
1:38:52 PM
Mr. Teal advanced to slide 3: "Total Agency Operating
Budgets, Statewide Items and Capital Budget Compared to
Revenue (UGF Only-$billions)." He explained that it was not
necessary to adjust for inflation when comparing FY 16 to
FY 17 or FY 15 to FY 17. If the numbers were not adjusted
for inflation the years would not be comparable and would
distort the picture. However, in looking back 40 years it
was critical to adjust for inflation. The chart reflected
from FY 13 forward. In FY 14 revenue declined by $1.5
billion. The FY 15 capital budget was reduced in response
to lower revenue. Statewide items continued to grow. He
noted that in FY 15 revenue crashed significantly. In
reaction to the crash the state lowered the capital budget
even further and cut the operating budget for the first
time for FY 16. He reported that FY 17 would be another
year of low projected revenue and the operating budget
would be about $100 million lower. The statewide budget
would be higher as would be the capital budget by about $75
million.
Representative Wilson asked about the previous three
budgets and what price per barrel they were based on. She
also asked about the actual price per barrel. Mr. Teal
would provide the information at a later time. The budget
was based on prices much higher than actuals.
Representative Wilson asked about the price per barrel that
the governor used in his current budget. Mr. Teal
responded, "$56."
Co-Chair Neuman asked about the difference in the value of
income to the state with oil prices between $30 and $50
oil. Mr. Teal had a slide later in the presentation that
would provide the answer to his question.
Representative Edgmon mentioned that $400 million was cut
from the operating budget and $400 million was cut from the
capital budget. He asked about the reduction of state
employees within the past 2 years. He was thinking of a
presentation by Neal Fried made to a committee in Anchorage
in early December [2015]. He reported 1400. He was unclear
if Mr. Fried's number included vacancies or actual bodies.
Mr. Teal responded that Ms. Pitney had given a presentation
in the Senate Finance Committee earlier in the morning
reporting that 600 people had been laid off since December.
He clarified he was talking about people rather than vacant
positions.
Representative Edgmon asked if it was the last year.
Co-Chair Neuman indicated Ms. Pitney would be making a
presentation to the committee later in the week on Friday.
Representative Edgmon clarified that it was 600 people in
the previous calendar year. Mr. Teal answered that it was
from the December 2014 payroll run to the December 2015
payroll run. Although it did not really reflect fiscal
years one to another but provided a good comparison of
employment.
Representative Gattis reported that in the current day the
price of oil was $26/bbl. She also commented that the
governor's budget in FY 17 looked larger than the budget
passed in FY 16 - a budget the legislature really worked
diligently to reduce. She remarked that $5.5 billion was
more than $5.4 billion. Mr. Teal responded that she was
correct.
Co-Chair Neuman remarked that Ms. Pitney was currently in
the audience and would be prepared to answer the question
on Friday.
1:44:33 PM
Representative Gara asked Mr. Teal to run through the top 4
items on page 2 for statewide operations in light blue. He
also wondered if the items could be cut. Mr. Teal stated
that it was possibly "cut-able." He concurred that
statewide operations was primarily composed of debt service
and state assistance through retirement programs including
PERS and TRS. Once debt was issued there would be debt
service payments for the following 20 years. Debt services
payments could be cut by a small amount by refinancing and
getting a lower interest rate. However, the only
significant way to reduce the debt service would be to pay
it off with cash. Since the state did not have the cash the
debt service was "uncut-able." The same applied for
retirement costs. The state was paying for what happened in
the past. State employees and retirees had not seen any of
the money lost in the stock market, but the state had to
put it back into the retirement system. Retirement
assistance could be cut if the January stock markets were
reduced. There was nothing the legislature could do to cut
the debt service.
Representative Gara wondered, aside from debt services and
retirement payments, if there were any other larger items
that could possibly be cut. Mr. Teal responded
affirmatively and would address it in an upcoming slide.
Co-Chair Neuman asked Mr. Teal to review the $5.4 billion.
He stated that it was comprised of $2 billion formula, $2
billion non-formula, $1.2 billion statewide including $650
million for Medicaid, $228 million for debt service, and
$268 million for retirement. Mr. Teal spoke of the big
crash in FY 15 and in the FY 16 budget process. The first
concern LFD had was burning through reserves at a rapid
rate. The prior year was the first year that the concern
spread throughout the legislature and to the public. People
were currently more aware of the fiscal problems Alaska
faced than there used to be. The budget was up $65 million
and was reflected as $100 million on the chart. The bottom
line was that the state was running deficits of roughly
$3.5 billion per year. The deficits would drain the state's
reserves by the end of 2020. The reserves were comprised of
more than just the Constitutional Budget Reserve (CBR): it
included the Earnings Reserve Account (ERA) as well. The
state did not have time to look at the problem as much as
legislators wanted to. He suggested legislators would need
to take action.
1:50:03 PM
Representative Munoz noted that on the page containing the
operations line from FY 05 to FY 17 there was considerable
growth. She wondered how much of the growth was attributed
to K12 education and Medicaid. Mr. Teal relayed that they
were large cost drivers. He had individual graphs on each
of the agencies. He did not have the numbers dating back to
FY 05 with him but they would all be seen in subcommittee.
He agreed Representative Munoz was correct that the drivers
were K12 education and Medicaid. The next was state
employee costs including retirement expenditures.
Representative Munoz asked to be provided with the amount
of growth in the two areas and how much it accounted for
the growth in the budget starting in FY 05. She also
remarked that in paying down the unfunded liability the
state's annual payment went from $500 million or $600
million to $250 million. She asked how it was reflected in
the graph. Mr. Teal stated that it would be discussed later
in the presentation when looking at the fiscal summary. He
commented that the state assistance cost for PERS and TRS
was over $700 million per year. In the current year,
without the payment, it would have exceeded $1 billion. The
legislature had a cash infusion of $3 billion to the
retirement fund along with some other reforms which cut the
retirement assistance payments down to about $250 million
and in the current year to about $215 million. He thought
the new evaluation would reduce the number further.
Representative Munoz asked why it was not reflected in the
turquoise [light blue] color on the graph. It appeared that
the amount for the cost was not reflective of the change.
Mr. Teal responded that she had a good observation. He
explained that beginning in FY 17 under the governor's plan
Permanent Fund Dividends (PFD) were paid from the General
Fund (GF). Because they appeared as unrestricted general
fund (UGF) expenditures, they were placed into the
turquoise bar reflecting $700 million. It explained the
growth Representative Munoz pointed out. He would discuss
it further when he reached the fiscal summary in the
presentation.
