Legislature(2023 - 2024)ADAMS 519
01/24/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Overview: Fy 2025 Fiscal Overview by the Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 24, 2024
1:34 p.m.
1:34:23 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Sara Hannan
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division
SUMMARY
OVERVIEW: FY 2025 FISCAL OVERVIEW BY THE LEGISLATIVE
FINANCE DIVISION
Co-Chair Johnson reviewed the meeting agenda.
^OVERVIEW: FY 2025 FISCAL OVERVIEW BY THE LEGISLATIVE
FINANCE DIVISION
1:35:22 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
provided a PowerPoint presentation titled "Overview of the
Governor's FY25 Budget," dated January 24, 2024 (copy on
file). He reviewed the presentation outline on slide 2:
• Update on Fiscal Situation
• Fall Revenue Forecast
• FY24 Update Energy Relief, Supplementals
• FY25 Governor's Budget
• Long-Term View
Mr. Painter turned to slide 3 titled "UGF Budget and
Revenue, FY19-FY25 Governor's Budget." He explained that FY
19 was the first year of the percent of market value (POMV)
draw from the Permanent Fund and reflected the start of the
state's current fiscal system. The chart background
reflected petroleum revenue in green, non-petroleum revenue
in orange, and POMV revenue in purple. The bars reflected
the budget for each fiscal year including undesignated
general funds (UGF) agency operations (the day-to-day cost
of state government) in blue, statewide operations
(operating costs that did not fit into an agency budget
e.g., debt service or retirement payments) in red, capital
budget in gray, and the Permanent Fund Dividend (PFD) in
light blue.
Mr. Painter detailed that when the budget exceeded revenue
there was a deficit, whereas revenues exceeding the budget
reflected a surplus. Since the implementation of the POMV
draw there were two years with budget surpluses (FY 22 and
FY 24) and four years with deficits (FY 19 through FY 21
and FY 23). The governor's budget proposed a deficit in FY
25. He relayed that despite the mixed results, the state's
savings balances had been pretty steady over the period
because the surpluses had made up for the deficits in terms
of draws from reserves. In the beginning of FY 19 there was
about $2.7 billion combined in the state's two primary
budget reserves the Constitutional Budget Reserve (CBR) and
Statutory Budget Reserve (SBR). In the end of FY 23, the
accounts were estimated to have a combined $2.7 million.
The slide showed there had been relatively balanced budgets
since the implementation of the POMV draw. Particularly in
the past several years when there had been difficulty
obtaining a three-quarter vote for a CBR draw, it meant
there had to be balanced budgets. He noted there had been a
successful three-quarter vote in FY 23 when the
supplemental had resulted in a deficit; however, when the
budget had been built it had to balance because there had
not been sufficient votes for a CBR draw.
Mr. Painter explained that the result had been relatively
balanced budgets. He relayed that there was still a
structural budget deficit, which he would talk more about
when discussing the long-term view. He elaborated that if
all of the current statutes were followed, there would be a
budget deficit. The governor's FY 25 budget included a
statutory PFD, resulting in a deficit of approximately $1
billion. In past years, the PFD and capital budget amounts
had varied based on available revenue resulting in roughly
balanced budgets. There was a gap between the reality of
budgeting year-by-year based on available revenue (mostly
varying the PFD and capital budget amounts) and the current
statutes including a statutory PFD resulting in a deficit.
1:39:18 PM
Representative Galvin appreciated the slide and found it
easy to read and interpret. She remarked it was easy to see
when the budget was not balanced when the [light] blue
portion of the bar moved above the purple [revenue]. She
presumed the FY 25 bar reflected a statutory PFD. She
understood that the PFD was north of $1,000 in FY 24. She
asked what FY 25 looked like with a statutory PFD and what
the number would need to be to avoid a deficit.
1:40:26 PM
Mr. Painter answered that in FY 24, the legislature
appropriated 25 percent of the POMV draw to the PFD. The
total was $881.5 million with a per person payout of
$1,312. In FY 25, the estimated statutory PFD was $2.3
billion. He noted the amount was still an estimate because
it relied on investment returns in 2024. He relayed that
$2.3 billion would pay about $3,500 per person. He noted
the exact number was included on a future slide.
Representative Galvin stated her understanding that with a
statutory PFD there was a deficit of approximately $1
billion in FY 25. She asked for verification that the
number was not inclusive of discussions around public
education and other items.
Mr. Painter agreed. The deficit under the governor's budget
was slightly less than $1 billion. He would discuss how the
budget may increase throughout the legislative process on
subsequent slides.
Mr. Painter moved to a chart on slide 4 titled "Daily ANS
Price, November 2021 January 2024." The chart reflected
the volatility of Alaska North Slope crude prices ranging
from $70 to $125. He detailed that in the past year prices
had peaked near $100 and were in the upper $70s in the past
several days. At current prices and under the current
revenue forecast, the amount of revenue the state received
for every dollar increase to the price of oil was about $45
million to $50 million. He highlighted that prices changed
by $1 daily. He explained that the legislature's challenge
was turning the volatility into a more stable budget. He
stated that it would seem the state would go from "broke to
rich" on a month-to-month basis when following the trends
from day-to-day; however, in reality there had been a
relatively stable forecast for the period.
1:42:51 PM
Representative Stapp referenced Mr. Painter's remarks about
a $1 increase in oil price resulting in an additional $50
million in revenue. He noted that the Department of Natural
Resources (DNR) had recently presented to the committee and
it had been noticeable that the current revenue in excess
of the [forecasted] $73 per barrel used in the budget was
around $210 million despite a $9 increase in the average
oil price. He estimated that because of lower production
and capital expenditures for ongoing North Slope projects,
it seemed $1 per barrel resulted in closer to $20 million
as opposed to $50 million.
Mr. Painter responded that he would answer the question
when he addressed a future slide on the change in forecast.
Co-Chair Johnson noted that Co-Chair Foster had been
present since the beginning of the meeting.
Mr. Painter addressed a chart on slide 5 titled
"Investments: History and Projections." The slide showed a
history of some of the state's investment revenue with the
blue line reflecting actual investment returns of the
Alaska Permanent Fund Corporation (APFC) and the red line
reflected the performance of the Public Employees'
Retirement System (PERS) invested by the [Department of
Revenue] Treasury Division. He highlighted that
historically the two lines moved in tandem with markets and
performed very similarly over the past decade. Going
forward, PERS was slightly higher than APFC, while
historically it had been slightly opposite. He emphasized
that budgeting from year-to-year based on investment
returns would result in extreme volatility in the
availability of revenue. He elaborated that instead, the
volatile revenue source was turned into a more stable
source by applying a POMV of the Permanent Fund. He
clarified that the budget was not based on returns from
year-to-year, but on an average of the value over a given
time period, which resulted in a stable draw.
1:45:28 PM
Mr. Painter turned to slide 6 titled "Percent of Market
Value Draw from Permanent Fund." He explained that the FY
24 POMV was based on 5 percent times the average of the
total balance of the Permanent Fund from FY 18 through FY
22. The result was $3.5 billion. The FY 25 draw of $3.66
billion was an average of the FY 19 through FY 23 balances.
He remarked there had been substantial discussion in the
building about whether a 5 percent POMV draw was the right
number. It was often mentioned that while the fund was
increasing, the effective amount drawn was less than 5
percent of the current balance because the formula averaged
historical years. He elaborated that the FY 24 draw was
about 4.6 percent of the last year of the average and the
FY 25 draw was about 4.7 percent of the last year of the
average. However, there was a large spike in value in FY
21; therefore, in two years the effective draw could be
higher at 5 percent because the market spiked and then went
back down. He explained that the rising market worked to
have a reduced draw at present; however, in a couple of
years if investment results did not improve, it was
possible it would not result in a lower draw as it had in
the past.
1:47:07 PM
Mr. Painter advanced to slide 7 titled "Earnings Reserve
Account (ERA) Sufficiency." He noted that the House Finance
Committee and the APFC Board of Directors had talked about
the concern over the sufficiency of the ERA to make the
POMV draws. The calculation was very stable, but the
ability to make the payments was not necessarily guaranteed
each year because the value of the ERA had to be
sufficient. He explained that that the Permanent Fund had
two accounts including the principal, which could not be
spent, and the ERA. The state could only spend realized
income from the ERA. He explained the statutory net income
calculation where investment returns were realized as
assets were sold or dividends, interest, or rental payments
were received. The projected statutory net income was
currently lower than the total return. He noted it had not
always been the case, but it often was. For FY 25 and
beyond, APFC projected it would receive 6.65 percent of its
value in statutory net income. He elaborated that inflation
of 2.5 percent and a 5 percent POMV draw exceeded the 6.65
percent. The resulting forecast projected a decline in the
ERA balance going forward.
