Legislature(2019 - 2020)ADAMS ROOM 519
01/22/2020 09:00 AM House FINANCE
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| Audio | Topic |
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| Start | |
| Fy 2021 Fiscal Overview: Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 22, 2020
9:05 a.m.
9:05:10 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 9:05 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Jennifer Johnston, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Andy Josephson
Representative Gary Knopp
Representative Bart LeBon
Representative Kelly Merrick
Representative Colleen Sullivan-Leonard
Representative Cathy Tilton
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Rob Carpenter, Analyst, Legislative Finance Division; Lacey
Sanders, Analyst, Legislative Finance Division; Alexei
Painter, Analyst, Legislative Finance Division;
Representative Sara Hannan; Representative Louise Stutes.
SUMMARY
FY 2021 FISCAL OVERVIEW: LEGISLATIVE FINANCE DIVISION
Co-Chair Foster reviewed the meeting agenda. He recognized
Representative Sarah Hannan in the audience. He welcomed
committee members back. The committee would begin with
budget overviews. He reviewed the agenda for the following
day.
^FY 2021 FISCAL OVERVIEW: LEGISLATIVE FINANCE DIVISION
9:06:50 AM
Co-Chair Foster invited Legislative Finance Division (LFD)
staff to the table.
ROB CARPENTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
introduced a PowerPoint presentation titled "Fiscal
Overview: House Finance Committee," dated January 22, 2020
(copy on file).
9:07:48 AM
Mr. Carpenter highlighted a presentation outline on slide
2:
• Where have we been?
• Last session
• Where are we now?
• Where are we going?
Mr. Carpenter turned to slide 3 titled "Why Unrestricted
General Funds (UGF)?" and spoke from prepared remarks:
I want to point out that this presentation focuses on
Unrestricted General Funds. The question often arises
as to why do we focus on UGF?
General Funds are typically the focus of most state
legislatures in balancing their budgets.
Specifically, for Alaska, we focus on what we have
termed Unrestricted General Funds.
AS the name indicates, UGF revenues are unrestricted.
They can be used for any purpose.
The non-UGF funding sources tend to require fewer
annual decisions. These are typically guided by
statute, the constitution, some contractual
obligation, or the federal requirement.
These non-UGF funding sources are also less likely to
get out of balance because expenditures are controlled
by receipts and or fund balances
On the fiscal summary all non-UGF revenues equal
appropriations
9:09:15 AM
Mr. Carpenter briefly pointed to a quick summary of the
presentation material on slide 4 titled "Where have we
been?" He moved to a bar chart on slide 5 titled
"Unrestricted General Fund Revenue/Budget History." The
chart showed the UGF revenue and budget from FY 76 to FY 21
and the Department of Revenue (DOR) Fall revenue forecast
to FY 29. The green shaded portion of the chart showed
traditional UGF revenue including oil revenue, oil taxes,
and all other historical UGF fund sources. The purple
shaded area showed the new use of the Permanent Fund
percent of market value (POMV). The bars reflected budget
appropriations over time broken out by agency operations in
dark blue, statewide items in light blue, and the capital
budget in yellow. He highlighted the pink portion of the
bars reflecting net fund transfers. He elaborated that the
"net fund transfers" were the net of transfers to or from
savings or to other accounts within the treasury that were
typically not considered expenditures but required an
appropriation.
Mr. Carpenter continued to review slide 5. He detailed that
in the 1980s revenue had spiked when the pipeline had come
online. He elaborated that along with appropriations there
had been considerable surpluses. As prices declined there
had been a long-term flat trend and budget through FY 05.
In FY 06 to FY 08, oil prices had spiked and there had been
a tax regime change to Alaska's Clear and Equitable Share
(ACES); the spike in oil prices resulted in a spike in
state revenue. There had been some volatility in subsequent
years and the latest revenue peak had been in FY 12.
Following FY 12, revenue had plummeted through FY 16.
Traditional UGF revenue had declined from $9.5 billion in
FY 12 to $1.5 billion by FY 16. He reported that the UGF
budget had declined 44 percent (from $7.8 billion to $4.4
billion).
Mr. Carpenter discussed that in the past several years the
state had been operating at an average deficit of $2.6
billion. He highlighted a large spike in FY 15 resulting
from a one-time appropriation from the Constitutional
Budget Reserve (CBR) to address the unfunded retirement
liability. He noted the timing of the one-time cash
infusion had turned out well. The deficit had been
decreased significantly; however, the governor's proposed
FY 21 budget built in a $1.5 billion deficit. The purple
shaded area reflected the POMV that started in FY 19, net
of dividends. He clarified that nothing on the slide
related to the Permanent Fund Dividend except for the
adjustment of revenue. He explained that the revenue to the
General Fund was net of dividends. The figure had been
roughly $2 billion in FY 19. Assuming the governor's
budget, the number would decrease significantly, with
approximately $1 billion going to the General Fund. The
slide made no assumptions about the dividend in outyears
because the amounts were to be determined.
9:13:20 AM
Mr. Carpenter moved to a bar chart on slide 6 showing end-
of-year reserve balances. He discussed that budget reserves
in the CBR and Statutory Budget Reserve (SBR) had been used
to fill the deficits. He noted that during the high oil
price and revenue years, the legislature had often been
accused of spending only, when in fact it had made
considerable contributions to the CBR, had paid off the
liability, and had put money in the SBR. The efforts had
built a savings balance that exceeded $16 billion and had
helped the state weather the storm. He pointed out that
reserve balances had declined significantly to the
projected FY 20 balance of roughly $2.3 billion. The
governor's proposed budget would leave approximately $800
million remaining at the end of FY 21.
