Legislature(2025 - 2026)ADAMS 519
01/30/2025 01:30 PM House FINANCE
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| Audio | Topic |
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| Start | |
| Overview: Fy 2026 Fiscal Overview | |
| 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 30, 2025
1:34 p.m.
1:34:55 PM
CALL TO ORDER
Co-Chair Josephson called the House Finance Committee
meeting to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Andy Josephson, Co-Chair
Representative Calvin Schrage, Co-Chair
Representative Jeremy Bynum
Representative Alyse Galvin
Representative Sara Hannan
Representative Nellie Unangiq Jimmie
Representative DeLena Johnson
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
Representative Jamie Allard
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division.
SUMMARY
OVERVIEW: FY 2026 FISCAL OVERVIEW
Co-Chair Josephson reviewed the meeting agenda.
^OVERVIEW: FY 2026 FISCAL OVERVIEW
1:36:06 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced himself and his staff. He noted that in addition
to being the Legislative Finance Division (LFD) Director,
he was also the analyst for the governor's office and the
legislature's budget. He outlined which LFD analyst was
responsible for each department: Rob Carpenter was the
analyst for the Department of Administration (DOA), the
Department of Commerce, Community and Economic Development
(DCCED), and the Department of Law (DOL). The coordinator
for the operating budget was Morgan Foss, who was also the
analyst for the Department of Fish and Game (DFG). The
capital budget coordinator was Michael Partlow, who was
also the analyst for Department of Environmental
Conservation (DEC), the Department of Military and
Veterans' Affairs (DMVA), the Department of Transportation
and Public Facilities (DOT), and the University of Alaska
(UA). The division's fiscal modeler was Connor Bell, who
also was the analyst for the Department of Corrections
(DOC), the Department of Family and Community Services
(DFCS), the Department of Revenue (DOR), the Department of
Health (DOH), and the Department of Labor and Workforce
Development (DLWD). The division's newest analyst was
Nathan Teal, who was the analyst for the Judiciary, the
Department of Natural Resources (DNR), and the Department
of Public Safety (DPS).
Mr. Painter introduced the PowerPoint presentation
"Overview of the Governor's FY26 Budget" dated January 30,
2025 (copy on file). He began on slide 2 and offered an
overview of the presentation. He would start by recapping
the current year's budget and providing an update on
changes since the legislature adjourned in 2024. He would
also cover the fall revenue forecast, the governor's FY 26
budget, and conclude by providing a long-term outlook.
Mr. Painter continued to slide 3 and noted that when the
legislature adjourned in 2024, there was a projected budget
surplus of approximately $66.3 million in FY 24 and $7.8
million in FY 25. The surplus for FY 25 was narrow and the
legislature had not included any provision to cover a
potential deficit if revenue fell short of projections. He
explained that the $7.8 million surplus for FY 25 had been
based on DOR's spring revenue forecast from the previous
year. At the time, the state had a projected $7.8 million
surplus. The capital budget appropriations approved by the
legislature amounted to $565.5 million across the FY 24
supplemental and FY 25. He recalled that both legislative
bodies had agreed on a deal that set the figure at $550
million, excluding the mental health capital items, which
were handled separately.
Mr. Painter explained that in 2024, a significant portion
of capital budget funds were put into the supplemental
because there was a surplus in the supplemental. He
explained that it was more appropriate to look at the
capital budget on a legislative session basis rather than a
fiscal year basis. This approach accounted for the fact
that each legislative year encompassed two fiscal years,
and the surplus in the previous year provided more
flexibility in the budget for the supplemental period.
Mr. Painter relayed that the budget had also included about
$175 million in outside-the-formula K-12 funds, which had
been one of the larger policy decisions made in 2024. The
funding was equivalent to $680 in the base student
allocation (BSA). He outlined several changes made in the
previous year's budget aimed at reducing the need for
routine supplemental budget requests. He noted that the
supplemental budget had been growing over recent years, and
the goal was to integrate certain items into the base
budget to minimize the reliance on supplementals.
Mr. Painter explained that DOC had proposed several
increases in order to align its budget with supplemental
needs, especially after experiencing over $40 million in
supplemental requests in 2024. Another significant change
was the handling of fire suppression activity, which had
been moved from DNR into a fund that allowed for carry-
forward balances from year to year. The change would enable
the state to retain funds from low fire years to offset
future supplemental requests.
Mr. Painter noted that the legislature had significantly
increased funding for fire suppression, coming close to the
10-year average of fire suppression costs. Additionally,
funding for the Disaster Relief Fund (DRF) had been
substantially increased to $20.5 million which intended to
cover projected needs and provide a buffer of up to $5
million for unforeseen disasters. The goal was to ensure
that there was sufficient funding to handle unexpected
events while reducing the need for routine supplemental
funding.
Mr. Painter shared that the legislature had funded all
statewide operating items to statutory levels in FY 25,
which included items like school debt reimbursement and
fund capitalization, excluding the Permanent Fund Dividend
(PFD).
1:41:26 PM
Representative Galvin noted that Mr. Painter had mentioned
in a previous presentation that there were some changes
made at the end of session in the prior year that had not
gone through the House Finance Committee, nor had a fiscal
note been provided for the committee. She inquired whether
Mr. Painter had conducted any analysis on those items and
could provide a figure to help the committee consider the
impact.
Mr. Painter replied that he did not have an exact number of
the increments. He explained that several increments in the
governor's budget for the current year were related to
fiscal notes that had not been included in the previous
year's budget. He explained that fiscal notes were
typically included in the appropriation bill and were added
by the conference committee toward the end of the
legislative session. He further explained that 2024 had
seen an unusually high number of bill combinations, with
some bills passing without going through the finance
committee. As a result, some of the fiscal notes were not
properly vetted by the committee. He relayed that one of
the bills involved was legally challenged due to the degree
to which bills were combined. He acknowledged that the
combination process typically happened in the second
session of the legislature, and sometimes the conference
committee could not anticipate all of the implications. He
offered to follow up with the total amount of increments
requested by the governor that corresponded to fiscal notes
not funded in the previous year.
Representative Galvin asked for an update an item that
related to teachers who had a higher degree in education.
She asked if Representative Hannan knew what the
certification was called.
Representative Hannan responded, "National Board
Certification."
Representative Galvin recalled there was a bill granting a
bonus for the certification, but that it was not included
in the governor's budget. She asked for confirmation of her
understanding and if there were any other such instances
where bills had passed but were not reflected in the
budget. She wanted to make sure that the committee was up
to date on the numbers.
Co-Chair Josephson commented that the governor typically
requested funds in the budget to comply with and execute
new laws, although not every law necessarily received
funding. He asked Mr. Painter to provide a breakdown of
such instances for the committee.
Mr. Painter confirmed that the governor had generally
requested funds to comply with new laws, though funds were
not requested for all of the new laws. He would follow up
with the committee.
1:44:52 PM
Mr. Painter advanced to slide 4. He explained that after
the legislature passed the budget in 2024, the governor
signed it into law and exercised his line-item veto power.
The slide included a table breaking down the vetoes by
fiscal year and budget type, showing that the majority of
the governor's operating budget vetoes occurred in FY 25.
The capital budget vetoes were more evenly distributed
between the two fiscal years but the majority occurred in
FY 24, during the supplemental period.
Mr. Painter relayed that in total, the governor's vetoes
amounted to approximately $191 million of unrestricted
general funds (UGF). He highlighted some of the largest
items in the operating budget that had been vetoed and
noted that several of the items would be discussed in
future meetings. The largest veto was $20 million from the
Community Assistance Fund (CAF), which was governed by
statute. The fund's balance was not permitted to exceed $90
million and one-third of the balance was drawn down on July
1 every year to provide distributions to communities. As a
result of the $20 million veto, the balance at the end of
FY 25 would be $70 million. The amount distributed to
communities would be $23.3 million, which was $6.7 million
short of the full $30 million distribution.