Mr. Painter reviewed a graph at the bottom of slide 7
titled "Realized ERA Balance: FY22-FY33." The graph came
from APFC's History and Projections Report from November.
The blue portion of the bars reflected the following year
POMV draw, and the red reflected the projected remainder of
realized and expendable ERA funds. The chart showed the
realized ERA balance was projected to decline year-over-
year. He noted the large drop from FY 22 to FY 23 was due
to very high inflation. He expounded that the inflation
proofing transfer was based on actual inflation, which was
8 percent, resulting in a transfer of $4.2 billion. The
chart showed that by FY 33 based on a straight line
projection, there would be $4 million in the ERA beyond
what was needed for the next year's POMV. He stated,
"that's definitely cutting it close." However, in a
probabilistic world where there were not straight line
investments, there was a higher risk of an insufficient ERA
balance.
Mr. Painter detailed that LFD's probabilistic modeling
showed a 54 percent chance of having an insufficient ERA
balance to make the full POMV draw over the FY 25 to FY 33
period assuming annual inflation proofing. The probability
of an insufficient ERA balance dropped to 39 percent if
inflation proofing was suspended when the ERA balance
dropped below the following year's POMV draw. He clarified
it was a policy intervention the legislature could make.
Mr. Painter noted that in 2023, the legislature recognized
the problem and took action. The House Finance Committee
did not include inflation proofing in its budget and the
Senate budget capped the inflation proofing transfer at the
equivalent of 2.5 percent inflation. He elaborated that the
U.S. Consumer Price Index (CPI) actual inflation for
calendar year 2023 turned out to be well above 2.5 percent;
therefore, the cap resulted in around $1 billion remaining
in the ERA rather than being transferred. He noted he did
not assume the legislature would draw the balance to zero.
Mr. Painter addressed the reason realized income was low
(in the last bullet point on slide 7). Much of the reason
for low realized income was due to the APFC investment
allocations. He elaborated that APFC's private equity
investments had not dropped much during the negative
markets of recent years because companies did not conduct
investment rounds during down markets as their valuations
would go down. As a result, 70 percent of the unrealized
gains that could become future realized gains were in
illiquid assets (private equity, private income, and real
estate). He explained that APFC would not sell its mall
investment in Virginia to realize income because it was an
income producing asset, but part of the unrealized gain
balance was the increase in the value of the property since
its purchase.
Mr. Painter expounded that APFC did not necessarily control
when it exited private markets because it wanted to wait to
cash out its investment until a company went to an IPO
[initial public offering]. He noted it may mean the
investment may not generate income for the fund for years.
The result had been less realized income in recent years
because the fund did not have a stockpile of unrealized
gains currently. The forecast going forward relied on a
rising equity market to create realized gains. He believed
the high likelihood of an insufficient balance reflected
the chance that a poor performing equity market could mean
the absence of gains for an extended period.
1:52:40 PM
Co-Chair Johnson noted that Co-Chair Edgmon had joined the
meeting.
Representative Stapp asked if LFD had considered that the
legislature may not take a full POMV draw. He stated that
choosing to not take a full POMV draw would dramatically
reduce the potential risk exposure down the road.
Mr. Painter answered that it was one of the ways to
mitigate the risk. He emphasized that he was not including
the slide to communicate the state was doomed. The purpose
was to point out a potential problem that could be handled
with a number of policy levers available to the
legislature. One option would be to reduce inflation
proofing and another was to reduce the state's draws. He
stated that either could result in ameliorating the
problem.
Co-Chair Edgmon believed the probability of the legislature
not taking a full [POMV] draw was low. He thanked Mr.
Painter for devoting a slide to the topic. He did not think
enough legislators or decision makers in the general public
really understood the full impact of the meaning of
statutory net income and depending on the market how
slippery a slope it could be if all of the factors went
against the fund relative to liquidity, the value of the
ERA, and the legislature's inability to take corresponding
action. He believed it was the reason legislation to create
an endowment was needed. He underscored the importance of
the information on the slide.
Representative Ortiz asked to what degree the problem would
be partially resolved if the ERA was eliminated to create
one fund and the annual draw was limited to a certain
amount of the fund's total value. He asked if the action
would alleviate the issue.
Mr. Painter responded affirmatively. He stated that if the
POMV draw was constitutionalized and the ERA was collapsed
into a single endowment with the principal, there would be
no ERA or sufficiency concern. The legislature would be
able to take 5 percent from the fund, which was how most
modern endowments were structured. He explained that the
two account structure had been common when the Permanent
Fund had been set up in the 1970s and was very uncommon in
endowments at present. He highlighted that the legislature
had taken a similar step with the Public School Trust Fund
in 2018. He explained it was an endowment of the state and
there had previously been two accounts. He elaborated that
there had been numerous problems with how much to spend
each year and determining whether there was sufficient
funding available. The fund was collapsed into a single
endowment and the process had been pretty automatic since
then. He concluded that it was something the legislature
had done before and was fitting with the modern way most
funds were managed.
1:56:53 PM
Representative Stapp stated that he believed in fiduciary
responsibility. He referenced the ERA draw plus inflation
exceeding the total value of the net income in the fund. He
stated that if the fund was combined and the legislature
took a 5 percent POMV draw on the entire value of the fund
and the draw was less than inflation and fund performance,
it would effectively draw down the entire Permanent Fund.
He asked if his understanding was accurate.
Mr. Painter answered it was the risk with any of the draws.
He confirmed that if the total return was less than
inflation plus the draw, it would draw down the value of
the fund if the full draw continued. He supposed that the
ERA provided a limiting mechanism where the spendable money
would run out before [the entire fund was depleted]. He
hoped the legislature would adjust the draw if needed. He
stated that generally when projections showed money would
run out, they were really a prompt for the legislature to
act. He stated that generally he had found the legislature
did act. However, it was possible the legislature could
continue drawing the balance of the fund with an
unsustainable draw.
Representative Josephson suggested that one way to combat
the threat of erosion was inflation proofing. He asked if
his statement was accurate.
Mr. Painter answered that if there were a true endowment
there would not be anywhere to inflation proof from and to.
He believed the legislature would want to set the draw to
be no more than the returns minus inflation. He explained
that instead of a 5 percent draw it could be a moving
target set at actual returns minus the impact of inflation
or it could be reevaluated based on actual experience. For
example, he had heard one option where the draw was capped
in the constitution and the statute could be lowered and
changed or a different formula could be established. There
were mechanisms to use to ensure inflation was accounted
for in the draw percentage.
1:59:40 PM
Co-Chair Edgmon noted it was not too many years ago that
DNR and the Department of Revenue (DOR) forecasts for oil
production and oil prices provided an entire revenue
picture. He stated it had all changed since the passage of
SB 26 [legislation establishing the POMV draw from the
ERA]. He suggested that at some point perhaps the committee
could have all three entities at the table including oil
and investment sides. He stated that slide 7 underscored
that the legislature should be budgeting very
conservatively going forward.
Mr. Painter turned to slide 8 titled "Fall 2023 Revenue
Forecast." He reported that compared to DOR's spring [2023]
forecast, DOR's fall 2023 forecast showed higher oil prices
in FY 24 and FY 25, but lower oil production, higher lease
expenditures, and higher transportation costs. The result
was an increase in projected revenue, but by less than
price alone would explain. He pointed to the table on slide
8 and noted there was a revenue increase of $221 million in
FY 24, but prices increased by $9.39 per barrel between the
[spring 2023 and fall 2023] forecasts. When considering the
price increase it appeared the revenue increase would be
larger when multiplying $9.39 by $40 million or $50
million; however, there were other factors to consider.
Production was down by 26,100 barrels per day, lease
expenditures, which were cost deducted by companies before
they began paying their production taxes, were up by $755
million. He added that transportation costs were also up.
Mr. Painter continued to review the table on slide 8. In FY
25, revenue was up by $79.1 million, but the price was up
by $6.00. When considering the price increase it appeared
revenue would be up by $300 million; however, reduced
production by 34,200 barrels per day and an increase in
lease expenditures by $1.6 billion resulted in less
revenue. He remarked that sometimes the price could mask
changes going on in the production forecast. He believed
DOR and DNR had both indicated when presenting to the
committee that the forecast reflected a shift in terms of
where the oil would come from in the future and what the
state was seeing in production. He stated it was a marked
shift in the underlying variables of the production
forecast from the prior year.