Vice-Chair Saddler mentioned hearing from his constituents
about running out of money within 2 years. He wondered what
was different presently. Mr. Teal thought it was a matter
of philosophy and how a person saw the need to fill the
deficit. He posed the question as to whether the cause of
the deficit had to do with expenditures rising or revenues
falling. Clearly expenditures had risen rapidly. Also,
clearly revenue had fallen rapidly. Some might say it was
not worth arguing about. The point Vice-Chair Saddler
brought up was important because the person who saw the
deficit a certain way would determine how they would
respond to it. If a person saw it as temporary oil market
craziness then they would be justified in doing nothing.
The world would return to normal and all involved would
just have to ride out the storm. However, after 3 years of
$3.5 billion deficits, reclassifying the temporary
situation as a more permanent one might be in order. He did
not think the situation could be considered temporary
especially given the forecast for a continued $2 billion
revenue stream and a $5 billion budget. He suggested if a
person thought the problem was due to spending then cuts
would likely be in order. He directed the committee's
attention to the next slide.
1:55:40 PM
Mr. Teal scrolled to the chart on slide 4: "Real Per Capita
Unrestricted General Fund Revenue/ Budget History (2014
dollars Per Person)." He explained that the graph adjusted
for both inflation and population growth. He suggested that
when adjusting for inflation and population growth there
might be 4 or 5 agency operating budgets lower in the
previous 40 years. However, on a real per capita basis the
state was spending less than in any point in history.
Capital was also small relative to past years. He relayed
that statewide numbers were up but reminded members that
the state was paying for the past. He surmised that even
cutting to the $4.8 billion mark, a cut of roughly $700
million, filled only 20 percent of the deficit. Cutting
spending would not fill the state's fiscal gap. If a person
thought the state had a longer-term revenue problem, he
would say facts were on that person's side. He conveyed
that per capita inflation adjusted revenue was the lowest
it had ever been. He queried about taxing citizens to
replace lost oil revenues. It would take approximately
$5000 per capita. He emphasized that per capita was every
man, woman, and child. On a per worker bases it would
likely have to be tripled to cover the costs - an unlikely
solution. He concluded that the traditional ways to close
deficits, cut spending or increase taxes, were
insufficient. The state could not cut its way out of a
deficit or tax its way out of the deficit. Even a
combination would bring massive economic shocks.
Co-Chair Neuman asked Mr. Teal to clarify how many years
the state could sustain a $3.5 billion with the available
pots of money for appropriations. He wanted the value of
each of the different funds and the total value of all
funds. Mr. Teal responded that when he talked about running
out of reserves the CBR contained roughly $7 billion. Those
monies would be gone after FY 18. Next, the legislature
would turn to the ERA which contained about the same amount
of money. That money could be expended in 2 years. Once the
ERA was exhausted people might advocate cutting the budget
down to $2 billion in cash flow revenue. By then,
legislators would not be talking about using Permanent Fund
reserves, they would be forced to use them. Essentially it
would be unlikely that dividends could be paid at all or
the fund inflation proofed. The entire fund balance would
be about $40 million. If the fund were to earn 6 percent on
investment the state would have about $2.5 billion to
spend. However, the scenario would place the state in an
extremely dangerous situation. This was due to not being
able to account for $2.5 billion in interest. There were
some years the state could lose on its investments and not
have any income other than the $2 billion or so from
traditional sources.
Co-Chair Neuman recited some estimated figures. He was
trying to place an emphasis on the timeline.
2:01:27 PM
Representative Wilson referred to slide 3. She asked if the
figures reflected the state's total actual spend for each
year. Mr. Teal confirmed that the totals reflected actual
dollars without any inflation adjustments.
Co-Chair Neuman asked if the totals included the deposits
into the CBR. Mr. Teal responded, "No."
Representative Wilson queried how much was generated in
Permanent Fund reserves. Mr. Teal clarified whether she was
asking on an annual basis.
Representative Wilson responded affirmatively. Mr. Teal
answered that the state earned 6 percent or $3 billion. He
explained that of the $3 billion, the state was currently
inflation proofing using $1 billion. The state was also
paying dividends. He added that of the $31.4 billion. Of
the three billion that might come in, the state was
spending about $2.4 leaving her with a surplus of $600
million in earnings.
Representative Wilson agreed that the state could not
maintain a $3.5 billion deficit. She furthered that by
lowering the budget to $4.5 billion or $4 billion the
legislature would use less from the CBR in the following
year. She wondered if such a course would get the state to
where it needed to be fiscally. She did not believe it was
possible for the state to maintain its level of spending at
$5.5 billion. She thought the budget needed to be at the
$4.5 billion level or lower. She asked for his expert
opinion about a sustainable budget amount without adding
the taxes being proposed.
Mr. Teal could not say what the state spending level should
be. He commented that the people of Alaska thought the
legislature was spending irresponsibly. He suggested that
Rasmussen was getting feedback that the growth of state
government had been very high and people assumed money was
being wasted, as they saw nothing for it. He thought a
budget of $4.5 billion was too high if nothing else was
done in tandem. The legislature would continue to burn
through its reserves, just not as quickly, and the problem
would remain unresolved. He opined that a $2.5 billion
deficit was absolutely unsustainable.
2:05:00 PM
Representative Wilson referred to slide 2. She wondered if
the state should lower its spending level to the levels
seen in FY 04 and FY 05. She had received several charts
from different entities regarding population growth and it
being minimal. She was unclear how to justify the current
levels of spending. She wondered if it was more realistic
to use the spending levels in FY 04 and FY 05 as numbers to
strive for.
Mr. Teal responded that the Legislative Finance Division
(LFD) had been providing the graphs to the finance
subcommittees for the previous 4 years. He suggested that
if the legislature needed to cut back it should begin
looking at unwinding some of the previous increases to the
budget. He continued that in taking inflation population
growth into account the operating budget shrunk rather than
grew. He was uncertain people knew the facts. In looking at
the numbers, the budget was not growing rapidly like people
thought. There was a $7.8 billion budget in FY 13. The
budget was currently at $5.5 billion, a $2.3 billion budget
cut in the previous 4 years (30 percent). He queried if the
public was aware of the facts. One of the perspectives was
that the legislature was only cutting the capital budget
rather than imposing agency reductions. However, as far as
the deficit was concerned whether $1 dollar was spent on
capital or on operations it did the same thing - it added
$1 dollar more to the deficit. The problem was total
spending which had fallen by 30 percent. He did not believe
the public understood the facts. He suggested the public
thought additional cuts were necessary. However, it was
very difficult to find cuts in agency budgets. Capital
costs were cut to a little more than federal matching
dollars. Statewide, if the state could not unwind the debt
service and the retirements cost not much would be left to
cut. He posed the question about where to find additional
reductions. He relayed that a $700 million cut would move
the level of state spending down substantially lower than
ever before which would result in reducing certain
services. It was the legislature's responsibility to
determine which agencies would spend less and what services
would be cut. He concluded that the decisions the
legislature had to make would likely take 90 days or more
to determine.