Representative Knopp referenced slide 5 and noted that
since FY 17, the statutory payoff for the PFD had not been
followed. He thought that prior to FY 17, all Permanent
Fund [Dividend] distributions had occurred outside of the
budget. He asked if the expense was reflected in the budget
for FY 17 to FY 19.
Mr. Carpenter replied that the expense had not been paid
outside the budget documents; however, the payments were
not addressed in the chart on slide 5. He elaborated that
LFD had always accounted for the appropriations in its
budget reports. Historically, they [dividends] had been
accounted for as "other" fund spending. Since the passage
of SB 26 that implemented the use of the POMV, the spending
had been reclassified as UGF.
Representative Knopp asked for verification it was not
reflected in the chart.
Mr. Carpenter affirmed.
Representative Wool referenced the black portion of the [FY
15] bar reflecting a [one-time] CBR payment to retirement.
He asked for verification that the payment reflected a fund
transfer. He asked if the payment was also reflected in the
red [pink] bar as a transfer out of the CBR. He wondered if
the slide reflected a double accounting.
9:16:03 AM
Mr. Carpenter replied that although the payment was
technically a transfer between funds in the treasury,
because the money appropriated to the retirement funds was
forever off limits, it was considered as an expenditure. He
detailed that the money was now obligated to pay future
retirement benefits. The payment was included in the pink
bar [reflecting expenditures] because it had contributed to
the decline in the CBR that year [FY 15].
Representative Wool asked for verification that the red
[pink] bar was particularly long because it also included
the CBR to retirement transfer.
Mr. Carpenter agreed. He noted that there had been a
significant decrease from $15 billion to approximately $10
billion. He stated the figure accounted for the deficit and
the additional $2.3 billion for a total of $3 billion.
9:17:25 AM
Mr. Carpenter moved to slides 7 and 8 and reviewed recent
history related to the past session. He discussed that the
past session had been challenging and convoluted. By
February 2019 the governor had released his proposed $980
million UGF operating budget reduction. By the end of
session, the legislature had accepted $146 million of
governor's proposed reductions. He noted the items only
included agency and statewide operations (the capital
budget was excluded). The governor vetoed an additional
$205 million for a total operating budget reduction of $351
million.
9:19:07 AM
Mr. Carpenter turned to slide 9 titled "Progression - FY19
to FY20 Budget" pertaining to the PFD. He reviewed that the
FY 19 appropriation for dividends was approximately $1
billion, which provided a $1,600 PFD. The governor had
introduced a full statutory dividend for FY 20, which
required an additional $992 million. He noted that the
increase directly offset his operating budget reductions.
Ultimately, the legislature had passed a $1,606 dividend at
roughly the same level as FY 19, which had taken just over
$1 billion.
Representative Josephson looked at slide 8 showing
legislative cuts as $146 million. He recalled a cut of $190
million from the conference committee.
Mr. Carpenter asked for clarification on the question.
LACEY SANDERS, ANALYST, LEGISLATIVE FINANCE DIVISION,
shared that the legislative cuts column [on slide 8] was
compared to appropriations. She explained that the
appropriations column included additional legislation the
legislature had passed with fiscal notes. The $146 million
netted the items.
Representative Josephson considered the total $351 million
operating budget reduction for FY 20. He surmised they
would know the actual reduction when the supplementals came
in. He considered a supplemental budget range of $250
[million]. He wondered if the figures meant the budget had
been cut by about $100 million.
Ms. Sanders agreed and explained the actual spend for FY 20
would depend on supplementals put forward on February 4.
9:21:30 AM
Mr. Carpenter briefly pointed to slide 10 titled "Where we
are now?" He moved to slide 11 showing the budget
progression from FY 19 to FY 21. The governor's FY 20
budget had included a cut of $351 million. He reported that
the governor's proposed FY 21 budget added back $178
million through a combination of increments and decrements.
9:22:11 AM
Mr. Carpenter moved to slide 12 and shared that the
governor had proposed a full statutory PFD, which required
another $865 million over the FY 20 budget. The proposal
would result in a dividend of approximately $3,100 per
Alaskan.
Mr. Carpenter asked Ms. Sanders to speak to the major UGF
changes between the governor's FY 20 to FY 21 budget.
Vice-Chair Ortiz looked at slide 12 and highlighted the
governor's proposal to increase the budget $865 million to
pay for a full statutory PFD. He asked if it was the
governor's proposal to backpay past PFDs [that were not
funded at the statutory level].
Mr. Carpenter replied that he did not know if it was the
administration's position. He deferred the question to the
Office of Management and Budget.
Co-Chair Foster clarified that in prior statements in the
media, the governor had communicated a desire to pay the
$1,400 he believed was shorted in 2019. Based on his
understanding, the amount was not included in the budget.
9:23:58 AM
Ms. Sanders addressed major UGF changes between the FY 20
management plan to the governor's proposed FY 21 budget
(slide 13). She noted that various colors in the table
reflected larger increases or reductions. She began with
the Department of Corrections (DOC) budget that had an
increase of about $52 million UGF. The increase included
$17.8 million for a contract to send prisoners out of
state; a reduction of $16.7 million for the closure of the
Palmer Correctional Center (the funding had been added by
the legislature in 2019 and the facility had not reopened);
an increase of approximately $30 million for inmate
population increases projected in HB 49; and a reduction of
$21.3 million in Power Cost Equalization (PCE) funding to
be replaced with UGF for HB 49 fiscal notes.