Mr. Painter further clarified that CAF had a base payment
for all municipalities, cities, or boroughs, regardless of
population, and that the base payment cost was about $20
million. The remaining $10 million of a full distribution
was a per capita payment. In the case of a partial
distribution, the per capita payment would decrease, and
the base payments would be prorated only if the amount fell
below the base. Therefore, with a distribution of $23.3
million, the per capita amount would primarily be about
one-third of what it would have been with a full
distribution.
Mr. Painter added that another significant veto was $11.9
million intended for school districts to satisfy a federal
maintenance of equity requirement from FY 22. The issue
stemmed from a disagreement with the federal government
over a condition tied to COVID-19 relief funds for school
districts. The $11.9 million was the amount the federal
government determined that Alaska owed the districts to
address the inequity. After the veto in December of 2024,
the federal government decided that the outside-the-formula
funding already provided to the districts met the
maintenance of equity requirement and placed Alaska back in
compliance. The decision contradicted the guidance the
legislature had received during session, but ultimately,
the issue was resolved.
Co-Chair Josephson recalled that the number was $17
million.
Mr. Painter responded that $17 million was the total amount
across FY 22 and FY 23. The legislature had chosen to only
appropriate the FY 22 amount, leaving the FY 23 amount
unresolved. The intent was to address at least part of the
issue related to the timing of the federal guidance.
Mr. Painter continued that there was also an $11.1 million
veto related to the Broadband Assistance Grants (BAG),
which had been included in a bill [SB 140] passed midway
through the 2024 session to reauthorize and expand the
program. The appropriation was already reduced during the
conference committee, but the governor reduced it further.
The reason for the reduction was that some districts were
late in applying due to the timing of the bill, and the
growing competition from other cheaper services led several
districts to opt out of the program which reduced costs.
Mr. Painter relayed that the governor vetoed $10 million
for the Alaska Seafood Marketing Institute (ASMI), a base
budget item, as well as $10 million for the Alaska Marine
Highway System (AMHS) backstop, which had been included in
case federal funds were insufficient. However, the $10
million was found to be sufficient due to the actual amount
received from the federal government, making the veto have
no impact on operations. Additionally, $7.5 million was
vetoed from the increase to DRF which reduced the total
amount to $13 million instead of the $20.5 million
originally included. There was also a veto of $5.4 million
for the University of Alaska Fairbanks' (UAF) Tier I
research and $5.2 million for additional funds for school
districts for students in grades kindergarten through third
grade. About one-third of the FY 24 UGF supplementals were
vetoed from the capital budget and 12 percent of the
supplementals were vetoed from the FY 25 projects. Most of
the vetoes were related to legislative district additions,
with some statewide items also included. The structure of
the budget meant that Alaska State Senate additions were
more heavily vetoed, as the additions were more likely to
be supplementals.
1:51:00 PM
Co-Chair Josephson asked if the $11.9 million for the
maintenance of equity and the AMHS item harmed those who
wanted the funds.
Mr. Painter responded that while the maintenance of equity
issue had been resolved, the school districts would have
preferred to receive the funds. He thought it was likely
that the districts still would have wanted the funding to
be restored, regardless of whether the federal maintenance
of equity requirement applied. The actual usage of the AMHS
backstop would have only been $10 million which meant that
the veto did not have a practical impact other than
reducing the amount to the necessary level.
Co-Chair Josephson asked if the maintenance of equity
dollars were like any other dollars in the way that the
dollars were spent.
Mr. Painter responded in the affirmative.
Representative Galvin asked for more information about the
$5.2 million for grade school students. She asked for
details on the impact of the funds for students who needed
help with reading, which might have been related to the
Reads Act.
Mr. Painter confirmed that the distribution formula was
based on a fixed amount per student, plus an additional
amount for students identified as needing reading
assistance. The funding was focused on grades kindergarten
through third grade. However, the $5.2 million allocation
was not enough to cover the full projected amount and it
would have been prorated even without the veto. Without the
funding, the school districts would not receive additional
assistance.
Representative Galvin understood that when the Reads Act
had initially passed, there had been a $30 increase to the
BSA, but it was recognized that the amount was not
sufficient to meet the goals of the Reads Act. The
additional $5.2 million was intended to help fill the gap,
but the districts ultimately ended up with no extra help.
Mr. Painter responded that the governor's veto message
cited the broader outside-the-formula funds as the reason
why the funding was not necessary. However, the $5.2
million funding would have been more targeted to the
specific needs of the students.
1:54:17 PM
Representative Stapp asked for more information about the
broadband funding and wondered whether a program with a 90
percent federal subsidy and a generous state subsidy could
still be unaffordable for some school districts. He
suggested that the program was leading districts to opt for
alternative options.
Mr. Painter confirmed that this was indeed the situation as
reported by the federal Department of Education.
Representative Johnson reminded the committee of the $175
million in outside-the-formula funding provided in 2024.
The goal had been to avoid vetoes of the funding and ensure
it went to the school districts. She noted that the $5.2
million was a minimal amount and that the $30 increase to
the BSA, along with the additional $680, had helped provide
funding outside of the formula.
1:55:56 PM
Mr. Painter continued on slide 5, explaining that after the
vetoes, the projected $7.8 million surplus in FY 25 turned
into a $146.9 million surplus based on the spring forecast,
providing a bit more breathing room. However, the fall
revenue forecasts later turned the surplus into a deficit.
The deficit was now estimated at $81.5 million before
considering any supplemental items in FY 25. Considering
that there was no longer a balance in the statutory budget
reserve (SBR) and the legislature did not have a three-
quarters vote to access the constitutional budget reserve
(CBR), the state was left with an unfilled deficit of $81.5
million, plus any additional supplementals. The situation
would likely need to be addressed during the current
session unless oil prices rose significantly.
Co-Chair Josephson asked whether surplus funds were often
sweepable when the state ran surpluses unless the funds
were appropriated for specific needs or put into the SBR.
Mr. Painter replied that if the state ran a surplus, the
remaining funds generally were swept into the CBR at the
end of the fiscal year.
Co-Chair Josephson thought that given the lack of revenue,
leaving surplus funds in the general fund increased the
risk of the funds being spent on other needs, which made it
harder to get the funds back out once they were used. If
surplus funds were left in the treasury as general funds,
the chance of appropriating the funds to a beneficial need
would be reduced. He asked if his understanding was
correct.
Mr. Painter responded that it was difficult to retrieve
funds once the funds were left in the CBR. He noted that a
couple of years prior, the legislature had included a
provision to appropriate any additional surplus funds to
SBR with a majority vote, but the governor had vetoed the
provision. Last year, the legislature did not include a
similar provision due to the expectation that it would be
vetoed again.
Representative Hannan asked Mr. Painter whether the $81.5
million deficit prediction incorporated the supplementals
requested for FY 25. She noted that 14 additional
supplementals were expected, which would only expand the
deficit.
Mr. Painter clarified that the $81.5 million deficit did
not include any supplementals and was based solely on the
budget passed by the legislature.
Representative Hannan asked whether the requested
supplementals had been analyzed to calculate the expanded
deficit.
Mr. Painter responded that the information would be
provided in a few slides as part of the fiscal summary.
1:59:13 PM
Mr. Painter continued on slide 6 and discussed the fall
revenue forecast. He relayed that the December 2024 revenue
forecast prepared by DOR indicated lower oil prices and
production in both FY 25 and FY 26. The forecast projected
that revenue in FY 25 would be $220 million less than the
previous forecast, and in FY 26, revenue would be $230
million less. The drop in revenue was attributed primarily
to a $4 decrease in oil prices in both fiscal years.
Additionally, production was slightly down, with a
reduction of 10,000 barrels per day in FY 25 and 12,000
barrels per day in FY 26, contributing to lower revenue.
Mr. Painter explained that another factor affecting total
revenue was an increase in lease expenditures. Since the
state's production tax was a net profits tax, companies
could deduct lease expenditures down to the minimum tax. As
lease expenditures rose, the state received less production
tax revenue. The fall revenue forecast showed a significant
increase in lease expenditures for both FY 25 and FY 26
which was driven in part by investments in new fields on
the North Slope and were more expensive than originally
projected. There was also an increase in operating costs
for the fields.