Representative Wilson understood that it was the
responsibility of the legislature to figure out a direction
to take. However, she wanted to know a monetary level of
sustainability. She relayed that the people in North Pole
thought the state was overspending because they were paying
property taxes and high energy costs. Adding more expenses
for constituents would likely be devastating to some in her
district. She requested a graph showing only the population
growth. She thought it would be easier to show to her
constituents. She believed the state's growth and
operations had increased substantially compared to how many
people the state was actually serving.
2:10:29 PM
Mr. Teal responded that the population had approximately
doubled from just under 400 thousand people to just under
800 thousand currently. He would provide members with a
graph that was just population adjusted. The total
adjustment for population would be doubled. Inflation
equaled about $3 to $3.50 which tripled things. He
suggested that population was responsible for approximately
2/5 of the increase [Note: Mr. Teal pointed to a place on
the graph but it was unclear where on the graph based on
the audio].
2:11:38 PM
Representative Gara believed that all legislators were
hired to lead even if they could not get the message across
to the public concerning the budget. He referred to page 4.
He wondered, in looking at the budget adjust for inflation
and population growth, if the state was somewhere below
where it was in FY 08. Mr. Teal responded affirmatively. He
explained that there were a few years including FY 03 and
FY 99 in the past 40 years that the state budget had been
as low as the current level of the budget.
Representative Gara wondered if the state was in worse
shape than the year Mr. Teal was pointing to. He noted that
legislators talked in terms of the $3.5 billion budget
deficit. The figure really depended on oil price
projections. He wondered what oil price projection LFD was
working from and whether the deficit could be larger than
$3.5 billion.
Co-Chair Neuman asked Mr. Teal to clarify whether he was
working from DOR's estimate of oil pricing. Mr. Teal
confirmed that LFD was using DOR figure of $56/bbl. The
price of oil had been less than $30/bbl. The average price
for oil currently was about $40/bbl.
Mr. Teal skipped to the sensitivity chart on slide 7:"FY17
Unrestricted General Fund Revenue - Fiscal Sensitivity." He
thought it addressed the question about whether the deficit
was larger than $3.5 million. He believed it was. He
explained that if the price of oil was $100/bbl then
revenue would equal roughly $4 billion. If oil reached
$110/bbl revenues would reach about $5 billion. He noted
that a $10/bbl price change provided $1 billion in revenue.
He highlighted that at $30/bbl revenue was about $1
billion. At $40/bbl revenue would reach about $1.2 billion.
He continued to explain that because production was low and
because of the way the tax structure worked it did not
matter whether oil prices were at $30, $40, or $50 per
barrel the gain in revenue was less significant. He
indicated that at about $80/bbl revenues increased more
rapidly.
Representative Gara asked if the oil tax structure affected
the curve. He wondered about the 4 percent minimum tax up
to about $70 or $80 per barrel.
Mr. Teal responded that the state was at the floor
currently. He was unclear whether the state would be at the
floor for the entire year. It was not completely the floor
but just that the tax rates went very low. At the current
price it was difficult to generate revenue.
2:15:50 PM
Representative Guttenberg mentioned that the public saw the
price of oil dropping. However, they were not seeing prices
reflected at the gas pump. Legislators had to explain the
circumstances to the public. He reported that some of his
constituents relayed that they were just waiting for the
price of oil to return to $100/bbl. In the meantime, they
relied on short-term fixes. Once the price of oil went up
things would return to normal. However, in the graph on
slide 4 or slide 2, he wondered what the bump would look
like with the current tax regime. Mr. Teal replied that the
state would balance the budget if oil went to an average of
$113/bbl in FY 17 given the governor's expenditures. He
pointed out that at $113/bbl revenues were about $5
billion. It was a different way of saying the same thing.
Higher oil prices increased revenue.
Representative Guttenberg asked if spikes would be much
higher looking at FY 07 and FY 11 at comparable prices. The
revenue sensitivity chart reflected only one year of
balancing the budget as compared with those years the
public thought money could be placed in the bank and
stretched out. He suggested that it would not happen at the
oil price of $110/bbl. Mr. Teal stated that if the price
reached $110 there would not be any money to put in the
bank. At $113/bbl the state would break even. It would take
oil priced higher than $113/bbl before there would be any
money to put in the bank. The amount of money the state
could put in saving would depend on the price of oil. At
$120/bbl there would be roughly $1 billion extra in revenue
which could be placed in the bank. If the price of oil were
to stay at $120/bbl the state would not have a deficit, but
rather a sustainable budget. As a result of having a large
deficit the state needed to pull money from reserves. He
emphasized that the faster the state pulled money from
reserves, the faster the reserves would be depleted. The
state's problem was spending a limited reserve balance. In
FY 16 one-third of the state's reserves would be exhausted.
There were only about two years to correct the problem
unless there was a significant drop in expenditures or a
substantial increase in revenues. He opined that it was
unreasonable to expect expenditures to fall to $2 billion.
Some people would argue that revenue would not increase to
$5.5 billion either. Finding a balance between revenue and
expenditures to reach a sustainable budget was a difficult
challenge.
2:21:47 PM
Representative Edgmon asked about economic shocks relative
to making substantial cuts to the budget. He wondered who
the legislature should turn to in order to understand the
ramifications of cutting $700 million or more from the
budget. He suggested that if a person looked at Alaska's
gross domestic product (GDP) in its totality it was about
$57 billion. There were economic consequences to cutting
the state's budget because it was a large part of overall
wealth in Alaska. He queried how to better understand what
it would mean to Alaska's economy if the state were to cut
an additional $700 million from its budget. Mr. Teal
responded with a question about who remembered the 80s.
Co-Chair Neuman referred to page 11 indicating that it
helped him to see what $700 million looked like.