Ms. Sanders moved to the Department of Education and Early
Development (DEED) budget with a total reduction of about
$20 million. The overall increase for K-12 foundation
formula funding was $19 million, including $10 million UGF
and $9 million for Public School Trust Funds. The budget
reflected the removal of a one-time appropriation of $30
million in FY 20 and the removal of $5 million for Pre-K
grants. The budget included an increase of $4.6 million to
move Public School Trust Funds from agency operations. The
governor's budget proposed to use all of the funding in the
K-12 foundation formula.
9:26:31 AM
Ms. Sanders moved to the Department of Health and Social
Services (DHSS) budget, showing an increase of about $134
million. She detailed that a $128 million increase restored
reductions made to Medicaid [in FY 20], which included $8.3
million for adult dental. The budget also included a $7.4
million increase for adult public assistance to reverse the
FY 20 reduction associated with the maintenance of effort
methodology; a $5 million increase for Pioneer Homes as the
division continued to true up its numbers; an $11.4 million
fund source change from UGF to Marijuana Education and
Treatment (MET) funds (DGF) due to an increase in available
revenue.
9:27:44 AM
Ms. Sanders moved to the Department of Public Safety (DPS)
budget, which included an increase of approximately $12.8
million. The most significant change was $10.3 million and
36 new positions to increase trooper capacity. The budget
also included an increase of approximately $900,000 and
seven new positions for the new Anchorage Emergency
Communications Center and $1 million for staffing needs to
address the backlog in laboratory services.
Ms. Sanders reviewed the changes in the University budget
including a reduction of $25 million based on year-two of
the multi-year compact agreement and is allocated as
follows: approximately $9.54 million to the University of
Anchorage, $13.75 million to University of Fairbanks, and
$1.75 million to statewide services.
9:28:33 AM
Ms. Sanders addressed statewide items including debt
service and retirement. Debt service included a reduction
of about $15 million due to a $10.6 million increase for
general obligation bond payments and a decrease of $27
million due to the removal of an oil and gas tax credit
bonds debt service payment for FY 20. She highlighted that
the governor's budget did not include funding for the debt
service payment or purchase of oil and gas tax credits in
FY 21.
Ms. Sanders reported that retirement system payments
increased by $37.6 million overall including a $44.5
million increase for the Public Employees' Retirement
System (PERS) and a $6.2 million reduction for Teachers'
Retirement System (TRS).
Ms. Sanders reviewed the totals on slide 13. Agency
operations and statewide items had a total increase of $178
million. The governor's budget proposed a full statutory
dividend requiring a total of $2 billion in FY 21, an
increase of $865 million over FY 20. The total budget
increase was slightly over $1 billion.
Co-Chair Foster requested a copy of the breakdown reviewed
by Ms. Sanders. He asked for verification that automatic
increases such as salary increases were included in the
governor's budget.
Ms. Sanders replied in the affirmative.
9:30:40 AM
Representative Josephson referenced the [oil] tax credit
issue. He discussed that the state had historically paid
everything that had been submitted as a certificate. He
noted there had been a year around FY 16 where the state
had paid around $200 million of a $700 million total.
Subsequently the state had been paying 10 percent. He
remarked that at present, the legislature was saying that
under the power of its appropriation, it would not pay
anything. He asked if the situation was still pending
litigation on the bond package.
Ms. Sanders affirmed that the bond package was still
pending. She agreed that the legislature had the power of
appropriation. She clarified she was noting that the
governor's proposal did not include anything at present.
Representative Sullivan-Leonard asked Ms. Sanders to
provide more detail on the PERS and TRS portion of the
budget.
Ms. Sanders replied that the total state assistance to
retirement was an increase of $37.6 million. She explained
the number had initially been projected to be higher. The
figure included a $44.5 million increase to PERS and a $6.2
million reduction to TRS. She deferred to Mr. Carpenter for
additional detail.
Mr. Carpenter relayed that the state actuary had recently
decreased the assumed rate of return for PERS from 8
percent to 7.3 percent, which caused an additional
liability to the state. Offsetting the amount was an
unusually large gain on the health insurance side. The
items netted out to considerably decrease the increase from
over $200 million to around $40 million.
9:33:25 AM
Representative Sullivan-Leonard asked about the reason for
the $6.2 million reduction to TRS.
Mr. Carpenter replied that the gains on the health
insurance side were fairly large and offset the increases
on the pension side. He did not know the precise reason TRS
went down and PERS went up, but he believed it was
primarily due to the different size of the plans.
Representative Wool referenced the DOC numbers. He
highlighted the increase of $17.8 million to send prisoners
out of state and a cost savings of $16 million to close the
Palmer Correctional Center. He observed it was almost a
wash.
Ms. Sanders agreed.
Representative Wool asked for the headcount of prisoners
out from the closure of Palmer Correctional Center.
Ms. Sanders answered it was her understanding there were
very few prisoners currently outside the state. Prisoners
currently outside the state had medical conditions. The
Department of Corrections was in the process of issuing an
RFP that had not been finalized and was currently in the
procurement process. There was currently no large contract
for prisoners to be sent out of state. Prison capacity in
Alaska was at 97 percent without the Palmer facility.
Representative Carpenter asked if the committee would dive
deeper into each of the issues at a later time.
Co-Chair Foster answered that at the committee's
discretion, they could dig deeper into the items.
Representative Carpenter thought that education, PERS and
TRS, and the DOC situation were on the minds of the public.
