Legislature(2021 - 2022)ADAMS 519
03/10/2021 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska's Fiscal Position, Look Back, and Projections By: 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
March 10, 2021
1:35 p.m.
1:35:37 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:35 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon
Representative Sara Rasmussen
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division;
Connor Bell, Fiscal Analyst and Economist, Legislative
Finance Division.
PRESENT VIA TELECONFERENCE
Megan Wallace, Director, Legislative Legal Services, Alaska
State Legislature.
SUMMARY
PRESENTATION: ALASKA'S FISCAL POSITION, LOOK BACK, AND
PROJECTIONS BY: LEGISLATIVE FINANCE DIVISION
Co-Chair Foster relayed the agenda for the meeting.
^PRESENTATION: ALASKA'S FISCAL POSITION, LOOK BACK, AND
PROJECTIONS BY: LEGISLATIVE FINANCE DIVISION
1:36:23 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced the PowerPoint Presentation: "Alaska's Fiscal
Position, Look back, and Projections." He began with an
outline on slide 2. He would review the budget changes
since FY 15, discuss the state's current position, and
explore what might happen looking forward. He noted that
the scenarios and adjustments in the presentation were
developed for the March 4, 2021 meeting of the Senate
Finance Committee. The Legislative Finance Division was a
politically neutral entity and did not endorse a particular
fiscal plan.
Mr. Painter discussed the reasons for the use of
unrestricted general funds (UGF) on slide 3. The
presentation would focus on UGF. He explained that the
budget deficit existed solely in UGF. If there were
appropriations from other fund sources that exceed revenue,
it would cause hollow appropriations but would not actually
cause a deficit. The only fund that contributed to the
budget deficit was UGF. Narrowing the focus to UGF
spotlighted the state's general fund (GF) cashflow issues.
The focus did not mean other fund sources were not
important. For example, designated fund sources (DGF)
contributed to the deficit indirectly because of lapsing
funds that could go into the GF. There were important
policy calls to be made across all fund sources.
Mr. Painter continued that the GF numbers reflected the
department activities and how they impacted the state's
treasury. It did not reflect the size of government.
Looking at the size of government would require a different
discussion, one in which all funds would be reviewed. The
presentation was not focused on the size of government.
Rather, it was focused on the impact to the GF.
Mr. Painter moved to slide 4 to review the agency budget
changes since FY 15. He mentioned there were handouts in
members' packets of the following two slides in larger
font. He referred to Handout A (copy on file). He noted
that the key points on the following few slides were to
show how agency budgets had changed since FY 15. Fiscal
Year 15 was chosen because it had been the peak year of the
agency operations budget.
Co-Chair Foster asked for clarification about the handout.
Mr. Painter indicated that Handout A had 3 pages and the
other handout had 2. He highlighted there were $651 million
in UGF budget reductions between FY 15 and FY 18. All
agencies had seen UGF reductions. Since FY 18 there had
been a much different trend. Although there had been an
overall reduction, there had been a mix of increases and
reductions depending on the agency. He encouraged members
to ask themselves whether the state had reached the maximum
in UGF spending it could appropriate without having to make
key structural changes to the state. Major legislation
would be needed to address such items.
1:40:41 PM
Mr. Painter turned to the spreadsheet of agency budget
changes since FY 15 on slide 5. The slide corresponded to
page 1 of Handout A. The slide showed the total picture,
agency budget changes since FY 15, between the FY 15 final
budget and the governor's amended budget. He noted the was
using the final budget rather than the management plan
because it had the least number of distortions in agency
spending. Neither were perfect. The final budget included
supplementals, more accurately reflection true funding.
Mr. Painter pointed out that over the period the state was
down $700 million or 15.6 percent in agency operations in
UGF over the period. The statewide items were down $3.5
billion The number was slightly inflated because of the
extra $3 billion transferred from the Constitutional Budget
Reserve (CBR) to the retirement system in FY 15. The total,
before considering the Permanent Fund and the capital
budget, decreased by 49.5 percent. Much of the decrease had
to do with the payment to the retirement system.
Co-Chair Foster noted there would be fiscal models in the
later part of the presentation along with an opportunity to
look at how different things affected the larger picture.
Mr. Painter focused on agency budget changes from FY 15 to
FY 18 on slide 6. The slide corresponded to page 2 of
Handout A. The period was one of substantial budget
reductions. The red ink represented budget reductions to
every agency's UGF. The total reduction was $663 million or
a 15 percent reduction to agencies. The largest reduction
in dollars was to the Department of Health and Social
Services (down $155.8 million) and to the Department of
Transportation and Public Facilities (down $160 million).
There were other agencies down in the double-digit
percentages in the same period. Substantial reductions had
been made across the board. The agencies were sorted from
the largest budget to the smallest rather than
alphabetically.
Mr. Painter noted that in statewide items there were two
major reductions. First, there were reductions to
retirement payments. The way they were reflected showed the
normal cost in FY 15 as state retirement payments. The
special appropriations reflected the additional deposit
into the retirement system above the normal cost. The
second major reduction was in fund capitalization due to
the change in oil tax credits. In FY 15, the state funded
the full statutory amount of $700 million. In FY 18 the
state funded it at a significantly lower level because of
the decline in oil prices.
Mr. Painter continued to the spreadsheet on slide 7 which
corresponded to page 3 of the handout. The slide showed the
agency changes from the FY 18 budget to the FY 22
governor's budget. Overall, the budget was down by $41.4
million or 1.1 percent in agency operations. A clear trend
did not exist from agency to agency. The Department of
Health and Social Services (DHSS) was down about $54
million, and the University of Alaska (UA) was down $60
million. There were counterbalancing increases including
$60 million for the Department of Corrections (DOC) as well
as significant increases for the Department of Public
Safety and Judiciary.
1:45:21 PM
Representative Josephson cited an example within DHSS. He
suggested that the Indian Health Service (IHS) reclaiming
might have had an impact on bringing as many dollars into
the overall system as there were at its peak. He did not
think it was accurate to say that dollars circulated for a
service were down by $53 million.
Mr. Painter responded that the representative was correct.
He indicated that tribal claiming and Medicaid expansion
brought in a much higher match because of more people being
eligible for Medicaid. In looking at an "All Funds" report,
it appeared that DHSS' budget had grown significantly
mainly due to the increase in matching federal funds.
Vice-Chair Ortiz asked Mr. Painter if he was referring to
all funds or UGF. Mr. Painter responded that all of the
slides in the presentation reflected UGF. He highlighted
the bottom right of the slide showing that the state's
operating budget for FY 22 was down by 1.4 percent of $62
million from FY 18. However, the percentage did not apply
across the board.
Mr. Painter moved to slide 8 to explain where the state's
budget was currently and where it would be for the
Governor's FY 22 budget. He indicated the circled numbers
showed the CBR draws. He pointed to line 16 showing the
pre-transfer deficit. It showed the true fiscal deficit of
the state. He explained that the state could not run a
deficit according to the Alaska Constitution. The
pre-transfer deficit was the fiscal deficit; post-transfer,
the state balanced its budget. The slide showed a
pre-transfer deficit of about $2.1 billion in both years
based on the governor's budget. The governor made up those
deficits as seen in line 17 with draws directly from the
earnings reserve account (ERA): $1.2 billion in FY 21 and
$2 billion in FY 22. The CBR draw was at the bottom of the
slide which showed the remaining amounts: $900 million in
FY 21 and $93 million in FY 22.
Mr. Painter also pointed out the other red circle on the
slide showing the fund balances. He noted a couple of
differences from past versions presented to the committee.
He explained that the Legislative Finance Division (LFD)
projected that the state would have about $1.4 billion at
the end of FY 20. In December, LFD and the Office of
Management and Budget (OMB) projected a higher balance
based on lapses they saw from different agencies. The
projection by LFD showed a balance of $1.76 billion at the
end of FY 20. However, the state's comprehensive annual
financial Report that came out a couple of weeks prior
showed a CBR balance of $1.4 billion or slightly lower. In
previous years, the balance would have been about $900
million in each year but had dropped by about $400 million
- leaving a balance of $500 million in each year. He
indicated that the change was primarily due to audit
adjustments. He admitted that there was a substantial
difference from a more recent forecast, and LFD was working
diligently to find out why it was so different.
