Legislature(2021 - 2022)
03/30/2021 11:30 AM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska's Revenues and Expenditures | |
| Presentation: 10 Year Plan | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 30, 2021
11:32 a.m.
MEMBERS PRESENT
Representative Ivy Spohnholz, Chair
Representative Adam Wool
Representative Andy Josephson
Representative Calvin Schrage
Representative Andi Story
Representative Mike Prax
Representative David Eastman
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
PRESENTATION: ALASKA'S REVENUES AND EXPENDITURES
- HEARD
PRESENTATION: 10 YEAR PLAN
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
ALEXEI PAINTER, Director
Legislative Finance Division
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"Historic Revenue and Expenditures," dated 3/30/21.
NEIL STEININGER, Director
Office of Management and Budget
Office of the Governor
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation on the
Office of Management and Budget's 10-year plan, dated 3/30/21.
ACTION NARRATIVE
11:32:09 AM
CHAIR IVY SPOHNHOLZ called the House Special Committee on Ways
and Means meeting to order at 11:32 a.m. Representatives Wool,
Josephson, Schrage, Story, Prax, Eastman, and Spohnholz were
present at the call to order.
CHAIR SPOHNHOLZ reviewed the three goals that the House Special
Committee on Ways and Means (HW&M) was charged with: consider
methods to control state spending, identify ways in which state
programs may be made more efficient, and propose new measures to
raise additional state revenue. She noted that the same
language had been used in resolutions that created the committee
in previous legislatures - most recently in 2003-2008. She said
each element is critical as the legislature works towards
resolving the state's structural deficit, which Alaska has faced
off and on for decades. She recalled that the first fiscal gap
was in the late 1980s when the price of oil dropped to
approximately $9 per barrel after the legislature repealed the
income tax.
REPRESENTATIVE WOOL made a motion to grant the [House Special
Committee on Ways and Means] chair the authority to draft
committee bills for the consideration of the committee.
REPRESENTATIVE EASTMAN objected.
A roll call vote was taken. Representatives Wool, Josephson,
Schrage, Story, and Spohnholz voted in favor of the motion.
Representatives Prax and Eastman voted against it. Therefore,
the motion passed by a vote of 5-2.
^PRESENTATION: Alaska's Revenues and Expenditures
PRESENTATION: Alaska's Revenues and Expenditures
11:36:48 AM
CHAIR SPOHNHOLZ announced that the first order of business would
be a presentation on Alaska's revenues and expenditures by
Alexei Painter, Legislative Finance Division (LFD).
11:38:00 AM
ALEXEI PAINTER, Director, LFD, Legislative Affairs Agency (LAA),
provided a PowerPoint presentation, titled "Historic Revenue and
Expenditures" [hard copy included in the committee packet]. He
began on slide 2, titled "General Notes," which read as follows
[original punctuation provided]:
-Historic revenue numbers are from the Department of
Revenue's "60 Years of Revenue" publication in the
Fall 2018 Revenue Sources Book
-Recent revenue numbers are from the Spring 2020
Revenue Sources Book
-Historic budget numbers use current fund
classifications so these numbers will not match
contemporary publications
-This allows for more straightforward comparisons with
the current year
-Inflation and population data are from the Department
of Labor and use Anchorage CPI
-All Funds data in this presentation excludes
duplicated funds
-Unrestricted General Funds (UGF) are used for most
slides because that is the only fund source that
impacts the size of the deficit. All Funds data
indicates the size of government but may not directly
correlate to the State's fiscal situation
11:40:18 AM
REPRESENTATIVE PRAX remarked:
You're saying the Unrestricted General Funds - the
only fund source that impacts the size of the deficit
- then the other funds are not just General Funds that
have been designated for this or that ... it's funds
that come in from some a source other than ... taxes.
11:40:48 AM
MR. PAINTER explained that a Designated General Fund (DGF)
included a designated tax by statute; however, for deficit
calculations, the expenditures and revenue from that fund are
set to be equal because if revenue exceeds expenditure
authority, that amount would either remain in the fund or lapse
to the General Fund. Further, when authorization exceeds
revenue, it is referred to as "hollow authorization." He noted
that neither case would necessarily feed into the deficit.
11:42:24 AM
MR. PAINTER resumed the presentation on slide 3, which featured
a graph showing UGF revenue since statehood. The green portion
reflected traditional UGF revenue, the orange portion reflected
Permanent Fund Dividend (PFD) transfers from the Earnings
Reserve Account (ERA), and the purple showed the percent of
market value (POMV) draw, which began in FY 19 and replaced the
direct draw from the ERA for the dividend. The graph
highlighted historic revenue spikes, including the Prudhoe Bay
lease sale [first spike in revenue - unlabeled], the first
production from Trans-Alaska Pipeline System (TAPS) in 1977, and
peak North slope oil production in FY 89.
11:44:36 AM
REPRESENTATIVE STORY asked when the tax structure changed under
the Palin Administration.