Mr. Teal thought that Representative Edgmon was asking what
a substantial cut would mean to the economy. He explained
that from the treasury's perspective the problem was
solvable because it would not be considering services. In
looking at the problem from an economic perspective other
things would need consideration such as jobs and housing
prices. He mentioned that the Institute of Social and
Economic Research (ISER) and the McDowell group had done
some work with economic input/output models. If the
legislature cut the operating budget it had a much larger
impact than cutting capital. In looking at the capital
budget it had a much lower multiplier in economic terms
than the operating budget did because the operating budget
created an immediate job and immediate money in people's
pockets. The capital expenditures immediately left the
state and did not get re-spent. In the 80s when the
legislature cut the capital budget severely, construction
workers left, people walked away from their houses, and the
markets became flooded. Things became more complicated.
2:26:31 PM
Representative Gattis noted that in the 80s there were some
differences including bank failures, and other things going
on at the time. She agreed that there was an economy
problem but did not agree that a bank failure was part of
the current challenge. Mr. Teal responded that
Representative Gattis had a valid point. He suggested that
with internet mortgages and other changes in the banking
industry. Banks tended to sell their mortgages and held
their mortgages much more than they did presently.
Representative Edgmon agreed that the budget had to be
reduced. However, he was concerned that if the budget was
cut in one place, the responsibility would be moved to
another agency. He suggested that cutting small schools
would lead to students moving to Anchorage and Fairbanks
and would result in a redistribution of costs. He wanted to
have a better sense of the impacts on the economy as a
whole as well as the downstream effects on a cost basis
elsewhere in the budget. He referred to Article 7 of
Alaska's Constitution. If the legislature was to make
several hundred million dollars in cuts, it would likely
violate its own health education welfare clause of the
state constitution. He appreciated the latitude to have a
wider range of discussion. He felt it was important to be
aware of the savings when the legislature made reductions.
He supposed that there would not always be a savings.
Co-Chair Neuman interrupted that ISER would be presenting
to the committee. They were economists that would delve
specifically into the effects of the budget and the
economy. He spoke to the issue of job losses. He reported
that for every $100 million cut from the capital budget 900
jobs were lost and, for every $100 million cut from the
operating budget 850 jobs were lost. In the previous year
the legislature reduced about $1 billion which equated to
about 8000 to 10,000 jobs lost. He continued that people
turned to drugs and alcohol during difficult times which
would create different strains on the state budget. The
state would see increased demands within the Department of
Public Safety (DPS), the Department of Law, the Department
of Health and Social Services (DHSS), the Department of
Corrections (DOC), and the Alaska Court System. Currently,
the state was experiencing hard economic times and the
legislature would have to make some difficult decisions. He
would try to get Gunnar Knapp before the committee.
2:30:52 PM
Mr. Teal discussed slide 5: "AGENCY OPERATIONS 2014
Inflation Adjusted $ (GF Only)." He stated that the
spreadsheet, adjusted for inflation, was a way of showing
that the operating budget was not as excessive as the
public might think. He explained that the past budget
closest to the FY 17 budget was highlighted for each
department. He commented that a few of the highlights were
more recent than FY 12 but most of the highlights fell
within the years of FY 07, FY 08, and FY 09. The overall
average for the operating budget was at the FY 10 level of
funding. On a per capita basis the highlighted area was in
FY 08. He expressed his concern about whether the public
was aware of the state's fiscal situation and mentioned a
recent lunch-and-learn sponsored by the Rasmussen
Foundation.
Co-Chair Neuman noted that members had a larger copy of the
fiscal summary in their packets.
Mr. Teal reported that the Rasmussen lunch-and-learn posed
the question about whether the public was aware that 30
percent was cut from the budget in the last 4 years. He
furthered that on a per capita adjusted basis the state
budget was as low as it had ever been. The Rasmussen
Foundation was aware of a problem but the public still
thought the budget was growing at 7 percent per year or
more. The other question posed was whether the public felt
the pain of the reductions. He surmised that the public
could not tell. In the past many of the cuts were related
to the capital budget for projects that were funded but had
not yet began. The backlog of capital projects made it such
that no one was aware of the cuts to the budget.
Co-Chair Neuman reported monies that still remained in
place. He noted he would be talking more about horizontal
and vertical types of construction. Horizontal projects
included roads and highways. Buildings were examples of
vertical projects. He suggested that vertical projects
would not be covered and the related trade groups would
feel the economic impacts first.
2:35:12 PM
Representative Wilson completely disagreed with Mr. Teal.
She pointed out that regulation played a large role. She
suggested looking at the budget from the standpoint of how
the money was being utilized. She elaborated that a small
section of the state's population used up a larger portion
of resources compared to the majority of the population.
She referred to social services and education. She spoke to
looking at regulations and their associated costs. She
opined that the public made a connection between being
regulated and state government being too big. She
speculated that without decreasing regulation it would be
difficult to understand the budget. She wondered if there
was a way to better understand how much of the population
in Alaska was using the majority of its resources. She
provided a personal example. The taxes she paid on her
house were used primarily to provide her with a place to
take her trash. She no longer had children in school and
did not live within a road service area. In her view, she
was paying too much for taxes because of what she
personally used. She wondered if she was accurate in her
assessment that only a small portion of the population was
using the majority of the resources.
Mr. Teal answered that former Senator Rick Halford had
published an article on Representative Wilson's point. He
explained Senator Halford's position was that a particular
person might not use certain services but used the roads
and other resources and previously attended school. That
person was paying for the next generation rather than
themselves. The article covered the notion of how to view
services used versus taxes paid. He agreed that there was a
large disconnect between what people believed they were
getting and what they believed they were paying for. He
also thought what people missed were things like the cost
of Medicaid expansion. He reported that the average cost
per recipient of Medicaid was less than $6000. His first
thought was that it would be cheaper for every state
employee to go on Medicaid because presently they paid
$14,000 for insurance premiums. He answered that the
elderly and infants burned most of the money. Some would
argue that the purpose of government was to redistribute
income and to provide services to those that needed it. He
furthered that the right side of government depended on the
individual. Mr. Teal could not tell Representative Wilson
what the right size of government was.
2:39:21 PM
Co-Chair Neuman asked for clarification about
Representative Wilson's question. Representative Wilson
reasoned that unless the legislature could understand who
utilized most of the services it would be difficult to
identify the breaking point for constituents if the state
were to add all of the extra that had to be paid. She
mentioned the discrepancies throughout the state having to
do with affordable energy. She thought that making
reductions in certain areas might have more of an impact in
a particular district. Whereas, additional taxation might
have a more devastating effect in a different district. She
wondered how to balance the issues she mentioned.