Mr. Painter indicated that the combined effect of the
changes in production and lease expenditures was that the
state was projected to receive less revenue than originally
forecast in the spring, regardless of oil price. While
there had been hope that higher oil prices would offset the
issues, even hitting a price of $78 per barrel would result
in approximately $90 million less in revenue compared to
the spring forecast due to the increased costs and lower
production.
Mr. Painter continued that the difference in revenue
projections from the spring forecast was due to various
factors, including the volatility of oil prices and the
structure of production costs. He emphasized that oil price
alone could not be relied upon to balance the budget
because the shifts in revenue projections from year to year
were significant. Currently, each dollar change in the
price of oil resulted in a revenue difference of
approximately $35 million to $40 million. However, the
starting point for the revenue projections could change
based on other factors, shifting the goalposts.
Co-Chair Josephson understood that the current thirty-
fourth Alaska State Legislature, along with the upcoming
thirty-fifth and thirty-sixth legislatures, would likely
bear the consequences of working through the lease
expenditures. However, he suggested future legislatures
could benefit from the increased production after about
2030, assuming the forecast for oil production and prices
remained stable. He asked if his understanding was correct.
Mr. Painter responded in the affirmative. He explained that
DOR had analyzed two large oil fields expected to come
online: the Pikka field and the Willow field. Both fields
had different economics due to the type of company
operating the fields as well as the fields' locations.
Positive revenue would not appear for either field until
oil started flowing, and even then, it would take some time
for the production tax revenue to materialize. The Willow
field was being developed by an existing player on the
North Slope who could deduct its lease expenditures against
current production. The fiscal analysis from DOR showed the
Willow field as a negative revenue impact until the field
came online; once the field was operational there would be
a significant positive revenue impact. In contrast, the
Pikka field had no current production to offset expenses,
meaning that production tax revenue would not be realized
for several years after oil started flowing, although
royalties would begin right away.
2:03:50 PM
Representative Galvin asked for further clarification
regarding the impact of lease expenditures. She speculated
that as the years went on, the situation would work more to
the state's advantage.
Mr. Painter responded in the affirmative. He explained that
the two fields had different timelines for realizing
revenue. He reiterated that because the Willow field was a
current operation, it would begin to generate production
tax revenue as soon as oil started flowing. However, Pikka
would have caried forward credits from the years during
which there was no production because Pikka was not
currently producing. For the first few years of operation,
Pikka would pay minimal production tax as it would simply
be going through the carried forward annual losses or
carried forward credits. He clarified that Pikka would be
paying royalties immediately, but the production taxes
would not be implemented until much later because of the
nature of the production tax.
Mr. Painter moved to slide 7 and discussed the volatility
of oil prices, showing a graph of daily oil prices from
November 2022 to the most recent data. He pointed out that
the volatility of oil prices made revenue projections
unpredictable. For instance, a change of just $1 in the
price of oil could result in a $35 million to $40 million
shift in the revenue forecast. He noted that while there
were periods where oil prices seemed to be stabilizing at
$80 per barrel, the price could drop to $76 per barrel just
a few days later and cause significant changes in the
revenue forecast. He emphasized that it was important not
to become overly attached to any given forecast due to the
volatility of oil prices. He remarked that while the
volatility in oil prices had been extreme in the past, such
as during the COVID-19 pandemic when oil prices briefly
went negative, the current volatility was much more
constrained.
Mr. Painter moved on to slide 8 and relayed that a more
stable source of revenue for the state was the percent of
market value (POMV) draw from the Permanent Fund. He
explained that in FY 25, the draw was based on the five-
year average market value from FY 19 to FY 23. In the
upcoming fiscal year FY 26, the draw would be based on the
five-year average from FY 20 to FY 24. He noted that the
balances changed from year to year. For example, FY 19 had
a balance of approximately $66 billion, while FY 24 had a
balance of $80 billion. The shift resulted in a significant
increase in the POMV draw, which was an increase of about
$140 million from FY 25 to FY 26. The trend was expected to
continue next year as the balance from FY 20 would be
replaced by the balance from FY 24, further boosting the
draw. However, the POMV draw would likely stabilize after
FY 27 and stop increasing significantly because the spike
in FY 21 would no longer be part of the average. He
emphasized that the current structure was helping Alaska's
revenue situation considerably as it still benefited from
the big spike in FY 21. The stability would likely continue
for another year, but the Permanent Fund's growth rate
would soon moderate.
2:08:17 PM
Co-Chair Josephson noted that he appreciated the positive
message, but there were challenges as well. He asked for
confirmation that no other state could turn to a $3.7
billion annual draw.
Mr. Painter responded in the affirmative. He noted that
North Dakota had a similar fund, but it was not nearly as
large as Alaska's.
Mr. Painter proceeded to slide 9 which displayed the budget
sensitivity chart for the current year. He mentioned that
in 2024, the chart had been a major point of focus because
of the waterfall provision in the budget. If revenue
exceeded the spring forecast by more than $135 million, the
excess would be allocated to an energy relief appropriation
because of the waterfall provision. However, the
possibility of hitting a surplus of $135 million was
unlikely as the current projections showed a $220 million
shortfall in revenue. He relayed that the lower section of
the slide indicated that the budget had originally been
expected to have a surplus. However, the state was now
facing an unfilled deficit as revenue projections had
dropped, which was represented in red. The deficit would
increase if additional supplementals were added to the
budget because it would raise the total appropriations.
Representative Galvin asked if there might be additional
resources that could help fill the deficit from funds held
by DOR. She was interested in learning more about the funds
and whether they were accessible for use.
Mr. Painter asked if Representative Galvin was referring to
the Higher Education Fund (HEF) and Power Cost Equalization
(PCE) fund.
Representative Galvin responded in the affirmative.
Mr. Painter responded that he would not be covering those
funds in detail during the current discussion. He noted
that the funds were already being drawn upon at
unsustainable levels. While it was possible to draw
additional amounts, the funds were designed to support
ongoing programs, unlike the CBR and SBR, which were
reserves not tied to specific programs. While drawing from
the funds could help address the deficit, it was a policy
choice and not something he would necessarily recommend.
Representative Galvin commented that she would be crossing
her fingers regarding the price of oil.
2:11:45 PM
Mr. Painter continued to slide 10 which outlined the
governor's supplemental budget. He noted that when the
governor introduced his budget in December of 2024, it
included a fast-track supplemental bill. Another
supplemental bill was expected to be introduced soon, with
Tuesday, February 4, 2025, being the deadline for
submissions, although it was unclear when the bill would be
introduced.
Mr. Painter explained that the fast-track supplemental bill
included two main items. The first was a request for $50
million in UGF for the Alaska Industrial Development and
Export Authority (AIDEA) to serve as a backstop for the
Alaska Liquified Natural Gas (AKLNG) contract. The second
item was a request for $15 million in UGF for DRF. The
request came after the governor vetoed $7.5 million from
that fund in the previous year. At that point, DRF did not
have enough general funds to cover pending disaster costs,
and the fund had been borrowing from the deferred
maintenance appropriation to cover expenses. Additionally,
the governor requested another $10 million in UGF for ASMI,
which was the same amount that had been vetoed from the FY
25 budget. However, the request was structured as a multi-
year appropriation spread over three years.
Mr. Painter noted that if the bill was intended to be fast-
tracked and passed before the operating budget, it should
include the CBR vote. He emphasized that the governor could
not sign an unbalanced budget and the state's constitution
required a balanced budget. If the fast-track bill
appropriated from the general fund without a corresponding
source to cover it, the governor could not sign it. If the
legislature wished to proceed with the governor's request,
the CBR vote would need to be moved from the operating
budget into the fast-track bill. He added that more
supplemental bills would likely be introduced next week,
including for DOC for fire suppression and [DOH] for
Medicaid.
Co-Chair Josephson understood that there was a previous
situation where deficit-filling language had been included
in the supplemental budget. He asked if it was in FY 25 or
FY 24.
Mr. Painter responded that there was deficit-filling
language for the SBR, but the SBR had no balance left which
would make it ineffective. There was a surplus in FY 24 and
the language was unnecessary. In FY 23, deficit-filling
language was added in the supplemental from the CBR. The
last time the CBR was accessed was in FY 23.