MR. PAINTER answered FY 15. He noted that the effect of the tax
regime change is not depicted on the current slide because it
coincided with a drastic drop in oil prices.
CHAIR SPOHNHOLZ informed the committee that 2 billion barrels of
oil per day was being produced in 1989 whereas today, oil
production is at 500,000 barrels per day.
11:45:30 AM
MR. PAINTER continue to the graph on slide 4, which showed the
data from slide 3 adjusted for inflation and population. He
indicated that the Prudhoe Bay lease sale, which was relatively
small on the previous graph, brought the state nearly $20,000
per person in real revenue after inflation adjustments. He
noted that the same level was not exceeded until oil revenue
peaked in the 1980s. Additionally, the graph showed that
today's revenue is similar to FY 16 and FY 17, which is the
lowest level since before the pipeline era.
CHAIR SPOHNHOLZ surmised that after adjusting for inflation and
population, [today's] revenue is well below the historical
average spending in the last 60 years. She asked if that is
correct.
MR. PAINTER replied in the affirmative. He noted that without
the POMV revenue, traditional revenue is at a lower level today
than in the 1990s, which was another troubling time for the
state fiscally.
11:48:30 AM
REPRESENTATIVE SCHRAGE asked for a breakdown of oil revenue
versus what was brought in by the state oil tax prior to 1980.
MR. PAINTER said at its repeal, the personal income tax adjusted
for inflation and population would bring in today's equivalent
of roughly $600-$700 million. He expounded that after the
Prudhoe Bay lease sale, the main sources of revenue were taxes
on Cook Inlet oil production and the personal income tax, as
well as an education head tax and several other revenue sources.
He believed that in the early period of statehood, the income tax
was a main source of revenue for the state. However, he
reiterated that if the income tax were adjusted forward, $600-
$700 million wouldn't meet the current level of government at
$4.5 billion.
REPRESENTATIVE SCHRAGE questioned whether the personal income
tax was primarily funding state government from 1961-1966.
MR. PAINTER confirmed that in the first few years of statehood,
the income tax was the state's largest revenue source.
REPRESENTATIVE SCHRAGE sought verification that today's revenue
is comparable to the income tax revenue during the first five
years of statehood.
MR. PAINTER said it's roughly equivalent without the POMV draw,
which is currently the state's largest source of revenue.
11:51:07 AM
MR. PAINTER proceeded to the graph on slide 5 showing ANS
[Alaska North Slope] oil production and prices from FY 11
through FY 21. The red portion reflected ANS production, which
declined from approximately 600,000 barrels per day in FY 11 to
just below 500,000 barrels per day in FY 21; the blue line
reflected ANS price, which was over $100 per barrel from FY 12
to FY 14 and declined to $52 per barrel in FY 20.
11:52:24 AM
MR. PAINTER advanced to the graph on slide 6 showing UGF revenue
and oil prices from FY 11 through FY 21. The black line
represented the ANS price, the blue portion represented the
petroleum revenue, the red portion represented the non-petroleum
revenue, the purple portion showed the ERA draw for the PFD, and
the green portion showed the ERA draw for the POMV. He
reiterated that the ERA draw for the POMV is still the state's
largest source of revenue; however, it doesn't compare to the
revenue level in FY 13 and prior.
11:54:12 AM
MR. PAINTER progressed to a graph on slide 7 showing UGF
spending and revenue since statehood with the bars representing
state spending. He conveyed that the agency operations portion
of the budget [shown in dark blue] had been relatively flat
since the mid-1980s through the early 2000s due to constrained
revenue. He noted that spending on agency operations increased
when revenue increased. He pointed out that there were several
deficits throughout the 1980s and 1990s resulting in draws from
the Constitutional Budget Reserve (CBR) account, which turned in
to surpluses when revenue spiked and returned to deficits when
revenue declined.
11:56:32 AM
CHAIR SPOHNHOLZ questioned when the oil tax changes passed by
the Palin Administration went into effect.
MR. PAINTER answered FY 07, which coincided with the spike in
oil prices.
CHAIR SPOHNHOLZ concluded that there was a nexus between oil
taxes and oil price, resulting in an infusion of resources that
allowed Alaska to "do a lot of things," but wasn't maintainable
after the price of oil dropped. She further noted that the
decline in oil price coincided with the passage of Senate Bill
21.
MR. PAINTER replied in the affirmative. He explained that the
Palin-era tax didn't have a minimum tax like the current oil tax
system. He expounded that during the periods of much lower oil
prices, the higher progressivity of the Palin-era tax wouldn't
have led to higher revenue because of the lack of a floor in
that tax system.
11:57:43 AM
MR. PAINTER continued to the graph on slide 8, which showed the
data on slide 7 adjusted for inflation and population. He noted
the prolonged period of constrained spending in per capita terms
from the mid-1980s through the early 2000s. Additionally, he
pointed out that today, spending has declined to roughly the
same level as FY 07 before the spikes in spending from the mid-
2000s.