He wanted to do a deeper dive on the issues.
Co-Chair Foster agreed it was a large issue and noted it
needed more time.
9:36:04 AM
Representative Knopp believed the $16 million for DOC had
been appropriated by the legislature the preceding year to
reopen the Palmer Correctional Center, but the facility had
not reopened. He asked if the administration was requesting
to reappropriate the funds to out-of-state contractual
services.
Ms. Sanders answered that the governor's budget requested a
reduction of the money for the Palmer Correctional Center
and a separate increase for out-of-state.
Representative Josephson thought it sounded like the
legislature was effective in constraining the allocation to
Palmer, although he assumed DOC must be using the funds in
other population management ways. For example, if a
contract was completed, DOC would be constrained by the way
the FY 20 budget was written by the legislature. He asked
for verification that the contract would merely sit there.
Ms. Sanders answered that DOC was not utilizing the funding
appropriated by the legislature the preceding year for the
purpose of opening the Palmer Correctional Center. The
language in the bill specified that the funds had been
specifically appropriated for that purpose. She explained
that any work completed for an RFP to move inmates out of
state would have to be conducted with other funding.
Representative Josephson asked how the department could be
getting by even if it maximized its other facilities and
did not reopen the Palmer Correctional Center. He thought
DOC must be in dire need of the $16 million.
Ms. Sanders replied that she did not want to speak for DOC
and thought it was an excellent question to ask the
department. She reiterated her earlier testimony that the
correctional centers were currently at 97 percent capacity
without the opening of the Palmer Correctional Center.
Co-Chair Foster noted that the DOC finance subcommittee
would be meeting the following week where more information
would be presented.
9:38:39 AM
Mr. Carpenter followed up on the oil and gas tax credit
issue. He shared that he had discussed the issue with the
Department of Revenue (DOR), and he believed an answer from
the court case was forthcoming. He reported that DOR was
considering the issuance of tax credit bonds. He would not
be surprised to see an amendment from the governor adding
the funds.
Mr. Carpenter turned to slide 14 showing a comparison of FY
20 to FY 21 including UGF and all funds. The slide showed
$5.1 billion in revenue for FY 20 and $5 billion in FY 21.
Appropriations had been $5.5 billion in FY 20 and had
increased to $6.5 billion in FY 21, primarily due to the
dividend and the $178 million Ms. Sanders had discussed. He
highlighted the $1.5 billion fiscal deficit circled in red
at the bottom of the chart.
9:40:25 AM
Mr. Carpenter moved to a "swoop graph" on slide 15
highlighting UGF funds going to each agency. The red bars
depicted FY 20 and blue bars reflected FY 21. The largest
increase went to the PFD. There were also add-backs for
DHSS, statewide items, DOC, and all items previously
reviewed by Ms. Sanders. He pointed to brackets on the
graph used to show the magnitude of the deficit. Starting
with the smallest agency and moving to the largest, it
would take a reduction of 16 agencies, including part of
DOC, to close the $1.5 billion deficit. Alternatively,
beginning with the largest budget component, it would
eliminate all but $500 million to the dividend program. He
clarified that the information was meant to provide
perspective only.
Mr. Carpenter moved to slide 16 and addressed "CBR Access
and Headroom." He quickly outlined the how the CBR had been
used for budget balancing and provided an explanation of
CBR headroom. In recent years, the CBR had been used for
balancing the budget, but its use had been limited to the
appropriation of bills passed that session. For example, in
the previous session, CBR access had been granted to
balance the budget, but only for bills that had passed that
session (any future appropriations had not been eligible).
However, a headroom provision had provided up to $250
million of future appropriations that could be accessed
with a simple majority vote.
9:42:56 AM
Mr. Carpenter advanced to a table on slide 17 showing FY 20
supplementals and CBR headroom. He discussed that the
governor's December 15, 2019 budget identified likely
supplementals. The likely supplemental items included $120
million for Medicaid, $5 million for Pioneers Homes, $6
million for the Alaska Psychiatric Institute, and $94.5
million for fire suppression. The slide included other
areas LFD believed may have probable supplementals
including, $8.3 million for adult dental, $7.5 million for
public assistance, and an additional amount for fire
suppression for spring fires (a total of $102.5 million
including the governor's $94.5 million increment. The slide
also showed $2.5 million included in the governor's budget
for redistricting. He noted the increment for redistricting
was the governor's only actual supplemental request thus
far. Community assistance was also included on the slide at
$30 million. The total potential supplemental was $281
million, which was beyond the CBR headroom by approximately
$31 million.
Mr. Carpenter elaborated that the potential supplemental
was not the end of the world, but it would mean there may
be need for an additional three-quarter vote [to access the
CBR].
9:44:33 AM
Representative LeBon asked for verification there had been
a community assistance component in the prior year's
budget.
Mr. Carpenter replied that the governor had vetoed the $30
million increment for community assistance in the FY 20
budget. He explained that if there was no further action,
there would be a payout of one-third of the remaining $60
million balance - a payout of $20 million.
Representative LeBon asked if it was a return to the
funding that was vetoed.
Mr. Carpenter replied in the affirmative.
Representative LeBon asked if LFD believed the community
assistance increment would be placed in the supplemental.
Mr. Carpenter responded that LFD had only included the
increment on the slide to provide a picture of what the
supplemental would look like if the governor chose to
include the money.
Co-Chair Foster acknowledged Representative Louise Stutes
in the audience.
Representative Carpenter asked if any of the fire
suppression cost would be reimbursable by the federal
government. He asked if the federal portion had already
been taken out of total fire cost.