2:02:59 PM
Representative Josephson asked if the lease expenditures
reflected the anticipation of Willow and Pikka projects.
Mr. Painter replied that he would answer the question on
the following slide. He turned to slide 9 titled "Fall 2023
Revenue Forecast (cont.)." He addressed how the production
forecast was calculated. He explained that DNR did not
include 100 percent of lease expenditures and production
for every potential future oil field. He elaborated that
DNR used a process called "risking" where it reduced the
amount in the forecast because there was a chance it would
not happen or that the project would happen after the
initial estimate. In 2023, there had been a great increase
in certainty in the Willow and Pikka fields, particularly
in the Willow project because it had cleared some federal
hurdles and the final investment decision by the company,
which meant it could be put in the forecast. As a result,
the production and lease expenditures were not risked
nearly as much as before. The change resulted in higher
production in later years and higher costs every year.
There was some increase in operating cost due to inflation
and other factors in addition to capital expenditures. The
big difference was that capital expenditures from the two
large new fields were much more certain. As a result,
production was far more certain (as shown on slide 10);
however, in the short-term, where companies could deduct
lease expenditures against their taxes, the state would
receive less revenue. The state would receive more revenue
once the production came online.
Mr. Painter turned to a table on slide 10 titled
"Production FC Difference, Fall 2022 - Fall 2023 RSB
(Thousands of BPD)." The slide compared the production
forecast from fall 2022 to fall 2023 by unit. The chart
highlighted where DNR was looking at more production on the
North Slope versus less production compared to a year ago.
He highlighted several notable trends. First, there was
significantly lower production expected in the Prudhoe Bay
and Kuparuk primary (legacy) fields; however, DNR was
expecting more production from the Prudhoe Bay and Kuparuk
satellites (newer fields). He detailed that the production
increases in the outer years offset production declines in
the early years. He pointed out that every barrel on the
North Slope was not equal because of the gross value
reduction (GVR) of new production and because of the
differences of land ownership. He explained that the state
would not necessarily get as much from the new fields as it
did from existing fields.
Mr. Painter highlighted the second trend in relation to the
difference in the fall 2022 and fall 2023 production
forecasts on slide 10. The currently producing Greater
Mooses Tooth field within the National Petroleum Reserve-
Alaska (NPRA) had a large reduction due to production
difficulties with a new well. He noted the projected
production for the field was much lower than the previous
year. He elaborated that the state did not get royalties
from the field because the NPRA was federal land;
therefore, the impact on the state's revenue was less than
it would be on state land. The table showed much higher
production in later years due to the impact of Willow
coming online beginning in FY 30. The other field on the
table largely reflected Pikka increasing. He noted there
were some other fields not included in the "other"
category. Overall, the table showed lower production in FY
24 and FY 25, but much of it was due to the NPRA and the
shift from Kuparuk and Prudhoe Bay [legacy fields] to their
satellite fields. There was much higher production in later
years, but much of the production was coming from
satellites and the NPRA where there was less incoming
revenue because of land ownership and potentially the GVR.
Co-Chair Johnson noted that Representative Cronk joined the
meeting.
2:08:23 PM
Representative Josephson complimented LFD on the table on
slide 10. He stated that GVR had been reformed by the
legislature in 2017 to be time or price limited. He asked
for a reminder of the details.
Mr. Painter replied that LFD's economist Conor Bell had
compiled the chart based on data from the [DOR] Revenue
Sources Book. He addressed the changes made to GVR by the
legislature. He explained that if prices exceeded $70
million for any 12-month period for three years, a field
could graduate from the GVR early. Normally it took seven
years to graduate from the GVR to the non-GVR production.
He explained that DOR's price forecast shown on slide 11
dipped below $70 starting in FY 28. Consequently, what
qualified as GVR eligible and what did not was influenced
in the outyears by the price forecast being at $68 or $69.
He explained there would be a very different result of what
was GVR eligible and what was not if the entire price
forecast was run at $70. He stated that the $70 number was
a very important one because of the GVR calculation, which
made it difficult to make a clear comparison of what would
get a GVR and what would not. He had spoken with DOR about
showing what production from GVR and non-GVR fields would
be if prices were $70 versus $69. He believed the
complicated system made it difficult for people to figure
out what would be eligible for GVR or not.
2:10:42 PM
Mr. Painter advanced to slide 11 titled "Fall 2023 Revenue
Forecast (cont.)." He began with a chart on the left
showing an oil price forecast comparison from fall 2021 to
fall 2023. He highlighted that the price forecasts were all
relatively close in the later years with oil between $65
and $70 [per barrel] in FY 29. He noted the band was not
large. He looked at the chart on the right showing a UGF
revenue forecast comparison from fall 2021 through fall
2023 and remarked that revenue was even more tightly banded
from the years because as price expectations increased,
cost expectations had increased. The difference in revenue
was only about $500 million in the mid to later years
between the high and low forecasts. He pointed out that
while he had started with a slide showing extreme
volatility in oil prices, the futures market the forecasts
were based on had been giving a pretty consistent picture
of the expectation for oil prices in five to ten years. For
long-term fiscal planning, while there was volatility from
oil, there had been surprisingly little variation in what
the fiscal picture would look like in the medium to longer
term, which aided the legislature in generating a long-term
fiscal plan. He explained that oil may be going from $70 to
$100, but the forecasts had not been quite as volatile as
day-to-day prices.
Representative Galvin looked at slide 10 and referenced Mr.
Painter's statement that each barrel of oil had a different
value to the state. She noted that Mr. Painter had
mentioned the price point of $70 and she was thinking about
other nuances. She remarked that the state was investing in
the new fields by giving up near-term revenue in exchange
for expected future revenue. She highlighted that Pikka
costs were not immediately deducted because they did not
have current production, but Willow costs were. She asked
how much more value the state would get from a Pikka versus
a Willow project given the time value of money.
Mr. Painter answered that he was not prepared to weigh in
on the time value of money associated with the projects. He
confirmed that when Pikka entered production it would have
a large amount of carried forward lease expenditures the
operator could use against future production. Whereas
Willow may have some [carried forward lease expenditures]
if it went below zero production tax value, but most of the
value of the credits would go against current revenue. He
relayed there was a big difference to the state in terms of
when the money would be received, but he could not
speculate. He added that DOR was updating its Willow
project analysis from the previous session for the coming
spring forecast. He did not know whether DOR had done a
similar analysis for Pikka, which would be very interesting
to see.
Representative Galvin recalled that the committee had been
told that the state would start seeing things turn around
with Pikka in 2026. She remembered thinking the state could
hold on and budget conservatively, but she thought the
table [on slide 10] indicated the timeframe was more like
2027. She asked if the timeframe had changed or if she had
misremembered it.
Mr. Painter recalled that DNR had presented there was a
higher likelihood that Pikka would come online a bit later
than previously thought as reflected in the large increase
shown for FY 27 [in the "Other" row on slide 10]. He
advised Representative Galvin to confirm details with DNR.
2:15:08 PM
Mr. Painter discussed key takeaways of the fall 2023
revenue forecast on slide 12:
Key Takeaways:
• The increased certainty of the Willow project is
evident in the forecast: increased lease
expenditures and increased future production.
o The revenue impact to the State is negative
while the project is under development and will
become positive after it enters production.
• The Fall 2023 forecast anticipates lower production
from legacy Prudhoe Bay and Kuparuk units, as well
as Greater Moose's Tooth, and higher production from
the satellite units of those legacy fields.
• Despite significant shifts in the fundamentals
behind the petroleum revenue forecast, overall
anticipated revenue in the medium to long term has
not changed substantially since the Fall 2021
forecast.
Mr. Painter elaborated on the last bullet point on the
slide. He explained that despite significant shifts in the
fundamentals behind the petroleum revenue forecast, the
overall anticipated revenue was not significantly different
because price increases canceled it out. He noted it was
still a significant shift that was worth the committee's
attention. He added that some of the impact could be seen
in the next several slides on the FY 24 budget.
Representative Stapp highlighted the merits of the Willow
project, which reflected the largest economic investment on
the North Slope in the history of the state since its
legacy fields. He stressed the capital investment was
greater than $10 billion with thousands of new jobs in his
district. He had not seen as much activity in Fairbanks in
a long time in terms of the staging and development of
things going to the North Slope. He remarked that it would
be a rough couple of years in terms of the state's revenue
picture, but there was a bright light at the end of the
tunnel.