1:50:19 PM
Representative Wool asked if the CBR balance of $531
million in FY 21 was post-transfer of $900 million, which
would bring the balance to about $1.4 billion. He asked if
he had heard Mr. Painter correctly. Mr. Painter responded,
"That's correct. Yes." Representative Wool wondered if the
following year was $463 million post the following
reduction of $93 million. He suggested there was not a line
that showed $1.4 billion balance pre-transfer on the graph.
Mr. Painter responded in the negative.
Representative Josephson suggested that in the prior year
the state had a balance of about $1.4 billion and currently
there was a balance of about $500 million. He asked if he
was correct. Mr. Painter responded that the amount was
based on the governor's budget and the fall revenue
forecast. It was the projected available balance at the end
of the current fiscal year.
Representative Josephson asked why the number had change.
Mr. Painter replied that the state's financials were
audited, and a number of adjustments were made that reduced
the available balance. He emphasized he was talking about
the balance of the CBR available for appropriation. The
legislature had made a number of direct appropriations from
the CBR for capital projects. He indicated there would be a
higher cash balance on the Division of Treasury's website
than in the financial statements. The difference was
attributed to the continuing appropriations out of the CBR
as well as cash being used for cashflow. The projection was
based on the fall forecast. He suggested that if prices
were higher, the available amount would be higher because
of a smaller deficit.
Representative Josephson suggested that if the legislature
followed the administration's view of monies that should be
placed in the CBR versus in the general fund, the balance
would be higher. Since the auditor was part of the
legislative branch, the legislature should subscribe to the
audit version of the account. He asked if M. Painter
agreed.
Mr. Painter responded that LFD and OMB agreed on the CBR
balance. He explained that when he received the audit the
projection became a firm number which was below LFD's
projection. Both entities used the same methodology. There
had been a disagreement in the prior year which had since
been worked out.
Representative Josephson queried about the governor's
vetoes and where the dollars went. Mr. Painter replied that
they went to a reduced deficit in FY 21. He furthered that
had the governor not vetoed the items, there would be a
greater deficit.
Representative Josephson asked if the veto dollars went
into the general fund or the CBR. Mr. Painter answered that
if the appropriations were not made, the money would not be
drawn out of the general fund and, therefore, the CBR draw
would be smaller. The CBR was used as a deficit filler.
1:54:33 PM
Representative Josephson relayed that previously the
Treasury Division testified that the state needed
$1.4 billion in reserves to cover the state's cashflow
needs. The division most recently testified that the state
needed $500 million. Based on Mr. Painter's testimony, the
account is not available to draw from because it was at
$500 million. He asked if he was correct.
Mr. Painter responded that based on the fall forecast the
representative would be correct. He would not suggest going
below the $500 million mark for cashflow purposes. He
suggested there were other alternatives for cash flow.
However, the CBR was currently what the state used for
cashflow.
Representative Carpenter asked if Mr. Painter had the total
lapsed fund balance or a projected amount for the end of
the year. Mr. Painter responded that on March 4, 2021, OMB
sent a letter indicating that there would be an estimated
amount of $110 million in lapsed funding in FY 21: $100
million in Medicaid funding and $10 million in funding of
other areas. The governor's budget grabbed some of the
lapsed funding and reappropriated it elsewhere. He
suggested that even with the governor's budget the state
would lapse about $45 million in FY 21.
Representative Carpenter clarified he was talking about
unencumbered lapsed funds - funds that were not supposed to
be used for other things. Mr. Painter remarked that
Representative Carpenter was correct. He noted he did not
adjust for projected lapsed funding but thought it would be
a reasonable adjustment to add $45 million to the CBR
balance.
Representative Rasmussen asked if the state would be able
to avoid any CBR draws with the passage of the federal
COVID package. Mr. Painter responded that the federal bill
directed just over $1 billion to the State of Alaska
directly plus amounts for education and particular
purposes. The $1 billion was analogous to the Coronavirus
relief fund of $1.25 billion the state received in the
prior year. Avoiding any CBR draws would depend on how the
legislature chose to use the funding. The money could be
used in place of general funds to help avoid deficits and
spent over several years.
1:58:04 PM
Representative Rasmussen thought there was more latitude in
the second round of federal COVID funding. Mr. Painter
thought Representative Rasmussen had provided a fair
characterization. He added that the second round of funding
could be used explicitly for revenue replacement. He
qualified his statement. The funds could not be used for
revenue replacement the state caused by reducing a tax or
fee, for example. He concurred that there were less
restrictions on the funding.
Representative Rasmussen asked if the loss of oil
production in the early part of the prior year would
qualify as a loss of revenue and, therefore, could be
replaced with federal Covid dollars. Mr. Painter responded,
given that oil prices presently were higher than they were
before the pandemic, after the spring forecast the state
would have minimal revenue replacement it could apply to
the general fund.
Representative Wool suggested that everything in the FY 21
column had occurred except for the ERA transfer of $1.2
billion. He wondered if that was in the supplemental.
Everything else including the CBR draw of $900 million had
occurred. He asked if he was correct. Mr. Painter responded
in the affirmative with the exception of line 9, the
supplemental appropriations in the operating budget, and
line 12, the supplemental capital appropriations.
Representative Wool reviewed the numbers on the slide. He
wondered why $2 billion was being taken out of the ERA to
pay the deficit. He asked if it only applied to the
Permanent Fund Dividend (PFD) and the remaining deficit was
$93 million and had to be paid out of the CBR. He asked if
it was the reason the two figures were not combined. Mr.
Painter indicated Representative Wool was correct. He
reported that the governor had an appropriation bill
separate from the operating budget that paid the Permanent
Fund Dividend (PFD). It had an additional draw directly out
of the ERA to pay the dividend. The draw was not used to
meet the general deficit. He would turn the presentation
over to Connor Bell.
2:01:33 PM
CONNOR BELL, FISCAL ANALYST AND ECONOMIST, LEGISLATIVE
FINANCE DIVISION, turned to slide 9. He relayed that the
following slides were based on LFD's fiscal model. The
Legislative Finance Division used revenue inputs from the
Department of Revenue (DOR). The department's fall forecast
was based on $45 per barrel of oil in FY 21 and $49 per
barrel in FY 22. Since the fall forecast was released oil
prices had climbed significantly. He would be using updated
futures numbers leading to an average oil price of $52 per
barrel in FY 21 and $59 per barrel in FY 22. He noted
current prices were even higher. The Alaska North Slope
(ANS) oil price Monday was $68 per barrel. There was some
uncertainty in the price, and futures markets seemed to
anticipate that the price would moderate in the coming
months. However, it was still possible that the price would
be higher - the current price was higher than what he was
showing in the presentation. Based on the numbers LFD was
using compared to the fall forecast, the increase in the
FY 21 price would increase FY 21 UGF revenue by
$250 million. Revenue would increase by $300 million in
FY 22 due to the $59 per barrel projected price.
2:03:06 PM
Mr. Bell clarified that, regarding assumptions, LFD was
using Callan's projected rates of return for the Permanent
Fund and assumed they were consistent returns for all
years. More volatile rates could have significantly
different outcomes even with the same overall average 10
years. The projections were 6.48 percent returns in FY 21
and 6.75 percent returns in FY 22. The model assumed that
no inflation occurred through FY 24. Beginning in FY 25
inflation proofing of approximately $1 billion would occur
every year in the models but would not appear in the
deficit numbers. It would appear in the form of decreased
ERA balances. If there was a shift in the trends of the ERA
balances it might be due to the introduction of inflation
proofing.
Mr. Bell continued that he would be showing fiscal
summaries alongside LFD's fiscal modeling outputs. They
would differ slightly due to the fiscal models assuming $50
million per year in supplementals. The model assumed that
all deficits would first be filled with CBR funds until the
CBR balance reached $500 million. After that, funds would
be drawn from the ERA. He had included a snippet of the
model. The full model provided more outputs and had various
tweaks to revenues and spending options. He was happy to
work with any legislative office on specific modeling
options. He could also provide a simpler model that offices
could use on their own to model simple scenarios.
