Legislature(2025 - 2026)ADAMS 519
03/05/2025 01:30 PM House FINANCE
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| Presentation: Fiscal Outlook Fy 25 - Fy 28 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 | ||
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HOUSE FINANCE COMMITTEE
March 5, 2025
1:33 p.m.
1:33:45 PM
CALL TO ORDER
Co-Chair Josephson called the House Finance Committee
meeting to order at 1:33 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Andy Josephson, Co-Chair
Representative Calvin Schrage, Co-Chair
Representative Jamie Allard
Representative Jeremy Bynum
Representative Alyse Galvin
Representative Sara Hannan
Representative Nellie Unangiq Jimmie
Representative DeLena Johnson
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division.
SUMMARY
PRESENTATION: FISCAL OUTLOOK FY 25 - FY 28 BY THE
LEGISLATIVE FINANCE DIVISION
Co-Chair Josephson reviewed the meeting agenda. He provided
a comment about the fiscal outlook. He relayed that
legislators had received the document "Volume 13, January
2025, Alaska's Economy" in their mailboxes from the
Department of Revenue (DOR)[Co-Chair Josephson later
clarified the document was from the First National Bank of
Alaska]. He highlighted that the document contained some
favorable news pertaining to increased oil production,
Alaska's labor market thriving amid national slowdown, and
an increase of 7,700 jobs in Alaska. He remarked that the
presentation the committee would hear was a bit glum with
no great news. He remarked that there was a lot of work to
do to get the state's fiscal situation in proper form. He
highlighted that Alaska had a sovereign wealth fund, no
broad-based tax, and distributed a Permanent Fund Dividend,
unlike any other state. He added that New Hampshire came
close with regard to the broad based tax issue. He thought
it may be interesting to ask the director [of the
Legislative Finance Division (LFD)] if the other 49 states
would have similar presentations that gave pause and
considered how to get through the morass.
^PRESENTATION: FISCAL OUTLOOK FY 25 - FY 28 BY THE
LEGISLATIVE FINANCE DIVISION
1:36:16 PM
Representative Hannan noted that Co-Chair Josephson had
referenced a DOR publication. She had not seen the
document.
Co-Chair Josephson apologized and clarified that the
publication was from the First National Bank of Alaska.
Representative Hannan stated that she had not received the
document.
Co-Chair Josephson would see that all members received the
publication.
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
provided a PowerPoint presentation titled "FY25-FY28 Fiscal
Outlook," dated March 5, 2025 (copy on file). He provided
an outline of the presentation on slide 2. He noted that
the Spring Revenue Forecast [from DOR] was expected the
following week. The presentation covered the following:
• Revenue Outlook
• Agency Operations Cost Drivers
• Formula items (K-12, Medicaid, etc.)
• Non-formula items
• Statewide Items
• Capital Budget
• FY25-FY28 Scenarios
1:37:23 PM
Mr. Painter turned to the revenue outlook for FY 25 to FY
28 on slide 3. A table on the slide indicated that the
percent of market value (POMV) draw from the Permanent Fund
was the state's largest source of unrestricted general fund
revenue (UGF). Other revenue sources were listed under a
row labeled "Traditional Revenue" followed by a row showing
total UGF revenue. The slide also showed oil forecast
assumptions. He explained that the FY 26 revenue forecast
of about $6.2 billion was built on a $70 oil price and
Alaska North Slope (ANS) production of about 470,000
barrels per day. The lower half of the slide included an
oil price forecast comparison chart showing the DOR
forecast and a couple of external forecasts to indicate
whether the DOR forecast was in the expected range for the
spring. The blue line reflected the fall forecast starting
at $73.86 in FY 25, $70 in FY 26, and $69 into FY 27 and FY
28. The Brent crude forecast was reflected by the red line.
He noted that the futures market for Brent crude was the
international standard, which ANS was often pegged to as
"water borne crude" transported on tankers. The red line
began a bit above the DOR forecast for the remainder of FY
25 and was about $1 below the state's going forward. He
noted that the difference fluctuated slightly by day, but
the difference of $1 to $2 was not too far off.
Mr. Painter continued to review slide 3. The green line was
the Energy Information Agency (EIA) short-term energy
outlook from February 11 (the outlook was updated
quarterly). The EIA forecast predicted prices would
decrease to the mid $60s by the end of calendar year 2026.
The EIA forecast was based on an assumption that production
would increase globally and demand would not significantly
increase, which resulted in lower prices. He noted there
had been announcements from Oil Producing and Exporting
Countries (OPEC) implying that production would increase.
He noted that it was hard to say the DOR fall forecast
looked gloomy compared to other forecasts - there could be
a spring forecast that showed a lower or comparable price -
but it was fairly unlikely the spring forecast would be
higher than the [past] fall.
Representative Galvin highlighted the importance of the oil
price shown on slide 3 in terms of accessible budgeting
dollars for the state. She understood it was complex to
make predictions. She asked how certain Mr. Painter was
about the numbers.
Mr. Painter replied that he was not certain at all. He
explained that oil [prices] could be extremely volatile.
Occasionally there were stretches where the price settled
at a certain level. He highlighted that things had not
changed significantly since the fall forecast was developed
in December. There had been a lot of uncertainty in the
global oil market and it was easy to imagine prices being
$10 higher or $10 lower in a year's time with very
plausible sounding reasons based on things that were not
yet known. He would not be surprised if the forecast was
$10 off from the actual price in one year's time.
1:41:41 PM
Mr. Painter discussed sources of revenue uncertainty on
slide 4:
• Oil prices: at current prices, each dollar change in
the price of oil is about $35-$40 million in revenue.
• Oil production and expenses: while not as volatile as
prices, both oil production and producer costs can
change from year to year and impact revenue.
• Investment returns: if the Permanent Fund
underperforms its projection by 1% in FY25, FY27
revenue is reduced by about $8 million and FY28
revenue is reduced by about $16 million.
• Federal revenue: reductions in federal funds to
programs like Medicaid could greatly impact the
State's overall revenue. In the FY25 budget, federal
funds exceeded general funds, and in FY26 they total
$6.1 billion.
Mr. Painter elaborated on slide 4. He explained that if oil
prices were $10 higher or lower than the forecast, it
equated to $350 million to $400 million above or below the
forecast that could easily occur a year from the current
day. There were other variables including oil production,
especially production in legacy fields that were
responsible for much of the production. He detailed that if
production was lower than expected, there could be
significantly less revenue. He explained that because
Alaska had an oil production tax based on a profits tax,
marginal changes in production were less of a big driver
than prices. He detailed that a $1 change in price resulted
in a higher profitability level whereas production going up
and down did not do so quite as much.
Mr. Painter continued to address sources of revenue
uncertainty on slide 4. The costs experienced by producers
could also change from forecast to forecast. He relayed
that DOR was projecting higher capital and operating
expenses for North Slope operators compared to one year
ago, which impacted the state's production tax amount
because of the profits tax. Another driver of UGF revenue
was investment returns. He explained that because the
Permanent Fund was the state's largest revenue source, if
investment returns over or underperformed projections, it
made a difference in revenue. He elaborated that due to the
lag in the POMV draw, it was not seen immediately. He
detailed that the FY 26 POMV draw was based on fiscal years
ending FY 24 (five years ending FY 24); therefore, no
matter what happened in the current year, the amount for FY
26 was set. He highlighted that if the Permanent Fund
underperformed its FY 25 projection by 1 percent, the
impact in FY 27 would be about $8 million for each 1
percent difference. He explained that it would represent
one year of the five-year average, meaning that in FY 28 it
would be $16 million because it would reflect two years of
the average. He stated that the POMV draw was much more
stable because it was based on the total value of the fund.
He detailed that 1 percent - an $8 million difference - was
not that large and there was a delay, meaning it was not
quite as volatile as oil revenue.
Mr. Painter continued reviewing slide 4. Federal revenue
represented the largest source of revenue in the FY 26
budget. He would address potential changes in federal funds
throughout the presentation based on things going on in
Washington, D.C. that could greatly impact the state's
overall revenue. In FY 25, federal funds exceeded general
funds and in FY 26 federal funds were about $6.1 billion
between the operating and capital budgets. Federal funds
were a very significant amount of money and were about the
same as the state's UGF.