2:17:22 PM
Mr. Painter turned to a graph on slide 14 showing the FY 24
budget at various oil prices. He reported that after the FY
24 budget and the governor's vetoes, there was a surplus of
approximately $292 million based on the spring [2023]
forecast. He explained that the FY 24 budget included a
provision that split the first $636 million of UGF revenue
received above the spring forecast 50/50 between the CBR
and an energy relief payment [to eligible Alaskans] in FY
25. The energy relief payment was expected to pay about
$500 [per person]. He elaborated that if oil prices were
higher and resulted in a larger surplus than $292 million
it did not result in an additional spendable surplus. He
reiterated that the energy relief payment would top out at
$500 per person and the CBR would receive the remainder.
Mr. Painter continued to review the chart on slide 14. He
explained that if prices were lower than the spring
forecast, the surplus would be lower. He expounded that
prices below $71 per barrel would result in a deficit.
Currently, DOR was estimating an average price of $82 per
barrel at the year-end; therefore, it would take a
substantial drop in price to get down to the lower price
scenario. At the close of the 2023 legislative session,
based on the spring forecast, the forecasted revenue was
estimated to start at $73 per barrel and the split between
energy relief and the CBR would top out at $83 per barrel.
He explained that because of the shifts in the revenue
forecast, the trigger points had changed to $78 per barrel
and $90 per barrel, respectively. Based on the fall
forecast, LFD estimated that about $110 million would go
into the CBR and the energy relief payment, paying about
$175 per person. He highlighted there was still a budget
surplus of $292 million that would lapse to the CBR if not
appropriated.
2:20:51 PM
Representative Stapp found the situation very concerning
because the numbers reflected "huge revenue misses." He
pointed to the initial expectation that the [FY 24] budget
was based on and balanced at $73 per barrel, only to find
out it actually took $78 per barrel. He stated, "That kind
of house of cards can start getting away from you really
quickly." He was interested in suggestions from LFD at a
later date on how to ensure better forecasting in the
future.
Mr. Painter highlighted that the final investment decision
on the Willow project made a big difference to the state's
revenue forecast. He thought it had been on the radar
during the construction of the FY 24 budget and was part of
the reason for the surplus, but there had been risk
associated with it. He elaborated that when relying on oil,
it was not merely possible to consider price only; the
other factors were significant in terms of the amount of
revenue available.
Representative Josephson asked for verification that the
shift from $73 and $83 per barrel to $78 and $90 per barrel
[highlighted on slides 13 and 14] was due to less
production and higher lease expenditures.
Mr. Painter replied affirmatively. The two items mentioned
by Representative Josephson were the primary factors. He
noted that higher marine transportation costs also played a
role.
Representative Hannan asked for verification that LFD
depended on DOR and DNR to provide the data for its own
analysis. She stated her understanding that LFD was not
producing the numbers.
Mr. Painter agreed. He confirmed that LFD used the DNR and
DOR forecasts. He explained that because of the nature of
the state's revenue much of the data needed for accurate
figures was company specific; therefore, LFD could not
replicate it without access to confidential taxpayer
specific information. He elaborated that the result of
having relatively few oil taxpayers and strong
confidentiality laws meant it was difficult for the public
or LFD to match DOR's numbers.
2:24:00 PM
Mr. Painter advanced to slide l5 and reiterated there was
$292.7 million of spendable surplus in FY 24. The
governor's supplemental request proposed to use $17 million
UGF, which had recently been presented to the committee by
the Office of Management and Budget (OMB) director. He
highlighted that more supplementals were due the following
week. He noted OMB's fiscal summary included a placeholder
for fire suppression. He added other potential supplemental
items were Medicaid, the Department of Corrections, and
other agencies.
Representative Josephson asked for verification that the FY
23 supplemental had been paid for with the CBR.
Mr. Painter confirmed that the FY 23 supplemental included
a CBR vote because prices dropped. He explained that actual
revenue came in a bit higher than forecast and based on the
amount of lapsed appropriations due to high [agency]
vacancy rates. He did not know that all or any of the
deficit filling language ended up being used. He noted
there would be a clearer idea when the state's
Comprehensive Financial Report was released, which was
statutorily due in December, but LFD was hoping for
February or March as had been the case in the past six to
seven years.
2:26:15 PM
Mr. Painter turned to slide 16 titled "FY25 Adjusted Base."
He explained that the starting point for building the next
year's budget was the adjusted base. He described the
adjusted base as a stop between the prior budget and the
governor's budget, which was equivalent to the prior year
budget minus one-time items plus current statewide policy
decisions (e.g., changes to formula programs and salary
adjustments based on negotiated increases or health
insurance costs) needed to maintain services at a status
quo level. He noted it was a bit of a shift from the way
the adjusted base was defined in 2023. He explained that
removing one-time items and adding statewide decisions made
the impact of the governor's policy proposals clear when
compared to the adjusted base. He elaborated that the
adjusted base provided a cleaner starting point and was
typically used as the starting point in finance
subcommittees and the legislative process.
Mr. Painter explained that LFD modified the adjusted base
for FY 25 to include changes to formula programs.
Previously, it was difficult to distinguish policy changes
from changes in formula amounts. For example, if the
governor was proposing to partially fund a piece of debt
reimbursement, it was hard to tell the difference between
the policy change and the formula change. He detailed that
including the automatic formula changes in the adjusted
base helped identify the governor's policy proposals that
differed from the previous year's budget. The adjusted base
reflected the current policy baseline. He believed OMB
planned to use the adjusted base more with the changes as
well; therefore, LFD and OMB should be using more similar
terminology going forward. He noted that partially funded
formula items would use the same formula as the prior year.
For example, if school debt reimbursement was partially
funded one year, LFD would show the impact of partially
funding it again as the adjusted base. He cited the PFD as
another example and explained that if it was funded by a
(non-statutory) formula one year, the same formula would be
used the following year as the adjusted base, which would
clearly show the governor's shift back to the statutory
draw.
2:30:14 PM
Mr. Painter turned to slide 17 titled "FY25 Adjusted Base
(cont.)." The slide showed one-time items totaling $165.3
million UGF in the FY 25 budget. He highlighted that more
than half of the total was for K-12 additional foundation
funding, which had been designated as a one-time item
outside the formula. The governor submitted quite a few new
Department of Education and Early Development (DEED)
programs as permanent items [in the FY 24 budget] and the
legislature's budget had switched them to one-time items to
review them again in the current budget process. He
highlighted a $5 million increment for the Alyeska Reading
Academy as an example. The items had been designated as
one-time increments to come out in the base and the
governor was asking for most of the items to come back in
the FY 25 budget. He noted the items appeared as a change
to the adjusted base, but it was really making a one-time
item from FY 24 permanent in FY 25. The slide also included
items the legislature had added explicitly as one-time
items such as the grant to the Alaska Travel Industry
Association (ATIA), Alaska Gasline Development Corporation
(AGDC), and Alaska Seafood Marketing Institute (ASMI). The
items all came out in the adjusted base to create a clean
starting point.
2:31:11 PM
Representative Galvin looked at the $7.5 million increment
for childcare benefits on slide 17. She had not seen it in
information provided by OMB. She was grateful to see the
increment and asked for details.
Mr. Painter replied that in the FY 24 budget, the
legislature had included a one-time increment of $7.5
million in UGF and federal funding for childcare benefits
to enhance declining federal funds as COVID-19 funding was
eliminated. He explained that recommendations from the
governor's Childcare Taskforce had not yet been finalized
and there may be some items from the taskforce included in
the governor's forthcoming amended budget. He stated that
those funds would be different than the $7.5 million
designated as a one-time item. He reiterated that the items
were one-time and would reflect a policy difference if they
were included in the governor's amended budget.
Representative Galvin stated her understanding that because
the [$7.5 million] increment was included in FY 24, it was
included on the slide, but it may change depending on the
work of the taskforce.
Mr. Painter clarified that the slide showed one-time items
from the FY 24 budget that were backed out in the FY 25
adjusted base. He noted that the governor had included some
of the items in his budget and may include others. He
explained that to get to [the adjusted base] the [one-time
FY 24] items were backed out.
Representative Hannan looked at the one-time increments of
$1.9 million for the Public Defender Agency and $9.5
million for the Division of Public Assistance on slide 17.