Mr. Painter turned to slide 10: "Fiscal Summary with
Updated Revenue Assumptions." The summary added in an
adjustment. The adjustment was made in February because he
pulled the futures in February. The slide showed the
revenues on line 3 - about an additional $250 million in
FY 21 and approximately $300 million in FY 22.
Mr. Painter pointed to the CBR balance in the bottom right
of the slide. Instead of $500 million, there would be a
balance of about $800 million by the end of FY 21 and about
$1 billion by the end of FY 22 because the state's deficits
would shrink. He further detailed that instead of drawing
$900 million from the CBR in FY 21 the state would only
draw $660 million. Also, there would be a post-transfer
surplus of about $200 million after the $2 billion direct
draw from the ERA. There would still be a deficit of about
$1.8 billion. However, after the state drew the PFD from
the ERA, there would be a post-transfer surplus. However,
the state would still have a fiscal deficit drawing an
extra amount from the ERA and depositing money into the
CBR.
2:06:39 PM
Representative Wool thought it would be a policy call. If
the deficit was $1.8 billion and the statutory PFD cost
$2 billion, he suggested that $1.8 billion could be pulled
out of the ERA without having to transfer money to the CBR.
In other words, the amount of $2.023 billion would not have
to be pulled out of the ERA.
Mr. Painter agreed it would be a policy call. The
governor's budget did not change the amount coming out of
the ERA based on the projected deficit. He relayed that LFD
did not change the governor's assumption, and the slide
reflected the structure of the governor's budget. However,
the legislature had the option of changing the budget's
structure.
Mr. Painter reviewed the fiscal model for the Governor's
Amended Budget before the PFD payment on slide 11. He noted
the FY 21 deficit of $661 million matched the previous
slide. The deficit in FY 22 (or surplus) was different
because of the supplemental assumption. The slide did not
include the PFD payment. The idea behind the slide was to
show the size of the gap or surplus before factoring in the
PFD. In the following few slides, he would make a series of
adjustments to the budget size to peel back the layers of
the governor's budget. He would show the true size of the
deficit without some of the one-time items in the
governor's budget that would affect certain assumptions. He
reiterated that the slide did not include a dividend payout
to make a comparison more easily. It was not a policy
suggestion. Rather, the slide did not include a dividend
payment to show larger surpluses and a growing CBR going
forward.
2:09:03 PM
Mr. Painter spoke of the unusual fund sources in the
Governor's Budget totaling $241 million on slide 12. There
were several unusual fund sources within the governor's
budget that were not necessarily bad or illegal in any way.
However, by using them it made the budget look smaller than
it would without the fund source items. He indicated he
would be unwinding the fund sources in order to see the
true size of the deficit.
Mr. Painter relayed that one category of unusual fund
sources was the use of lapsing balances, which was higher
than in other years. There was $35 million in lapsing
Medicaid appropriations that the governor was carrying
forward into FY 22. There was also $5 million of fire
suppression money that would potentially lapse. The
governor wanted to appropriate it for the construction of
fire breaks in the previous year. Originally, the
legislature appropriated UGF dollars for fire breaks. It
was essentially trying to get the same appropriation
without having to count it towards the budget. Also, there
was $500 million to OMB for rate smoothing. He remarked
that it was inline with how the state had used lapsing
funds in the past. However, the legislature could simply
appropriate UGF in the FY 22 budget making the budget more
transparent. The governor was using lapsing balances which
were in line with current practices.
Mr. Painter identified another category: the use of fund
sources for non-designated purposes. The largest fund
source in this category was $60 million of AIDEA receipts
for oil and gas tax credits. He indicated the fund
classification for AIDEA receipts was "other" and did not
show up as UGF spending, even though it was typically a UGF
item. There was also $10.5 million of Power Cost
Equalization (PCE) funds that the governor proposed using
for capital projects. The amount was greater than the draw
level from the fund as laid out in statute. The governor's
supplemental budget included $4 million of Higher Education
Funds for prosecutor recruitment and housing. Although the
fund was for a designated purpose, there was no apparent
link between prosecutors and higher education. Similarly,
the governor had a fund change utilizing PCE funds in
Alaska Energy Authority's (AEA's) operating budget not a
designated use as defined in statute. Also, the governor's
budget used $400,000 of Higher Education Funds for
operations at the Alaska Commission on Postsecondary
Education which was not a designated used in statute.
Mr. Painter continued that there were several one-time or
temporary fund sources, most notably $104 million of Alaska
Housing Finance Corporation (AHFC) bonds in the capital
budget for a federal match for both the Department of
Transportation and Public Facilities (DOT) and the
Department of Environmental Conservation (DEC). The state
could not continue bonding $100 million per year from AHFC,
as that was AHFC's bonding capacity at present. He
indicated there was $16.3 million of Mental Health Trust
Reserve funds which was not a fund source expected to be
available in the future.
2:12:30 PM
Representative LeBon referred to the middle of the slide
regarding AIDEA receipts for oil and gas tax credits. He
had heard in a previous presentation that AIDEA typically
earned about half of the amount. They paid about half of
their net profit in dividends to the state equaling about
$18 million. He suggested that $60 million was a large
overdraw - more than what they made in the prior year. He
wondered about the sustainability of using AIDEA receipts
to pay oil and gas tax credits on a long-term basis.
Mr. Painter reported that AIDEA's dividend in FY 22 was
$17.3 million based on earnings of twice that amount: $34.6
million. Representative LeBon's math was correct, as it was
twice the amount of AIDEA's earnings. He confirmed that
AIDEA had about $350 million in reserves. However, there
was about $60 million of outstanding tax credits. It would
exhaust the reserves long before tax credits were paid
back.
Representative LeBon suggested that it would impair AIDEA's
ability to raise bonded money in the future because it
weakened their capital position. The bond market would not
be impressed with such a program. He suggested that the
beneficiary of the $16.3 million was the Alaska Psychiatric
Institute (API). He thought the use of the funds was more
logical. He asked Mr. Painter if he had an opinion about
that use.
Mr. Painter did not have an opinion. He agreed that it was
a designated use to the degree that the funds were
designated for mental health purposes. The Alaska Mental
Health Trust Authority (AMHTA) preferred not to do ongoing
investments the investment would be ongoing at $6 million
per year. It was not in line with the preferences of the
trust, but it would impact trust beneficiaries.
Representative LeBon suggested that if AMHTA chose to
reallocate their earnings reserve to their beneficiaries
and included API it would be within the scope of their
mission. He wondered if Mr. Painter agreed.
Mr. Painter remarked that the entire cost of API would be a
significant portion of their budget. He thought it would be
within the scope of their mission. However, the draw level
would not be sustainable and would use up their reserves.
In addition, AMHTA had indicated they might consider
catching up with their inflation-proofing which they had
not done since 2005. If they were to do so, very little of
the reserve funding would be available.
2:16:09 PM
Vice-Chair Ortiz brought up the topic of oil and gas
credits. He had heard that because oil prices had increased
recently, there was a greater obligation for the state to
pay a higher amount in oil and gas tax credits. He asked if
he was accurate. Mr. Painter deferred to Mr. Bell.
Mr. Bell replied that if the price of oil was higher than
expected the statutory calculation for the appropriation
would be higher. The appropriation was based on the amount
of the production taxes levied. The Department of Revenue
interpreted that as the amount of tax levied before
credits. Therefore, a price increase could raise the
statutory calculation more than proportionately. In
addition, if the price of oil was below $60 per barrel, the
statutory calculation would be 15 percent of taxes levied.
If the price of oil was above $60 per barrel, the
calculation would be reduced to 10 percent. Based on a $59
price per barrel in FY 22 he expected the calculation to be
$120 million. At $60 per barrel, just one dollar more, the
calculation would be $80 million due to the percentage of
15 percent versus 10 percent.
Vice-Chair Ortiz suggested the lower price of $59 would be
more desirable for that particular calculation. Mr. Bell
responded that he was correct. Vice-Chair Ortiz asked about
an increase in the state's obligation. Mr. Bell replied
that the statutory calculation would increase by about $60
million subject to appropriation.
Representative Josephson spoke of AMHTA as an independent
standalone body. However, Mr. Abbott testified that AMHTA
was required to pay $6 million for the current fiscal year
(he noted the figure was really $16 million in total).