1:45:06 PM
Representative Stapp referenced the spring revenue
forecast. He noted that OPEC had recently stated it was
boosting production substantially. He observed that Brent
and WTI [West Texas Intermediate] prices were below $70 and
looked like they would remain there. He asked what a $10
drop in price would do to Alaska's revenues. He asked if
the same calculation applied and the difference would be
roughly $400 million.
Mr. Painter answered that the rule held for about $10 plus
or minus. Beyond that it would be necessary to use a
different calculation.
Mr. Painter turned to slide 5 titled "Significant One-Time
Items in FY25 Budget." He detailed that the previous year
there were some significant one-time items in the budget,
some of which were repeated in the governor's budget and
others were repeated in likely forms at the end of session.
One item was K-12 outside-the-formula funds of nearly $175
million. He explained that it was not part of the formula
and had to be added back in the FY 26 budget if there was
to be additional money. Another significant one-time item
was for the R-1 research project for the University of
Alaska, a multiyear operating budget project of $14.6
million. He elaborated that the item counted against the FY
25 budget, but it would be available. The governor was
asking for another $5 million for the project. A third item
was the Alaska Marine Highway System (AMHS) backstop
funding of $10 million that had been included in the FY 25
budget in case the state did not receive the full federal
grant. He relayed that the backstop was triggered based on
the actual grant amount received. The item was not included
in the governor's FY 26 budget.
Mr. Painter continued addressing slide 5. The fourth item
was $7.5 million for the Child Care Grant Program for
grants going to providers. The governor's [FY 26] budget
included $6.1 million for childcare assistance grants
(needs based grants), which pertained to SB 189 (passed the
previous year). He explained that the bill was being
challenged in court as potential violation of the single
subject rule. He stated that it was unclear whether there
would be certainty by the end of session about whether the
bill would take effect or not. He clarified that the $7.5
million going to providers was not repeated in the FY 26
budget; however, the budget did include the $6.1 million
for needs based grants. Another significant one-time item
was K-12 additional pupil transportation funds of $7.3
million. He noted it was a one-time item similar to the
outside-the-formula foundation money. The last item on the
slide was $5 million UGF for tourism marketing. He remarked
that there were additional one-time items [in the FY 25
budget], but he had selected items of $5 million or more to
highlight on the slide. He reiterated that the items were
not repeated in the governor's FY 26 budget. He noted that
if the legislature wanted the funds included in the budget,
it would be an addition above the governor's numbers.
Co-Chair Josephson asked for verification that the items
listed on slide 5, with the exception of $5 million for the
R-1 research program, were not included in the FY 26
budget.
Mr. Painter agreed.
Co-Chair Josephson stated his understanding that invariably
the budget was going to grow above the governor's amended
budget.
Mr. Painter believed Co-Chair Josephson's statement was
fair, given that the governor had legislation that would
add significant K-12 funding inside the formula and for the
pupil transportation formula and other items. He noted the
committee would talk about those fiscal notes later. He
stated that the governor was proposing legislation that
would result in over $100 million for K-12 in the final
budget.
Representative Hannan asked about the childcare grants tied
up in litigation. She asked how it would impact the budget.
She wondered if the money could be spent if the court
settled the case after the fiscal year. She presumed the
state agency was not distributing grants awaiting legal
decisions.
Mr. Painter responded that the fiscal note associated with
the [childcare grant] bill was not funded in FY 25. There
were currently no funds in the FY 25 budget to implement
the program.
Co-Chair Josephson provided a hypothetical scenario where
the legislature did not correct its purported error. The
money was there effective July 1. He stated that if the
court ruled that the legislature was wrong and former
Representative David Eastman was right, the administration
would still have $6.1 million. He asked what would happen
to the money.
1:51:22 PM
Mr. Painter answered that the administration could redirect
the $6.1 million to other programs within the same
allocation, such as other childcare grants.
Co-Chair Josephson asked if it was Mr. Painter's
understanding that the lawsuit would not defeat the
legislation.
Mr. Painter agreed. He elaborated that the appropriation
was not contingent, as a fiscal note would have been one
year ago. He explained that it was an appropriation as part
of the numbers section [of the budget].
Representative Stapp thought the childcare money was under
the Department of Health (DOH). He believed the funds could
be spent be spent anywhere in the department because it was
under the $10 million threshold of authority.
Mr. Painter agreed that DOH would not be obligated to spend
the funds on that purpose.
Mr. Painter turned to slide 6 titled "Agency Operations:
Formula Programs." He explained that formula programs
comprised about half of the UGF budget. The largest of
which were K-12 driven by a statutory formula and Medicaid,
which entailed a combination of rates negotiated with the
federal government. There was also nearly $200 million in
UGF in other formula programs including Pioneer Home
payment assistance, Foster Care and Adoption/Guardians
programs, Adult Public Assistance, Child Care Benefits, and
Senior Benefits. He elaborated that formula programs were
generally dictated by statute and by rates set out by the
departments, often in coordination with the federal
government, especially in the case of Medicaid. There was
less control on the state level of the dollars through the
appropriation process than through nonformula programs
because there was some sort of external program or formula
followed. He explained that if Medicaid was short funded it
did not necessarily mean the services did not happen, it
may mean that billing was pushed to the following fiscal
year. There was not necessarily the power in the
appropriations bill to completely dictate how the formula
was spent.
1:54:11 PM
Representative Stapp looked at slide 6 and observed that 54
percent of the budget was non-formulaic, which included
statutes passed by the legislature and things inside the
different RDU components of divisions. He asked when a
department last went through an RDU component and attempted
to zero-base its budget.
Mr. Painter answered that he was not aware of a department
that had gone through a zero-based budget exercise with the
exception of the Alaska Mental Health Trust Authority
(AMHTA), which used a zero-based budget annually.
Representative Stapp asked if a reason had ever been
provided as to why different RDU components did not attempt
to zero-base their budgets. He realized the entire budget
was likely too large to zero base in a fiscal year, but he
thought it would be an interesting exercise to have
departments zero base their expenses in different division
level components.
Mr. Painter answered that the concern had often been about
the administrative capacity in the state in terms of the
number of budget analysts at the Office of Management and
Budget (OMB) and other departments. He noted that many
departments had a couple of budget analysts, and it may be
difficult to do that level of analysis.
1:55:40 PM
Mr. Painter advanced to slide 7 and discussed K-12 funding
legislation and trends. He noted that the slide included
information based on the assumption that the House Rules
committee substitute (CS) would move forward. He would
explain the difference based on what the committee had
actually moved out. The FY 25 budget included about $175
million in funding above the foundation formula, which was
equivalent to $680 in the Base Student Allocation (BSA),
plus $7.3 million for the pupil transportation formula, for
a total of $182 million. The governor currently had two
major K-12 bills. The first, HB 76, was the education
omnibus bill with fiscal notes totaling $116 million in FY
26, rising to $181 million in FY 27. The second was a
tribal compacting bill that would have a $17 million fiscal
note in FY 26 and $12 million in FY 27.
Mr. Painter continued to address slide 7. He relayed that
HB 69 had been introduced in the House, and the House
Education Committee version would have increased funding in
FY 26 by about $325 million. The House Rules CS as
introduced would have increased the BSA by $1,000 and had a
total cost of $253 million. The committee adopted an
amendment that added some language from the governor's bill
that gave out additional amounts to schools for reading
proficiency incentive grants with a cost of $22 million
(not reflected on the slide). He detailed that the
projected K-12 formula money was projected to decrease by
about $28.7 million UGF largely due to a lower student
count. He highlighted that the Department of Labor and
Workforce Development's demographic projections showed
significantly fewer children aged zero to five than six
through 18 (about 1,000 fewer per year). The trend may
continue, which would drive the baseline cost of K-12 down.
Co-Chair Josephson asked for verification that SB 82 was
the same as HB 76.
Mr. Painter agreed.
Co-Chair Josephson asked for the fiscal note amount
associated with the tribal compact legislation.