2:14:35 PM
Representative Stapp asked if there was a possibility that
the governor could invoke an impoundment if a supplemental
bill passed without an available fund source.
Mr. Painter responded that impoundment typically only
applied if the legislature adjourned without addressing the
deficit. If the legislature remained in session, it would
have the opportunity to address the issue before the
governor would need to consider impoundment.
Co-Chair Josephson understood that the state would not run
out of money until early June of 2025 if the legislature
took no action. He asked if it would make sense if the
state passed a fast-track supplemental bill and one
operating budget bill that spanned FY 25 and FY 26.
Mr. Painter responded in the affirmative. The reason for
the fast-track bill was not due to an immediate need to
address the deficit, but rather to fund certain priorities
more quickly than waiting until May of 2025. Even when the
state had large deficits such as in FY 15, the legislature
was still able to deal with the deficits during the regular
legislative process. The fast track represented the
governor's desire to appropriate the $50 million and $15
million more quickly than waiting until May.
Representative Hannan asked for more information about the
impact of using the deferred maintenance account to cover
disaster relief costs. She understood that some projects
originally intended to be funded by the deferred
maintenance account had been delayed or halted. She asked
for clarification on how the deferred maintenance schedule
was being affected, as it already had a significant
backlog.
Mr. Painter responded that the Office of Management and
Budget (OMB) had indicated that only a $6 million portion
of deferred maintenance funds was being used for disaster
relief purposes. As a result, the funds were not being
allocated to other projects. If the gap in DRF was filled,
the $6 million worth of projects could be resumed, but the
projects currently remained on hold.
2:18:14 PM
Mr. Painter moved to slide 11 which focused on the upcoming
FY 26 budget. He explained that the starting point for the
FY 26 budget was what was referred to as the "adjusted
base," which involved taking the prior year's budget,
removing one-time appropriations, and adding necessary
statewide policy decisions to maintain services at a status
quo level. For example, if there was a change in student
enrollment affecting the education formula, the change
would be reflected in the adjusted base, but it would not
be considered a policy choice. Similarly, statewide salary
adjustments for union contracts that had already been
approved would also be included in the adjusted base. The
inclusion of formula changes in the adjusted base was a
recent development, which made it easier to compare policy
changes. He emphasized that the adjusted base for the next
year would typically mirror the prior year's funding levels
unless there were changes. For instance, the PFD was set at
25 percent of the POMV draw, and it could be assumed that
the baseline for the following year would assume the same
percentage of the new POMV draw.
Mr. Painter continued to slide 12 and addressed one-time
items, the largest of which was the $175 million for
kindergarten through twelfth grade (K-12) education funding
outside the formula. The funding amount was removed from
the adjusted base because it was considered a one-time
item. He explained that this accounted for most of the one-
time items, with other smaller one-time items totaling
about $53 million. The items included funding for the AMHS
backstop, child care grant programs, pupil transportation,
and tourism marketing. He noted that the rate-smoothing
appropriation was technical and would be reflected in the
management plan.
Co-Chair Josephson asked if he was correct that even though
the legislature might not be repopulating or refunding the
items on slide 12, it was still important for legislators
to focus on the items. He advised that legislators not
become fixated on the governor's budget, which was a
slimmed down budget.
Mr. Painter responded in the affirmative. Some of the items
were one-time needs and some were ongoing needs that were
funded once with the intention to revisit the items, such
as the K-12 formula. He did not think the message was that
the legislature thought schools only needed funding for one
year, but that the legislature wanted to visit the item
again the following year.
Mr. Painter continued to slide 13 which covered significant
formula adjustments to the state's budget. The largest
change was a projected reduction of $28.7 million in UGF to
fund the same base student allocation as in FY 25. The main
driver of the reduction was a decrease in the student
count. There was a noticeable drop of approximately 3,800
brick-and-mortar students, although this was partially
offset by an increase in correspondence students, which
added around 978 students. Despite the offset, the overall
trend was a decline in student enrollment. The reduction in
student numbers aligned with demographic projections from
DLWD, which indicated that there were fewer children in the
zero to five age group compared to those aged six to
eighteen. The trend of declining student enrollment would
continue in the coming years unless there were significant
changes in the state's demographic landscape.
Mr. Painter noted that the K-12 foundation formula also saw
changes in funding contributions. The required local
contribution to the formula was set to increase, while the
federal impact aid was projected to decrease slightly,
which somewhat balanced out the formula adjustments.
Additionally, the amount allocated for pupil transportation
was also reduced due to the decrease in student numbers.
Another significant change was in the school debt
reimbursement program, which was projected to decrease by
$10.2 million in UGF. The reduction stemmed from a
moratorium on new school debt eligible for reimbursement,
which had been in place since 2015. The moratorium was
scheduled to end on July 1, 2025, allowing school districts
to take on new debt. The program had seen a steady decline
in funding year after year because schools had been unable
to take on new debt for several years. The expiration of
the moratorium could potentially increase future state
obligations as new school debt became eligible for
reimbursement.
Mr. Painter explained that the capitalization of the
Regional Educational Attendance Area (REAA) fund was also
tied to the school debt reimbursement program, meaning as
the school debt reimbursement amount decreased, the REAA
fund capitalization was also reduced. The adjustment
reflected the broader trends related to the state's
approach to school debt. Additionally, the state saw
reductions in other debt services attributed to a
successful refinancing effort by DOR's debt management
group, as well as the fact that the state had not issued a
general obligation bond in over a decade. As older debts
were paid off, the state's debt obligations continued to
decrease.
Mr. Painter also highlighted an increase in state
contributions to retirement, which was set to rise by $36
million based on the June 30, 2024, valuation. The increase
in retirement contributions was one of the cost drivers for
FY 26 and was expected to have significant financial
implications moving forward.
2:25:51 PM
Co-Chair Josephson noted that when he arrived in Alaska in
2013, the state had allocated $90 million to community
assistance. The typical annual allocation had been about
$60 million but over the years, that amount had decreased.
Currently, the state was providing only around $23 million.
He noted that the suspension of the school bond debt
reimbursement program had contributed to the deterioration
of buildings due to a lack of funds for necessary repairs
and maintenance. He understood that the moratorium on
school bond debt reimbursement was set to end in six
months. He asked what the impact on future budgets would be
if the moratorium were not extended. He asked if it would
add $10 million to the budget.
Mr. Painter responded that it was hard to tell if
municipalities would bond for more projects. There were ten
years of built-up projects and once the moratorium ended,
it was difficult to predict whether districts or
municipalities would initiate many new bond projects. He
explained that the program would be less generous than in
the past, with reimbursement levels decreasing from 60
percent to 70 percent to only 40 percent to 50 percent,
which was down from a peak of 90 percent. While the
reimbursement rate reduction would decrease the state's
financial burden, the uncertainty remained regarding how
many new projects would be pursued after the moratorium
ended. Many districts had seen their previous school debt
projects fall off the books, providing municipalities more
debt capacity and more projects had the potential to come
online.
Mr. Painter continued to slide 14 and relayed that the
salary and benefits adjustments were based on finalized
negotiations with certain bargaining units. The adjustments
included changes in the Public Employees' Retirement System
(PERS) rate, health insurance adjustments, and salaries for
UA, which had been impacted by past costs incurred by the
university. He clarified that while the legislature funded
the adjustments on an annual basis, it was not bound by a
multi-year contract, which meant that the legislature had
the discretion to decide whether to continue funding the
adjustments in the future.
2:29:33 PM
Representative Hannan asked for more information about the
legislature's historical record of not funding contracts
that were negotiated in good faith.
Mr. Painter responded that there was a legal case in the
early 1990s that had settled the current understanding of
constitutional provisions regarding contract funding. He
would need to gather more information on whether the
legislature had defunded a contract since then.
Co-Chair Josephson asked if the funding for the Alaska
State Troopers (AST) and small-town police officers would
be guaranteed in future years. He understood that the
Public Safety Employees Association (PSEA) needed $9.3
million more to reach the bargain for agreement and the
governor had included the entirety of the $9.3 million in
the FY 26 budget. He thought it was likely that it would be
funded again in FY 27.