Effectively, they would have to reconfigure their own
regular appropriation and would no longer be their own
authors of what was good for the mental health needs of
their constituency. He thought it would be rife for a
thread of litigation. He suggested a Superior Court Judge
would ask whether it had been done before. At some point,
AMHTA would just be passive while the legislature was being
the appropriator without their guidance. He asked if Mr.
Painter agreed. Mr. Painter deferred to Megan Wallace.
2:21:10 PM
MEGAN WALLACE, DIRECTOR, LEGISLATIVE LEGAL SERVICES, ALASKA
STATE LEGISLATURE, clarified the question posed. She
concurred that there was a chance of litigation anytime the
legislature took action that AMHTA disagreed with. While
AMHTA was being reconstituted as part of the Weiss
settlement, the judge suggested that if the legislature did
not follow the statutes or amended them, the only remedy
for plaintiffs would be to reopen litigation. She thought
there would be some litigation risk but could not speak to
whether the litigation would be successful.
Representative Edgmon commented that at face value the
additional deficit was $241 million. However, he did not
think the figure was correct. He pointed out there was the
Alaska Housing Finance Corporation (AHFC) bond package of
$104 million that might put an annual dent in the dividend
that the state received. He asked Mr. Painter to identify
the funds on the slide that were not tied to federal
funding. He thought it was clear that a third of the $241
million that came from AIDEA receipts for oil and gas tax
credits were not tied to federal funding. He asked Mr.
Painter to walk through which of the figures were tied to
federal funding sources.
Mr. Painter responded that Medicaid was tied to federal
reimbursement. There was no federal impact to fire break
construction, rate smoothing, or oil and gas tax credits.
The Alaska Energy Authority capital projects would bring in
additional federal funding. The other item that would bring
in federal matching funds was the AHFC bond package of $104
million.
Representative Edgmon asked what percentage of the
$241 million was federally funded. Mr. Painter responded
that over half of the items were being used for match
funding. He suggested that AFHC was one way to get the
match. The legislature could also appropriate general
funds. The governor structured it so that it was tied to
match funding.
Representative Wool referred to Representative LeBon's
comments about AMTHA's $6 million of the $16 million that
went to the Alaska Psychiatric Institute (API)
beneficiaries. He also brought up AIDEA spending $20
million to get the leases in ANWAR, and over the following
10 years leasing would cost an additional $40 million
totaling $60 million for the oil and gas industry. He asked
for a definition of receipts. He wondered if the $60
million would come out of their [AIDEA] investment fund.
Mr. Painter responded that AIDEA had their dividend which
was the amount they declared the state could spend. They
also had their receipts which were their corporate receipts
of ongoing revenue and was money they typically spent on
their budget. In the current case, drawing from AIDEA
receipts meant it would come from funds other than their
dividend. The Alaska Industrial Development and Export
Authority (AIDEA) had indicated that if the draw was
enacted they would draw the money from their reserve funds.
2:27:16 PM
Mr. Painter advanced to slide 13 to examine the fiscal
summary for the Governor's Budget with typical fund
sources. In other words, UGF was added in place of the
unusual fund sources. He highlighted that $10 million was
in the supplemental budget and the remainder was in the
FY 22 budget. The intent of the slide was to show the true
size of the budget if normal fund sources were used. It
resulted in significantly higher operating and capital
budgets and a much higher deficit from the CBR. Whereas
previously it showed a surplus of about $200 million. If
the legislature were to draw the amounts from the general
fund as opposed to the fund sources proposed by the
governor, the CBR balance (shown on line 21) would be down
to $770 million in both years. If the other fund sources
were used in place of UGF, the CBR balance would climb to
$1 billion.
Mr. Painter advanced to the bar charts on slide 14: "Fiscal
Model: Governor's Budget with Typical Fund Sources." He
highlighted that the spending line shifted up resulting in
a deficit in FY 22 and a pre-PFD surplus in the out years
with a CBR balance continuing to rise. In future years, the
state would be left with available funds before the
dividend was paid.
Representative Josephson clarified that Mr. Painter meant
funds available before the state paid the dividend. Mr.
Painter concurred.
Mr. Painter moved to slide 15 to review how the federal
COVID-19 relief package impacted Alaska's budget. He
reported there were significant federal Covid-19 relief
dollars in the state budget already. He noted the Federal
Medical Assistance Percentage (FMAP) increase from 50
percent to 56.2 percent. It was the primary reason the
state was seeing a projected lapse in Medicaid in FY 21 and
why there was a lapse in FY 20. The higher rate saved the
state about $15 million to $17 million UGF per quarter. It
was likely that the percentage rate would be extended
through the end of the current calendar year but was not
yet certain. It was not built into the budget. The governor
was making up the amount with $35 million. In many cases,
the Coronavirus relief fund was used before state funds
which created lapsing funds to the CBR in FY 20.
Mr. Painter reported that the other lapsing funds projected
in the OMB lapse report were primarily due to the use of
federal offsets. There were ongoing federal funds to DOT
for airports, highways, and transit authority grants. The
governor's budget did not propose to use the money in place
of UGF. The funds would be used to make up lost marine
highway revenues and to pay for grants. Some of the funds
had not been allocated to-date. The governor's budget had
$14.6 million in fund changes in order to utilize some of
the airport funds. A reduction in UGF of the same amount
resulted. Federal funding that helped the state's budget in
the current year could not be counted on in future years.
The state would have to adjust accordingly in terms of the
true size of the fiscal gap.
2:31:23 PM
Mr. Painter continued with slide 16 which showed the fiscal
summary that added the adjustment of $14.6 (shown in green)
which he thought was minor in the scheme of things. There
was a slightly larger deficit and a slightly lower CBR
balance on line 21.
Mr. Painter turned to the charts on slide 17: "Fiscal
Model: Governor's Budget without COVID-19 Funding." The
slide did not look much different [from slide 14] because
it only reflected a small adjustment.
Mr. Painter moved to slide 18 which corresponded to
Handout B. The slide showed FY 18 - FY 22 spending with
adjustments for fund sources and Covid-19 (the governor's
amended budget with the adjustments Mr. Painter had
reviewed). He noted that without the one-time or
non-designated fund sources in the governor's budget, the
slide showed what the changes would have been. The largest
difference was that instead of seeing a reduction in agency
operations between FY 18 and FY 22 there was a slight
increase due to higher amounts in the budget for the
Department of Health and Social Services and in other
agency budgets.
Mr. Painter advanced to slide 19 to provide an overview of
obligations and funding needs of the State of Alaska. He
reported that the list was not exhaustive. The Alaska
Energy Authority had testified earlier their need for
additional funding in the amount of $800 million for the
bulk fuel program for deferred maintenance which was not
reflected on the slide. The purpose of the slide was to
show that while many of the items were subject to
appropriation, the state had large outstanding obligations
or needs. The state had some sort of payment plan for most
of the items, all of which were subject to appropriation.
Mr. Painter relayed that the largest outstanding obligation
was to the retirement system. The state had an unfunded
liability of over $6 billion. An annual payment plan was in
place and paid over $300 million per year through FY 39.
The state had outstanding existing debt including general
obligation bonds, lease purchase agreements, and other
sorts of state debt totaling about $1.1 billion with
payments extending to FY 41. The amount of the payment in
FY 22 was $91.3 million.
Mr. Painter continued that the state's share of outstanding
municipal school debt (subject to appropriation) was nearly
$800 million stretched out through FY 39. The moratorium on
new debt expired in FY 25. If the moratorium was not
extended there would be future debt protracting out
further. The full funding of municipal school bond debt was
$84 million in FY 22. He reported there was also $760
million outstanding for oil and gas tax credits. A statute
was in place that dictated how much to deposit but was
subject to appropriation. The governor's budget included
$60 million for that purpose.
Mr. Painter reviewed that the state had approximately
$2 billion of deferred maintenance outstanding. Currently,
the payment plan was to use the capitol income fund which
earned about $30 million per year not enough to make a
dent in deferred maintenance. The governor's budget
included $51.6 million by scooping some other funds into
the capitol income fund. The state's share of school major
maintenance and construction lists, lists of prioritized
projects by the Department of Education and Early Childhood
Development, was about $350 million combined. The Regional
Educational Attendance Area (REAA) Fund could be used for
many of these projects, and there was an annual deposit
made into the fund. However, the fund could not be used for
all of the projects. He detailed that for projects in the
REAAs and eligible schools the state had a payment plan of
annual deposits. The state did not have an ongoing funding
mechanism for the other projects.