She believed the funds were for staffing increases and
thought some of the funding was for permanent positions and
some was for temporary one-year positions to catch up.
Mr. Painter answered that both of the items were multiyear
appropriations that were effective across FY 24 and FY 25.
He elaborated that the items counted as FY 24 costs, but
they would be available over multiple years. The items were
not counted against the FY 25 budget because they used
previous year's revenue. The governor included additional
related items in the proposed FY 25 budget, some of which
added to the base.
Representative Josephson understood the purpose of backing
the one-time items out to result in a clean view of the
base budget. He asked if there was a simple way to show
which items the governor had restored if the committee was
interested in restoring the items [on slide 17].
Mr. Painter answered that LFD could follow up with the
information.
2:34:39 PM
Mr. Painter advanced a table showing formula adjustments on
slide 18 titled "FY25 Adjusted Base (cont.)." There was a
reduction in the formula projected of $30.1 million UGF for
K-12 education. Part of the change was due to a shift to
the Public School Trust Fund, which offset general funds.
The state cost went down by $27.2 million in the same
statutory formula. He noted the reduction was due to a
decrease in the state's share going to districts. He
explained that basic need was calculated based on the Base
Student Allocation (BSA) multiplied by the adjusted student
count and was paid by multiple parties including municipal
governments. He elaborated that as property tax values
increased in communities, the minimum required local effort
increased because it was based on a mill rate of the
communities' tax value. He explained that the situation
essentially shifted the cost from the state to
municipalities. Additionally, there was increased
deductible federal impact aid, meaning the state could
deduct more. He elaborated that the state paid less but it
was not less money going districts; costs were shifted from
the state to federal funding. There were student count
changes resulting in a $2.2 million decrease, which was
offset by a $3 million increase from Pre-K funds through
the Alaska Reads Act. He remarked that although there
appeared to be a decrease to K-12 funding, the amount to
districts was almost the same because the change to student
count offset by the additional Pre-K funding. There was a
shift from state funding to other payers funding the
formula.
Mr. Painter addressed a decrease of $9.6 million to school
bond debt reimbursement on slide 18. There was a moratorium
on the issuance of new school bond debt from July 1, 2015,
to July 1, 2025. Consequently, the amount owed by the state
decreased each year. The Regional Educational Attendance
Area (REAA) Fund also declined because the two items moved
in tandem. The state's contribution to retirement increased
by about $46 million because of higher calculated liability
to the funds based on the June 30, 2022 valuations. There
was also a cost to the state as an employer (shown on the
next slide), reflecting an increase in the state's share
paid on behalf of school districts and local governments.
Mr. Painter turned to salary adjustments to the FY 25
adjusted base on slide 19. The first salary adjustment was
a $22.7 million increase ($11 million UGF) for the state as
an employer associated with Public Employees' Retirement
System (PERS) and a slight decrease for the state as an
employer with the Judicial Retirement System (JRS).
2:38:55 PM
Mr. Painter briefly highlighted the second row on slide 19
showing an increase in health insurance cost. The slide
included a series of union cost of living adjustments from
previously negotiated contracts from prior years showing
next year costs. He noted the legislature had to approve
the money annually. He pointed out that the slide did not
include any new contracts. There were three unions
currently in the negotiation process that had until the
60th legislative day to provide the contracts.
Additionally, when Representative Josephson's bill had
passed several years ago that increased salaries for exempt
employees, it had included language specifying that
increases to the supervisory unit would go to exempt
employees as well. He stated that future legislation would
be needed to make that happen. The supervisory unit was
currently in contract negotiations and the legislature may
want to pass a bill that followed the supervisory unit. He
pointed out that it required legislation and would be a
future policy choice. He stated that it could be discussion
for the legislature later in session, while currently it
was merely an unknown cost.
Representative Hannan referred to the intent language in
Representative Josephson's legislation about exempt
employees following the supervisory unit. She asked if it
was followed in one or two years. She stated her
understanding it was not currently being followed.
Mr. Painter responded that the supervisory unit was in the
middle of a contract that paid employees 3 percent, then 1
percent, then 1 percent. He explained that at the time, the
5 percent increase received by exempt employees was 1
percent more than the supervisory unit had received at the
time. In FY 24, the two units had equalized when 1 percent
went to the supervisory unit and no increase went to exempt
employees. Going forward, to keep pace with one another, a
bill would be required to increase the exempt salary
schedule. He believed the two were currently roughly the
same. He noted that while legislative employees were on 40-
hour workweeks like the supervisory unit, not all exempt
executive branch employees were on a 40-hour workweek;
therefore, they may not be quite comparable in terms of
their hours.
Representative Coulombe looked at slide 18 and asked how
long the moratorium on school bond debt reimbursement would
be needed to retire the debt owed.
Mr. Painter answered that because the debt could be
refinanced, some had been refinanced beyond FY 33. He could
follow up with the current end date. He added that if the
debt continued to be refinanced the payments could be
extended farther into the future. He reasoned that because
rates were not as favorable currently, refinancing may be
less likely than it was several years back.
2:43:29 PM
Representative Josephson referenced the moratorium on
school bond debt that would sunset in the near future. He
assumed major maintenance increased because the state had
been uninvolved in inviting districts to invest in new
construction. He asked for verification that the governor's
bill only covered a couple of schools on the major
maintenance list.
Mr. Painter replied that the governor put forward one
project from the school construction list and two from the
major maintenance list in the capital budget. He would
discuss the topic more when he reviewed the capital budget
slide.
Mr. Painter turned to a fiscal summary on slide 20 titled
"Governor's FY25 Budget." The top row of the table showed
the revenue forecast [for FY 24 and FY 25]. He highlighted
a decrease of about $100 million in agency operations on
the second row. He noted that due to numerous one-time
items in FY 24, the FY 25 agency operations actually
reflected an increase over the adjusted base. The big
increase in the governor's budget was the PFD going from
$881 million in FY 24 to $2.3 billion in FY 25. He noted
the energy relief payment used FY 24 money for distribution
to Alaskans in FY 25. As a result, the governor's FY 25
budget was $1.175 billion higher than the FY 24 budget (an
increase of 19 percent). There was $292.7 million available
in the FY 24 budget for future appropriation or lapse; the
governor was currently spending $17 million of the total.
The LFD fiscal summary assumed any unspent surplus went
into the CBR. He highlighted that the CBR numbers shown on
the slide were higher than those in OMB's fiscal summary
because LFD's analysis assumed any unspent funds would go
to the CBR. Additionally, LFD's analysis assumed any
remaining funds would not be spent without an
appropriation, although some amount was likely to be spent.
Mr. Painter turned to slide 21 and highlighted a pre-
transfer deficit of $977 million [in FY 25] and a post-
transfer deficit of $982.3 million, which would deplete the
SBR and draw just under $1 billion from the CBR. The
largest increase was the statutory PFD payment. He relayed
that appropriations were above the adjusted base; however,
there were several areas where LFD expected the budget to
be significantly higher by the time the budget was
finished.
2:46:28 PM
Mr. Painter turned to a swoop graph comparing the FY 24
management plan budget to the governor's FY 25 budget (UGF
only) on slide 22. The red bars reflected the FY 24
management plan and blue bars reflected the governor's FY
25 budget. The graph was broken out into type, with the PFD
as the largest item in the governor's budget, followed by
DEED and the Department of Health (DOH). He noted the PFD
was third after DEED and DOH in FY 24. The graph helped
show the relative size of various agencies and made it
easier to see where big changes resided from year-to-year.
He highlighted that the PFD stood out and education was
lower, much of which was due to a one-time increment of
$87.4 million in FY 24. He noted significant increases in
the Department of Corrections (DOC), the Department of
Public Safety (DPS), and the Department of Transportation
and Public Facilities (DOT).
Mr. Painter addressed agency operations items in the
governor's FY 25 budget on slide 23. There was a $20.8
million UGF decrease due to the sunset of the Senior
Benefits program. He noted an extension of the program
would require legislation. There were significant UGF
increases to DOC and DOT with a mix of fund source changes
and increments to both departments. There was $17.3 million
UGF over the adjusted base for DEED due to one-time FY 24
items the governor was proposing to make permanent in FY 25
(e.g., additional funding to the Alyeska Reading Academy
and the Alaska Native Science and Engineering Program). The
largest reduction (outside of one-time items) was $6.2
million to DOH to stop funding for the tuberculosis and
congenital syphilis elimination plans. The items were made
temporary by the legislature and the governor did not
include the funding in FY 25. He noted the funding had been
set to end in FY 30.