11:58:41 AM
CHAIR SPOHNHOLZ noted that in times of lower spending, there
were also services that made the quality of life much better in
Alaska compared to the 1970s and 1980s. She recalled times in
her childhood when streets went unplowed, rural students were
sent to boarding schools, and public safety was a challenge.
Further, the federal government had primacy over many elements
of issues that affected Alaska's government and the way commerce
functioned.
12:00:29 PM
MR. PAINTER addressed the spike on statewide items, noting that
there was not an unfunded pension liability until the mid-2000s,
which is now an annual expense of $300 million. He directed
attention to the graph on slide 9 showing All Funds spending and
revenue since statehood. He noted that the data assumed that
revenue equals expenditures for the non-UGF sources.
CHAIR SPOHNHOLZ asked what the buying power of an unadjusted
dollar from 1970 would be today.
MR. PAINTER offered to follow up with the requested information.
12:02:17 PM
MR. PAINTER advanced to the graph on slide 10, which showed All
Funds spending and revenue since statehood adjusted for
inflation and population. He pointed out that the spike in FY
20 is primarily due to federal aide for coronavirus relief. He
said the graph shows less volatility because the state's federal
authorization was stable over the years. He added that many of
the overall trends are the same.
12:03:27 PM
REPRESENTATIVE WOOL questioned why agency operations spiked in
1982 and decreased in 1983.
12:03:36 PM
MR. PAINTER offered to follow up with the requested information.
12:03:44 PM
MR. PAINTER progressed to the graph on slide 11 showing UGF
spending and revenue from FY 11 through FY 21. He noted that FY
13 was the first year of deficit spending despite having oil
prices over $100. He pointed out that FY 21 is the ninth
straight year of deficits. The total budget is significantly
smaller today than it was in FY 13, much of which is the
reduction in the capital budget. There is also a reduction in
statewide items. He informed the committee that the retirement
liability and the oil and gas tax credits are the largest
spending items.
12:05:22 PM
REPRESENTATIVE JOSEPHSON sought to confirm that the state cannot
"deficit spend" institutionally in the final analysis.
MR. PAINTER defined "deficit spending" as drawing from the
budget reserves to meet the state budget, according to LFD.
However, to understand the state's fiscal situation, he said a
draw from the Statutory Budget Reserve (SBR) or a draw from the
Constitutional Budget Reserve (CBR) is considered a deficit.
12:06:26 PM
REPRESENTATIVE SCHRAGE questioned whether the capital budget
funds include deferred maintenance or new construction of
projects.
MR. PAINTER said it includes both. He explained that an
initiative in the Parnell Administration addressed deferred
maintenance with $100 million per year for five years, which
brought the deferred maintenance backlog down from over $2
billion at its peak to $1.5 billion. He noted that the backlog
is currently back up to $2 billion because that investment
wasn't continued. Additionally, he stated that capital budgets
during that era included numerous direct grants to nonprofits,
local governments, and schools.
12:07:41 PM
REPRESENTATIVE PRAX shared his understanding that when a private
business uses the term "capital spending," it's referencing
expenditures that last more than a year, whereas "capital
spending" to the state refers an expenditure in the capital
budget. He asked if that is correct.
MR. PAINTER stated that in many cases, LFD counts items "based
on their nature;" for example, if there were a clear operating
item in the capital bill, it would be counted as an operating
item. He noted that many items in the capital budget are in a
"gray area," such as a grant for a nonprofit's roof repair or
funding for a study.
12:09:30 PM
REPRESENTATIVE SCHRAGE, referencing slide 11, asked whether most
of the capital budget (in light blue) is deferred maintenance.
Additionally, he asked whether the [current] level of capital
budget is holding deferred maintenance steady or if deferred
maintenance is growing.
MR. PAINTER restated that the deferred maintenance backlog is
over $2 billion. He said the largest share of that is at the
University of Alaska, which historically used part of its
general funds for deferred maintenance. He explained that as
the University's of Alaska's budget has been reduced, the
university reduced funding for deferred maintenance.
Additionally, the way deferred maintenance is funded changed.
Several years ago, a statute was passed that designated the
Alaska Capital Income Fund as "for deferred maintenance," which
provided a regular revenue source of $30 million per year.
However, for comparison, the state owns about $9 billion in
buildings, which in the most conservative 1 percent rule, would
be about $90 million per year. He said that amount [of deferred
maintenance] has not been funded since the Parnell
Administration. He conveyed that the backlog grew over the past
few years because less was invested in it.
REPRESENTATIVE SCHRAGE characterized the deferred maintenance as
"incredibly troubling." He also expressed concern that there
are no new construction jobs to develop new projects or maintain
basic upkeep on the state.
12:12:09 PM
CHAIR SPOHNHOLZ asked whether the list of accruing deferred
maintenance projects includes every statewide project that needs
to be completed or if the list could potentially be higher.