Mr. Painter replied that the decision was at the purview of
the legislature. Funding for such agreements was subject to
legislative appropriation and if the legislature chose not
to fund it in future years, the union would return to the
bargaining table.
Co-Chair Josephson thought it seemed unfair.
Representative Stapp commented that he would be surprised
if the items were not funded. He understood that the
AlaskaCare plan had more eligible enrollees than the UA
choice plan.
Mr. Painter responded in the affirmative.
Representative Stapp asked what the percent increase was to
the UA Choice Plan. He noted that the increase for
AlaskaCare was 6.2 percent, which seemed typical.
Mr. Painter responded that he did not know the exact
percentage increase for the UA Choice plan. He explained
that the increase for AlaskaCare was partially due to past
costs, and that the current 6.2 percent increase was
subsidized through the Group Health and Life (GHL) fund.
The subsidy was a result of a policy choice made by DOA to
use part of the fund balance to offset the increase.
Without the subsidy, the increase would have been closer to
10 percent.
Representative Stapp asked for more information about the
lapsing funds used to subsidize the premiums. He asked
where the fund source originated from and whether it was
related to people leaving their place of employment.
Mr. Painter responded that unspent personal services funds
at the end of the year went into several categories before
being lapsed into the general fund. Some of the categories
were the working reserve, which paid for things like leave
cash ins, and the GHL fund which helped maintain a certain
balance for the health insurance plan, which was primarily
due to unfilled positions beyond the vacancy factor. He
offered reassurance that the fund would get refilled.
Representative Stapp understood that DOA was using lapsing
funds from unfilled positions that fell into GLH and
subsidizing the premiums on AlaskaCare. He was curious
about the potential impact of a high vacancy rate on the
health insurance premiums. He asked whether the costs of
the premiums would increase sharply if the state were to
reach near full employment, as the subsidies from unfilled
positions would no longer be available.
Mr. Painter responded in the affirmative. He added that
some of the costs were paid for by other fund sources, not
just the lapsing funds. He also noted that lapsing funds
would not be dollar-for-dollar in terms of savings, as some
of the savings would go into the CBR.
2:34:52 PM
Mr. Painter moved on to slide 15 and provided a fiscal
summary for FY 25 and beyond. He began by outlining the
projected fiscal situation for FY 25. Before any
supplementals, there was an expected deficit of $81.5
million. With the governor's proposed supplementals of $75
million, the deficit was anticipated to rise to $156.5
million. The projection did not account for any further
supplementals that the governor might propose the following
week. He noted that there was a significant reduction in
the agency operations budget for FY 26, which had decreased
by $175 million compared to the previous year. The main
reason for the reduction was the removal of $228 million in
one-time items. He explained that statewide items had
increased slightly and that there would be more details in
a later slide.
Mr. Painter highlighted that there was a 15 percent
reduction in the capital budget, but the figure understated
the actual difference in the capital budget because there
was a supplemental in the previous year. When accounting
for the supplemental budget from the previous year, the
true decrease from session to session was closer to 38
percent. He added that the governor proposed the statutory
amount of $2.5 billion for the PFD. Ultimately, there was a
projected deficit of around $1.5 billion for FY 26. The
governor proposed drawing from the CBR to cover the
shortfall. He explained that the CBR had an estimated
balance of $3 billion, which meant that using the CBR for
the deficit would be using approximately half of the fund.
Mr. Painter advanced to slide 16 which included a swoop
graph showing a visual comparison of the governor's
proposed budget in blue against the FY 25 management plan
in red. The graph highlighted key differences, such as the
significant reduction in the PFD, the smaller allocation
for education due to no additional funding outside the
formula, and a reduced capital budget. He noted that the
other changes were likely too small to be noticeable.
Mr. Painter moved to slide 17 and explained the Sankey
diagram, which was another way to visualize the governor's
budget. On the left, the diagram showed the sources of UGF
revenue, with the largest contribution coming from the
Permanent Fund's POMV draw at nearly $3.8 billion.
Petroleum revenue was estimated at around $1.7 billion,
while non-petroleum revenues, including excise taxes and
corporate income taxes, were approximately $675 million.
The budget also included a deficit draw from the CBR, which
amounted to $1.5 billion and brought the total UGF
available for the budget to $7.7 billion. The largest
portion of the revenue was allocated to agency operations,
totaling $4.5 billion. Other items such as the PFD, the
capital budget, and fund transfers were also included in
the diagram.
Mr. Painter proceeded to slide 18 and reviewed agency
operations. He relayed that the governor's budget included
$57 million above the adjusted base which meant that there
were policy changes contributing to the budget, even though
overall spending was lower than the previous year. One of
the items was $7.5 million in UGF allocated to DOC to
replace lost federal funding due to changes in federal
prisoner reimbursements. The reduction in federal funding
came from a decline in the number of federal prisoners and
changes in how the federal government reimbursed the state
for housing prisoners.
2:40:00 PM
Representative Galvin asked for more information about a
discrepancy in the funding for additional troopers. In a
previous presentation from OMB, the cost for additional
troopers was listed as $3.75 million, whereas in Mr.
Painter's presentation, the figure was $6.6 million.
Mr. Painter responded that the higher figure represented
multiple increments, including the costs for the new
trooper post, additional troopers in Kotzebue, and overtime
funding.
Representative Galvin understood that there was a remaining
discrepancy of about $1.7 million and requested further
clarification offline.
2:41:42 PM
Mr. Painter continued to slide 19 and the statewide items
in the governor's budget. He explained that the statutory
appropriation for CAF was $30 million annually, but the
amount did not bring the fund up to the full $90 million
level that had been provided in the past. To reach the full
$90 million, additional funding would need to be added to
the budget. The next item was the $13 million UGF deposit
to DRF, which matched the post-veto number for FY 25. Over
the last eight years, the average usage of the fund has
been around $16.8 million, although the number fluctuated
based on the occurrence of disasters. If the first two
years during which there were fewer disasters were
excluded, the average would be higher. If the 2018
Anchorage earthquake were not included in the total, the
average would be lower. He explained that the amount to be
allocated in the governor's budget was a judgment call,
with some flexibility in how the legislature might choose
to leave a buffer for potential needs.
Mr. Painter explained that the next significant item was
the Fire Suppression Fund (FSF). The budget allocated $25.8
million for the fund, which was $8.6 million less than the
FY 25 deposit. The amount represented about 75 percent of
the costs associated with fire suppression, as most of the
expenses were incurred during the first half of the fiscal
year, which aligned with the fire season. The remaining 25
percent would likely be allocated through a supplemental
request later in the year. He noted that the fire season
spanned two fiscal years, and funding only 75 percent now
might reduce the need for additional funding in the future.
However, the growing costs of fire suppression made it
difficult to predict the total amount that would be needed
each year. By funding the FSF more robustly, the state
could avoid the need for larger supplemental requests in
the future. The fund could be used to bring stability to
the funding process year-to-year, with the added benefit of
potential federal reimbursements coming in after a multi-
year billing cycle.
Mr. Painter explained that the more funds that were
allocated now, the fewer funds that would be required for
future supplementals. Over time, unspent amounts could be
carried forward to offset future costs. The federal
reimbursements could help offset costs in the future,
though the benefit had not yet materialized.
Co-Chair Josephson remarked that he had recently examined
the DNR budget and noticed that item after item showed
increments for fire suppression related activity. He asked
whether the items were supplemental, suggesting that they
could be helpful in mitigating future costs.
Mr. Painter clarified that fire suppression involved two
components: preparedness and activity. Preparedness
referred to ongoing efforts to mitigate future costs, such
as constructing fire breaks, which could reduce the need
for emergency response and reduce long-term costs. While
the benefits of preparedness measures might not be
immediately apparent, such measures could ultimately reduce
activity costs. However, unlike some other states, Alaska
had not conducted extensive cost-benefit analyses of the
preparedness measures. The state funded less than the
average amount it spent on activity and it would not be
able to reduce the activity budget; however, in theory,
spending money on preparedness reduced the need for
activity spending in the future.