Mr. Painter replied that the tribal compact legislation, HB
59/SB 66, was $17.5 million [in FY 26] and $12 million [in
FY 27].
Co-Chair Josephson asked for verification that the $17
million went down to $12 million.
Mr. Painter agreed.
Co-Chair Josephson thought it sounded like the governor
wanted to spend about $200 million in total by FY 27. He
asked for verification that the bill advanced by the Rules
Committee earlier in the day was closer to about $275
million. He observed that both options were expensive.
Mr. Painter agreed. He explained that when the governor
gave a press conference announcing the budget, he said he
was coming out with K-12 bills that would total about $200
million.
1:59:28 PM
Representative Tomaszewski referenced Mr. Painter's mention
of loss of funding due to lower student enrollment. He
asked for the average dollar amount per student paid by the
state.
Mr. Painter replied that the BSA was $5,960, but when
accounting for the multiplier he believed the average was
about $12,000 to $13,000 per student. He would follow up
with a number.
Representative Tomaszewski remarked that the BSA did not
reflect total spending for schools. He asked for a ballpark
figure for the total spending.
Mr. Painter would follow up with an answer.
2:00:36 PM
Mr. Painter advanced to slide 8 titled "Student Count
(ADM), FY11-FY26." He remarked that sometimes people in the
Capitol Building talked about the BSA only or total funding
only. He explained that neither completely hit the mark in
terms of what was taking place in district finances. He
elaborated that over the past 15 years the number of
students had decreased and there had been a significant
shift towards correspondence students and away from brick
and mortar students. He highlighted FY 17 where there had
been a total of 130,000 students, which was the most recent
peak year in terms of total number of students. He detailed
that the total average daily membership (ADM) between FY 17
and the projection for FY 26 was down about 4.3 percent or
5,600 students. The correspondence ADM had increased from
about 12,000 to 22,000 students (an 86 percent) whereas the
brick and mortar ADM had decreased by 16,000 students or
nearly 14 percent. The correspondence students received
less funding at 0.9 percent of an ADM and did not go
through the multipliers. He elaborated that correspondence
students received significantly less funding than non-
correspondence students. He explained that total dollars
had gone down on a per student basis in part because of the
shift; however, districts were also seeing lower costs due
to that because correspondence students were cheaper. He
noted that some districts had cost issues relating to the
shrinking student population in terms of schools having to
consolidate. Additionally, some districts were too small to
consolidate and ended up with empty classroom space. He
clarified that the total dollars shown on the slide could
be a little misleading because of the change in student
makeup over the past decade.
2:03:11 PM
Mr. Painter addressed slide 9 titled "K-12: Impact of
Factors per Non-Correspondence ADM, FY11-26." He explained
that the slide addressed why only considering the BSA [in
terms of K-12 funding] missed part of the point. The slide
showed how the multipliers had changed over time and each
layer on the graph represented the impact of each
adjustment to each student on the ADM. The blue portion of
the bars represented one ADM. Other layers included the
school size multiplier, cost factor multiplier, special
needs factor, career and technical education factor, and
special education (SPED) intensives. There were some
changes in formula but there had not really been any
changes since FY 15.
Mr. Painter explained that the graph showed that $1 in the
BSA in FY 11 became $1.96 [when including the other
layers]. In FY 26, $1 in the BSA meant $2.28 per student.
There was a significantly greater impact of a single dollar
on the BSA at present. One of the drivers of the count of
the special education intensive students, which had
increased over one-third or 10,000 students over the past
decade. He elaborated that because those students were
counted as 13 times the BSA, there was a significant impact
on total funding. He elaborated that it increased funding
and changed the cost structure for districts because there
were certain obligations it came along with, in terms of
how they provide services to students. He summarized the
slide by explaining that looking at the BSA only overlooked
that more money was received, but looking at total dollars
only missed that there were higher costs. Part of the
reason it was so difficult to wrestle with the issue was
because there were changes to both the cost side for the
state and cost side for districts.
2:05:31 PM
Representative Stapp thought there were some interesting
correlations between the graphs on slides 8 and 9. He
observed when the non-correspondence ADM count went down,
the school size multiplier funding went up. He considered
that students were not in school; therefore, an empty
school was worth more money to districts than a full school
because of the multiplier. He asked why the state would
want to incentivize more schools with fewer people.
Mr. Painter replied that one of the reasons for the
correlation, especially in FY 21, was a result of the hold
harmless provision that could be phased in over the course
of several years if a school lost more than 5 percent of
its in-person student count. He explained that in FY 21,
during the COVID-19 pandemic, there were many students who
switched over [from in-person to correspondence], which
triggered the hold harmless provision in many districts. As
a result, districts saw a spike in funding on a per student
basis. There had been a spike in total funding because some
districts received the hold harmless funding for a student
and also counted them as correspondent students, which
resulted in the districts receiving double the funding
mostly confined to FY 21. He noted that in FY 26, 18
districts were under the hold harmless provision because of
losing 5 percent [of their in-person student count] within
the last several years. He explained that many districts
were losing population, and they retained some of the
funding for a few years based on the hold harmless
provision.
Representative Stapp remarked that he was aware of the hold
harmless provision and was trying to think of the financial
impacts. He stated that the hold harmless provision ran out
after a period of time and if a school district was not
prepared it could face a cliff in funding when the hold
harmless was gone. He asked about the logic behind
utilizing a multiplier such as school size.
Mr. Painter answered that the reason it was included in the
formula in 1998 was related to economies of scale. He
detailed that certain fixed costs associated with buildings
scaled up to some degree, but not necessarily one-to-one
with the student count. He elaborated that the first
student in a building was the most expensive, while the
1001st student would not have a big increase in the
facility cost. He explained that when [the school size
multiplier] was designed there were not as many shrinking
communities and when the extent became clear, the
legislature had adopted a school consolidation hold
harmless provision several years back to try to encourage
districts to consolidate without losing funding for four
years. He elaborated that when the bill was adopted, the
legislature understood that districts may want to leave
schools open because they got the school size factor, but
it would save money overall to close them; therefore, it
had offered the hold harmless for consolidation to
encourage districts to close schools if needed.
2:09:28 PM
Representative Allard highlighted that the state spent a
certain amount on SPED based on the formula that was to be
directed to individual students. She asked if it was
possible that funds could be spent by districts on other
items instead of SPED students.
Mr. Painter answered he could not speak confidently in
detail on the specific question. He relayed that there were
certain requirements for services that must be provided,
but he did not know the extent of the reporting required.
He could check with DEED and follow up with details. There
was a 20 percent special needs factor in the form of a
block grant. Additionally, there were SPED intensives. He
stated that other than for intensives, there was nothing
that scaled up for students who may need extra help but not
the full intensive. He explained it was "all or nothing"
where a district received 13 times extra for a student or
nothing extra for a student. He detailed that there may be
students that needed some extra help, but because the
special needs factor was merely a block grant, the district
had no extra money for those individuals unless they were
an intensive. He remarked that it was one of the challenges
of the current formula.
Representative Allard wondered if schools could reallocate
any potential money left over from intensive need funding
to other purposes. She asked if there was a way to track
where the funding was spent. She wondered why the funding
was perhaps not given back. She understood Mr. Painter
would follow up with DEED and provide the information to
the committee.
Mr. Painter would follow up with DEED and get back to the
committee.
Representative Galvin looked at slide 8 pertaining to
student count. She referenced a DEED report dated February
26 and looked at the preliminary brick and mortar ADM of
103,110 with a projected number of 101,840, reflecting a
decrease of 1.2 percent. She highlighted that the
preliminary correspondence student count for 2025 was
23,620 and the projected number was 22,840, reflecting a
decrease of 3.3 percent. She considered that it was an
unusual trend and perhaps some of the [correspondence
students] were returning [to brick and mortar schools], but
the reason for the change was unknown. She stated it was
hard to know which high intensive needs students were
moving where and she thought it was critical in terms of
overall expenses. She highlighted that the trend was
changing a bit more than the committee had just heard.