Co-Chair Neuman invited Representative Wilson to formulate
her question and provide it to his office. He would take it
to the Institute of Social and Economic Research (ISER).
Representative Wilson responded that perhaps the
legislature should use the constitution as a guideline,
funding only those things the constitution required.
Mr. Teal indicated he would begin his overview of FY 17.
Co-Chair Neuman agreed that the overview of FY 17 was very
critical to Mr. Teal's presentation. He noted that the
largest differences could be seen in the columns associated
with revenue.
Mr. Teal spoke to the fiscal summary that had 10 lines for
revenue. He would not be talking about the governor's
fiscal plan in the current meeting. In FY 16 revenue came
from the traditional sources. The new revenue lines were
related to the governor's fiscal plan which he would not be
looking at to evaluate the FY 17 budget. Typically LFD
looked at the budget as being the expenditure plan.
However, in FY 17 the budget was not just an expenditure
plan. The budget, submitted by the governor, included the
appropriation bills (expenditures), the revenue bills, and
his fiscal plan. The governor's budget was comprised of all
three elements. He could not leave taxes out of his budget
because they were a part of it. Mr. Teal clarified that
they were looking at the governor's budget, not the
legislature's budget, or a budget reflecting what LFD
thought should happen to the budget.
Co-Chair Neuman commented that the budget was based on all
of the governor's proposed legislation being enacted in
their current form. Mr. Teal concurred with Co-Chair
Neuman. He continued that the governor's budget included
revenue measures, Permanent Fund re-plumbing, and all of
the things that would be discussed in the following week.
He noted that revenue was up from $1.6 billion to $1.8
billion but was based on oil priced at $57 /bbl. If the
market price was less, revenue would be less. He again
referenced the sensitivity chart and reminded members that
revenue was not that sensitive to price. He furthered that
if $30 /bbl was used rather than $57 /bbl the state would
be approximately $200 million sort in revenue.
2:44:43 PM
Representative Gara asked if he could present a question
from another legislator.
Co-Chair Neuman asked that the other legislator to pass the
question through his staff to him and he would ask the
question. He remarked that it was the Finance Committee's
meeting. He would try to do what he could.
Mr. Teal turned to the fiscal summary looking at
expenditures. He pointed to the non-formula agency
operations (representing the typical day-to-day operations)
on line 14. The change in UGF reflected a decrease of $60
million. The $60 million included the $30 million
unallocated fund reduction the legislature took in the
prior year. The legislative intent was that the agencies
received the funding in FY 16 but would not receive them in
FY 17. The money was taken out, put back in, and then taken
as an unallocated reduction at the agency level. The next
question was would the finance committee allocate the
unallocated cuts in the governor's amendment process. In
theory the legislature would want to apply the cuts rather
than leaving them unallocated for the agencies to
determine.
Mr. Teal referred to line 15 representing K-12 Foundation
formula monies. The monies were down $4.5 million. FY 17
was the last year of the $50 increase in the base student
allocation (BSA). He reported that the $50 increase in the
BSA equated to $12 million in expenditures. The amount was
down $5 million because the governor added $17 million of
earnings from the Public School Trust and replaced $17
million of general funds (GF) with the trust money.
Co-Chair Neuman clarified, "One-time."
Mr. Teal responded that all of the earnings that had been
built up over the years were gone. The governor apparently
had a bill changing the way the school trust paid out. At
the present time the trust had a balance of $600 million
without purpose. He thought most people believed that the
school trust was supposed to be spent on K-12 education.
However, for every dollar that came from the school trust,
the general fund was reduced by $1. The trust never
supplemented and had no purpose. He suggested eliminating
the trust for all the good it did education. He recapped
that there was a $12 million increase due to the increase
in the BSA offset by $17 million resulting in being down
about $5 million. Medicaid, found on line 16, showed a $32
million reduction. Most, if not all of the Medicaid
expansion savings were taken in FY 16. He understood that
the $32 million came from reforms that were not yet
identified. In other words, the governor was hoping to save
$32 million on Medicaid.
Mr. Teal reviewed the statewide obligations beginning on
line 23 reflecting the state's debt service. In FY 16 debt
service was $206 million in GF and jumped to $436 million
reflecting a $230 million increase in FY 17.
2:50:10 PM
Co-Chair Neuman asked how many years the state had before
it could no longer pay the Permanent Fund Dividend (PFD)
assuming that the CBR and the earnings reserve accounts
(ERA) would be used to pay for a yearly budget deficit of
$3.5 billion. Mr. Teal responded roughly 4 years.
Representative Edgmon suggested there was a statute in
place that stated only half of the earnings reserve could
be used to pay for dividends.
Mr. Teal explained the formula which determined the
dividend. The formula took the earnings for the previous 5
years multiplied by 21 percent and divided by half. In a
year where the PF lost money it was possible that the state
could be in a situation where it was paying dividends but
the earnings reserve account was empty. There was a time,
in 2009, when the state came close to not being able to pay
dividends. The dividend equated to half of the previous 5
years' earnings - which might not be there because those 5
years of earnings were paid out as inflation proofing and
dividends already.
Representative Gara wanted to put into perspective how much
money had been spent on the education budget. He relayed
that two years prior, when HB 278 [Legislation passed in
2014 - Short Title: Education] passed, it passed with an
additional $43 million that was distributed as if it went
through the BSA. The $43 million was gone, but since then
the state had added $12.5 million to the BSA for two years.
He concluded that the state had funded $18 million less
than two years prior under the governor's proposal. He
wondered if he was accurate. He did not account for
differences in student numbers. Mr. Teal could not reply to
his question in a simple way because it depended on student
counts and many other factors. It was not merely the total
amount that went to the K-12 formula. It had to do with how
much of it was GF. The school trust kicked in. It showed
the state spent less for education for the year, however,
the state did not. The numbers appeared the state spent
less. The bottom line was that the state probably spent
less per student in the current year than couple of years
previously. He did not have the numbers with him and
admitted they were difficult to put together.
Co-Chair Neuman added that the amount of money the state
spent on education up to the previous year had continued to
increase. Mr. Teal responded affirmatively if a person
considered what the state was spending and not just the UGF
portion. He suggested including the school trust fund and
adjusting for the student count.