2:47:08 PM
Representative Galvin recalled that there had been previous
discussions on ways to avoid high supplemental costs,
especially in relation to fire suppression. She understood
that there was an attempt to amend the budget to reflect
the high 10-year averages, but the governor was not on
board with the idea. She asked whether it would have been
worth further consideration to accurately estimate a two-
year average, or if there had been other reasons for
ensuring the funds were available beyond simply improving
budgeting and reducing supplementals.
Mr. Painter replied that the amount in the governor's
budget for fire suppression was still nearly twice the
amount allocated the previous year. He noted that DNR
needed enough funding to cover initial setup costs at the
beginning of the fire season but beyond that, the disaster
relief statute ensured that the state would respond to
disasters regardless of the available funds. He emphasized
that the goal had been to reduce unpredictability and avoid
supplementals, though the executive branch would still
respond to emergencies using the disaster declaration
process even if the funds were not yet available.
Representative Galvin asked whether there was concern that
the state would not have enough readily available funds for
urgent needs that could eventually be drawn from the CBR.
Mr. Painter responded that the executive branch had not
been worried as the CBR had about $3 billion in it. Fire
costs were not expected to come close to depleting the CBR.
The assumption had been that the legislature would approve
a draw from the CBR if needed.
2:50:49 PM
Mr. Painter moved to slide 20, which covered the capital
budget. The governor's capital budget proposal for FY 26
totaled $282 million in UGF, which was a 14.6 percent
reduction from FY 25 and a 38.2 percent reduction from the
total for the 2024 session across both fiscal years. The
$282 million in UGF would be used to match $2.8 billion in
total funds and 55 percent of the total funds would be
allocated to match federal funds, primarily for the surface
transportation program, airport improvement projects, and
the Village Safe Water (VSW) program. The funds would be
used to match other large federal appropriations, including
those from DEC. He highlighted a few key items in the
budget, noting that the Alaska Housing Finance Corporation
(AHFC) would receive UGF funding that mirrored its
dividend, which the corporation used to build its budget.
Though the governor had made some adjustments, the funding
level remained largely the same.
Mr. Painter noted that there was $19.5 million for IT
projects across five agencies. The demand was growing for
IT-related expenditures, with the potential for more
projects in the future. There was also $17 million
allocated for UA, though many of the items in the
university's capital budget were effectively operating
budget items such as the drone program.
Mr. Painter continued that there was a $6.5 million
appropriation for an airplane requested by DPS, which had
been turned down by the legislature the previous year. He
noted that AEA had requested $6.3 million for the Dixon
Diversion Hydro Project. The Renewable Energy Fund (REF)
list had several unfunded projects from the previous year,
with around $15 million still unallocated. Additionally,
there was a $5.6 million request for DFG for Gulf of Alaska
Chinook Salmon research.
Mr. Painter clarified that there was no funding for school
construction or major maintenance in the governor's budget.
However, the school debt reimbursement program would be
coming back online and rural areas would receive some
funding through the REAA fund.
Co-Chair Josephson asked if the $154.6 million match was
larger than usual due to the Infrastructure Investment and
Jobs Act (IIJA).
Mr. Painter responded in the affirmative. The match had
increased as the amounts for DOT projects had also
increased. The largest increase in IIJA funding was for DEC
and came in the form of funds that did not require a state
match.
Representative Galvin understood that there was a lack of
funding for school construction and major maintenance.
Mr. Painter clarified that the funding under the school
debt reimbursement program could go toward either deferred
maintenance or new projects.
Representative Galvin asked what the total amount needed
for school construction and maintenance was.
Mr. Painter responded that it was around $500 million
across major maintenance and school construction. He
offered to follow up with the exact figure.
2:55:39 PM
Representative Hannan asked if any analysis had been done
regarding the federal executive orders and the impact on
the state's match for federal grants or projects. She
wondered if any of the $154.6 million in matching funds
might not come through.
Mr. Painter replied that the primary items being matched in
the capital budget were for DOT projects and the VSW
program, which were unlikely to be affected by any federal
funding freezes. However, the broadband funding could
potentially be impacted. There was funding in the operating
budget for the state's Green Bank, which was funded through
AHFC. He noted that some of the AHFC grants might be
targeted, along with renewable energy projects supported by
federal funds through AEA. However, many of the projects
were not dependent on a state match as the grants would be
distributed to recipients.
Representative Hannan commented that she was most
interested in AMHS grant funds that the state had
anticipated receiving.
Representative Tomaszewski asked for an estimate of the
yearly obligation for school debt reimbursements.
Mr. Painter responded that it was difficult to estimate due
to the 10-year backlog. He explained that there was
uncertainty about how much the local districts would submit
initially and whether the districts would be wary of the
state's willingness to fund the full amount. He added that
the fiscal modeling used a placeholder based on past usage
but it was not clear how accurate the number would be.
Representative Tomaszewski asked how much the school
districts were currently paying in debt.
Mr. Painter responded that there was an established debt
schedule. He could follow up with a list from DEED
outlining the current debt schedule. He noted that some of
the projects had been refinanced until FY 39.
Mr. Painter expressed that the governor's proposed capital
budget was unlikely to be sufficient to meet the ongoing
capital needs of the state, especially if the state
intended to maintain its current facilities. He relayed
that many state buildings were constructed during the late
1970s through the mid-1980s and were now 40 to 50 years old
and in need of replacement and not just maintenance. He
noted that there was a $2 billion deferred maintenance
backlog, but the figure likely underestimated the actual
need. For example, the Fairbanks Pioneer Home (FPH)
required a full replacement, although it was listed in the
deferred maintenance budget. He stressed that the facility
was not ADA accessible and needed a new roof. The estimated
replacement cost was $115 million, which was a significant
expense not included in the capital budget. He stressed
that if the state did not plan for the replacement of aging
facilities, there would be future problems as some of the
buildings could become uninhabitable within the next few
years.
Mr. Painter explained that while it would be ideal for the
state to spend a small percentage of its facilities funding
on maintenance. The funding did not account for the
replacement of aging structures. Additionally, the state's
IT systems were aging, such as the Integrated Resource
Information System (IRIS) accounting system, which had no
value as an asset but still required eventual replacement.
He offered a specific example of a system used for the
Office of Children's Services (OCS) that was deemed
inadequate by the federal government and would cost an
estimated $52 million to replace. He highlighted that only
about half of the cost would be covered by federal funds.
The legislature would need to decide whether to fund the
remaining $26 million or allow the department to phase in
the replacement over several years. However, phasing the
replacement in would mean the system would be more
expensive in the long term because the entire cost would
not be paid all at once. He remarked that the system would
need to be replaced if the state were to keep functioning
and if OCS were to continue receiving federal funds.
3:02:07 PM
Mr. Painter highlighted that the $282 million allocated for
capital expenses likely would not be sufficient unless
there was a drastic change in the way the state operated.
He emphasized that deferred maintenance and new
construction needed to be addressed. He encouraged
legislators to think proactively about solutions and build
the solutions into fiscal planning, particularly to avoid
leaving future legislatures to handle the consequences of
neglecting facilities like FPH.
Co-Chair Josephson asked if the federal connection to OCS
was primarily through the Indian Child Welfare Act (ICWA).
Mr. Painter responded in the affirmative and noted that
ICWA provided some funding. The state had to meet certain
standards within its system to continue receiving federal
funds.
Mr. Painter continued to slide 21 to further discuss the
operating budget. He relayed that the amended budget would
likely reflect a $200 million bill for education funding,
which had not yet been included in the governor's proposed
budget. As a result, the projected $1.5 billion deficit
would likely increase to $1.7 billion after the education
bill was added. He explained that the Medicaid budget did
not yet account for the $19.6 million UGF increase
requested by DOH. The department had recently been notified
of a potential federal rate increase for the Indian Health
Service (IHS), which could further increase costs.
Mr. Painter stated that there were nine unions still
negotiating their contracts and the cost of the agreements
was not yet included in the budget. The cost could total
nearly $30 million if a 3 percent increase were to be
assumed. He advised the legislature to factor in a
reasonable estimate for unknown expenses when developing
the budget.