MR. PAINTER deferred the question to the director of the Office
of Management & Budget (OMB). He stated his belief that there
is currently a multi-agency effort to bring all projects forward
on a unified list.
CHAIR SPOHNHOLZ emphasized the importance of prioritizing
deferred maintenance projects when considering a strategy to
address the state's fiscal situation. She pointed out that if
it is not addressed, the cost would only grow higher;
furthermore, some deferred maintenance projects could help with
energy efficiency, which could save costs in the future.
12:13:33 PM
MR. PAINTER noted that the $2 billion figure only includes state
facilities, leaving out deferred maintenance at facilities that
the state may have some responsibility for, such as rural
schools, which are funded through separate means. Additionally,
there is $1.8 billion of deferred maintenance in water and sewer
projects that is met through the Village Safe Water (VSW)
program. Further, the Alaska Energy Authority (AEA) identified
$800 million in bulk fuel deferred maintenance projects that's
funded through an AEA appropriation. He concluded that there
are a number of other items that fall into the general category
of deferred maintenance that are not necessarily state
facilities, so they are not included in the $2 billion figure.
CHAIR SPOHNHOLZ asked whether some facilities contribute to
operating expense because the state is responsible for providing
funding to local communities to operate the buildings.
MR. PAINTER said in some cases, yes. He explained that the water
and sewer programs don't feed into the budget directly; however,
there's not a local capacity for those projects, so the state
and the federal government, through VSW, make that investment.
12:16:32 PM
REPRESENTATIVE JOSEPHSON recalled that DEC [Department of
Environmental Conservation] opined that there could be less
regulation of bulk fuel containers in the last fiscal year. He
characterized that statement as "ironic" given the amount that
they claim needs to be enhanced. He asked if that is correct
[that the administration's position was that they didn't need
on-site inspection of some large bulk fuel containers].
MR. PAINTER confirmed [that he recalled that discussion]. He
noted that the $800 million figure is AEA's number, not DEC's.
12:17:23 PM
REPRESENTATIVE WOOL noted that some of the $1.8 billion in water
and sewer is maintenance and some is new construction. He asked
whether the new construction is typically paid for by the
federal government.
MR. PAINTER said both are partially paid for by the federal
government with an existing state match. He explained that the
annual VSW appropriation includes a portion for new construction
and a portion for maintenance.
REPRESENTATIVE WOOL asked whether the state match is 50/50.
MR. PAINTER shared his belief that the match is 25 percent. He
offered to verify that number and follow up with the committee.
12:18:23 PM
MR. PAINTER proceeded to the graph on slide 12 showing agency
operations by fund group from FY 11 through FY 21. The blue
portion reflected UGF, the red portion reflected Designated
General Funds (DGF), the green portion showed other state funds,
and the purple showed federal receipts. He highlighted the
spike in federal receipts in FY 20 from the CARES Act funding.
He noted that while UGF had decreased, All Funds remained level.
12:19:04 PM
MR. PAINTER continued to the graph on slide 13 showing UGF
agency operations by department from FY 11 through FY 21. He
pointed out that in agency operations, the peak year for UGF was
FY 15. He noted that the governor's FY 22 budget is roughly the
same as FY 18, which was the lowest.
12:19:47 PM
MR. PAINER turned to the table on slide 15 listing UGF budget
changes by agency since FY 15. He explained that the table is
divided into two separate periods: FY 15-18 and FY 18-22. From
FY 15-18, every agency experienced UGF reductions with an
overall reduction of $663 million or 14.7 percent. Since FY 18,
the overall reduction is 1.1 percent; however, some agencies
have increased while others have decreased. He noted that the
table uses final budget, which explains the increase to the
legislature. He added that in terms of the actual expected
spending, the legislature is closer to flat.
CHAIR SPOHNHOLZ surmised that the legislature is a restoration
of previous funds spent in FY 15.
MR. PAINTER said that is correct to some degree; however, a
considerable amount of the funds are projected to lapse. He
reported that rather than providing capital projects, [the
legislature] over-authorizes on operating and lapses into the
capital budget. He conveyed that the legislature took some
reductions in Legislative Legal Services and Legislative
Research, but generally, the legislature's budget in actual
spending had been flat during this time.
12:22:08 PM
REPRESENTATIVE JOSEPHSON sought to verify the change of 1.1
billion, which he derived by adding statewide expenses. He
approximated that it drove up the percent change to 21 percent.
He asked if that sounds plausible.
MR. PAINTER answered in the affirmative.
12:22:39 PM
REPRESENTATIVE STORY asked why there's not an asterisk by the
legislature's spending column to note the relative flatness.
Further, she asked whether any other agencies are similar in
that they differ from the figures on the table.
MR. PAINTER related that there's no single point of comparison
that's completely fair when doing historical comparisons, as
final budget includes supplementals and things like the lapse in
the legislature. He noted that the Department of Natural
Resources (DNR) is misleading because its budget fluctuates
based on the fire season. He explained that it looks like there
had been a large reduction; however, it's actually reflecting
the fire suppression funding.