Mr. Carpenter replied that the slide only included the
state funding portion. He deferred to Mr. Painter for
additional detail.
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
answered that the $94.5 million that had already been spent
was the UGF portion after federal reimbursements. The
additional $8 million added was based on a long-term
average of the spring costs for UGF only. There may be an
additional federal cost, but the language in the budget
provided unlimited federal authority for fire suppression;
therefore, it would not need to be supplemental. The slide
included federal reimbursements that had already occurred.
9:46:43 AM
Representative Josephson thought that when the legislature
had completed the three-quarter vote in late July that
community assistance had flowed from the reverse sweep of
the PCE fund. He stated that in the end, there had been
some funding for community assistance.
Ms. Sanders thought there may be some confusion about the
PCE fund. She clarified that PCE funds could be utilized to
be deposited into community assistance fund. She elaborated
that one-third of the balance flowed out, but if the fund
was not replenished, the balance was diminished for the
following year. Currently there was a lower balance than
the full $90 million, and the legislature had until the end
of the current fiscal year to restore the balance to its
full amount.
Representative Josephson remarked that the scenario
reflected an amendment offered by Senator Lyman Hoffman
several years back. He thought one of the presenters had
stated that community assistance had been vetoed.
Ms. Sanders replied that the deposit into the fund the
previous session had been vetoed by the governor.
9:48:18 AM
Representative Wool referenced the short fiscal summary on
slide 14. He stated that slightly over $1 billion of the
governor's proposed budget came from the appropriation of
the PFD. The budget also contained $178 million more for
items compared to the past year. He asked where the other
$300 million in additional deficit came from.
Mr. Painter pointed to slide 14, line 16 titled "Pre-
Transfer Surplus/(Deficit)." He explained it was a more
normal picture of the state's deficit. He detailed that in
FY 20 there had been a $350 million deficit, not including
supplementals; however, there had been direct
appropriations from the CBR and SBR (that showed up as fund
transfers) to help pay for the deficit. There was a
substantial deficit in FY 20 that was being added to with
the $1 billion and $178 million increases. The SBR had been
fully expended and was no longer available. He relayed that
the governor's budget did not directly appropriate from the
CBR but used it as a deficit filler. He explained that the
data showed up in line 19 titled "Post-Transfer
Surplus/(Deficit)" as the post-transfer deficit rather than
in the pre-transfer deficit in line 16.
Co-Chair Foster suggested that part of the answer was due
to a shortfall in revenue. For example, petroleum revenue
was down by $178 million.
Mr. Painter agreed. He reported that petroleum revenue was
down about $150 million. The POMV draw was up and roughly
offset the decline in petroleum revenue. He explained that
revenue was shown as down $100 million; however, much of
the amount was the carryforward and a reclassification of
royalties. Overall, revenue was fairly flat between FY 20
and FY 21.
Co-Chair Foster looked at slide 14 that showed $5.5 billion
in revenue for FY 20. He referenced Mr. Painter's statement
that revenue was down by $100 million but fairly flat. He
asked for verification that the $100 million accounted for
part of the $300 million.
Mr. Painter answered that $73 million of the amount was
royalties above 25 percent that were appropriated to the
Permanent Fund. The funds had been considered UGF in the FY
20 budget and had been reclassified as DGF in FY 21, which
was reflected as an offsetting appropriation on line 14. He
explained that the $73 million did not contribute to the
deficit. In an effort to avoid confusion, LFD had
reclassified the amount as DGF because of the statutory
designation that the royalties should go to the Permanent
Fund.
9:51:31 AM
Representative Wool returned to the $300 million. He stated
that the CBR transfer had been $346 million. He noted that
a CBR transfer had not been appropriated for FY 21. He
asked if the $300 million was leftover from FY 20 under the
premise that when funds were taken from the CBR they were
owed back to the CBR.
Mr. Painter replied that in FY 20, instead of using the CBR
as a deficit filler, the capital budget had been directly
appropriated from the CBR. The action showed as a fund
transfer from the CBR rather than deficit filler. For the
FY 21 budget, the governor was not proposing to fund the
capital budget from the CBR, meaning there was no fund
transfer from the CBR. He explained that the same thing had
happened with the PFD in FY 20 - a portion of the dividend
came directly from the SBR, which showed up as a fund
transfer. He relayed that the comparable numbers to use
were the pre-transfer deficit numbers on line 16 before
fund transfers were used to pay for the budget. The pre-
transfer line showed an FY 20 deficit of $350 million
increasing to about $1.5 billion in FY 21.
Representative Wool asked if the difference in deficit was
closer to $1.1 billion or $1.2 billion. He surmised the
majority of the difference was related to the PFD at about
$900 million in addition to $178 million for other items.
Mr. Painter agreed.
Vice-Chair Ortiz looked at the $30 million in community
assistance. He asked if the money had been distributed to
communities throughout the state.
Ms. Sanders answered there was a difference between a
deposit into the fund and a distribution to communities. In
FY 20 there had been a $30 million distribution to
communities because it had been based on the prior year's
balance. In FY 21, if the balance was not increased by
depositing an additional $30 million, there would not be a
$30 million distribution.
9:54:16 AM
Mr. Painter noted there was a white paper on the LFD
website explaining how the community assistance
appropriations and flows operated. He noted the complexity
of the issue and recommended reviewing the information on
the website for further detail.