Mr. Painter conveyed that the Department of Environmental
Conservation (DEC) reported a rural sanitation need in the
amount of $1.8 billion that the state met in the capital
budget through the Village Safe Water Program. He
reiterated that the purpose of the slide was to show that
much of the budget was devoted to ongoing large
obligations. While the state's payments were subject to
appropriation, the obligations existed and placed pressure
on the state.
2:36:25 PM
Representative Josephson suggested that if Mr. Painter had
prepared slide 19 in FY 13 the PERS amount would have been
$10 billion. He thought the information was troublesome. He
wondered if every state had a similar slide. Mr. Painter
responded affirmatively that every state had a list of
obligations.
Representative LeBon knew every state did not have an REAA
Fund. He asked if there was an actual REAA fund where money
was set aside or whether it simply an appropriation.
Mr. Painter responded that the state made appropriations
into the fund and DEED could, without further appropriation
use the fund for projects on the list. The legislature
appropriated money into the fund. If there were lapsing
balances from those projects because they came under
budget, the funds could be returned to the fund and used
for other projects.
Representative LeBon asked if there were any lapsed funds
sitting in the REAA fund. Mr. Painter was uncertain, since
the department could spend the money without further
appropriation, they sent the state a list each year of the
obligations they make each year. At any given time, they
might have funding in which they were waiting to get enough
to meet the funding needs for the next project on the list.
There might be a balance sitting in the fund waiting for
additional funding to come in for the next project on the
list.
Representative LeBon theorized that it was not likely a
material amount money. Mr. Painter confirmed that
generally, the money in the fund was obligated for the
following project on the list.
Representative Rasmussen thought everyone should consider
that the total amount was actually more than double the
state's obligation because the state was constitutionally
obligated to replenish the Constitutional Budget Reserve
(CBR). She had heard people question how the state could
possibly achieve repayment of the fund because of its
already large budget deficit. She believed the state should
be seriously discussing a repayment plan and the type of
revenues it would take to meet the plan. She suggested that
if the obligation was not considered, it would be akin to
stealing from future generations. She requested that the
issue be addressed in a future slide.
Mr. Painter indicated that he had debated putting the slide
in the deck because it was an internal debt versus and
external debt. He appreciated the legislator's point.
Representative Edgmon asked if the University was included
in the deferred maintenance figure. Mr. Painter responded
in the affirmative.
2:40:29 PM
Mr. Painter discussed the governor's budget and statutory
formulas on slide 20. The governor's budget fully funded
the statutory formulas. There were several other statutory
formulas that the governor's budget did not fully fund. He
noted school debt reimbursement. The governor was funding
it at 50 percent of the statutory level. Full funding would
add another $41.8 million to the budget. The governor was
also funding the REAA fund at 50 percent of the statutory
level. The governor was proposing to put in $12.4 million
for community assistance. The statute indicated either $30
million or the amount needed to get to a fund balance of
$90 million should be deposited. Another $17.6 million or
more would be needed to reach a fund balance of
$90 million. The governor was not funding municipal project
debt service, an item subject to appropriation. He had
vetoed funding for that the previous 2 years. If it were to
be funded the amount would be $2.4 million.
Representative Josephson indicated that at the federal
level the House of Representatives concurred with the
Senate regarding the American Rescue Plan. He thought
Alaska's local governments were supposed to receive about
$227 million. He wondered if the monies could fund the bond
debt.
Mr. Painter understood that the allocation for local
governments would flow directly to those governments or at
least as directly obligated. He did not know if the funds
could be diverted to school debt reimbursement or other
purposes rather than sending them directly for allowable
related pandemic expenses. The state did not have guidance
yet on how the funds could be used. He suspected the state
would have more clarity in the following weeks.
Representative Josephson had talked to someone at OMB who
indicated a clear nexus to a Covid need had to be
demonstrated. He wondered, if the funds were sent directly
to local governments, whether they could be used for that
purpose.
Mr. Painter answered that the funds could be used either
for direct Covid-19 expenses or assistance to businesses
and families to make up for the economic impact of the
pandemic. He did not know if the school bond debt would
fall into that category. The local governments could use
the funds for things other than specific expenses related
to COVD-19 as was specified for the CRF [Community
Reinvestment Fund part of the Coronavirus Aid, Relief,
and Economic Security (CARES) Act].
Representative Edgmon asked Mr. Painter about the wave of
money that would be coming to Alaska from the American
Rescue Plan and the possibility of folding those funds into
the budget process in the current session. Mr. Painter did
not know. Guidance from the federal government was supposed
to be distributed within 60 days. It would be a major
policy call for the legislature and the governor on how to
spend the money. The governor might come forward with
amendments or the legislature might make its own plan.
Nevertheless, it would be a major call for the legislature.
Representative Edgmon suggested that normally federal
funding was largely predictable. He was seeing a large
asterisk in terms of what the ARP could bring in and the
involvement of the legislature in terms of appropriation
power. He thought Mr. Painter would be addressing the topic
in another slide.
2:45:51 PM
Mr. Painter turned the presentation over to Ms. Wallace.
Ms. Wallace advanced to slide 21 to compliment the
discussion about statutory formulas and the legislative
power of appropriation over expenditure of funds provided
for statutorily. The Alaska Constitution, Article 9,
Section 13 stated, "No money shall be withdrawn from the
treasury except in accordance with appropriations made by
law." She also relayed that the constitution had a
dedicated funds prohibition in Article 9, Section 7 that
prevented the legislature from dedicating the proceeds of
any state tax or license for any special purpose. Reading
the items together, an appropriation was required to carry
out any statutory formula that the legislature enacted. A
common question that her office received related to whether
an appropriation was specifically required and whether the
legislature had the power to differentiate from the
Permanent Fund Dividend statutory formula. The issue was
considered by the Alaska Supreme Court.
Ms. Wallace explained that in the case Wielechowski versus
the State of Alaska, the Alaska Supreme Court held that
legislature's use of the Permanent Fund income, which was
used to fund the dividend, was subject to the normal
appropriation and veto process. Therefore, each year the
legislature might appropriate from the earnings reserve
account to the dividend fund any amount regardless of the
language set forth in statute. She indicated that while the
slide provided a general sense of the legislative power of
appropriation, there might be specific funds or formulas
outside of the generality. However, in general, unless an
exception to the dedicated funds prohibition applied, each
year the legislature could appropriate money from any
available source for any public purpose it deemed
appropriate.
Ms. Wallace went on to say that statutory formulas served
as guidelines or policy suggestions that the legislature
set forth as an expectation to follow but one that was
subject to appropriation each year. Each year state
programs were all subject to appropriation and competed
amongst and against each other for funding by appropriation
from the legislature. She was available for questions.
2:49:15 PM
Representative Thompson commented that it was interesting
that both state taxes and licenses could not be dedicated
to any special purpose. He noted that licensing fees, such
as those for the Board of Accountants, were used for the
members to meet three to four times per year. They paid
extra licensing fees in order to pay for their travel. He
asked if the money could be wiped out according to statute.
Ms. Wallace responded that ultimately Representative
Thompson was correct. She indicated that when the
legislature enacted statute it was setting guidelines or
expectations for what the legislature would do through
appropriations. For example, if the statute stated that the
legislature might appropriate fees from licenses back to
the corresponding board, it showed a policy decision that
the legislature made that it was the intent that the fees
collected would stay with the board or organization to fund
the expenses of the board. It was typical of what she saw
in the Alaska Statutes. She explained that some phraseology
used in the statutes made a soft dedication such as the
word "may." She continued that because the dedicated funds
prohibition prevented the legislature from enacting
statutes that used words such as "shall" the legislature
had the authority to recommend where the fees were
appropriated. However, if the legislature wanted to use the
funds for another purpose, it would have the constitutional
power to make that decision.
Representative Thompson indicated that many of the boards,
not just the example he gave, used licensing fees for
travel and annual board meetings. He appreciated the
information.