2:13:52 PM
Mr. Painter moved to slide 10 titled "Medicaid UGF
Funding." He reviewed that Medicaid spending declined from
FY 15 to FY 18, primarily due to Medicaid reform efforts,
tribal reclaiming, and efforts to hold the rate structure
down at the time. Spending dropped further in FY 20 and FY
21 due to a temporarily higher Federal Medical Assistance
Percentage (FMAP) and reduced utilization during the COVID-
19 pandemic. He relayed that spending had increased as the
enhanced FMAP had gone away and utilization returned to
normal. He noted that based on DOH's December 15, 2025
projection, the FY 26 need was $134.2 million (21.9
percent) higher than FY 23. He elaborated that the MESA
[Medicaid Enrollment and Spending in Alaska] report the
committee had heard [on Monday 3/3/25] indicated Medicaid
growth should exceed inflation by around 4.4 to 4.7
percent. The state had been fortunate that over the past
decade it had not been a significant cost driver, the level
from FY 15 had only recently been exceeded; however, it may
be an upward cost driver going forward.
2:15:36 PM
Co-Chair Josephson noted that Dr. [Ted] Helvoigt [MESA
presenter] had praised the state. However, he observed the
cost was inching up.
Mr. Painter advanced to "Non-formula Agency Operations" on
slide 11. He reported that there were significant
reductions from FY 15 to FY 18 decreasing from ~$2.3
billion to ~$1.8 billion. He explained there was a flat
period and starting in FY 22 there was an upward trend. He
reported that using FY 22 as a baseline, nonformula agency
operations had increased by about $500 million or 26
percent, reflecting an average annual growth rate of 5.9
percent. Inflation was also high with a cumulative 18
percent over the same period, but the non-formula agency
operations growth rate exceeded inflation. He explained
that part of the reason was because the cost had been held
flat for a period of time. He likened it to avoiding going
to the dentist and eventually needing to deal with
cavities. He detailed that even with cost belt-tightening
efforts that kept agency operations going down and flat
eventually there would be upward pressure on things like
health insurance costs, employee pay, commodities and
services costs, and program expansion (some from adding
things back that had been cut and some from adding in
different places). Additionally, much of the temporary
COVID-19 funding used to offset general fund expenditures
was no longer available. For example, there were COVID-19
funds in the Department of Transportation and Public
Facilities (DOT) that significantly reduced the UGF cost of
airports for a number of years, but those funds were gone.
Mr. Painter continued to review slide 11. He noted that one
of the large variables was the statewide salary survey that
was expected to be released within the next several weeks.
He highlighted that the UGF funding for executive branch
salaries was about $661 million, which did not include all
personal services. He pointed out that if salaries were
increased across the board, each 1 percent increase equated
to $6.6 million. He noted that the salary study may only
include targeted raises, but the information was not known
because it was not yet public.
Co-Chair Josephson noted there was a 1.3 percent growth in
agency spend in the governor's proposed FY 26 budget. He
asked how the [annual growth] rate had been 5.9 percent
over the last several years. He asked if there were big
ticket items that had contributed to the increase.
Mr. Painter replied that the governor's number included
formula programs. He noted that the governor's budget
contained nothing compared to the K-12 outside the formula
funding of $175 million, which suppressed apparent growth.
He separated out non-formula items in the current
presentation to show there was a steady increase in the
past four years.
Co-Chair Josephson remarked on Mr. Painter's statement that
inflation over the period was [a cumulative] 18 percent. He
asked if the remaining 7 percent "is sort of on us."
Mr. Painter answered that some bargaining contracts were
making up for lost inflation they had not received. For
example, several years back the Public Safety Employees
Association contracts included 10 percent raises. He
explained that inflation had not been 10 percent, but the
increase reflected that the employees had not received
raises for a couple of years before that time. He
elaborated that sometimes there was a flat trend followed
by a higher-than-inflation catchup provision.
2:20:07 PM
Mr. Painter turned to statewide items on slide 12. He
described statewide items as operating items that did not
fit into agency budgets. The largest was state assistance
to retirement, reflecting what the state paid on behalf of
school districts and municipalities for costs above their
contribution caps for the Public Employees' Retirement
System (PERS) and Teachers' Retirement System (TRS). The
Alaska Retirement Management Board (ARMB) projected the
number would increase from $220.0 million in FY 26 to
$284.4 million in FY 27. He believed the FY 27 number would
be lower in reality because the June 30, 2024 valuation was
more favorable than the June 30, 2023 valuation. He
explained that when the 2024 valuation was adopted for FY
27, the number should be lower than the $284 million shown
on the slide. He noted that the $284 million was used in
the budget scenarios later in the presentation because it
reflected the adopted rate.
Mr. Painter continued to review slide 12. He relayed that
state debt payments are expected to stay flat for general
obligation bonds. He noted some of those started to fall in
a few years, but not within the next three years. School
debt reimbursement was projected to go down and had done so
in the past several years because of the moratorium on the
debt. The moratorium had been in place for a decade and was
scheduled to end on July 1, 2025. He explained that LFD had
an assumption that the exact same rate of debt that existed
prior to the moratorium would resume at a new prorated
amount after the moratorium ended. He detailed that the
reimbursement rate used to be 60 or 70 percent and the new
rate was 40 or 50 percent. He stated that in the absence of
better information, the assumption was that the old trend
would continue. Realistically, there were reasons to
believe the new debt could be higher due to pent-up demand
or it could be lower because the state had not always paid
its share. He noted that the legislature made up the amount
in a lump sum in FY 22, but there were several years where
some municipalities had to raise property taxes because
debt reimbursements had been vetoed. He summarized that LFD
was using $7.8 million of new debt per year as a
placeholder, but the actual amount was "a big question
mark."
2:22:45 PM
Co-Chair Josephson used a high school in Seattle in a
hypothetical scenario where the city had bonded
indebtedness. He asked if King County would also afford
some revenue to the Seattle city schools. He noted that
Alaska did not have that local government structure;
therefore, it fell on the state and sometimes the cities.
He asked if it explained some of the issue.
Mr. Painter answered that it was part of it, but he did not
know the structures in other states well.
Representative Bynum referenced Mr. Painter's discussion
about outstanding debt and LFD's base assumption. From his
perspective, when considering long-term capital throughout
the state, he speculated there was a bigger backlog of
deferred maintenance and that facilities were not being
planned for. He feared that there would be much more debt
in the future because of the aging of facilities. He asked
where LFD was getting its information when trying to
accurately project school bond debt into the future.
Mr. Painter answered that the $7.8 million came from asking
DEED for the history of new school debt for the decade
prior to the moratorium and taking an average of the
number. He stated it was intentionally not a sophisticated
number because LFD did not believe there was a basis for a
good number. He shared that DEED had a publication on its
website that showed the value of school facilities and what
3 percent of the replacement cost would be for ongoing
costs to maintain them. He explained that it was very hard
to predict what local governments would do with the
backlog. He offered to provide the DEED report to the
committee.
2:25:19 PM
Mr. Painter moved to slide 13 titled "Deferred
Maintenance." He detailed that in FY 25 the state had a
$2.4 billion deferred maintenance (DM) backlog. The
University of Alaska accounted for over $1.5 billion (63%)
of the total because of its large square footage of
buildings and in part because it had more rigorous
standards for tracking. For example, the DOT commissioner
had talked to the committee about the Public Building Fund
a couple of weeks back, where the state paid into a pool to
use for deferred maintenance. Two years back, the
department estimated $81 million in deferred maintenance
for the fund. Subsequently, DOT did a complete inspection
of its facilities and determined the true number was $211
million. He noted that when it was seen that the state as a
whole accounted for much less than the university, some of
that was that much of it was not tracked as rigorously.
Mr. Painter continued to address slide 13. He detailed that
based on an estimated $9 billion asset value (as of 2022,
excluding the University) if the state spent 2 percent on
the backlog, it would need to spend $180 million on
deferred maintenance. He highlighted that the 2 to 6
percent guideline for ongoing maintenance expenditure did
not really include a deferred maintenance backlog. He
elaborated that with a $2.4 billion deferred maintenance
backlog it was unclear if spending more on regular
maintenance would catch the state up. There was a five-year
period from FY 10 through FY 14 when the legislature and
administration had a deferred maintenance program that
spent $100 million per year on deferred maintenance, which
was the one time the backlog had been reduced. He relayed
that as soon as the $100 million went away, the backlog
started increasing.