CHAIR SPOHNHOLZ asked whether each figure includes the
supplementals.
MR. PAINTER answered yes.
CHAIR SPOHNHOLZ pointed out that in the last three years, the
legislature had essentially increased the department of
Corrections' (DOC's) budget by over $60 million, which is about
the same amount that was cut from the University of Alaska. She
said at a time of fiscal constraint, more money is being spent
to lock people up and less money is spent on educating them.
Additionally, she highlighted the $54 million decrease in
Department of Health and Social Services (DHSS) and asked why
that is.
12:25:37 PM
MR. PAINTER said the bulk of that change is the Medicaid
program, as the governor has a reduction of $35 million from the
FY 21 amount. Additionally, changes to behavioral health, as a
waiver process through Medicaid enabled reductions in that
program.
CHAIR SPOHNHOLZ pointed out that the governor's proposed
Medicaid cut is based on a one-time drop in utilization that
occurred last year because of the public health measures, which
restricted health care delivery.
12:26:53 PM
MR. PAINTER turned to the table on slide 15 showing All Funds
budget changes by agency since FY 15. He noted that All Funds
for DHSS stands out due to a $700 million increase in Medicaid
in federal receipts, which is primarily an impact of Medicaid
expansion. Additionally, the $151 million increase in DOR from
FY 18-22 reflects federal funding for rental relief. He
summarized that All Funds for most agencies decreased; however,
Medicaid expansion was such a large influx of federal funds that
it made the total aggregate look like it did not go down.
CHAIR SPOHNHOLZ shared her understanding that 65,000 additional
Alaskans are covered because of Medicaid expansion. She further
noted that the federal government covers most of it, as the
match is 90/10.
12:29:17 PM
MR. PAINTER advanced to the table on slide 16 listing filled
full-time position count changes by agency since FY 15. He
indicated that the trend in positions mirrors the total budget,
as nearly every agency shows a 10 percent reduction in filled
positions from FY 15-18. From FY 18-22, there's a mix of
agencies being up and down with a total decline of 2 percent.
He said many of the increases are the public safety items that
resulted from House Bill 49 and the increased investment in the
criminal justice system.
12:30:55 PM
REPRESENTATIVE PRAX questioned whether comparing state spending
against gross state product would accurately measure Alaska's
overall economy.
12:31:37 PM
MR. PAINTER said gross state product, which is largely dependent
on the oil industry, would give a "decent proxy" to the state's
revenue generation ability, as [oil] is a primary revenue
source. He pointed out that it wouldn't factor in the
investment revenue. He suggested using personal income as a
proxy for the size of Alaska's economy because it would exclude
the swings of the oil industry; however, it wouldn't relate to
the ability to finance government. He offered to prepare a
slide with the requested information.
12:32:42 PM
REPRESENTATIVE JOSEPHSON asked, "Would this 44 number in the
change in the last three fiscal years - would that represent
that they're down 56 from the beginning of the spreadsheet?"
MR. PAINTER answered yes.
12:33:08 PM
REPRESENTATIVE STORY questioned whether the position cuts are
distributed equally across the state.
MR. PAINTER offered to follow up with the requested information,
per OMB.
^PRESENTATION: 10 Year Plan
PRESENTATION: 10 Year Plan
12:33:53 PM
CHAIR SPOHNHOLZ announced that the final order of business would
be a presentation by Neil Steininger, Office of Management &
Budget.
12:34:35 PM
NEIL STEININGER, Director, Office of Management and Budget,
Office of the Governor, provided a PowerPoint presentation [hard
copy included in the committee packet] by the Office of
Management and Budget (OMB) on a 10-year plan. He detailed a
graph on slide 2 showing historical state savings balances. He
explained that in some of the high-revenue years, the
legislature made an effort to put money away into both state
savings accounts, the CBR and the SBR [in dark blue]. He
highlighted the peak savings balance of over $16 billion in FY
13, which combined with prior efforts to save, allowed the state
to weather the last decade of budget deficits from a revenue to
expenditure perspective. He indicated that very little money is
left in the traditional reserve accounts to accommodate
continued budget deficits. He explained that while there's not
a "magic" number that the state needs in its savings balances,
$500 million is the amount that may be needed on a day-to-day
basis to cover financial outlays in advance of revenue
collections from federal programs. He informed the committee
that money is expended in advance of collection from the federal
government; therefore, at any given time, the state may be $500
million ahead of those collections and requires cash on hand to
manage it. He said that while developing the budget and the 10-
year plan this year, OMB recognized that the savings balances
could not be relied upon.
12:38:25 PM
CHAIR SPOHNHOLZ noted that the CBR and SBR were built up when
the price of oil was high. She shared her understanding that
[the legislature] is obligated to repay the CBR for money that
is spent from it.