3:05:30 PM
Mr. Painter advanced to slide 22 and noted that the
governor's budget had a $1.5 billion deficit. Over the last
two years, the legislature had responded to the governor's
budget by reducing the PFD from the statutory amount to a
75-25 split. If the same approach were taken in the current
year, the proposed budget would be balanced; however, the
split would only address the deficit in the governor's
budget and would not cover the additional costs discussed
in the previous slides. He noted that the $1.5 billion
deficit did not include other proposed costs, such as the
$200 million in funding the governor had mentioned or the
additional costs from the proposed HB 69, which would
increase the BSA. There were also other items not yet
accounted for.
Mr. Painter emphasized that simply adjusting the PFD to the
75-25 split would not be enough to balance the budget. The
legislature would need to either find other budget
reductions, reduce the dividend further, or explore new
revenue options to close the gap. He emphasized that simply
relying on one solution, which had been the strategy for
the last two years, would not be sufficient in the current
year.
Representative Stapp asked for more information about the
impact on revenue of a possible drop in oil prices. In the
past, the 75-25 split rule had been pitched to him as the
"gospel," but he thought it was unaffordable because the
legislature could not stop itself from spending money and
it relied on oil prices. He asked what the revenue loss
would be if the spring revenue forecast showed the oil
price had dropped to $63, which would be a $10 decrease
from the current price.
Mr. Painter replied that the difference would be $7 for FY
26. He added that if the price were to fall to $60, the
revenue loss would range between $350 million and $400
million.
Representative Stapp suggested that the deficit could reach
about $500 million if the oil price dropped further. He had
heard about many ways the legislature wanted to spend
money, but he had not yet seen any new revenue or tax bills
from the House Majority. The bills he had seen appeared to
propose an additional $100 million in education funding for
the first year. He expected another couple hundred million
dollars in operating expenses and a potential capital
budget increase. He stated that if oil prices dropped and
such expenses were included, the deficit could be closer to
$700 million to $800 million.
Mr. Painter responded that the additional expenses would
bring the deficit to Representative Stapp's estimated
range.
Representative Stapp asked if Mr. Painter had modeled "99
things that people want to spend money on but the PFD isn't
one."
Mr. Painter responded that he assumed Representative
Stapp's question was facetious but clarified that they had
not modeled that particular 99-1 split. He stated that it
would likely result in a zero dividend at that level.
3:09:29 PM
Mr. Painter continued to slide 23. He explained that the
graph on the slide showed the state's UGF revenue and
budgets dating back to FY 14. He chose FY 14 because it
marked the beginning of the state running large deficits.
The bars at the front of the graph represented the budget,
while the area in the background represented revenue. The
major change in the graph began in FY 19, when the state
started the POMV draw from the Permanent Fund. Since then,
the state had been running relatively balanced budgets each
year, with an average deficit of about $200 million. He
noted that, although the state had drawn down the CBR to
zero, the state had been able to rely on revenue
replacement dollars from the federal government. He added
that the CBR balance had grown over the period due to those
other revenue sources.
Mr. Painter relayed that historically, the legislature had
generally managed to figure out the budget on a year-to-
year basis and the large deficits had not continued year
after year. However, there was still a structural deficit,
which was reflected in the governor's budget. If the state
followed the current PFD statute, a structural deficit
would remain, even before factoring in other proposed
expenditures. The state's current projected deficit was
expected to continue into the if nothing was done to
address it. The governor's 10-year plan illustrated a
status quo scenario, where the $1.5 billion deficit would
persist and likely worsen over time.
Mr. Painter continued to slide 24 which included a chart of
projected revenue by source from FY 26 to FY 34. He
explained that DOR forecasted that oil would be a
relatively stable over time and decrease only slightly from
$70 per barrel in FY 26 to $68 to $69 from FY 27 to FY 32.
Oil production was projected to increase over time from the
current level of just under 500,000 barrels a day in FY 26
to 650,000 barrels a day by FY 34. However, he noted that
the projections did not necessarily mean that revenue would
grow faster than inflation. For the first several years of
the forecasted period, revenue would grow slower than
inflation and it was not expected to reach an inflation-
adjusted level until FY 34, which would coincide with a
higher production year and the end of carried-forward
credits from Pikka. He emphasized that if a balance could
not be achieved now, it would not be achieved in the
future.
Mr. Painter stated that the Permanent Fund was projected to
grow at 7.65 percent per year during the forecasted period,
and the POMV draw would also grow; however, oil revenues
would not grow faster than inflation. He reiterated that if
the legislature could not balance the budget using the POMV
draw in the current year with current strategies, it would
not work in the overall modeling period. He noted that
while oil prices could spike, the fall forecast did not
suggest that it would happen.
3:13:08 PM
Mr. Painter advanced to slide 25 which included a similar
chart of the realized Earnings Reserve Account (ERA)
balance from FY 22 to FY 35. The total return from the
Permanent Fund was projected to grow 7.65 percent from FY
22 to FY 35, but the statutory net income, which
represented realized income each year, was projected to be
only 6.25 percent. The discrepancy meant that a growing
portion of the fund would be made up of unrealized gains
that were "paper" gains that could be spent through the
POMV draw as the draw was based on the total market value.
However, the gains had to be realized and moved into the
ERA in order for the gains to be spendable which meant that
there would be a gap between the unrealized and realized
gains in the future. He pointed out that with 2.5 percent
inflation and a 5 percent POMV draw, the total amount spent
would exceed the 6.25 percent projected realized income. As
a result, the ERA balance was projected to decline over
time.
Mr. Painter noted that the graph compared the year-end
realized ERA balance starting in FY 22 with the following
year's POMV. The comparison was used because it showed how
much money was available to spend on June 30 of a given
year, and then how much APFC owed to the general fund by on
July 1. He explained that if APFC owed more on July 1 than
it had on June 30, the corporation would need to pay as it
earned, which could lead to a precarious situation. The
graph assumed statutory inflation proofing, which included
a 2.5 percent inflation adjustment each year. Based on
static modeling, there would not be enough money in the ERA
to make the following year's full POMV draw by FY 31,
meaning the state would need to rely on additional
earnings.
Mr. Painter added that probabilistic modeling indicated a
46 percent chance that the ERA balance would be
insufficient to make the full POMV draw during the modeling
period even after realizing all earnings. He explained that
the scenario was based on the assumption that the
legislature would continue inflation proofing each year. If
the legislature chose not to inflation proof in FY 31, the
likelihood of an insufficient balance would drop to 33
percent. The legislature could make a policy call about
whether to inflation proof at all or to inflation proof
less aggressively. Over the last two years, the legislature
had not fully inflation proofed the Permanent Fund. Two
years ago, the inflation proofing transfer had been capped
at the estimated $1.4 billion, rather than the full amount
with true inflation. The transfer was currently capped at
$1 billion and the governor's budget did not include any
inflation proofing at all.
Mr. Painter added that the decision regarding inflation
proofing was a significant policy choice. He suggested that
the best choice from a strictly financial standpoint would
be to never inflation proof as it would retain all the
money in the ERA to make it spendable. He stressed that the
decision would likely be one of the largest policy
decisions the legislature would make in terms of dollar
amounts. Whichever choice the legislature made, there were
risks involved. If the ERA was not inflation proofed, the
money would always be spendable, but the legislature and
the governor often proposed overdrawing the ERA when it
contained large amounts of money. The reason for inflation
proofing was to protect the fund from future legislatures
and governors. The question was whether the legislature
feared the unpredictability of the financial markets more
or the unpredictability of the legislature more.
3:17:07 PM
Representative Bynum asked what the POMV draw would need to
be in order to ensure long-term stability.
Mr. Painter responded that different draw percentages had
not been experimented with yet. He noted that adjusting the
draw rate was another policy choice and would affect the
likelihood of being able to fully make the POMV draw. He
stated that based on static modeling, the draw could always
be made, but the probabilistic modeling would show how
different draw rates might impact the likelihood of running
out of funds. However, LFD had not done an analysis yet. He
offered to follow up if the committee desired.