Mr. Painter detailed that the governor's FY 26 budget
included $26 million for deferred maintenance in state
facilities. The university sometimes used some of its
operating money [on deferred maintenance], but it did not
have an increment in the capital budget for that purpose.
He explained that the $26 million and the idea of basing
the amount on the asset value did not account for the
eventual need to replace aging specialized facilities such
as Pioneer Homes and prisons. He expounded that it was not
possible to keep maintaining the same facility without
reaching the point of no return where the facility needed
to be replaced. He noted that the cost may need to be
handled through bonding because it was too large to handle
through the regular capital budget process. He added that
the numbers did not account for line-of-business technology
systems. He explained that a monetary value was not placed
on the state's accounting system; therefore, it was not
included in the $9 billion. However, the governor's FY 26
budget included nearly $20 million for IT projects because
replacing IT systems over time was a significant need. He
added that it did not account for school construction major
maintenance because they were not state owned facilities or
they were not counted as state owned facilities even if the
state technically owned them. He explained that school
construction major maintenance was handled through the
school debt reimbursement program and the Regional
Educational Attendance Area (REAA) fund used for rural
maintenance but was not really reflected in the overall
totals.
2:29:33 PM
Mr. Painter advanced to slide 14 titled "FY25 Deferred
Maintenance by Agency." He noted that the graph did not
include the university. The DOT accounted for the largest
deferred maintenance need because it managed many buildings
on behalf of other agencies. The next largest was the
Department of Natural Resources including park facilities,
which were often small and remote. The Department of
Corrections accounted for the next largest deferred
maintenance need associated with its operation of a number
of multi-decadal prisons. Additionally, the Department of
Family and Community Services included Pioneer Homes and
juvenile justice facilities that could be expensive to
maintain.
2:30:17 PM
Mr. Painter turned to slide 15 titled "Operating Budget
Federal Funding Outlook." The federal funding outlook was
uncertain for programs like Medicaid due to proposed
budgetary changes by Congress. The federal House of
Representatives passed a reconciliation budget directing
the Energy and Commerce Committee to make $880 billion of
cuts to Medicaid and the Supplemental Nutrition Assistance
Program (SNAP) over the next decade. He noted that many of
the proposed changes were difficult to quantify. One
discussed change was reducing the FMAP for the Medicaid
expansion population to the regular Medicaid rate. He
explained that currently in FY 24, the department estimated
the UGF cost for the Medicaid expansion population was
about $50 million. He detailed that changing the rate from
90 percent to the state's regular FMAP of 51.54 percent
would cost the state around $250 million. He noted there
had been discussions about phasing in a reduction to FMAP.
There had been many other discussions about changes to
Medicaid that were very difficult to quantify, such as work
requirements or per capita coverage caps. He could not
begin to know how the changes would impact the state's
Medicaid budget. He noted that the state was quite
dependent on the federal government revenue to pay for the
current budget.
Mr. Painter continued to review slide 15. He explained that
the FY 26 operating budget included $76.5 million of
federal authority for AMHS for the fourth of five years of
federal grants (totaling $1 billion) under the
Infrastructure Investment and Jobs Act (IIJA). He explained
that there was no funding for the item in FY 28, the third
year in LFD's three-year outlook. He elaborated that the
state would have to make up $76.5 million from somewhere.
He remarked that when the state first started receiving the
federal funding there was some expectation the state would
be able to save up a balance in the Marine Highway Fund. He
noted it had not come to pass and the state had been
spending the fund in the operating and capital budgets. The
department projected, based on the governor's budget, the
AMHS would be about $8 million in the hole in FY 26. He
explained that if there was no extension of the program,
there could be a sudden $76.5 million hole in the operating
budget where the federal funds had been.
2:33:33 PM
Representative Bynum looked at the second bullet point on
slide 13 related to deferred maintenance using an estimated
$9 billion asset value assumption for FY 22. He assumed the
asset value was based on when the actual asset was put into
place. For example, if a facility was put in place in 1970,
they were assuming the asset value from 1970. He asked for
verification that the values were not inflated or escalated
values based on the initial investment.
Mr. Painter replied that he did not know the answer. He
explained that the number came from OMB, and he would
follow up with an answer.
Representative Bynum remarked that Mr. Painter had listed
many things that were not included on the backlog list if
Alaska spent 2 percent of [the 9 billion asset] value. He
asked if highways were included in the value.
Mr. Painter responded that he did not believe highways were
included. He elaborated that generally highways were not
included in the deferred maintenance backlog because it was
handled through federal funding. He explained that DOT
included things like maintenance stations and repair to
sheds that were state funded.
Representative Bynum remarked that state highways and state
obligated roadways were not included. He assumed bridges
were not included. He asked about federal and state grant
money going into facilities in communities. He asked if the
state took the value and needs for long-term capital
replacement for the facilities into consideration.
Alternatively, he asked if it fell on the shoulders of the
communities receiving the dollars.
Mr. Painter answered that the Executive Budget Act
specified the information should be provided, but he could
not guarantee it always was.
2:36:06 PM
Representative Stapp asked for verification that the
Congressional budget set a number but did not identify
specifically where cuts were supposed to come from.
Mr. Painter replied affirmatively. He elaborated that the
federal budget did not specify how the reduction would
happen. There were a range of federal programs they could
fall on.
Representative Stapp recalled the public debate when the
previous governor expanded Medicaid and the legislature
adamantly disapproved of doing so at the time. He thought
the primary reason was the legislature did not believe that
the federal government would maintain the level of FMAP
funding - that used to be 100 percent and stepped the state
down to 90 percent - in perpetuity because the
congressional budget office indicated it would expand the
federal deficit. He considered a scenario where there was a
reduction to the FMAP percentage. He asked if LFD had any
information on what the number would be if it was a 70 or
80 percent cost share, similar to the oil price per dollar.
Mr. Painter answered that LFD used the $53 million from FY
24 and scaled it because it was at 90 percent. He explained
that going to 80 percent doubled the amount by about $53
million. He relayed that it was difficult to get anything
more recent than FY 24 from the department. He elaborated
that they did not know what Medicaid expansion would be in
FY 25 or its projection for FY 26. The department felt
confident in the FY 24 number, and it could be scaled up
and down.
Representative Stapp shifted topics to AMHS. He highlighted
that during his time in the legislature, the plan was to
bank the federal money, but it was not happening. He asked
what the state's liability would be once the federal funds
expired.
Mr. Painter replied that on the operating side the state
would have to replace $76.5 million. He explained it was
harder to determine on the capital side because it depended
on what the state planned to do going forward in terms of
constructing vessels. Currently much of the capital money
was going to the Tustumena replacement, which would be
completely funded in FY 26. He explained it was a broader
question in terms of what would be funded the next year
(i.e., the next mainliner), how much the funding would be,
and where the money would come from.
2:39:17 PM
Mr. Painter moved to slide 16 titled "Capital Budget
Federal Funding Outlook." The state had received a
[federal] grant for the Alaska Energy Authority (AEA) Grid
Resilience and Innovation Partnership (GRIP 1) project, but
it had not received a grant for GRIP 2. The state had
received a large award for the project a couple of years
back. Some state match had been allocated, and it would
require another $143.0 million in state match from FY 27 to
FY 32. He explained that if the state did not provide the
funds, the cost could be passed on to local ratepayers. The
governor's FY 26 budget included a $1.5 million request.
Based on the project timing, the number would need to
increase over time in certain years when there were larger
needs. He noted that it was a relatively small part of the
state's budget in FY 26. He elaborated that if the cost was
spread out evenly between FY 27 through FY 32 it would be
$24 million per year; however, the request would not be
even each year. He added that the federal funds for the
project were currently frozen. He explained that a project
season may be lost depending on how long the funds were
frozen. He did not know how it would impact the cashflow of
the project going forward.