Mr. Teal remarked that the debt jumping up by $230 million
might seem like a huge increase. He explained that most of
the amount was comprised of pension obligation bonds. There
was about $12 million in general obligation bonds and
another $4 million in school debt reimbursements. He
highlighted line 28 which showed retirement costs of $262.5
million in state assistance dropping to $50 million. There
was a $121.3 million reduction in the retirement costs. The
items went together because in the governor's plan he
intended to issue pension obligation bonds, depositing the
proceeds in the trust fund. As a result the contribution
rate would fall as would the state assistance. The state
assistance would be replaced with debt service.
2:55:20 PM
Mr. Teal scrolled to the table on slide 10: "PERS and TRS
Costs ($ million)." He explained that in FY 17 the state
was currently projected to pay $99 million if the state did
not issue pension obligation bonds, retirement assistance
to the state and to the municipalities. If the state were
to issue pension obligation bonds the rate would fall to 22
percent and it would no longer have to pay state
assistance. The state would have to pay $7.2 million to
issue the debt, of which the debt service payments would be
about $129 million. The state would pay $37 million more if
the state issued bonds than if it did not. In the Teachers'
Retirement System (TRS) a similar thing would happen -
state assistance would drop but not vanish. The state would
continue to pay $50 million. There would also be issuing
costs and the debt service equal to another $22 million. In
short, issuing pension obligations would cost the state
about $60 million in FY 17. The reasons for considering
pension obligation bonds were to take advantage of the
spread, borrow money at 5.5 percent, make 8 percent, and
over the life of the bonds come out ahead. His office had
run a bunch of scenarios and the state came out ahead after
20 years. If the bonds were sold in the previous December
when the stock market fell 10 percent it did not pencil
out. It was a question of risk assumptions. He conveyed
that pension obligation bonds were built into the
governor's budget presently. He pointed out that the group
of numbers were one possibility for debt service payments.
There were hundreds of ways to structure debt. There were
several other approaches that would have the same effect
without issuing pension obligation bonds.
Co-Chair Neuman remarked that the House Finance Committee
would be having an in-depth discussion on the topic in
future meetings regarding the governor's bill.
Representative Pruitt referred to the fiscal summary on
slide 6. He highlighted under the column labeled "Other
State Funds" the figure of $2.5 billion for FY 16. He
wondered if it was the governor's intent to sell the
obligation bonds in the current year. He wanted to
understand where the money received on the bonds would be
placed. He wondered if the money would go to the Permanent
Fund, into a savings account, or used over the next few
years. Mr. Teal explained that the administration would
expect to sell the bonds in FY 16 which was the reason the
cost of issuance could be found in the supplemental budget.
The proceeds would be deposited into the Public Employees'
Retirement System (PERS) and TRS trust funds, which could
only be used to pay benefits. The money would be gone and
the state could not retrieve it. The next question would be
who would pay the debt service. The hope was that the
retirement system would pay it. However, the debt service
would be paid with the state's UGF.
2:59:41 PM
Representative Pruitt commented that the state had been
burned by investments in the stock market with its pensions
in the past. He asked about the risk. The state would have
been in a difficult situation had it sold the bonds in the
previous December. He queried about the long-term risk to
the people receiving the pensions from the state system. He
also asked if the risk would be shifted. Mr. Teal replied
that if the state issued pension obligation bonds the GF
would pay a fixed debt service schedule. If the state did
not make an 8 percent return it would be faced with
returning to state assistance in addition to the debt
service. In terms of risk, he posed the question as to
whether Representative Pruitt was the type of person that
would mortgage his house, borrowing it at 4 percent and
placing it into the stock market. If so, then pension
obligation bonds might be attractive investments.
Otherwise, they might not be so appealing.
Representative Munoz wanted to respond to a statement
Representative Pruitt made about being burned by
investments. She thought the return on the investments had
been favorable and that the Alaska Retirement Management
(ARM) Board had been very successful in investments.
However, the decision about underfunding the obligation
lead to the unfunded liability as well as the high costs of
the Tier I Retirement Plan and early retirement. She
understood there were 3 or 4 things that happened that
resulted in the large unfunded liability but, the nature of
the investments and the return on the investments were not
part of the issue. She furthered that the actuarial
recommended deposits into the trust funds were lower than
what the state should have invested which led to an
underfunding of the state's obligation.
Co-Chair Neuman informed the committee that there would be
a more detailed discussion on the topic at a later time. If
members needed more information they could contact Co-Chair
Thompson, as his office was working on related legislation.
Co-Chair Neuman referred back to slide 3. He remarked that
in the previous year the legislature had made reductions to
the operating budget of more than $400 million. The
reductions translated to a 9 percent reduction in agency
operations, the largest operations decrement over a period
of one year in the state's history. Last fall the state
spent an additional $150 million for the gasline. He
thought the additional appropriation made the operating
budget cut for FY 16 look smaller. He asked if he was
correct. Mr. Teal confirmed the chairman was correct. He
offered that there were one-time appropriations such as the
gasline which took $157 million from the budget last year.
He did not know if the amount would be sufficient. It was
possible that money would have to be added in 2017. He
expounded that the governor's figures were $157 million
lower due to one-time expenditures in 2016. If there were
supplemental budgets in 2017, then the numbers would change
because of spending additional monies in FY 17.
Co-Chair Neuman commented that the $157 million
appropriation was an anomaly. He wanted to make sure it was
highlighted.
3:04:40 PM
Representative Wilson asked about how much the legislature
had cut prior to appropriating money for the gasline and
other things that had been added. Co-Chair Neuman thought
it was about $5.2 billion. Mr. Teal answered that the gas
line was the large expenditure.
Representative Wilson thought the legislature was closer to
a budget of $5.0 billion rather than $5.4 billion when the
legislature concluded last year. If her number was accurate
then the budget the legislature would be looking at would
be $500 million higher for the FY 17 budget. Mr. Teal
replied that the number could be greater than $500 million
depending on whether there was a supplemental budget in FY
17. He was almost certain there would be additional costs.
He reported that the state was about $30 million to $35
million short for fire suppression in FY 16 and in FY 17.
Representative Wilson was looking at the "normal" budget
for FY 16. However, LFD did not identify budgets as
"normal" but, rather, added the numbers to determine the
current numbers. He furthered that LFD identified what
amounts were appropriated and placed on a chart. He could
only use the numbers available.
Representative Wilson mentioned that she had heard several
comments from constituents about agencies making large
expenditures at the end of each fiscal year. She asked if
it could be tracked. Mr. Teal explained that the
information could be tracked in the accounting system.