2:52:12 PM
Representative Edgmon argued that every day the committee
grappled with how much money should be used for government
services versus the PFD. He was annoyed by the remarks of
the governor and others about the legislature was not
following the law as it related to the PFD. However, it was
up to the legislature on how to spend the state's coffers.
He listed a number of government services. He noted it had
been 5 years since the state had elected to pay a full PFD
as reflected in the 1982 statute. However, the legislature,
according to the Wielechowski case, had not broken the law
because it ultimately had the power to appropriate. He
asked if he had made any misstatements.
Ms. Wallace responded that Representative Edgmon was
correct. The issue with respect to the power of the
legislature to appropriate an amount for a PFD was squarely
resolved in the Wielechowski v. State matter that was
before the Alaska Supreme Court. The Alaska Supreme Court
affirmed that the appropriation for the PFD was subject to
the normal appropriation and governor veto process.
Representative Edgmon thought it was an important
distinction to make that he continued to hear policy makers
and people in high positions suggest that the 1982 statute
overrode what the Alaska Supreme Court decided only a
couple of years prior.
Representative Wool brought up the dedicated fund
provision. The alcohol and marijuana taxes came to mind. He
indicated that a large percentage of the taxes went towards
alcohol and marijuana prevention programs. He asked if the
soft dedication applied.
Ms. Wallace agreed that the revenue was subject to
appropriation, and the statute set a policy guideline as to
where the legislature might appropriate the fund. However,
they would be subject to appropriations.
Representative Wool recalled the three rules of starting a
new job. The first rule was the boss was always right. The
second rule was the boss could be wrong. Rule number three
was that if the boss was wrong, refer to rule number one.
In other words, whatever the legislature did was the law.
2:56:12 PM
Representative Rasmussen [Audio cut out]. Ms. Wallace asked
Representative Rasmussen to restate her question.
Representative Rasmussen asked if the legislature was
technically breaking a statute by not following the formula
in statute. Ms. Wallace opined that the statute had always
been subject to appropriation. The Alaska Supreme Court had
affirmed that notion in the Wielechowski v. State Alaska
Supreme Court decision. In her opinion, if the current and
previous legislatures chose not to follow the formula
outlined in statute, she did not consider it a violation of
law. The legislature had the constitutional power of
appropriation to decide how much to appropriate to the
program each year.
Representative Rasmussen asked if the legislature had the
ability to either change or remove the section in statute
[containing the PFD formula] within statute. Ms. Wallace
responded in the affirmative. The legislature could amend
the provision at any time.
Representative Wool mentioned the debt to the CBR. He
recalled a presentation by Mr. Teal [previous director of
the Legislative Finance Division]. The committee heard
about the CBR balance. The debt the state owed to the
account was whatever the highest balance was. If the
legislature put $16 billion and brought the balance to that
amount, then forever and always the legislature would owe
back up to $16 billion. Whereas, if the legislature had
never put that money in the CBR, the debt would not exist.
He thought it was an odd way to structure debt the
legislature was being punished for saving money. He was not
sure if the same applied to the SBR. He was unfamiliar why
the state owed a savings account from which the legislature
put money away and later spent when it needed to. He asked
if the debt was similar to an appropriation. He asked if it
was a statutory item like the other items being discussed
or a separate category.
Ms. Wallace indicated that the repayment obligation to the
CBR was a constitutional provision. She reported that
Article 9, Section D of the Alaska Constitution had the
sweep provision which provided that until the legislature
reconstituted any amount that was paid out of the CBR fund,
a sweep would occur. The repayment obligation was a
constitutional mechanism rather than a statutory one. The
same requirement did not apply to the SBR which was create
in statute as opposed to the constitution.
3:01:14 PM
Representative Wool asked for clarification of Ms.
Wallace's use of the word reconstituted. He queried that
since the high-water mark for the CCR was $16 billion, if
the money was repaid, would that amount have to remain in
the account forever. He wondered if there was a way to get
rid of the $16 billion. He thought he might have missed
part of Ms. Wallace's answer. Ms. Wallace indicated that
from a legal perspective the repayment requirement was a
constitutional requirement. Therefore, when the legislature
spent from the CBR, it was contemplated that the
legislature would replace the money. She deferred to Mr.
Painter for further clarification.
Mr. Painter stated that the repayment amount was not to
reach the prior fund balance, it was to repay every dollar
the legislature borrowed. There might be additional funds
flowing into the account every year because of new oil
settlements. There also might be some investment earnings.
The legislature did not get to count that against its debt.
The only thing the legislature could count against its debt
was payments into the CBR through direct appropriations or
allowing the sweep to occur. In FY 15 the legislature drew
$3 billion from the CBR and deposited into the retirement
funds. In the same year there were deposits into the CBR.
However, the legislature still owed the $3 billion. If the
legislature were to repay the entire debt, the CBR was at
its peak at about $12 billion and $16 billion when combined
with the SBR. If the state paid back the amount owed, the
CBR would be larger than it had ever been. The governor had
a constitutional amendment proposal that would eliminate
the repayment provision.
Representative Josephson asked Mr. Painter what the
legislature intended when the CBR provision was written in
1990. He asked what the money was being saved for at the
time. Mr. Painter was not sure what legislators had
anticipated when they wrote the amendment.
Representative Josephson indicated that when he looked at
slide 19 it appeared the CBR repayment was one of the
lowest priorities. He thought it might be a political
matter. He pointed out the PERS/TRS unfunded liability. If
the state did not pay the obligation, the legislature would
hear from constituents because the state would have
violated the constitution regarding pensions. If the state
did not pay the general obligation bonds, creditors would
come knocking. He continued that if the state did not pay
the state's share of municipal debt, the local governments
would cry foul. If the legislature did not pay deferred
maintenance, buildings would collapse. If the state did not
pay the CBR there would be no penalty or interest charged.
It was simply a debt the state owed itself. He asked if he
was correct.
Mr. Painter supposed the penalty would be the sweep
occurring each year which either required getting rid of
all of the state's subaccounts of the general fund or the
vote. He confirmed that the state did not charge itself
interest for the use of the CBR.
3:06:30 PM
Representative LeBon noted that on slide 21 Representative
Thompson talked about a designated account whereby the
Board of Accountants collected dues from accountants in the
th
state for their special purpose. However, every June 30
the account was subject to the reverse sweep and the money
was deposited into the CBR. He asked if he was accurate.
Mr. Painter thought carry forward language was used in the
budget each year to avoid the sweep. The language stated
that on June 30th the balance in those accounts could be
carried forward and used in the following year essentially
obligating the money before the sweep occurred.
Representative LeBon asked whether changing the legal
language of the repayment of the CBR funds would require an
amendment to the constitution.
Representative Rasmussen asked why prior legislators or
legislatures moved money to the CBR knowing that the state
had a constitutional obligation to pay the money back. The
legislature allowed the account to grow to its current
level instead of utilizing the SBR.
Mr. Painter replied that during the years the state was
repaying the CBR, it stopped at the level of its previous
debt. Beyond that, the state began filling up the SBR.
Legislatures at the time recognized the circumstances. One
factor that allowed the account to grow was, because the
state had surpluses in that era, the entire balance was
able to be invested. There were some very strong market
years that enabled the CBR to earn significant monies in
the stock market. The legislature made the policy choice in
the years of surplus that as soon as the state paid back
the CBR, it would use the SBR and place money in the public
education fund, the higher education fund, and other funds
that did not have the CBR's strings.
Representative Rasmussen asked why, when there was an
opportunity to invest money and to see large returns, the
legislature chose to invest in the CBR instead of the ERA.
She wondered if anything prohibiting the legislature form
doing something like that.
Mr. Painter explained that the legislature would have had
to appropriate the money out of the CBR. The earnings made
by the CBR stayed in the account. If the legislature
appropriated the funds out, it would owe the money back. At
the time, when the balance of the SBR was several billion
dollars, the state invested the funds. The earnings were
counted as UGF in those years. The Constitutional Budget
Reserve earnings were held by the CBR. The decision at the
time was to build the CBR through investments. However, the
money was still locked in the CBR.
Representative Rasmussen commented that as legislators it
was often easier to do the right thing when the public was
demanding accountability. Although the public was not
screaming about replenishing the CBR, she felt policy
makers had a moral obligation to make every effort to
follow the constitution which was put in place by Alaskans
in the 1970s.