Co-Chair Foster stated his understanding that every year
one-third of the balance in a pot of money was paid out. He
detailed that if the total balance was $90 million, $30
million would be paid out to communities. He reasoned that
if $30 million was not included in the deposit the
preceding year, the fund balance was currently $60 million,
and one-third of that amount was $20 million. He continued
that in the previous year, $30 million would have been paid
out to communities because the [governor's] veto had taken
place after the fact. He surmised that going forward the
community assistance funding would be one-third of $60
million, for a total of $20 million.
Ms. Sanders agreed [that the amount was accurate] unless
there was an additional deposit made in the current year.
Representative Josephson looked at slide 17 and asked about
adult public assistance. He shared that his office had
prepared a document showing what was vetoed in HB 39 [the
original FY 20 operating budget] and what was re-vetoed in
HB 2001. His document showed that adult public assistance
had been vetoed twice the past year. He asked if it
required a plan amendment. He thought the governor's
proposal had been to end the program. He wondered why there
was a supplemental need if the program had ended.
Ms. Sanders answered that there were two reasons the item
was included. The governor's budget and the vetoes that had
followed with the funding for adult public assistance were
based on moving the program back to the 1983 payment
standard with the Social Security Administration. While the
federal Social Security Administration was approving the
change, which would have saved $7.4 million, it identified
an error in the calculation that went back to 1995. Once
the recalculation had been completed, it had been
determined that the changes in the assistance provided to
individuals was too low; therefore, the governor had
decided the program would be continued at the original
program amount. The governor was requesting additional
money in his budget to bring the program back up to the
full amount.
Representative Josephson asked for verification that the
item paralleled with adult dental - the administration was
proposing to restore the programs to the way they had been
in FY 19.
Ms. Sanders answered in the affirmative. The governor was
requesting to restore the programs.
Representative Knopp asked if the governor had requested an
additional $30 million for community revenue sharing in his
FY 21 budget.
9:58:40 AM
Ms. Sanders replied that the governor had put an additional
deposit into the fund from the PCE fund based on the
formula in statute; however, FY 20 had been skipped and did
not have the deposit.
Representative Knopp referenced a scenario where $30
million was not appropriated to keep FY 20 whole. He asked
whether the fund would have a balance of $70 million or $80
million in FY 21.
Mr. Painter replied that at the end of FY 20 there would be
$60 million, meaning the distribution would be $20 million.
After the $20 million distribution, the governor would add
$28 million, which would result in a payment of about $23
million in FY 22 (not the full distribution, but higher
than the FY 21 distribution).
Ms. Sanders made a correction on her earlier answer to
Representative Josephson regarding adult public assistance.
She explained that it had been a separate change that the
Centers for Medicare and Medicaid Services (CMS) had been
reviewing. There were two pieces including the Social
Security Administration and CMS. She clarified that she had
misspoken earlier when she had identified which entity had
found the error.
Representative LeBon stated that PCE was an endowment of
sorts, but not a pure endowment. He asked for verification
that the earnings of the PCE annual draw was approximately
4 to 5 percent.
Mr. Painter answered that reading the white paper on the
LFD website was probably a clearer description. He
explained that the cost of the PCE program was paid for
first. After the cost of the PCE program was paid, the
legislature was allowed to spend 70 percent of the
remaining earnings from the previous year. The earnings had
been high enough that 70 percent of the remaining earnings
had left about $28 million for community assistance, which
the governor was proposing for FY 21. The amount was based
on earnings and not a percent of market value.
10:01:34 AM
Representative LeBon considered a scenario where funds fell
short. He asked if a supplemental amount was placed into
the program to ensure the draw met expectations for the
program.
Mr. Painter replied that statute specified that regardless
of earnings, the full amount could be appropriated for PCE.
He elaborated that even if nothing was earned, the PCE
program could be fully funded. He explained that funding
could only be used for community assistance or other
programs after PCE had been fully funded.
Co-Chair Foster surmised that if the legislature did not do
anything there would be a shortage of $30 million that had
been vetoed in FY 20. Additionally, going forward, the
excess funding that would be available from PCE funds would
be about $28 million, meaning the funds would be short $32
million. He explained that several years earlier
legislation had changed the PCE payout to allow any excess
earnings beyond what was needed for PCE to go toward
renewable energy and community assistance.
Ms. Sanders affirmed by nodding.
10:03:23 AM
Representative Wool asked about the $6 million Alaska
Psychiatric Institute (API) increment that LFD had
identified as a likely request by the governor. He asked if
it was for capital improvements or operational.
Ms. Sanders answered it was operational funding to continue
the contract with Wellpath.
Representative Wool asked for verification that the
contract was $1 million per month.
Ms. Sanders responded that a colleague was available to
answer in further detail if needed.
Representative Wool understood the discussion would occur
in more depth at a later time. He asked for verification
that the funding was not for building improvements such as
new doors or windows.
Ms. Sanders agreed. She reiterated that the funding was for
operations.
Mr. Painter added that the governor's FY 21 capital budget
included a request for capital improvements to API, but it
was not part of the supplemental.
10:04:29 AM
Mr. Carpenter moved to slide 19 showing various graphs of
the LFD fiscal model and status quo. He contended that it
was the most important slide because it provided the big
picture of the state's revenues, budget, and reserves
through FY 29. The slide provided the status quo scenario
to show what would occur. The data used the DOR Revenue
projections and inflation and investment earnings as
projected by Callan (the state's investment consultant).
The key takeaway circled in red at the bottom left, showed
that through FY 29 the state would average a fiscal deficit
of $1.8 billion to $2 billion per year. Through FY 29 the
total deficit would be approximately $17 billion. He
reported that LFD was neutral in its stance and analysts
were available to provide any number of scenarios using its
fiscal model for fiscal improvement. He offered to quickly
go through the slide.