However, he thought many managers did the same thing he did
which was to make sure staff was paid and avoided running
short on payroll. He provided a hypothetical example of
spending money to purchase new computers in July at the
beginning of the fiscal year but later finding out payroll
was short in the following June. As a manager he would wait
to ensure that payroll and other costs for the year would
be met. If money was left over then it would be spent. In
other words, it was not a matter of having a spending spree
at the end of the year, it was about making sure money was
available for spending. He understood the myth brought up
by Representative Wilson. It was a common misconception of
the public.
Co-Chair Neuman suggested asking the commissioners when
looking at their agency budget. Representative Wilson
replied, "I have, they denied. But I have asked." Mr. Teal
responded, "Probably for the same reasons." Representative
Wilson responded that she did not think she would ever
know.
3:09:13 PM
Mr. Teal turned to slide 8: "Agency Operating Budgets
Percentage Change from FY16 Mgt Plan to FY17 Gov (UGF
Only)." He made the minor point that the slide showed in FY
17 that virtually every agency was taking a reduction.
There was a small increase in Department of Revenue (DOR)
and the Department of Natural Resources (DNR) related to
the AKLNG Project. There was also an increase in the
Department of Military and Veterans Affairs (DMVA) having
to do with the expansion of the rural presence of the
Alaska Scouts.
Mr. Teal advanced to slide 9: "Agency Operating Budgets
Change from FY16 Mgt Plan to FY17 Gov (UGF Only)." He
relayed that the slide showed the same information as in
slide 8 but in percentages.
Mr. Teal returned to the fiscal summary on slide 6. He
pointed to line 24 representing fund capitalization. Oil
and Production tax Credits appeared as a sub appropriation
under fund capitalization. There was $500 million in the
previous year and $73 million in the current year. He
reminded members the state had started out FY 16 with $700
million in expected tax credit expenditures. The governor
vetoed $200 million. In FY 17 credits were projected to
claim about $625 million. If the $200 million in credits
that were not paid in the previous year were added to the
credits anticipated in the current year, the state would
have $825 million of outstanding credits. However, the
governor's budget only paid for $73 million of them. He
returned to Representative Wilson's point about whether the
budget was really equal to $5.4 billion, especially if the
state ended up paying the remaining $700 million in oil and
gas tax credits that did not appear in the fiscal summary.
He concluded that the budget would be greater if the
legislature did not do something related to a bill the
governor submitted that changed the tax credits and took
$1.2 billion from the CBR to pay some of them. In the
legislation the funds would come from the CBR rather than
from UGF. However, in his opinion, the tax credits were
state expenses and were understated in terms of the amount
of state money being spent. There were a lot buried in the
budget that were not visible on the surface.
Mr. Teal discussed line 26, the Permanent Fund Dividend
Fund. In FY 16 the amount was zero and in FY 17 the amount
equaled $700 million. He explained that the numbers were
due to a re-plumbing. He detailed that in FY 16 $1.4
billion in PFDs went out the door. The state classified
them as coming from the ERA, part of the PF and did not
show up as GF expenditures. Under the governor's plan 50
percent of royalties would go to dividends. He added that
royalties were UGF. The Legislative Finance Division looked
at it as if dividends would now be paid from the GF. He
believed the payouts would continue to be referred to as
PFDs. He suggested that no one would begin calling them
royalty dividends even though that was what they would be.
He added that he looked at the dividend checks as checks
from the government whether from the permanent fund
earnings or the GF. He thought the governor's re-plumbing
made it very clear that PFDs competed with K-12, and other
GF expenditures. He thought it might change legislators'
views of dividends as well as the public view of dividends.
Also, the $700 million would show as revenue because it
came into the GF. He would discuss the re-plumbing in the
following week.
3:14:09 PM
Representative Edgmon asked if it was cheaper to spend
money from the CBR because the account was invested in long
term investment vehicles rather than using money from the
ERA that had a target return of 7 percent. Mr. Teal stated
that the CBR was no longer invested in long-term
investments because DOR had instructions that if there
could be a call on the funds (a likely possibility), then
they could not be invested long-term. The state was not
earning as much on the CBR as it could be because the cash
had to be readily available.
Representative Edgmon stated that in order to go into the
ERA the legislature would be extricating or liquidating
investment vehicles but it was not with the CBR. He thought
it was important to look at the opportunity costs
associated with reaching into the PF versus taking money
out of the CBR. Mr. Teal responded that the fiscal summary
reflected the governor's plan. The governor's plan would
take the CBR away and place the money in the ERA. It would
sort of address Representative Edgmon's issue with the
difference in earnings because there would not be a CBR
under the governor's plan. He clarified that the CBR
currently received settlements between $120 million and
$150 million per year from disputes with oil companies over
taxes. There would be a continued flow into the CBR, the
balance never going to zero. However, the governor's plan
was to take the existing balance and place it into the ERA.
Representative Edgmon had additional questions but would
save them for another time.
Mr. Teal continued that the questions about the governor's
plan should probably wait until the following week due to
time constraints.
Mr. Teal reported that the capital budget was up from $118
million to $195 million, an increase of $75 million. The
total authorization increased to $5.4 million, with a net
increase of about $65 million noted on line 41 of the
fiscal summary. He mentioned that there was a complication.
He pointed to line 42 in the first column that showed an FY
16 deficit of roughly $3.8 billion. The revenue covered a
little less than 30 percent of the expenditures in that
year. Line 44 was included in anticipation of members
asking about what it would do if it did not execute the
governor's plan doing business as usual. The Legislative
Finance Division tried to adjust as best as possible. The
dividend would be about $3.5 billion as shown on line 44.
State revenue would then cover about one-third of its
expenditures. He pointed to line 42 and highlighted that
under the governor's plan the deficit would fall to $440
million. With its plan, the administration was aiming to
eliminate the deficit. It would not happen in FY 17, but
within a couple of years. He suggested that if the numbers
in the model were correct, the plan seemed reasonable. He
knew dividends would fall by $200 million in the following
year if they were based on 50 percent of royalties and the
state did not prop the payment to $1000. The payment would
be about $700 per person and cost about $500 million. LFD
also knew that there were a number of things that were not
covered. The income tax, for instance, in FY 17 would be in
effect for half a year which would generate an additional
$100 million in revenue. The deficit would hopefully
decline and eventually vanish if all went well. He stated
that legislators might ask why it might be the wrong
direction to turn.