3:11:00 PM
Representative Edgmon defended the legislature, as there
were many years in which it chose to put money into the
Permanent Fund via special appropriations and not into the
CBR. He indicated the CBR was capitalized largely in the
2000s when oil production was still fairly healthy and the
price of oil was high. He noted Representative Wool talking
the other day about how 10 years prior oil money brough the
state over $8 billion and in the current year anticipated
oil revenues were expected to be about one-tenth of that
amount. At one point money coming into the CBR largely from
oil revenue was beyond extravagant.
Representative Edgmon remembered money being put into the
Permanent Fund which currently had a balance of about $76
billion. Large allotments of money being placed into the
fund resulted from decisions made through the use of the
appropriation process by the legislature. He did not
believe the legislature had been dismissive of the future
needs of Alaskans. He agreed with Representative Josephson
that the repayment of the CBR was lower on the priority
list for surplus funds. He mentioned the hey day of surplus
funds in 2007 and 2008.
Mr. Painter continued to slide 22: "Fiscal Summary:
Governor's Budget with Statutory Funding of Statewide
Items." The slide showed what the governor's budget would
look like if the statutory formulas were fully funded. The
amount would be $78.9 million increase shown in red. He
noted the next fiscal model would use the amount, but
future models by LFD would not show the amount. Adding the
$78.9 million to fully fund the other statutory formulas
would increase the CBR draw to $124 million causing the CBR
balance to drop at the end of FY 22.
Mr. Painter turned to the charts on slide 23 showing the
fiscal model of the governor's budget with statutory
funding of statewide items. He highlighted that the fiscal
model resulted in an FY 22 deficit. However, in future
years it would have less of an impact. He explained that
the largest amount was school debt reimbursement and with
the moratorium on new debt was extended since 2015, the
amount would drop off substantially over the following few
years as prior debts were paid off. The division assumed
that after FY 25 the state would not build in new projects.
However, in reality, he assumed there would be additional
projects.
Mr. Painter scrolled to slide 24: "Fiscal Model: Budget
with Typical Fund Sources, No COVID Offsets, Statutory
PFD." The slide showed the budget with only the adjustments
for unusual funds and Covid funding. The slide also
reflected the statutory PFD from FY 22 through FY 30 and
showed the gap. In FY 22 the state would be left with a
$2.1 billion deficit which would fluctuate in the out year.
The gap would range from $1.5 billion to $1.9 billion.
Assuming the state was paying the statutory PFD, it would
need to overdraw the ERA and completely deplete the fund by
FY 29. He suggested that the legislature was to pay a full
statutory dividend, the slide showed the gap that would
need to be filled each year. He was not suggesting that it
was not affordable or impossible, he was reporting the size
of the gap if the legislature were to pay the statutory
dividend.
3:15:42 PM
Representative Josephson recalled Governor Walker stating
that if the state continued to lack revenue, paid out the
full dividend, and continued to rely on oil, it was
unlikely there would be a dividend in the future. He
suggested Mr. Painter was illustrating the PFD would end in
about 6 years with a full dividend and status quo budgets.
The state would no longer have $3 billion to spend on basic
services although there would still be income generated
from the corpus into the ERA. He concluded that the
dividend discussion would simply disappear, as there would
be no money to pay it. He asked if he was accurate. Mr.
Painter thought it was a policy decision about what the
legislature would be cutting.
Representative Josephson asked what kind of new income the
state could see in a typical year from the corpus without
ongoing ERA to buttress the flow. Mr. Painter replied that
LFD's models assumed no changes to APFC's investment
policy. The Alaska Permanent Fund Corporation had stated
that if the legislature consistently overdrew the ERA, they
would have to make management changes in order to ensure
they had the cash to make those draws. The changes might
result in less earnings depending on the persistency of the
overdraws which might change the corporation's investment
policy. A single draw might cause the corporation to stop
investing in some of their riskier assets. Multiple
overdraws might lead them to move to a much more
conservative cash-heavy portfolio.
Mr. Painter discussed the charts on slide 25: "Fiscal
Model: Budget with Typical Fund Sources, No COVID Offsets,
and 50/50 POMV Split." The slide reflected switching to a
PFD in FY 23 of 50 percent of the POMV draw, the plan the
governor was proposing. However, the slide did not reflect
the governor's budget that also incorporated some
reductions. He indicated that for a 50/50 POMV split, the
size of the gap would be from $1.3 billion to $1.5 billion.
It was a smaller gap than if the statutory dividend was
paid, but a gap would still exist requiring other fund
sources in order to avoid overdrawing the ERA. He
reiterated that the 50/50 split dividend amount was lower
than the current statutory dividend amount which would
stretch the ERA farther out to FY 30 before being
exhausted.
Mr. Painter reviewed slide 26: "Fiscal Model: Budget with
Typical Fund Sources, No COVID Offsets, and $1,000 PFD."
The slide showed a dividend of $1000 similar to the amount
appropriated in the current fiscal year, $992.00. It also
showed a persistent gap each year of between $240 million
to $600 million in FY 23. There would still be overdraws
from the ERA through the period reflected on the slide.
However, the fiscal gap would not be as large as some of
the other scenarios he had proposed. Even with a dividend
of $1000 and based on the current revenue forecast, the
state would still have a fiscal gap of between $300 million
to almost $800 million.
3:20:31 PM
Representative Carpenter suggested that the committee was
currently talking about only cutting the PFD amount. He had
just had a conversation in which the governor acknowledged
he had several conversations with the medical community
regarding the state's response to covid. The governor had
an obligation to look both a medical response and a fiscal
response. He could not bring up the issue of cutting the
amount of the PFD without considering the private sector.
He thought legislators also needed to look at cutting
government. In other words, legislators should consider all
of the options rather than just one. He cautioned members
that some constituents were unhappy with the idea of only
propping up government without propping up the private
sector. He indicated the issue was a point of frustration
for him.
Co-Chair Foster agreed that the legislature needed to look
at all of the tools that were available.
Representative Rasmussen was wondering about additional
revenue measures. She was trying to understand how
different revenue measures would affect the gap. She
mentioned the possibility of a sales tax or bringing in new
industry. She noted it would take time to implement certain
measures. She wondered if there was a point at which the
state would not have a deficit even by paying a reasonable
dividend of $1000.
Mr. Painter indicated that if the state enacted new revenue
measures or spending reductions it was possible to no
longer have a deficit with a $1000 dividend or larger. The
point of the slides was not to say a larger dividend was
not affordable. Rather, they were to point out the size of
the other things that needed to be done in order to balance
the budget. He referred to the previous slide that showed a
dividend that was 50 percent of the POMV draw. He suggested
the legislature would need to find $1.3 billion to $1.5
billion of budget reductions or new revenue in order not to
have a deficit with that dividend level. It was the level
of other changes that would need to happen if the
legislature wanted to pay a dividend based on the 50/50
POMV split.
3:24:52 PM
Vice-Chair Ortiz agreed with Representative Carpenter that
the current type of conversation did not happen very often.
However, he opined that it was grossly inaccurate that
government had been protected for several years. He
referred to slide 5 which showed that budget reductions to
government had already been made to all of the state
agencies. He thought further reductions would be difficult.
Education and health and human services would likely be the
targets of additional reductions, as certain departments
had already experienced significant cuts.
Representative Carpenter appreciated that the conversation
would be difficult when considering reductions to any
department. He wanted to remind members that it was
important to have the discussion. He suggested that the
legislature needed to way all of its options including
additional revenues. Only reducing the PFD was not the only
option. He thought it would be very helpful to keep a
long-term approach to solving the state's fiscal problems
rather than myopically looking at the current year's
budget. He thought it might be helpful to look at the
period prior to the legislature's binge spending from about
2006 to 2014 due to oil wealth. There was a long period in
which state revenues were less than the high spending
years. He asserted that the state was trying to find its
equilibrium and recommended looking at revenues, spending,
and population prior to 2006.