2:48:35 PM
Mr. Painter addressed statewide items totaling $365 million
in the governor's budget on slide 24. The governor's budget
fully funded school debt reimbursement, the REAA Fund
capitalization, state assistance to retirement, and
community assistance at statutory levels. He noted that the
governor had vetoed the community assistance funding in FY
24. He detailed that the distribution from the program was
based on one-third of the balance of the fund. As a result
of the veto, the distribution to communities in FY 25 would
be $20 million. He explained that $20 million was enough to
pay the communities' base payments but not the per capita
payments, meaning the impact of the veto would be on high
population areas. Funding the full statutory $30 million
would result in a fund balance of $70 million at the end of
FY 25, meaning the distribution in FY 26 would also be
reduced but it would still be a bit above the bases.
Mr. Painter addressed other fund capitalizations in the
governor's budget on the bottom of slide 24. There was $5
million for the Disaster Relief Fund. He elaborated that
the legislature appropriated $50 million in the FY 22
supplemental to the fund to try to cover future disasters.
No money had been appropriated to the fund in FY 23 or FY
24 due to the large balance. The governor's budget
requested an additional $3 million for the Alaska Liquid
Natural Gas (AKLNG) project fund. The budget also included
funding for the Alaska Clean Water and Drinking Water
funds. The funding had been appropriated two years back,
but the department had not yet been ready to move forward
with the program at the time. The funding had lapsed, and
the department was making the request again in the FY 25
budget.
Representative Stapp recalled that the finance committee
had added money into the FY 24 budget for community
assistance that had not been in the governor's proposed
budget. He stated that the money had been vetoed and the
governor had included it in his FY 25 budget. He thought it
was strange the governor would veto funding and put it back
in the next fiscal year.
Mr. Painter responded that the [statutory appropriation]
was one-third the balance of the fund and the fund balance
had been $90 million at the end of FY 23; therefore, $30
million went out in FY 24. The remaining balance was $60
million and without a capitalization of the fund, one-third
of the balance was $20 million. He believed the decision to
veto the funding in FY 24 and include it in the FY 25
budget was a policy choice by the governor. He could not
answer the reason why.
2:51:38 PM
Representative Galvin looked at the swoop graph on slide
22, which she believed provided a clear picture of the
state's big expenditures. She observed that spending on
education was lower in FY 25. She highlighted that the
statutory PFD exceeded $2.3 [billion] and she thought Mr.
Painter had stated the prior PFD was $1,300. She noted that
Mr. Painter had mentioned the budget was unbalanced. She
remarked that the PFD had been $881 million in FY 24. She
asked how appropriating funding for a $1,312 PFD for FY 25
would change the $1 billion deficit outlook.
Co-Chair Johnson noted that it was very early in the budget
process.
Representative Galvin agreed. She noted that many people
were talking about whether or not there would be any
revenue, what the state would do with it, and statutory
versus not statutory funding. She remarked that the graph
provided substantial information in terms of the larger
budget picture. She asked what [reducing the PFD to the FY
24 number] would do to the overall budget deficit.
Mr. Painter responded that he did not have the number on
hand that would result from a $1,312 PFD. He relayed that
if the PFD was 25 percent of the POMV draw (which was
larger in FY 25 due to a larger POMV draw) and nothing else
changed in the governor's budget, there would be a surplus
of about $400 million. Under the scenario, the total PFD
appropriation would be about $914 million. He noted the
total would be larger than the $1,312 and would also
include the energy relief payment. He would have to
calculate what the total would be at a particular dollar
figure.
Representative Galvin noted that she was aware it was early
to discuss the topic but appreciated the response.
Co-Chair Johnson pointed out that the presentation focused
on the governor's proposed budget compared to the budget
passed by the legislature the previous year. She believed
there would be some significant changes during the budget
process.
2:55:04 PM
Mr. Painter reviewed capital budget items in the governor's
FY 25 budget on slide 25. There was a huge increase in
federal funds, largely due to $1 billion for the broadband
program. There were several new items including funding for
the Alaska Housing Finance Corporation (AHFC) Down Payment
Assistance Program. He relayed that about half of the
capital budget was for matching general funds to obtain
federal funding.
Co-Chair Edgmon asked if there were more operating items
being put in the capital budget over the past four years.
Mr. Painter answered it was a broader trend with quite a
few examples in the FY 25 budget. He confirmed that a
number of the projects were potentially more appropriate in
the operating budget. For example, he thought the AHFC Down
Payment Assistance program was likely an operating item and
did not create a state asset. Part of the question was how
operating and capital were defined. Another example was the
project for the University of Alaska Fairbanks to achieve
research tier 1 status. He explained that the university
was not building a new campus to do the work, it was hiring
faculty, which was an operating purpose. The drone program
had started as an operating item and had moved to the
capital budget and was now proposed as a capital item in FY
25. He elaborated that much of the increment seemed to be
for ongoing cost for faculty and not just creating drones
for state use that would be creating an asset.
Mr. Painter had noticed a few areas where a portion of a
project was a capital item and the remainder was not. For
example, DOT had projects that included capital expenses in
addition to five years of maintenance costs for an
aircraft. He explained it was an item that should be in the
operating budget. He added it was probably underfunded in
the operating budget and had been inserted in the capital
budget. He stated that ultimately ongoing maintenance for
aircraft should be included in the operating budget and not
put forward as temporary capital budget funding.
2:57:42 PM
Co-Chair Edgmon stated that conversely the $5 million
included in the FY 24 budget for the Alyeska Reading
Academy went towards or was projected for brick and mortar
spending.
Mr. Painter stated his understanding that FY 24 funds were
for hiring several employees, leasing a space, and funding
a training conference. He elaborated that the funding would
go towards travel for around 100 teachers. He stated it was
more of an operating purpose and he was uncertain of the
long-term plan.
Co-Chair Edgmon remarked that he could dig into the issue
more when the OMB director was back before the committee.
He remarked that if an operating item went into the capital
budget, the one-year timeframe for expenditure increased to
five years.
Mr. Painter answered that the timeframe increased
potentially beyond five years. He explained that capital
budget increments allowed five years to start the work and
as long as substantial work was made every five years the
funding could continue for decades. He stated there were
two problems with including operating items in the capital
budget. The first was the potential to stretch things out
that should be done more quickly. Additionally, including
an ongoing cost reflected in the budget every year rather
than every few years led to a more predictable and
transparent budget. For example, if the goal was to take
care of DPS airplanes, the money should be included in the
budget annually rather than putting it in the budget in the
current year and having to request the funding again in
five years.
2:59:56 PM
Representative Ortiz thought the capital budget reflected a
decrease of about 10 percent from the previous year. He
asked if the size of the capital budget had been decreasing
over the past five to six years in comparison to the
overall budget.
Mr. Painter answered that in FY 22 and FY 23 there had been
higher revenue forecasts and much larger capital budgets.
He noted the capital budget had been $700 million in one of
those years. He elaborated that the capital budget level
had been much lower from FY 16 through FY 21 at a total of
$100 million to $200 million per year. He noted the
governor's proposed FY 25 capital budget was a significant
increase from those past amounts. He explained that as a
result of the federal infrastructure bill [Infrastructure
Investment and Jobs Act (IIJA)] a capital budget of $125
million would no longer match federal funds. There had been
an increase in part because the amount needed to match
federal funds had gone up. He added that the state was not
necessarily getting more highway projects, but the costs
had increased. He explained that the FY 25 capital budget
would be much smaller when compared to capital budgets
prior to FY 16. The proposed budget was much larger than
the lean budgets from FY 16 to FY 21, but much smaller than
the $2 billion UGF capital budget around FY 13 or FY 14.
3:02:09 PM
Representative Ortiz noted the costs for construction
projects were increasing not decreasing. He remarked that
the proposed capital budget only covered two items out of
around 25 on the school deferred maintenance list. He asked
if declining to address the issue at present meant it would
be more difficult to address the issue fiscally in the
future.
Mr. Painter agreed and believed it was evident in the
state's deferred maintenance backlog. He explained that
during the years where $100 million was being invested in
deferred maintenance, the backlog was decreasing. He noted
that in the past year the backlog had increased from year-
to-year by somewhere between $200 million to $400 million
because of the increase in costs. He remarked that if the
state had invested in the projects five years back, it may
have been able to prevent some of the increase. There was
currently a very large deferred maintenance backlog
including school major maintenance and in the Department of
Environmental Conservation. He stated there were many costs
that the state did not necessarily have an established
funding mechanism to cover. He emphasized that $30 million
per year was going from the Capital Income Fund into
deferred maintenance against a $1.8 billion backlog, which
would not get through the backlog quickly.