Mr. Painter continued to address the capital budget federal
funding outlook on slide 16. He relayed that IIJA increased
capital funds available for DOT's highways and aviation,
AEA's renewable energy projects (although these funds were
frozen), and the Department of Environmental Conservation's
Village Safe Water Program. He noted that when IIJA expired
in FY 27, it was unclear whether the higher funding levels
would continue. To some extent, the DOT amounts had not
kept up with project inflation. He highlighted that the
state was receiving approximately 20 percent more for
highways than prior to IIJA, but projects were more than 20
percent more expensive than prior to the pandemic. He
questioned whether the state should expect to see a new
[federal] infrastructure bill with more or less money than
IIJA. He explained that it was uncertain and hard to say.
He noted it was also unclear whether higher funding levels
would continue for programs like Village Safe Water when
IIJA funds expired. He concluded it was very difficult to
project what the federal government would be doing a couple
of years into the future.
Co-Chair Josephson asked how much GRIP funding the
governor's FY 26 budget included.
2:42:09 PM
Mr. Painter replied that the governor's budget included
$1.5 million.
Co-Chair Josephson noted that Mr. Painter had explained
that it was not an even amortization. He asked for
verification that funding only $1.5 million meant the $23.8
million cost would increase.
Mr. Painter responded that the $23.8 million factored in
funding of $1.5 million in FY 26 and would be the average
from FY 27 to FY 32. He explained that based on AEA's
cashflow, there would be some years the agency needed $60
million and other years it needed $10 million.
Representative Johnson thought she asked the Department of
Commerce, Community and Economic Development (DCCED) if
GRIP funding had been paused and the department indicated
the funds had not been frozen. She had previously heard it
had been paused. She understood there were a couple of
different projects under the Department of Energy grants.
She asked for clarification.
Mr. Painter replied that his information was based on what
had been reported in the media. He would follow up with
DCCED.
Representative Stapp recalled the chart from the previous
year, and he believed the FY 26 appropriation was supposed
to be much larger than $1.5 million. He was a little
perturbed about the idea of entering into something the
state wanted done and putting a future legislature and
governor on the hook for paying the bulk of the funding,
especially when revenue projections were not as optimistic
in the next couple of years. He understood that if the
legislature appropriated the funding it would sit there
until utilized. He asked what the future liability would be
if another $1.5 million was paid [into GRIP] in the next
year.
Mr. Painter answered that he would not try do the math in
his head, but the number would increase. He was not certain
when the large need for cash flow would be. He believed the
number in FY 26 was unusually low because AEA had an
ability to use some bonding authority it already had for a
portion of the cost.
2:45:07 PM
Co-Chair Schrage considered that if $1.5 million was paid
in FY 26 and again the next year, it was essentially $140
million in state match required by future legislatures and
administrations. He stated that whatever was paid at
present would reduce the amount to be paid by future
legislatures.
Mr. Painter agreed to the extent that the liability was not
shifted to ratepayers.
Representative Hannan asked how much GRIP funding ended up
making it through the veto process in the FY 25 budget.
Mr. Painter answered that he would follow up with the
number. He explained that it was split between the
supplemental and FY 25.
Representative Hannan stated there had been "13 and 30 and
both were cut."
Mr. Painter would follow up with the information.
Co-Chair Josephson recalled that the GRIP award came with
$206 [million]. He asked if it was the amount the state was
awarded if it matched the amount.
Mr. Painter confirmed it was $206 million matched dollar
for dollar.
Co-Chair Josephson surmised it would be odd to apply for
the funding, be awarded the generous grant, and not try to
match it. He understood it was a policy call.
Mr. Painter agreed that the previous year the legislature
appropriated the entire federal award and only a portion of
the general funds. The expectation was it would be financed
in the future.
2:46:52 PM
Mr. Painter turned to long-term state needs on slide 17. He
noted that much of the information on the slide rolled up
items discussed on the past several slides such as deferred
maintenance, school major maintenance, and school
construction, which were included on DEED lists. There were
other annual state needs lists including the Harbor
Matching Grant fund and the Renewable Energy Fund. There
were priority lists for the Bulk Fuel program and the Rural
Power System program. He explained that the top 25 projects
were large and the amount in the governor's budget was not
quite enough to get through the list quickly. The state was
basically matching the federal funds available for the two
programs. Additionally, there was the pension past service
liability, which would be amortized through 2039.
Co-Chair Schrage asked to what extent the list on slide 17
was vulnerable to the cost of inflation and escalating
costs. He asked if the inflationary cost was built into the
costs.
Mr. Painter answered that it was built in for pension past
service liability, but not for the others. He explained
that if the state paid for the deferred maintenance backlog
it would currently cost $2.4 billion. He detailed that if
the backlog was not funded it would increase due to
inflation and the deterioration of assets.
Co-Chair Schrage asked for verification that the costs on
the slide reflected the present day cost and included the
last several years of inflation.
Mr. Painter responded, "To some extent." He believed the
deferred maintenance amount understated the true need. For
example, the full deferred maintenance list for the whole
department [DFCS] was over $40 million, while the cost of
replacing a single Pioneer Home was multiple times the
amount. He stated that the actual cost "to deal with all of
these things" may far exceed the deferred maintenance
backlog.
2:49:35 PM
Mr. Painter advanced to the FY 25 supplemental budget on
slide 18. He noted that the presentation focused on the
three-year plan; however, it also included the
supplemental, which reflected four years. There was an
$81.5 million deficit based on the fall forecast prior to
any FY 25 supplementals. He noted that prices had been a
bit above the average so far, but he would be surprised if
the spring forecast showed a balanced budget in FY 25. He
elaborated that it may slightly reduce the deficit, but it
would likely not be a large amount. The governor's UGF
supplementals currently totaled $84.2 million, which was
down from a previous number because the governor removed a
$50 million UGF supplemental from his list. There may be
additional supplemental amendments. For example, judgements
and settlements often came in late as settlements were
reached. The next amendment package [from the governor] was
due on March 14, which may include additional supplemental
items. He relayed that combined it was a $165 million
deficit in FY 25 that the legislature needed to address. He
explained that the current legislature needed to address
the issue because the previous legislature had not. The
governor proposed filling the FY 25 deficit from the
Constitutional Budget Reserve (CBR), which required a
three-quarters vote of the legislature.
Co-Chair Josephson stated that alternatives to using the
CBR were limited and controversial.
Mr. Painter agreed that funding could be used from the
Permanent Fund, the Higher Education Fund, or the Power
Cost Equalization Fund, which would not be easy options.
Co-Chair Josephson surmised that the governor's choice was
arguably the easiest choice, without impacting existing
capitalized funds.
Mr. Painter replied that it was the easiest choice
financially. He would leave it to the legislature to
determine whether it was the easiest choice politically.
Representative Hannan asked about the legal parameters and
timeline in terms of filling the FY 25 deficit. She asked
if it could be done on June 30.
Mr. Painter replied affirmatively; however, the governor
included supplemental requests because he wanted some of
the things to happen sooner than June 30. He highlighted
capitalization of the Disaster Relief Fund as an example.
The governor had around $29 million of appropriations into
the specific fund in FY 25 because it was currently in the
negative and the administration was borrowing from the
deferred maintenance appropriation to try to get through
the cost of disasters. He stated that it was possible to
wait until June 30 to deal with the issue, but the
governor's inclusion of the funds in the fast track
supplemental indicated some urgency that he wanted the
funds appropriated earlier. The governor could not
constitutionally sign an unbalanced budget. For example, if
the legislature gave the governor a supplemental from the
general fund without paying for it, constitutionally,
Legislative Legal Services indicated the governor could not
sign it. He stated that if the legislature wanted agencies
to have money before June 30, it needed to deal with the
deficit problem before June 30.
Representative Hannan clarified that she was not advocating
for June 30. Theoretically, the legislature could pass and
balance the FY 26 budget before it dealt with the FY 25
deficit.
Mr. Painter answered affirmatively, but the longer the
legislature pushed it there would be questions about
whether the governor should be invoking impoundment at that
point assuming the legislature was not going to act. He
stated it got into some interesting legal territory.