3:29:35 PM
Representative Wool would be leaving for a separate
committee and wanted to return to the topic of the CBR. He
explained that the legislature drew down the CBR for
several years because it did not eliminate the PFD or
institute a broad-based tax. He suggested that if the
legislature had not drawn down the CBR by $14 billion, it
would have had to institute revenue measures, eliminate the
PFD, or both, as the state did not have the money. He
understood that people wanted to right-size government to
Alaska's current population (higher than 20 years prior).
However, in 2010 oil brought in $10 billion. Presently, oil
revenues were one-tenth of that amount. He suggested that
perhaps Alaska's government should be smaller but
emphasized that revenues were much smaller. The state
needed to make adjustments including new revenues. He
reported that the federal government had been sending out
checks in the amount of $600 to $1400 per person, like a
divided check. Not everyone received a check; families that
made more than $150,000 did not receive checks. He also
pointed out that some people put their checks into savings
rather than spending it and stimulating the economy. He
suggested the legislature had learned a significant amount
from the federal government's dividend programs. He
suggested that even the governor stated that $1.2 billion
in revenues would be necessary if the legislature wanted to
maintain the PFD program. The legislature had to make these
types of decisions in an economy in which oil revenues were
one-tenth of what they were in prior times. Oil revenues
made up 90 percent of the state's budget previously but
only made up 20 percent of the state's revenues currently.
He argued that the legislature would have to make some
serious adjustments. There was no way around it.
Representative Josephson reported that LFD regularly
displayed a single graph that showed, in real spending
terms, the state's bar on the right-hand side in FY 22, was
at the height of the mid 1970s. He asked if he was correct.
Mr. Painter replied that adjusted for inflation and
population it was fairly close to the amount. He noted
there were a series of peaks throughout the period. He
suggested the state was back to a comparable spending level
prior to the current peak in the early 2000s and comparable
to the 1970s as well. He could provide a full version of
the information.
Representative Josephson indicated that the graph showed
that oil came on in the fall of 1977 and showed a parody
with the period before oil if accounting for inflation and
population. Mr. Painter thought the period before oil would
be prior to the start of the pipeline construction. He
believed the budget was lower. The period during pipeline
construction, when the state was reaching parody, the state
had a reserves tax on future production. The state was
getting more revenue from oil during that period.
Essentially the stat was comparable prior to the
construction of the pipeline.
3:33:50 PM
Representative Josephson thought that when the
administration came into power it sought restoration of all
of the back dividends to calendar year 2016. The
administration no longer talked about that. It talked about
completing calendar year 2020 dividend, paying a full
dividend in calendar year 2021, and finding $1.3 million in
additional revenue. He asked if his assessment was correct.
The administration had changed the discussion because of
the complexity of the problem, in his opinion. The
administration no longer talked about thousands of dollars
in dividends.
Mr. Painter indicated the governor's 10-year plan no longer
reflected a payment of past dividends other than the
current fiscal year. It was a shift from his plan at the
beginning of his administration.
Representative Rasmussen thought it was disingenuous to
Alaskans to suggest that an income-based welfare program
established by the federal government was equivalent to a
share of mineral wealth that was established in Alaska
creating a relationship between Alaskans and the state's
mineral rights. She had listened to the debate about the
dividends for several years. She thought it would be worth
modeling the dividend being tied directly to royalties with
a 25/25/50 percentage split. The split would be made up of
25 percent of royalties going directly into the ERA, the
POMV draw being observed, and paying 50 percent to Alaskans
in the form of a dividend. She thought the split would help
build a relationship with Alaskans giving them a stronger
desire for more royalties which would mean more production
of Alaska's resources. She was very nervous when the
legislature talked about income-based payments taking away
from what the dividend was supposed to be: Alaskans' share
of the state's resource wealth. She opined that it was not
right to say that Alaskans could not own any mineral
wealth, as they deserved their share.
3:37:32 PM
Representative Carpenter highlighted a slide from a recent
Alaska Permanent Fund Corporation briefing that showed
petroleum revenue, non-petroleum revenue, and POMV revenue.
He suggested that when the legislature discussed needing to
raise $1 billion in revenue in order to balance the budget,
it was talking about raising it from Alaskans. Some
Alaskans worked in the petroleum industry and some in
non-petroleum industries. The slide showed the period from
2015 to 2023. He thought what was striking about the slide
was that state revenue fluctuated over the prior few years,
yet non-petroleum revenue had stayed flat. He argued that
the majority of Alaskans' incomes came from non-petroleum
industries. He disagreed with the idea of raising taxes on
Alaskans to pay for services without a plan of growing non-
petroleum industries. He thought the state would be
increasing the burden to Alaskans. He thought if the
legislature was contemplating raising taxes or cutting the
PFD, it should also be discussing what policies needed to
be put into place to grow the economy. He opposed the
notion of simply adding a tax because it would likely
encourage people to move out of the state.
3:40:33 PM
Representative LeBon suggested that the perfect economic
storm the state found itself in currently started at least
45 years prior when state leaders tied spending to a non-
renewable resource with a finite life. The legislature
started spending money based on oil revenue. In the early
years of the program revenue was robust and sufficient
enough to cover the appetite of state spending and payout a
PFD based on a statute passed in the early 1980s. The
Permanent Fund Dividend program worked and government was
funded at the level at the time government officials
wanted. He thought the populous was likely lulled into a
false sense of security because the PFD was being paid per
the statute, government was being fed, and everything
seemed to be working.
Representative LeBon recalled that there was a sense that
the status quo had a longer life than people thought. He
remembered when the vote was taken in 1976 to establish the
PFD there had been a sense of urgency. Voters believed that
oil was finite and the state needed to save some of it for
future generations. Thus, the Alaska Permanent Fund was
established.
Representative LeBon reported that currently oil still
flowed through the pipeline, although it was a finite
resource showing signs of decline. He thought the state was
at a crossroads where something had to give. He thought it
was too bad that 45 years prior the state did not dump all
of the royalty earnings from the sale of Alaska's oil into
the Permanent Fund and kept the state income tax in place
and laid out a plan for the size of government. Currently,
the legislature had to reconcile reality. He was afraid
everyone would have to share in the pain.
Representative Rasmussen asked if it was possible for LFD
to put together a chart together that showed the
relationships with the decline in oil revenues and the size
of the dividend payment. She thought it would be helpful.
Mr. Painter responded in the affirmative.
Mr. Painter presented slide 27 which showed a fiscal model
with a $500 PFD. There was essentially no gap although
there would still be a deficit in FY 22 and FY 23. In
future years there would not be a gap based on the revenue
forecast. He indicated the slide showed a surplus
increasing because revenue was increasing with inflation.
3:45:15 PM
Mr. Painter continued to slide 28: "Fiscal Model: Budget
with Typical Fund Sources, No COVID Offsets, 50/50 POMV
PFD, FY 21 Supplemental PFD." The slide showed the
governor's supplemental PFD as well as the 50/50 split POMV
going forward. The governor's proposed supplemental PFD for
FY 21 and additional draws from the ERA would lead to the
ERA running out earlier than the comparable version without
the supplemental PFD.
Mr. Painter moved to the swoop graph on slide 29 reflecting
all of the governor's proposed appropriations in the
current session including supplementals and the regular
budget ranked from largest to smallest. The two PFDs
stacked together equaled more than $3.2 billion and, by
far, the largest item. d about $
Mr. Painter discussed the final slide, slide 30: "Impact of
FY 21 - FY 22 Overdraws on ERA Balance and POMV Draw." The
slide showed the impact of the governor's proposed FY 21
and FY 22 overdraws of the POMV draw. It reduced the POMV
draw in the future by reducing the value of the fund. Over
the model period through FY 30, collectively there would be
about $1 billion less in the POMV draw than if the state
did not do the overdraws. He concluded his presentation and
was available for questions.
Co-Chair Foster thanked the presenters. He reviewed the
agenda for the following day.
ADJOURNMENT
3:47:47 PM
The meeting was adjourned at 3:47 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD-HFIN A - FY15-22 Budget Changes.pdf |
HFIN 3/10/2021 1:30:00 PM |
|
| LFD-HFIN B - FY15-22 Budget Changes with Adjustments.pdf |
HFIN 3/10/2021 1:30:00 PM |
|
| HFIN-LFD Fiscal Modeling 3-10-21_.pdf |
HFIN 3/10/2021 1:30:00 PM |