3:04:01 PM
Mr. Painter highlighted items that were not yet included in
the budget on slide 26. He noted that every year the
governor released the budget followed by amendments. Most
years the amended budget tended to be higher. He remarked
that childcare was not included on the slide because he did
not know what the cost could be. The governor's budget did
not include a Base Student Allocation (BSA) increase or
outside of the formula funding. There was $87.4 million
outside the formula in the FY 24 budget. He elaborated that
a bill on the House floor [SB 140] had a $220 million price
tag. He stated that where the amount would end up was
unknown, but it was unlikely to be a zero dollar increase.
Additionally, there was a pending issue with the federal
disparity test that could cause state costs to increase by
$89.1 million. He noted there may not be clarity on the
issue for a number of months. He highlighted that the cost
could end up being higher if the state failed the disparity
test. He noted it was a possibility related to how some
districts had funded themselves.
Co-Chair Johnson asked about the date of the disparity test
ruling.
Mr. Painter replied that the state typically submitted its
test to the federal government in February. He stated that
if the department found a way to pass the test, the issue
would not be a concern. However, if the department had to
change its methodology or the federal government determined
the state's information did not account for everything, the
situation could drag on longer. He relayed that the state
had failed its initial FY 21 disparity test, which resulted
in a resubmittal. He reported that the process in FY 21 had
taken about a year before the issue was cleared up. He
stated that there was not a clear timeframe on how long it
would take to completely resolve the issue. He concluded it
may drag on for a while.
Co-Chair Johnson asked if the committee needed to
anticipate the situation or just figure out a way to fund
the cost if it arose.
Mr. Painter replied that they may have better information
forthcoming as the department was working to compile the
data. The department did not yet have all of the financial
data from districts. Once the department had the data, the
seriousness of the issue may be clearer.
Co-Chair Edgmon remarked there were a host of other items
that could be added to the list on slide 26 including the
Renewable Energy Grant Program, weatherization, ASMI, and
ATIA. He pointed out that when factoring in all of the
additional items it represented real money. He thought the
list on slide 26 was impressive on its own and there were
other additional items not shown.
3:07:26 PM
Mr. Painter answered there were certainly things that could
be added to the list on slide 26. The list used a minimum
threshold of $20 million. He confirmed that using a lower
threshold would include many additional potential
increases.
Mr. Painter continued reviewing the list on slide 26. The
governor's budget did not include an increase to Medicaid
funding because the projection prepared by DOH was too late
to include. The projection indicated a need for an
additional $22.6 million UGF. He explained that the
estimate would be refined for the governor's amended
budget. The Senior Benefits Program was scheduled to sunset
and was not included in the governor's budget. He noted
that based on the number of pieces of legislation and the
variety of sponsors it seemed likely the program would be
extended at a cost of $20.8 million. The Alaska Energy
Authority (AEA) received a $206.5 million federal grant to
upgrade the electrical grid, which would require equal
state matching funds. The state could potentially pay the
amount over several years, but many of the funding
mechanisms may still require some upfront investments. For
example, it may be possible to repurpose some existing bond
money, but it would require permission from bond holders.
He elaborated that it may take time and if no funds were
put forward, AEA may not be able to start work on the
project in the upcoming summer. The agency was working on a
funding package, but the need in the FY 25 budget was
likely to be $30 million to $35 million.
Mr. Painter continued to review items not included in the
governor's budget on slide 26 beginning with the Alaska
Marine Highway System (AMHS). He relayed there could be a
gap up to $38 million or no gap between what AMHS was able
to run in terms of vessel and crew availability and the
amount of federal funding. In calendar year 2024, the state
applied for $66 million in federal funds, but only received
$38 million, resulting in a large gap. He explained that
the [U.S.] secretary of transportation had significant
flexibility in how to award the funds and he had awarded
extra funds in 2023 and a bit less in 2024. He elaborated
that although Alaska was the only state that really
qualified, the eligibility had been opened at the
secretary's discretion and $21 million had been awarded to
American Samoa. The application process for 2025 had not
yet started and the potential future gap was unknown. He
expounded that if the situation was the same as the current
year and there was no backstop funding, the gap could be as
much as $38 million; however, if AHMS received more grants,
the gap could be much smaller. He stressed it was a huge
unknown.
Mr. Painter addressed the last item on slide 26. There were
three sizable unions currently negotiating contracts, which
could result in increases. He noted the increase could be
substantial based on recent inflation.
Co-Chair Edgmon referenced Mr. Painter's earlier discussion
of disaster fund capitalization. He recognized that it was
a policy call. He asked if LFD would potentially add the
expense to the list for FY 25.
Mr. Painter answered, "Probably not." He explained that the
department had been able to use funds from a $50 million
capitalization in FY 22. He elaborated that many of the
state's disasters had been partially federally funded,
which had substantially reduced the state's costs. He
relayed that there was a fairly healthy balance of general
funds still available in the fund. He did not recall the
number but would follow up with the information. He was not
particularly concerned about the current fund balance
because of the large infusion in FY 22.
3:12:34 PM
Representative Ortiz referenced the potential $38 million
shortfall for AMHS. He asked if the toll credits funding
source was at all related to the $38 million.
Mr. Painter answered that the issue was unrelated and was
on the capital side. He explained it was a choice on how
the governor had opted to meet the state's matching
requirement for the Tustumena. One of the options for
meeting the matching requirement was to use other federal
revenue as toll credits. He elaborated that because the
state had used receipts collected in the Marine Highway
Fund for maintenance in the past, it was eligible to use
federal funds as toll credits to mach. He clarified that it
was not required, and the state could use the federal money
for additional projects and match it with other sources.
How to fund the items was a policy choice.
Mr. Painter turned to slide 27 titled "Long-Term Outlook
and Governor's 10-Year Plan." The LFD modeling baseline
assumed the FY 25 adjusted base grew with inflation
including FY 25 and that all statewide items were funded to
statutory levels (including the PFD). He noted that adding
all of the items listed on slide 26 to the governor's
budget would exceed the cost of inflation. He was not
certain it was a realistic starting point, but it was an
objective starting point that had been used in the past. He
was happy to model other scenarios requested by the
committee as the budget process moved further along and
governor's amendments were received.
Mr. Painter relayed that with LFD's baseline assumptions,
deficits started at $1.1 billion in FY 25, increased to a
peak of about $1.9 billion in FY 31, and subsequently
declined a bit. The governor's 10-year plan made several
policy changes relative to the baseline that would reduce
the deficit, but there would continue to be deficits each
year. He emphasized that the legislature had not run the
state off a cliff in the past six years; it had run
relatively balanced budgets. He clarified that the purpose
of the information was not to indicate the state was going
to run off a cliff. The information was meant to indicate
what would happen if the current statutes for the PFD and
other items were followed at current revenue and budget
levels. He clarified that he believed it was a very
unlikely scenario.
3:15:37 PM
Mr. Painter moved to slide 28 titled "LFD Baseline Model,
No ERA Overdraws." The top row on the slide reflected the
surplus and deficit in millions, reflecting a surplus in FY
24 followed by deficits increasing from $1.1 billion to
$1.9 billion over the years. The bar graph on the left
showed the UGF budget and revenue. The blue portion of the
bars reflected traditional oil and non-petroleum revenue
(non-POMV revenue). The green portion of the bars reflected
POMV revenue, and the gold portion of the bars represented
draws from the CBR and SBR. The black solid line reflected
the budget including the PFD. He explained that to balance,
the budget line and the bars needed to meet, which was
accomplished in FY 25 and FY 26 by drawing from state
savings accounts. Savings accounts would run dry by FY 27
and an unfilled deficit resulted. He explained that the
legislature could choose to fill the deficit with the ERA,
but it was not automatic (shown on the next slide). He
believed showing the picture without the ERA draw first
demonstrated the size of the problem without compounding
effects.
Mr. Painter addressed a graph on the right of slide 28
showing the state's budget reserves. The yellow portion of
the bars represented the CBR and SBR balance. He noted the
model left $500 million in the CBR for cashflow needs. The
realized ERA balance shown in green was declining based on
discussion earlier in the meeting. The bottom of the slide
showed the effective POMV draw rate, which included
overdraws as part of the POMV draw. The bottom row on the
slide showed the PFD per person under the statutory
formula, which was $3,654 estimated in FY 25.