Co-Chair Josephson compared the issue to planting a new
garden before raking the leaves from the previous year.
2:54:00 PM
Representative Stapp asked for an explanation of
impoundment and when it could be used by the governor.
Mr. Painter replied that there were not many supreme court
cases that gave clear guidance on the topic. He explained
that if the legislature left an unbalanced budget, the
governor had to figure out how to pay bills and could
impound/withhold appropriations to try to get through the
year. Generally, he did not believe governors would impound
appropriations while the legislature was still in session
and trying to get through the budget process. However, it
may come to a point where the governor would have to act if
no movement took place by June 30. He was not an attorney
and did not want to get into the legal ramifications, but
essentially, it was the last resort to not spend money on
the capital or operating items to ensure there was not a
shortfall in the year.
Co-Chair Josephson believed there was a case involving
former Governor Bill Sheffield that may be the only
authority and was fact specific.
Mr. Painter stated his understanding that the case was so
fact specific, it was not possible to draw general rules as
a result. He restated that he was not an attorney and did
not want to wade into that territory.
Mr. Painter advanced to slide 19 titled "House Finance Co-
Chairman's FY26 Budget Scenarios." The House Finance Co-
Chairman requested several scenarios to envision what the
final FY 26 budget could look like. He clarified that the
scenarios did not reflect final decisions and were
illustrative only. He added that the scenarios were not
developed by LFD and had been requested by the co-chair.
The presentation included five different scenarios with
varying Permanent Fund Dividend (PFD) levels.
Mr. Painter moved to "HFIN Co-Chair FY26 Budget Scenario 1"
slide 20. The scenario began with the $6.2 billion UGF
revenue forecast and removed the governor's amended
operating budget and fund transfers, leaving the surplus
remaining of more fungible items. The first item was a
placeholder for new contracts. He referred to an LFD
overview presentation from six weeks earlier that included
a $29.6 million placeholder. The amount had been increased
to $40 million because contracts were coming in and the
correctional officers were getting 11 percent rather than 3
percent and Mt. Edgecumbe teachers received 5.6 percent. He
was uncertain the $40 million would be sufficient, but it
was a ballpark placeholder. The second item was the
foundation formula increase for the $1,000 BSA increase.
The amount matched the original CS for HB 69. He noted that
the [House] Rules Committee version came out $22 million
higher. The next item was $7.3 million for the pupil
transportation formula, which matched the amount that went
outside the formula in FY 25. He noted that it was not
included in HB 69. The governor's education bill included a
pupil transportation formula increase that was about twice
the amount. He explained that $7.3 million was a
placeholder matching FY 25.
Mr. Painter continued to review scenario 1 on slide 20. He
moved to line 7 of the table and addressed $6.7 million for
community assistance, which represented the additional
amount needed to add to the distribution in FY 26 for a
total distribution to communities of $30 million. Without
any additional appropriations, the distribution would be
$23.3 million, which was enough to pay base payments, but
not full per capita payments. Line 8 included $7.5 million
for childcare, which matched the FY 25 level. Lines 9 and
10 matched the fire suppression and Disaster Relief Fund
amounts in the governor's budget. Line 11 added $10 million
for AMHS backstop. He noted the amount was increased to
$76.5 million in FY 28 - when federal money was presumed to
run out - under the multiyear scenarios. Line 12 included a
base capital budget of $300 million compared to the
governor's amend number of $294 million. There was no
funding for legislative additions of district projects. The
scenario included $50 million for school construction,
deferred maintenance, and University of Alaska deferred
maintenance. He noted that the co-chair had mentioned
additional renewable energy projects, which were another
possibility. The two numbers resulted in a capital budget
of $350 million without legislative district projects. Line
15 for fiscal notes did not include anything for fiscal
notes beyond foundation formula increase in line 5. Line 16
included $40 million for subcommittee and other additions
above the governor's number. He remarked that the last
subcommittee was scheduled to close the following day. Line
17 included a 75/25 Permanent Fund Dividend, where the PFD
was 25 percent of the percent of market value (POMV) draw
or about $1,400 per recipient and a total cost of about
$950 million. The scenario resulted in a deficit of $440
million in FY 26.
Co-Chair Josephson believed the Alaska Superintendents
Association and the School Board Association were hoping
item 5 [on slide 20] would be $1,800.
Representative Allard stated she did not see a scenario
with a lower BSA. She asked if the idea had not been
considered with regard to coming closer to a balanced
budget.
Mr. Painter deferred the question to Co-Chair Josephson.
Co-Chair Josephson believed the governor would be
incredibly surprised if the budget did not include one-time
funding of $182 million because it had been included in the
current year. The number proposed in the House Rules CS
[for HB 69] was larger than $182 million by about $60
million. He answered that the scenario had not been
considered because it would further starve school
districts.
Representative Johnson noted there were several bills that
looked like they would pass. She highlighted the defined
benefit bill [HB 78] and calculated its cost at $76
million. She estimated the BSA bill would cost $200
million. She asked if the bills would increase the amount
[shown on slide 20].
3:02:27 PM
Mr. Painter referred to line 5 on slide 20 showing the
foundation formula.
Representative Johnson observed that the scenario showed a
$440 million [deficit]. She remarked that the BSA bill was
the only bill accounted for in the scenario.
Mr. Painter agreed.
Representative Johnson asked for verification that the
scenario reflected the governor's capital budget with no
additions.
Mr. Painter replied that the scenario was $6 million higher
plus $50 million for deferred maintenance. The amount
included in the scenario was $56 million higher.
Representative Johnson thought they would be looking at [an
additional] $500 million at a minimum by the time some
bills were included. She was surprised the proposal did not
show a balanced budget. She asked what the PFD would be if
the budget was balanced.
Mr. Painter believed it was reflected in scenarios 4 and 5.
Co-Chair Josephson noted that slide 20 showed a deficit of
$440 million, while the governor's budget had a deficit of
about $1.5 billion. He argued that the deficit in the
governor's budget was higher than $1.5 billion if one-time
funding was added.
Mr. Painter agreed. He elaborated that if the governor's
education bill was included in the governor's budget, the
number would be closer to $1.7 billion.
3:04:21 PM
Representative Stapp looked at the community assistance
line of $6.7 million on slide 20. He asked if the scenario
capitalized the fund at $30 million even though the total
capitalization in statute was $90 million.
Mr. Painter answered that the scenario would provide an
additional amount to ensure the distribution was $30
million, but it would not add an additional amount to the
fund to reach $90 million. The fund currently had a balance
of $70 million, leading to the $23.3 [million]. The
governor's budget included $30 million to add back, which
ended up at around $70 million. He clarified that scenario
1 did not include anything to bring the amount back up to
$90 million, it topped off the distribution for FY 26 only.
Representative Stapp stated that statute specified one-
third of capitalization funds distributed to communities.
He surmised that the funding would be expended, the fund
balance would reduce to $60 million, and it would need to
be recapitalized at some point later on.
Mr. Painter replied that the governor's budget included $30
million, which was also included in scenario 1 [slide 20].
The fund would be reduced from its current $70 million
balance by $23.3 million and $30 million would be added;
therefore, the ending balance would be a bit higher (~$77
million) than the starting balance. In FY 27, one-third of
the balance would be "$20 something million" again. He
explained that it was not a full distribution, but a $6.7
million addition to the FY 26 budget would bring the
distribution to the full $30 million, despite not having
the full $90 million in the fund.
Representative Stapp observed that scenario 1 reserved a
$40 million placeholder for contract negotiations. He
characterized the salary study that was not yet available
as "the elephant in the room." He noted there were critical
shortages, especially in the DOT Dalton Highway northern
region. He had not seen the salary study, but when
comparing to private sector wages, he estimated it could
reflect wage increases of up to $200 million the state
would have to pay people in order to hire them. He asked if
Mr. Painter was comfortable with a $40 million placeholder.
Alternatively, he wondered if Mr. Painter saw the number
being higher.