3:20:21 PM
Mr. Teal discussed slide 11: "FY17 Governor's Request
Agency Operating Budget, Statewide Items and Capital Budget
(Formula & Non-Formula) (UGF Only--$ millions)." He
indicated that the diagram showed the FY 17 request in
declining order of expenditures. There were many ways to
look at the chart. First, the state had $1.8 billion in
revenue with oil priced at $56/bbl. It was coincidentally
about the same $1.8 billion for all of the agencies except
for the Department of Education and Early Development (K-12
education), statewide appropriations, and the Department of
Health and Social Services. It could also be argued that
the state would spend $1.3 billion on statewide
expenditures including retirement, assistance, debt
service, and in FY 17 PFDs and $200 million for the capital
budget totaling $1.5 billion. If revenue was $1.8 billion
and $1.5 billion was accounted for, only $300 million would
be left to spend on education, Medicaid, and every other
agency. There were a number of other ways to look at the
budget but, the bottom line was that the state did not have
enough money to do what it wanted to do. He observed that
the cuts were difficult to identify. It was one thing to
suggest reducing the budget by a certain percentage.
However, it was harder to be specific. He listed a number
of things that would be a challenge to cut. He thought the
chart was interesting because it demonstrated how difficult
it was to begin balancing the budget by reducing it. He
referred back to the Rasmussen Lunch-and-Learn when it was
stated that people wanted reductions but they also liked
their services.
Mr. Teal discussed things for the legislature to consider.
The price of oil had been discussed earlier and how it
might affect things. He speculated that $200 million could
be considered a large or a small amount. It was a margin of
error in forecasting. The price of oil in the future was
unknown. There were some budget shortfalls including one
for fire suppression. He drew attention to line 32 of the
fiscal summary which showed a supplemental for Community
Revenue Sharing in the amount of $34 million. It would
bring the revenue sharing fund up to $150 million. The
governor wanted to distribute $50 million to communities in
FY 17. The governor's plan also indicated he would like to
reach a $60 million distribution level. If a distribution
were to happen in FY 18 another $80 million would need to
be deposited in FY 17. If an $80 million was not deposited
then Community Revenue Sharing would fall to $33 million in
FY 18. If the governor intended to increase the
distribution to $60 million then $80 million should be
placed in the FY 17 budget - it was not reflected in the
governor's plan. He also was unclear if additional money
would be needed for the Alaska Liquefied Natural Gas
(AKLNG) Project. If the expenditures he mentioned were
considered, the governor's deficit would jump to a little
over $600 million from the $400 million that it was
currently. It would be a big deficit but it was much
smaller than the $3.9 billion deficit the state would be
faced with if the legislature chose to do business as
usual.
Mr. Teal concluded that LFD was currently stuck. It had the
governor's budget as submitted on December 15, 2016. The
revenue bills were released as LFD was putting the overview
together. He elaborated that the Permanent Fund Protection
Act had been redrafted and until the previous day LFD had
not received a copy of the revised legislation. He was
unclear whether LFD was portraying the governor's budget
accurately. He thought the division was doing the best it
could with the information it had. He was unsure what the
legislature would do. If the legislature chose to continue
to do business as usual, only about one-third of
expenditures would be covered with revenues and reserves
would rapidly deplete to zero within 3 years. The
legislature could make additional cuts to bring the ratio
up a little bit. However, it would not extend the state's
reserves by more than a year. The legislature could also
adopt the governor's plan or a variation of it. He
clarified that when he used the term "governor's plan" he
meant any of the plans floating around including the GCI
plan, a Rasmussen Plan, the DOR model, and the ISER model.
They were conceptually all the same. They all looked at
expenditures, revenue, and the PF earnings. There were some
tweaks with inflation proofing the PF, the percentage of
royalties, and other items. However, he felt they were all
conceptually the same because they all had to rely on PF
earnings to fill the deficit. The governor's plan took the
state's current fiscal circumstance and bumped the revenue
curve up. There were other plans that could do the same
thing but, the governor's plan covered about 90 percent of
expenditures. In other words, it used less than 4 percent
of the state's reserve balance. Under the governor's plan
the state's reserves could last 25 years or more making the
state essentially sustainable at about the current level.
He added that at least there was some hope for a
sustainable future for Alaska because the deficits would be
small enough that a little more tax or a little lower
expenses would result in a balanced budget. He closed by
offering that he and his staff were available to assist
legislators in any way possible. He understood that
legislators had a significant amount of work ahead of them.
3:29:09 PM
Co-Chair Neuman thanked Mr. Teal and his staff for the work
they do. He was aware of the time his people spent working.
Representative Gara made a humorous remark about
Representative Guttenberg's tie. He was aware the governor
had tried to craft his plan in a way that would not require
a constitutional amendment. He commented that the bill was
written with money remaining in the new oil credit fund at
the end of the year and money remaining in the sovereign
wealth fund at the end of the year after appropriations. He
wondered if the money would be swept into the CBR and
require a three-quarter vote every year to return the money
back into the sovereign wealth fund and oil tax credit
fund. He asked if it was an unintended consequence. Mr.
Teal responded that under the governor's plan (an attorney
general opinion) the ERA would not be swept into the CBR
and there would be no more CBR in the future. He disagreed
strongly with the idea. He believed that the ERA was
unsweep-able because it was part of the PF. The earnings
went into the GF defined by the constitution. It was only
statute that required the sweep. He thought the plan was
not workable as written because it lacked a sweep and a
super majority vote. It would be something that would
likely be examined in depth in the following week. In order
to review the plan in detail he would need additional tools
to review the complicated process. If the legislature's
main concern was the CBR vote, the solution would simply be
to repeal the statute that stated the ERA was not part of
the PF. The legislature would be able to easily follow the
constitution and indicate that the earnings were part of
the GF.
Co-Chair Neuman commented that the meeting needed to wrap
up. There had been several conversations on the issue. He
reviewed the agenda for the following day.
ADJOURNMENT
3:32:54 PM
The meeting was adjourned at 3:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| FY17 Overview 1 20 16.pdf |
HFIN 1/20/2016 1:30:00 PM |
HFIN LFD Budget Overview |
| Respones FY17 HFIN 1-20Budget_History_Presentation_January 2016.pdf |
HFIN 1/20/2016 1:30:00 PM |
|
| Respones FY17 HFIN 1-20Forecast and Actual GFUR Comparison 1 25 16 from DOR.pdf |
HFIN 1/20/2016 1:30:00 PM |
|
| Respones FY17 HFIN 1-20Cost Drivers - Agency Ops FY05 Mgt Plan -FY17 Gov UGF Only.pdf |
HFIN 1/20/2016 1:30:00 PM |