Mr. Painter reviewed slide 29 titled "LFD Baseline Model
with ERA Overdraws." The graph on the left showed UGF
revenue and budget. The red portion of the bars reflected
the unplanned ERA draw, which would draw the ERA balance to
zero by FY 33 and result in a gap beginning in FY 33. He
elaborated that if the legislature chose to run large
deficits and run out of money with no changes, the ERA
would no longer be available by the end of FY 33. The
bottom portion of the slide showed how the ERA overdraws
would impact the effective POMV draw. He noted the scenario
reflected running the current statutes and budget up with
inflation into the future with no policy changes.
Co-Chair Edgmon stated that annually they went through the
projections with a statutory PFD when everyone knew it was
unaffordable as much as some would like to have it. He
thought the OMB director had recently told the committee
that the governor was required to include a statutory PFD
in the proposed budget. He stated that the governor could
put anything in his budget and was not required to include
any statutory item. He believed it was the previous year
that LFD did a 25/75 and 50/50 analysis [of the POMV draw
split]. He thought including the statutory PFD was
misleading for the public because it did not reflect the
reality. He found it to be an annoyance. He reiterated that
a governor was not required to include numbers in the
budget because there was a statutory formula. He emphasized
the governor could put whatever they wanted in their
proposed budget.
Mr. Painter confirmed that the governor could put forward
any number. There were a number of statutes that were not
followed year-to-year that the governor did not follow in
his 10-year plan. He stated it was a policy choice. He
relayed that LFD started its modeling with current statute
and was happy to model proposals to do something different.
He explained that as a nonpartisan agency, LFD did not want
to pick scenarios or its favorite formula. He stated it was
up to legislators as policy makers to pick what scenarios
they wanted to see.
3:20:38 PM
Mr. Painter turned to slide 30 titled "Long-Term Outlook
and Governor's 10-Year Plan (Cont.)." The governor's 10-
year plan made a couple of policy changes. Agency
operations and the capital budget grew at 1.5 percent
instead of inflation, which LFD assumed to be 2.5 percent.
The governor's budget did not fund community assistance
with UGF after FY 25. He highlighted assumption differences
in the LFD model that were not included in the governor's
10-year plan. There was a longstanding difference where the
governor's plan assumed lapsing appropriations and
supplementals canceled out, whereas LFD included a
supplemental placeholder of $50 million, which was based on
the pre-pandemic average of the difference between
supplementals and lapsing appropriations. He relayed that
since the pandemic both of the numbers had been much
higher, and it was more difficult to make a fair
comparison. He noted the figure was merely a placeholder
and he could not empirically justify any particular number
because of the extreme volatility of the supplemental and
lapsing funds over the past several years.
Mr. Painter continued to highlight assumption differences
in the LFD model compared to the governor's 10-year plan.
The LFD model included a placeholder based on historical
numbers for new school debt after the moratorium was set to
end in 2025. He relayed it was possible there would be
increased school debt due to a backlog of projects or that
districts may not want to use the program because of a lack
of annual funding. He explained that because of the
uncertainty, the LFD assumption used the historical number.
Additionally, there was a timing difference between LFD
assumptions and the governor's 10-year plan. He detailed
that the fall Revenue Sources Book and the governor's 10-
year plan used a preliminary number from APFC that did not
really reflect the final scenario. He explained the number
was not public and could not be used by LFD. The LFD
modeling used figures from APFC's November history and
projections report because it had come out around the
release of the governor's budget. The LFD model showed a
bit higher POMV numbers and slightly lower PFD numbers than
the governor's 10-year plan. He reiterated that it was a
timing difference related to which forecasts had been used.
3:22:59 PM
Co-Chair Johnson asked Mr. Painter to provide the most
important pieces between LFD's analysis and the governor's
10-year plan on the last slides. She stated they could look
at the governor's 10-year plan all they wanted but she
recognized it led the state down a path that it was
unlikely to take. She asked for the key takeaways.
Mr. Painter moved to slide 31 with a comparison of the LFD
baseline to the governor's 10-year plan. He found the big
takeaway to be that inflation was very powerful and
compound interest was a powerful force. He explained that a
1 percent change in the difference between 1.5 percent
growth [in the governor's 10 year plan] and 2.5 percent
growth [in the LFD model] started out small but amounted to
a lot of money by the end of a 10-year period. He
highlighted there was a sizeable difference between the
baselines despite it merely being a difference in inflation
assumptions. There was a difference of nearly $700 million
just because of inflation by FY 33.
Mr. Painter turned to slide 32 titled "Governor's 10-Year
Plan in LFD Model, No ERA Overdraws." He stated the numbers
were very similar to the 10-year plan. He highlighted that
the governor's 10-year plan statute specified that the
governor was supposed to balance expenditures and revenue
and available fund sources; however, the governor's 10-year
plan ran the CBR to -$10 billion. He noted that it did not
reflect balanced fund sources. He stated that the
governor's 10-year plan did not reflect a full fiscal plan;
it was not possible to follow the plan and get out of the
fiscal woods. He noted that in past years the governor's
plan had included a placeholder for $900 million in new
revenue and one year the governor had included five
different plans to look at, while he had provided one plan
in the current year that did not balance. He agreed there
was likely not a lot of point to keep talking about it.
Co-Chair Johnson did not know there was a requirement to
include all of the statutory pieces for the PFD and so on
in the proposed budget. Additionally, the structural
deficit had been discussed. She did not know there was much
more that really needed to be added in terms of discussion.
Co-Chair Edgmon shared that he had been in the legislature
when the 10-year plan statute was implemented in 2008 by
former Representative Mike Hawker. He emphasized that what
the 10-year plan had become was counter to or violated the
spirit of the original legislation. He explained the 10-
year plan was supposed to be a viable look into the future
and not merely a document that any governor could use to
include policy implications. He noted he had recently asked
in committee whether the document was used by credit rating
agencies. He thought it was the last thing they would want
to be able to put forward because it was not realistic. He
highlighted that carbon capture money that had been
included the governor's plan the previous year and it had
disappeared in the current plan. He thought it seemed there
needed to be a retooling of what the 10-year plan was
supposed to be. He stressed it had ceased to be an
effective tool or even a believable representation of what
was going forward in many respects. He did not know if it
deserved any more discussion.
Co-Chair Johnson noted it meant the committee did not
necessarily have a lot of guidance, but the House Finance
Committee had a responsibility - without significant
sideboards - to sort out. She knew all of the committee
members were committed to making it happen. She asked if
Mr. Painter had any concluding comments.
3:27:56 PM
Mr. Painter thanked the committee for the invitation to
present. He noted that LFD was happy to model 10-year plan
scenarios the committee felt were more realistic. He
relayed that LFD typically started with the governor's
budget and 10-year plan. He stated that if it was not a
particularly meaningful starting point to the committee,
the division was happy to start with something the
committee found to be more reasonable.
Representative Tomaszewski thanked Mr. Painter for the
information. He stated it made it clear that the
legislature had balanced its budgets on the backs of the
people of Alaska in its tax of the PFD. He remarked it was
clearly shown to be the case where there had been a
balanced budget. He stated the balanced budgets reflected a
regressive tax on the most vulnerable people in the state.
He appreciated some of the comments about how the
legislature needed to be thoughtful in the way it
conservatively looked at its budgets. He looked forward to
the process and determining how to balance the budget
without hurting the most vulnerable Alaskans.
Co-Chair Edgmon thanked Mr. Painter for a great
presentation. He found Mr. Painter's knowledge of the
intricacies to be impressive. He remarked that Mr.
Painter's knowledge was balanced with his practical
experience in the building in different capacities for a
number of years. He suggested that perhaps Mr. Painter
could present various scenarios to the committee that were
perhaps truer to the committee's sense of the budget going
forward. He thought it would be helpful to have information
for a two to three-year timeline as well. He equated making
predictions after a certain period of time when considering
commodities and oil prices to throwing darts at the wall.
Co-Chair Johnson thanked Mr. Painter for the presentation.
She reviewed the schedule for the following day.
ADJOURNMENT
3:31:24 PM
The meeting was adjourned at 3:31 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD FY25 HFIN Fiscal Overview 1-24-24.pdf |
HFIN 1/24/2024 1:30:00 PM |
|
| LFD Response to HFIN Questions FY 25 Fiscal Overview 1-24-24.pdf |
HFIN 1/24/2024 1:30:00 PM |