MR. STEININGER replied in the affirmative. He said any money
drawn from the CBR to meet a budget deficit is due to be repaid
to the CBR per the constitution.
CHAIR SPOHNHOLZ reiterated that in FY 13, combined CBR and SBR
savings peaked at about $16 billion, which is close to the same
amount of money in the ERA of the Alaska Permanent Fund. She
opined that the inability to resolve the state's fiscal
situation could result in depleting the ERA, as it only requires
a majority vote in each body.
12:39:52 PM
REPRESENTATIVE WOOL highlighted the uptick in savings in FY 22
and asked how much of that is from settlements with oil
companies for past audits over the last seven years.
Additionally, he inquired about the money from tax audits and
lawsuit settlements that was put in the CBR, which contributed
to the growing balance in early years.
MR. STEININGER confirmed that revenues diverted to the CBR were
a result of claims settlements, which primarily contributed to
the balance in the CBR. Regarding the uptick in FY 22, he said,
that is primarily the adjustment in revenue from the spring
revenue forecast.
12:41:52 PM
REPRESENTATIVE SCHRAGE observed that the state had been
"weathering the storm" for quite some time. He questioned
whether the state is "hunkered down, weathering the storm,
hoping that things will get better" or is something being done
internally to change the trajection. He expressed concern that
the [current fiscal situation] isn't temporary.
MR. STEININGER acknowledged that it's become the new normal. He
emphasized the need for significant structural changes to the
way the state approaches state finances to change the trajectory
and meet existing obligations. He said there are many different
financial levers and changes that could be made to adjust the
state's financial structure. He referenced several
constitutional amendment proposals that address some of these
issues, one of which would change the relationship between the
permanent fund and state finances by enshrining the POMV draw in
the constitution.
12:45:37 PM
REPRESENTATIVE PRAX asked if "savings" referred only to the CBR
balance.
MR. STEININGER clarified that state savings is both the CBR and
the SBR; however, the SBR is empty.
REPRESENTATIVE PRAX sought to clarify whether the "considerable"
amount of money in the ERA and other designated funds could
conceptually be considered savings.
MR. STEININGER replied in the affirmative. He explained the ERA
is available with a simple majority. He said there are other
designated general funds, but most of them have programs reliant
on either the earnings of that fund or some other mechanism to
spend money from the fund. He acknowledged that those could be
considered as state reserves in terms of money available for
appropriation. He clarified that in the "budget world," the CBR
and SBR are primarily acknowledged as state savings that are
generally available for appropriation.
12:47:45 PM
REPRESENTATIVE PRAX inquired about the "prohibition" of
dedicated funds.
12:48:40 PM
REPRESENTATIVE STORY asked where the money from past oil company
audits is distributed into the budget.
MR. STEININGER offered to follow up with the requested
information.
12:49:22 PM
REPRESENTATIVE JOSEPHSON in response to Representative Prax,
opined that the difference is ultimately a lawsuit. He
explained that if [the legislature] spent in violation of a
dedicated provision from the territorial days, a successful
lawsuit would be provoked.
12:49:47 PM
MR. STEININGER reviewed that there are truly dedicated funds
that existed prior to the clause in the constitution barring
dedicated funds, such as the school fund. He clarified that
designated - versus dedicated - funds are up to the discretion
of the legislature to appropriate in any given year.
CHAIR SPOHNHOLZ added that many of those designated funds
resulted from carefully crafted compromises over many years.
She pointed out that the administration views them as sweepable
funds that can be used for other purposes, whereas many in the
legislature would like to see a change in statute before
implementing such a change.
12:51:14 PM
MR. STEININGER advanced to the table on slide 3 showing a fiscal
summary of [FY 21 and] FY 22. He highlighted the difference in
revenues, noting the slight increase in unrestricted revenue to
approximately $1.7 billion in FY 22. He further noted that in
FY 22, [OMB] is proposing that the entire POMV draw be used for
government services. He added that the deficit or surplus in FY
22, as indicated on the slide, is before the payment of the PFD.
Additionally, in FY 21, the $1.1 billion in carryforward and
adjustments reflects CARES Act money that was extended from the
FY 20 budget. He explained that the $50 million decrease in
capital appropriations from restricted general funds in FY 22 is
a "misnomer" because the full capital budget wasn't fully
appropriated in FY 21 due to the pandemic. In FY 22, OMB is
proposing to use bonding through the Alaska Housing Finance
Corporation to cover the traditional capital budget, as
indicated by the deflated UGF amount for capital spending.
CHAIR SPOHNHOLZ asked how many other states use bonding for
their capital budgets.
12:54:29 PM
MR. STEININGER shared his understanding that some states are on
a three-year cycle of using bonding for the majority of their
capital spending. He said Alaska had enough unrestricted
general fund to cover most of its capital needs in prior years.
Additionally, the state has a generous match in its highway
program. He explained that the interest rates are low, so there
is an advantage to using bonding from a financial perspective,
which is why the administration put forward two different
bonding proposals.