Co-Chair Foster agreed. He asked Mr. Carpenter to focus on
the primary takeaway regarding the deficits. He noted LFD's
calculation of a $1.5 billion deficit according to the
budget proposed by the governor. He highlighted that the
CBR had a balance of $2 billion. He believed the previous
slide specified when the CBR would be drained if the status
quo was maintained. He asked for detail.
Mr. Carpenter returned to slide 18 and reported that
assuming the supplementals, the CBR balance at the end of
FY 20 would be $2 billion. Assuming the supplementals in
conjunction with the governor's FY 21 budget, the CBR
balance would be approximately $500 million at the end of
FY 21.
Mr. Carpenter returned to slide 19 and pointed to a bar
chart in the upper left showing budget reserves. The blue
portion of the bars reflected traditional revenue, the
green portion reflected the POMV payout to the General
Fund, the orange showed the use of the CBR until depleted,
and the remainder of the deficit was filled with the ERA
draw shown in red. Under the scenario, the CBR would be
drained in FY 22. The data assumed that the ERA [in red]
would be used to balance the budget on an ad hoc basis
going forward. The assumption had been used because there
was no other way to pay for the budget under the scenario.
He noted that as the ERA was utilized the budget reserves
bars began to decline as the account was consumed.
Co-Chair Foster asked when the ERA would be depleted.
Mr. Carpenter replied that under the scenario the ERA would
be depleted by FY 30.
Vice-Chair Ortiz looked at the upper left chart showing the
UGF revenue/budget. He asked about the projection that
revenue (shown in blue) would increase slightly. He
wondered if the projection assumed anything about increased
production or oil going to the pipeline. He asked about the
volatility of projected revenue.
10:10:23 AM
Mr. Carpenter answered that the scenario assumed DOR's fall
forecast, which included oil price and production forecasts
for the next ten years. He relayed that LFD could change
production and price to model another scenario upon
request.
Vice-Chair Ortiz surmised it was a volatile section of
revenue where anything could happen in terms of large
spikes or decreases.
Mr. Carpenter replied in the affirmative. He believed it
was a concept that was overlooked in the model. He noted
that the probability the forecast would be the reality was
unlikely. He elaborated that it was not known what would
happen in the following year, much less in 10 years;
however, assumptions had to be made.
Co-Chair Johnston asked if the model assumed the ERA's
reduction in earning capacity.
Mr. Carpenter replied in the affirmative.
10:11:54 AM
Representative Wool looked at the chart on the upper left
of slide 19. He observed that FY 19 was the "high water
mark" and even ten years out, the blue [revenue] bar would
not return to FY 19 levels according to the DOR
projections.
Mr. Carpenter affirmed.
Representative Wool considered the $500 million CBR balance
[ending FY 21] shown on slide 17. He asked if the bulk of
the decrease in the $1.5 billion fund balance from FY 20
was to pay a full PFD. He believed about $1.1 billion of
the amount would go to pay PFDs.
Mr. Carpenter agreed.
Representative Wool surmised that if the CBR balance was
reduced to $500 million it was the last time the source
could fully fund the budget deficit.
Mr. Carpenter agreed that FY 21 would be the last year the
CBR could fully fund the budget deficit.
Representative Wool asked for verification it was the
budget the legislature was currently working on.
Mr. Carpenter affirmed.
Representative Josephson returned to the upper left chart
on slide 19 where Mr. Carpenter had stated that it was
difficult enough to know what FY 21 would look like, let
alone FY 29. He thought that when legislators played the
uncertainty vision it tied their hands. He did not believe
the situation was speculative. He noted that with shale,
oil prices were not likely to exceed $120. Additionally,
the CBR was largely gone and there would not be a doubling
of production in Alaska National Wildlife Refuge (ANWR) for
example. He thought the facts were in and a number of
important policy calls remained. He believed it was another
reasonable interpretation.
10:15:02 AM
Mr. Carpenter agreed. He stated that the charts included
assumptions from all of the professionals in Alaska. The
Department of Revenue had provided its revenue forecast to
the best of its ability. The Alaska Permanent Fund
Corporation had given the earnings projection on its assets
to the best of its ability using their investment advisors.
The information also assumed an inflation rate agreed upon
by most people. Whether the projections would materialize
was unknown. Given the projections, the charts showed the
best guess at what would take place.
Co-Chair Johnston asked for verification that the CBR was
currently the state's cash management fund.
Mr. Carpenter agreed.
Co-Chair Johnston asked what kind of assumptions were made
to the cost of not having a cash management fund.
Mr. Carpenter replied that he was not sure LFD had assumed
a cost associated with cash management. There were policies
in place for cash management using the ERA if the CBR was
emptied or insufficient for cash management purposes.
Co-Chair Johnston considered a scenario where the earnings
from the ERA became a cash management tool. Under the
scenario, fund liquidity would need to be maintained.
Mr. Carpenter replied that the data did not include detail
at that level. He explained that typically the ERA had a
large cash balance at all times that could handle cash flow
issues the state may have. He was not sure there would be a
significant impact. However, declining balances had a huge
impact on earnings power.
10:17:24 AM
Representative LeBon followed up on earlier committee
member comments on the working capital fund that the CBR
represented. He considered it to be the state's bridging
cashflow including receipts of revenue and expenditures
over the course of the fiscal year. He explained that the
account represented the state's cash reserve to do business
as a state. He pointed out that any private business needed
a working capital reserve. He asked what the minimum amount
should be.