Mr. Painter answered that the $40 million placeholder was
probably a bit on the low side. The number was based on
taking 3 percent for the unions that did not yet have
contracts and percentages in actual contracts. He thought
they may be underestimating a couple of the true impacts
for the marine highway union for example "where we don't
have those in the personal services." He noted it was hard
to estimate the true cost, and he reiterated it was likely
on the low side.
3:07:32 PM
Representative Stapp noted that a salary increase had been
given to a union the previous year. He asked if the
increase had been 7 percent.
Mr. Painter answered that the supervisory unit received a 5
percent increase plus one step worth approximately 3.3
percent for a total of about 8.3 percent. He noted that the
correctional officers had been up in the past year, but did
not come to a contract agreement. Subsequently, they
received 11 percent in the current year. He explained that
when adding the 3 percent the supervisors would receive in
FY 26 in addition to the 8 percent they received in FY 25,
it was about equal to the correctional officer's increase.
He stated it was unclear exactly where the general
government unit would land. He explained that 3 percent was
used in the scenario because that was what the supervisory
unit had for FY 26.
Representative Stapp observed that the PFD amount was the
only item that changed in the other [upcoming] scenarios.
He noted that he had asked LFD about modeling a 99/1
scenario at the beginning of session. He asked if it was
included in the presentation.
Mr. Painter replied that he did not believe the co-chair
requested that analysis.
Mr. Painter advanced to "HFIN Co-Chair FY26 Budget Scenario
2" on slide 21. The scenario changed the PFD shown on line
17 to $1,000. The change would reduce the deficit to $168.9
million. He clarified that the $680 million included the
cost needed for the dividend program and the projected
recipients.
Co-Chair Josephson asked for verification that the
scenarios used $70 per barrel of oil.
Mr. Painter agreed.
Mr. Painter moved to "HFIN Co-Chair FY26 Budget Scenario 3"
on slide 22. The scenario doubled the PFD to $2,000 per
recipient with a total of ~$1.3 billion. The scenario
increased the deficit to $808.2 million.
Co-Chair Josephson remarked that the scenario got closer to
the governor's request.
Mr. Painter replied, "Yes."
3:10:14 PM
Mr. Painter addressed "HFIN Co-Chair FY26 Budget Scenario
4" on slide 23. The scenario showed a statutory dividend of
~$3,800 per recipient for a total of $2.5 billion. He noted
that it did not reflect the governor's number. He explained
that it was the Alaska Permanent Fund Corporation's (APFC)
new number; therefore, it was about $50 million lower. The
scenario would result in a deficit of approximately $1.9
billion.
Mr. Painter looked at "HFIN Co-Chair FY26 Budget Scenario
5" on slide 24. The scenario showed a balanced budget with
a PFD of $511.9 million or $736 per recipient.
3:11:06 PM
Co-Chair Josephson observed that under scenario 5, line 4
was not much of a variable because the state typically paid
contracts, lines 5 and 8 were wild cards, the capital
budget on line 12 could be smaller, and other changes on
line 16 could be smaller; however, overall, there was not a
lot that could change.
Mr. Painter agreed there was not a lot that could be
changed unless the legislature wanted to make significant
changes to the structure of the budget.
Representative Tomaszewski looked at scenario 5 on slide
24. He noted that Representative Stapp had asked about a
99/1 split. He asked what the POMV split was under the
scenario. He stated it looked like "about a 99 to
something."
Mr. Painter replied that he would follow up with the
information.
Co-Chair Josephson suspected the [government services/PFD]
split [under scenario 5] was around 83/17.
3:12:28 PM
Co-Chair Schrage noted that adjusting the PFD amount was
not the only solution available. He highlighted that the
committee had talked about the CBR. Additionally, there
were revenue measures being discussed in the other body.
The legislature did not know what the [revenue] forecast
would be the following week, but he thought it was not
likely to change significantly. He thought there were a
number of tools available to the legislature and it would
be necessary to continue having the difficult
conversations.
3:12:57 PM
Mr. Painter turned to slide 25 titled "FY26-28 House
Finance Co-Chairman's Scenario." The three-year scenarios
assumed the existing schedules for statewide items and
added a $7.8 million placeholder for new school bond debt
starting in FY 27. The scenario assumed agency operations
and the capital budget would grow with inflation of 2.5
percent and added a $50.0 million placeholder for future
supplemental budgets in FY 26 and beyond.
3:13:39 PM
Mr. Painter turned to " House Finance Co-Chairman's FY25-28
Scenario 1" on slide 26. The scenario used a 75/25 PFD and
began with a deficit shown previously [in scenario 1 on
slide 20], which crept up to a deficit of $487.8 million
[in FY 26] with the addition of the $50 million
supplemental. The deficit for FY 25 through FY 26 was
projected at $653.6 million, which was projected to grow in
the next several years as revenue did not grow with
inflation, but costs did. He noted there was also an
assumption in FY 28 that federal money for AMHS ended and
was replaced with UGF.
Co-Chair Schrage considered the scenarios and the numbers
moving into the out years. He and remarked that the s-corp
loophole had been talked about quite a bit. He asked how
much revenue was projected to come in if the loophole was
closed. He noted it would reduce the annual deficit. He
asked what the current balance in the CBR was. He did not
believe running annual deficits was sustainable, but he
thought there was a general view in the legislature that in
the future there may be an increased appetite for fiscal
reform. He asked about the state's ability to weather
annual deficits for some time with funds from the CBR.
Mr. Painter replied that the s-corp legislation was
proposed in the other body and would bring around $180
million in the first year and around $120 million in next
couple of years. He would get back to the committee with a
more precise number. The CBR balance was currently about $3
billion.
Co-Chair Josephson shared that he had asked his staff to
look at CBR balances. He believed the balance was down to
$1.3 billion in 2021 or 2022. He highlighted that the CBR
balance was currently more than twice its lowest recent
point.
Mr. Painter responded affirmatively.
3:16:36 PM
Representative Allard asserted that the s-corp was not a
loophole. She asked for verification that it was in
statute.
Mr. Painter agreed. There was no tax on s-corps.
Representative Stapp observed there was a lot of red on the
slides, indicating money was not available for the items.
He noticed that since subcommittee closeouts were taking
place, the red was increasing. He had not heard of any
revenue proposals from the majority. He noted that the s-
corp taxation did not generate enough revenue to cover the
red. He asked what the legislature should do to get into
black.
Mr. Painter noted that it was a policy call for the
legislature. There were a number of alternatives in terms
of revenue generation or spending reductions.
Co-Chair Josephson remarked that Representative Stapp was
correct. For example, the subcommittee had elected to
include $5.5 million to pay for forensic exams of sexually
abused children because it was important. He hoped his
colleagues would join in supporting the funding.
Representative Stapp supported the $5.5 million for rape
kits, which was valuable and important. He pointed out that
it was not the $653 million red number on the screen. He
asked what would happen if the legislature sent an
unbalanced budget to the governor.
Mr. Painter answered that the last time it occurred was
during the Walker administration and the governor had
vetoed down to the amount needed to have a balanced budget.
Representative Stapp asked for verification that if the
finance committee failed to balance its budget, the
governor would take care of it for the legislature.
Mr. Painter confirmed that in order for the governor to
sign the budget, he would have to balance it.
3:19:32 PM
Co-Chair Schrage asked for verification that it was
possible to run deficit budgets as long as there was a
funding source available to fill the deficit for the year.
He noted that some of the things (e.g., education) were
constitutional obligations the legislature had to balance
with the rest of the constitutional obligations. He
remarked that the legislature's duties went beyond a
fiduciary responsibility.
Mr. Painter responded that the state could run a deficit as
long as there was a deficit filling source available. For
example, if the state drew $3 billion per year from the CBR
for a five-year period.
Co-Chair Josephson thanked Mr. Painter for the
presentation. He reviewed the schedule for the following
day.
ADJOURNMENT
3:20:48 PM
The meeting was adjourned at 3:20 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN LFD FY26-28 Fiscal Outlook 030525.pdf |
HFIN 3/5/2025 1:30:00 PM |
|
| LFD Response_to_HFIN Fiscal Outlook_3-5-25.pdf |
HFIN 3/5/2025 1:30:00 PM |
HB 53 |