CHAIR SPOHNHOLZ asked whether bonding was used for capital
projects in 2012.
MR. STEININGER confirmed.
12:55:35 PM
MR. STEININGER detailed the state savings accounts on slide 4.
He highlighted the $1.5 billion in the CBR in FY 21, noting that
OMB is projecting a $550 million draw from the CBR leaving an
end balance of $897 million going into FY 22. He pointed to the
lower chart, titled "Permanent Fund Earnings Reserve," which
showed a POMV draw for government, POMV draw for the Permanent
Fund Dividend (PFD), and a statutory PFD draw in both FY 21 and
FY 22.
CHAIR SPOHNHOLZ noted that the POMV, as referenced in an earlier
slide, is about $3 billion. She sought verification that the
administration is proposing to draw the $3 billion in addition
to $1.2 billion from the Alaska Permanent Fund to pay a
statutory PFD [in FY 21].
MR. STEININGER replied in the affirmative. He acknowledged that
completing the statutory calculation of the PFD would require
another $1.2 billion.
CHAIR SPOHNHOLZ asked whether overdrawing the permanent fund
this year would impact the fund's balance and earning potential
in the future.
MR. STEININGER replied any amount of money spent out of the
earnings reserve would reduce the balance and impact future
earnings. He added that drawing $1.2 billion would change the
POMV calculation in the future.
CHAIR SPOHNHOLZ pointed out that the ERA is invested in the same
way as the corpus. She explained that overdrawing the ERA
essentially reduces the amount of earnings that the permanent
fund produces for the state in perpetuity; therefore, the $1.2
billion overdraw would result in losing additional revenue every
year in the future and, potentially, increase the amount of
revenue needed to fill the fiscal gap in perpetuity.
12:59:02 PM
REPRESENTATIVE JOSEPHSON sought to clarify whether the
administration considers the ERA a state savings account.
MR. STEININGER answered no, the administration does not consider
the ERA an account that should be used for general government
expenses; however, in the state's current economic situation,
the money to pay the PFD outweighs the consideration of the
impact on the POMV going forward. He opined that paying a PFD
is more important, especially in the current economic climate.
He reiterated that the administration does not view it as a
savings account, but it had to be drawn from to meet the
statutory obligation.
1:01:30 PM
REPRESENTATIVE WOOL asked whether the constitutional amendment
that proposes constitutionalizing the POMV draw of 5 percent is
tied to a PFD formula.
MR. STEININGER said that constitutional amendment was proposed
alongside a statutory change to the PFD formula. He explained
that the POMV and dividend calculations in Senate Bill 26 are
"on different date ranges" for the five-year averages;
therefore, enshrining the POMV draw into the constitution would
necessitate addressing those statutory issues with the PFD.
Additionally, the constitutional amendment would
constitutionalize the payment of a dividend.
1:04:02 PM
CHAIR SPOHNHOLZ pointed out that if the legislature were to
overspend the POMV by $1.2 billion, as proposed by the
administration, the Alaska Permanent Fund projects earnings of
6.5 percent over the long-term. She emphasized that
overspending on a one-time basis would result in losing
approximately $80 million in revenue to the permanent fund every
year in perpetuity. Additionally, the five percent draw would
result in a lower amount available to the government, which
would potentially necessitate increased taxes to meet that gap.
She opined that overspending the permanent fund is essentially
raising taxes on future Alaskans forever.
1:05:27 PM
MR. STEININGER proceeded to slide 5, which showed a snapshot of
the state's operating budget over the past 10 years. The tables
[top right] indicate the changes from FY 19 through the proposal
for FY 22. He emphasized the significant reduction in UGF and
noted the .7 percent reduction in the number of full-time
budgeted positions. Further, he highlighted the following in
the development of the FY 22 operating budget: organizational
changes for service delivery; utilization of COVID relief;
process changes from telework resulting in savings; continued
constraint on operational costs.
1:07:22 PM
CHAIR SPOHNHOLZ asked whether the FY 22 figures exclude federal
COVID-19 relief funds.
MR. STEININGER explained that the federal COVID-19 relief funds
show up in the FY 20 column, which is the year they were added
into the budget. He noted that some of the federal relief funds
flow into FY 21 as carryforward transactions. He also pointed
out that the FY 22 column does not reflect the American Rescue
Plan (ARP) dollars.
CHAIR SPOHNHOLZ conveyed that the federal ARP numbers would be
at least $1.1 billion and flexible. She anticipated that the
federal relief funds would mask the structural deficit moving
forward for the next several years.
1:08:32 PM
REPRESENTATIVE EASTMAN recalled hearing conversations regarding
the amount of funds in the CBR. He said different people
posited different numbers and questioned the accuracy of
historical reportings. He asked how the data on slide 4
resolves that conversation.
MR. STEININGER confirmed that there had been discussions on the
CBR balance calculation and the source of the information for
that calculation. He reported that over the summer, OMB worked
with LFD, Division of Finance, and Legislative Audit Division to
ensure that the numbers and calculations used to estimate the
CBR balances were aligned and robust. He said the figures on
slide 4 reflect that effort.