Ms. Sanders replied that the amount utilized approximately
$400 million on an annual basis. She remarked that the
balance could and should be more.
Representative LeBon understood the question was difficult
to answer. He asked for verification that the ERA was not
the state's working capital reserve account. He noted the
ERA was not intended to be used by the state for working
capital on a month to month basis.
Mr. Carpenter affirmed that the ERA was not intended to be
a cash management tool for the state's cash flow. He noted
that the CBR was not intended as a cash management tool
either, it was just how the state utilized the account. He
addressed the question about what the minimum balance of
the CBR should be. He reported that beyond cashflow
purposes, the CBR served as a budget shock absorber. He
highlighted that what that amount needed to be to annually
cover the volatility in the revenue stream was another
pertinent question. He questioned whether the amount should
be $1 billion, $1.5 billion, $5 billion, or other.
Representative LeBon believed legislators had an implied
belief that the CBR was the working capital account. He
noted it was a critical part of doing day-to-day business
for the state.
Co-Chair Foster added that for years he had heard the
minimum in the CBR should be $1 billion. More recently he
had heard $500 million and $400 million. The issue made him
nervous. He believed $400 million was the absolute minimum,
but the figure should be about $1 billion.
10:20:26 AM
Representative Wool referenced revenue projections broken
down into price and production. He noted that there was
much talk about the renaissance on the North Slope with new
fields coming online. He asked how DOR weighed the
information in its projections. He wondered if potential
increases in production were balanced against projected
decreases in other fields. He asked if production and price
was fairly flat in the revenue equation.
Mr. Painter answered that the DOR price forecast was based
on the futures market for FY 21 plus inflation. He
explained it was essentially a flat real price. For
production, the Department of Natural Resources (DNR) took
the decline curves for the existing fields and added the
potential for new fields. The projection included risk
factors for fields that had not yet been developed due to
uncertainty about whether the field would come online at
all or in the amount or year projected. There was
significant uncertainty that was accounted for by not
including all of the potential production for new fields in
the middle forecast. There were also projections showing
the perfect case scenario and the worst case scenario. He
believed the information could be presented the following
day.
10:22:18 AM
Representative Josephson recalled testimony from DOR the
previous spring strongly encouraging the legislature to
leave $1.4 billion in the CBR. When the legislature had
followed up, the department had said possibly $1.2 billion.
Co-Chair Foster asked Mr. Carpenter to continue reviewing
the graphs on slide 19.
Mr. Carpenter complied. He pointed to a table on the lower
left of the slide showing the forecasted deficits of $1.8
billion to $2 billion per year under the LFD fiscal model
and status quo scenario. The table also showed the
percentage of the budget that would be covered from savings
at approximately 27 percent per year. Additionally, the
table showed an unplanned ERA draw of approximately $1.9
billion, which was essentially the entire projected
deficit.
Mr. Carpenter pointed to the upper right chart [slide 19]
showing the PFD check under the status quo and according to
statute. The scenario followed a full dividend payment
until it began to decline as a result of a declining
Permanent Fund. The middle bar chart on the right reflected
the Permanent Fund balance. The red bars reflected the
total Permanent Fund growing with inflation from FY 20,
while the multicolor bars reflected the fund principal and
the ERA (in purple and green respectively).
Mr. Carptenter pointed to the graph second from the bottom
on the right that showed the POMV payout split between
dividends and the General Fund. The lower table at the
bottom right showed dividends of $2 billion per year
growing up to $2.3 billion in the outyears with the
remainder of approximately $1 billion going to the General
Fund. The plan assumed the statutory 5 percent POMV (FY 21
was the last year at 5.25 percent and the figure dropped to
5 percent going forward). The bottom row showed the
effective POMV payout. He explained that given the five-
year lag in the calculation and a growing balance, the
effective payout would always be less than 5 percent. In
the early years the effective percent was less than 5
percent, but with ad hoc draws the effective percent
increased to 7 or 8 percent. He noted that the middle
section of the slide showed [cost] variables.
10:26:12 AM
Representative Wool considered a scenario where everything
was kept constant except the dividend check. He asked if
LFD had manipulated the effective POMV draw to show zero
deficit going forward or effective draw under 5 percent.
Mr. Carpenter responded that LFD likely manipulated the
numbers in every possible way. He stated that at an
effective POMV of 5 percent, the POMV would be much higher
at around 6.25 percent. At a 5 percent effective POMV, the
payout would be larger, which would be beneficial to the
General Fund, though he did not believe it would fill the
deficit. He noted that if the assumption was a 7 percent
return and an effective 5 percent payout was desired, it
would still cover inflation for the most part.
Co-Chair Foster noted that LFD was available for committee
members to ask about various scenarios.
Co-Chair Johnston reminded the committee that working with
LFD was more accurate, it was also possible to use the
Permanent Fund Working Group modeling. She noted the model
showed a point in time with the assumption of $50 million
in supplementals without a revenue shortfall.
Mr. Carpenter thanked the committee. He noted that LFD had
implemented an email notification system for any
publications posted on its website.
Co-Chair Foster thanked the presenters for the overview. He
asked LFD to follow up with a requested breakdown of
information. He reviewed the schedule for the following
day.
ADJOURNMENT
10:30:00 AM
The meeting was adjourned at 10:29 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD_HFC Presentation 1-22-20-1.pdf |
HFIN 1/22/2020 9:00:00 AM |
Fiscal Overview LFD |