Co-Chair Schrage assumed that the reason LFD had not
modeled lower draw amounts was that it seemed unlikely the
legislature would reduce the draw from the current level.
He understood that doing so would require a major reduction
in spending, which was something that had not been proposed
by the legislature or the administration. He acknowledged
that there was a general appetite for spending and that it
was unlikely to change from year to year. He asked if this
was a fair summary of why lower draw rates had not been
modeled.
Mr. Painter agreed with Co-Chair Schrage's assessment. He
explained that if the draw rate were lowered, the money
would have to be supplemented from other sources, which
would further increase the deficit. While it might be a
wise policy decision to lower the draw rate and find other
sources of revenue, LFD had not modeled the scenario due to
the existing deficit.
Co-Chair Schrage asked for more information on the overall
growth rate of the Permanent Fund. He asked what growth
rate was for both the corpus and the ERA combined.
Mr. Painter replied that the projected growth rate was 7.65
percent.
Co-Chair Schrage asked if the 5 percent POMV draw rate was
sustainable when considering the overall account structure,
particularly given the inflation rate over the last year.
Mr. Painter responded that the POMV draw rate would grow
slightly faster than inflation based on the projection of a
7.65 percent growth rate and a 2.5 percent inflation rate.
The issue was not with the total draw rate itself but with
the ERA balance overall.
Co-Chair Josephson remarked that Representative Stapp's
comments on the legislature's thirst for spending was
somewhat contradicted by the "two large checks" in the
Senate Finance Committee room. He noted that the checks
were not required.
Mr. Painter agreed and noted that the checks represented
the legislature's choice to spend $4 billion on inflation
proofing.
3:20:41 PM
Representative Hannan asked whether the recommended
restructuring of the Permanent Fund corpus in the ERA had
been modeled. She asked how the restructuring would impact
the draw and adjustment.
Mr. Painter explained that if the state adopted a
constitutionalized POMV system, the risk of overspending
the draw or having insufficient amounts in the ERA would be
eliminated. The state would always have enough funds to
make the draw if it was constitutionalized, which would
remove the risk of being unable to make the payment. He
clarified that the restructuring would not change the POMV
amount itself but would ensure that there was no risk of
being unable to fulfill the payment.
Representative Hannan commented that she had heard the
issue described in a different way by the APFC trustees,
who had relayed that restructuring the accounts and
unrealized gains reduced the risk and properly overall
reduced the POMV mandate. She asked if her understanding
was correct.
Mr. Painter responded that if the accounts were combined,
the distinction between realized and unrealized gains would
only be relevant from a cash flow perspective. The POMV
draw would no longer be reliant upon the content of the
ERA, but the legislature would only need to ensure there
was enough cash available each year to meet the draw. The
restructuring would remove the risk of not being able to
make the draw. Additionally, it could potentially allow for
a slightly different investment portfolio, though he did
not anticipate significant changes in the portfolio due to
the adjustment at present.
Co-Chair Schrage expressed concern about the potential
insufficiency of the ERA in future years as it could result
in not having enough money for state services or the PFD.
He understood that the proposed solutions were to stop
inflation proofing, reduce spending, or generate new
revenue; however, he argued that there was another solution
which was to constitutionalize the Permanent Fund and
restructure it into a one-account structure. He argued that
constitutionalizing would ensure both the availability of
funds for the draw and protect the fund from overdraws.
Mr. Painter confirmed that adopting a constitutionalized
POMV system would eliminate both the risk of not being able
to make the draw and the risk of overdraws. The remaining
risk would be selecting an unsustainable draw rate. He
clarified that if the draw rate was set too high or if
investment returns were poor over an extended period, the
ERA could act as a floor. However, if the draw rate was
properly structured, there would not be a significant risk.
3:24:03 PM
Mr. Painter moved to slide 26 and relayed that he would
finish the presentation quickly due to the committee's time
constraints. He explained that if the budget was not
balanced in the current year, it could not be balanced in
10 years either. He emphasized that revenue was not
projected to grow faster than inflation, and spending was
assumed to grow with inflation. He noted a key difference
between LFD's modeling and OMB's 10-year plan was that LFD
used last year's management plan as a baseline, which
assumed that the budget would grow with inflation, while
OMB's 10-year plan assumed the governor's current budget
would grow with inflation. He explained that either
approach would result in large deficits, with the deficit
size varying depending on the assumptions used.
Mr. Painter continued to slide 27 and explained that the
baseline model projected a deficit between $1.8 billion and
$2.1 billion, assuming no overdraws from the ERA. The chart
on the slide depicted a situation in which the budget could
not be balanced, leading to the depletion of the CBR within
the next year. Without a source to fill the revenue gap,
the model depicted an unsustainable financial situation.
Mr. Painter advanced to slide 28 which showed a similar
projection but assumed the ERA would be used to fill the
revenue gaps. The scenario allowed for a few more years of
drawing from the ERA, but it would be depleted by FY 31
which would make it impossible to continue the practice
into the future. The model depicted larger deficits due to
the reduced POMV draw resulting from drawing from the ERA.
Although the scenario was unlikely, it illustrated the size
of the financial challenge the legislature faced.
Mr. Painter moved to slide 29 which detailed the long-term
outlook and the governor's 10-year plan. He noted that the
governor's main policy change was that the FY 26 agency
operations and capital budgets were below the FY 25 levels.
The budget assumed a 2.5 percent growth with inflation
rather than 1.5 percent growth. The 10-year plan also
included a reduction of fire suppression funding. He
highlighted that the plan was significantly different from
prior 10-year plans and reflected the status quo scenario,
highlighting the size of the gap that the legislature
needed to address. He noted that the plan matched LFD's
assumptions. He added that there were some assumptive
differences in the LFD model, such as the division using
placeholders for school debt and supplementals in its
projections. The governor's plan assumed supplementals and
lapses canceled out after FY 25 while LFD included a $50
million placeholder. There was an error in DOR's fall
revenue forecast, which was being corrected. The department
had indicated that the correction would be made in the
spring forecast.
Mr. Painter continued to slide 30 and explained that the
governor's 10-year plan projected lower spending across all
years due to one-time items and other elements from the
prior year's budget not being carried forward, as well as
some differences in assumptions. He relayed that the gap
was about $375 million in FY 26 and would grow in future
years.
3:27:26 PM
Co-Chair Josephson understood that "one is sort of awful
and one is more awful."
Mr. Painter responded in the affirmative. Both projections
included large deficits, but one was significantly larger
than the other. He continued to slide 31 and explained that
the modeling on the slide was similar to the governor's 10-
year plan, but LFD did not assume the CBR would be drawn
down to negative $12 billion. Instead, LFD simply assumed
that the model was broken, but it still projected that
there would be a $1.5 billion deficit that would grow in
future years.
Mr. Painter advanced to slide 32, which illustrated what
would happen if the ERA were used to fill the deficit gaps.
The approach would allow for a few more years of funding,
but the model would be broken by FY 33 and there would be
no revenue left. He clarified that he was not suggesting
this course of action should be taken but he was using it
to highlight the magnitude of the structural deficit.
Co-Chair Josephson remarked that the issue was not just
theoretical as the legislature had come close to voting in
favor of overdrawing the ERA in the past. He asked if his
recollection was correct.
Mr. Painter responded in the affirmative. He noted that
there was one year in which the House Finance Committee's
version of the budget even included a second POMV draw as a
supplemental, following a failed vote to overdraw the ERA
the previous year.
3:29:14 PM
Co-Chair Josephson reviewed the agenda for the following
day's meeting.
ADJOURNMENT
3:29:25 PM
The meeting was adjourned at 3:29 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD - HFIN FY26 Budget Overview HFIN 1-30-25.pdf |
HFIN 1/30/2025 1:30:00 PM |
HB 53 HB 54 HB 55 |
| LFD Response to House Finance 2-10-25.pdf |
HFIN 1/30/2025 1:30:00 PM |
Fisacl Overview 1.30.25 mtg HB 53 HB 53 HB 54 HB 55 |