1:10:11 PM
REPRESENTATIVE EASTMAN asked whether there is a consensus or a
difference of opinion [on the CBR balance].
MR. STEININGER replied there is a consensus.
1:10:42 PM
MR. STEININGER continued to slide 6, titled "Budget Cost
Drivers," which read as follows [original punctuation provided]:
From FY2019 to FY2022?
• State assistance to retirement has increased
$70.3 million
• Employee salary adjustments for cost of living
and health insurance have increased $50.0 million
• Public protection services including law
enforcement, prosecution, defense, courts, and
corrections have required investment of $52.8
million
$173.1 million in UGF reductions to maintain a flat
budget
MR. STEININGER added that the $330 million reduction in UGF
spending [slide 5] is after accommodating $173 million in upward
cost pressure.
1:12:24 PM
REPRESENTATIVE EASTMAN sought to clarify whether the third
bullet on slide 6 is referring to an increase to the base budget
or a capital investment.
MR. STEININGER explained that the third bullet reflects
increases in the base budget for public protection agencies,
such as the Department of Public Safety (DPS), DOC, and the
Department of Law (DOL). He noted that the court system had
also seen increases during this time period.
REPRESENTATIVE EASTMAN sought clarification on the first
bullet's reference to state assistance to retirement.
MR. STEININGER said the state assistance to retirement is the
difference between the 22 percent of payroll charge that both
the state of Alaska and municipal PERS employers pay into the
retirement system and the total actuarial cost, which is 30.11
percent of payroll. He stated that the 8.11 percent difference
between contributions made by employers and the total actuarial
cost is born by the state in a UGF expenditure. He added that
the $70.3 million figure in the first bullet reflects the
increase in that cost over this time period.
1:13:56 PM
CHAIR SPOHNHOLZ asked if that is in part, due to a
miscalculation of the retirement formula from previous years
that must be rectified.
MR. STEININGER said he would not characterize it as a
miscalculation because the actuaries perform this determination
on an annual basis.
CHAIR SPOHNHOLZ offered her understanding that there was a
previous miscalculation that resulted in less money being put
toward retirement, which resulted in a "fairly significant"
liability on the balance sheet.
MR. STEININGER said that is not the genesis of the $70.3
million.
1:15:13 PM
REPRESENTATIVE WOOL pointed out that the third bullet is a
budgetary choice rather than mandated by law or by contract,
which is different than the first two bullets. He asked if that
is correct.
MR. STEININGER acknowledged that there is a distinction, as the
third bullet point reflects a policy decision to focus on
rebuilding investments in public protection versus a formula
that is set in statute.
1:16:42 PM
REPRESENTATIVE JOSEPHSON returned to slide 5 and asked whether
the UGF reduction is mostly from school bond debt reimbursement.
He expressed interest in hearing OMB's assessment of what
constitutes the $389 million delta since the administration came
into power.
MR. STEININGER said yes, a large portion of the reduction is
school bond debt reimbursement, as well as other statewide items
not necessarily just personnel. He offered to follow up with a
report on "which agencies and how much over this time period."
1:18:00 PM
MR. STEININGER moved to a "swoop graph" on slide 7 depicting FY
22 UGF budgets by department. He indicated that the statutory
PFD would be the largest single expenditure followed by the
Department of Education and Early Development (DEED) -
specifically the K-12 formula program - and the Department of
Health and Social Services (DHSS) - specifically the Medicaid
program- which make up the lions share of the state budget. He
noted that Department of Commerce, Community & Economic
Development (DCCED) has the smallest UGF budget.
1:18:47 PM
REPRESENTATIVE PRAX asked how much of the Medicaid program is
"controllable" rather than mandated by federal policy.
MR. STEININGER said that is one of the more difficult programs
for the state to exert unilateral control over. He expounded
that there are many federal rules associated with the Medicaid
program that restrict changes to eligibility or services
offered. He stated that much of the UGF budget within DHSS for
Medicaid must be spent per the direction of the federal
government.
CHAIR SPOHNHOLZ noted that the committee would perform a deep
dive on Medicaid and Medicaid reform at a later hearing.
1:19:58 PM
MR. STEININGER proceeded to slide 8, titled "Operating Budget
Cost Drivers" which read as follows [original punctuation
provided]:
?Medicaid $610.0 Million UGF (14.2% of Operating
Budget)
?$43.7 million UGF (7.7%) increase in last 10 years
-12 Support $1,246.7 Million UGF (29.0% of Operating
Budget)
?$72.2 million UGF (6.1%) increase in last 10 years
?Retirement Assistance $342.0 Million UGF (8.0% of
Operating Budget)
?$207.9 million UGF (155.1%) increase in last 5 years
?Payroll 17,149 PCNs $812.4 Million UGF (18.9% of
Operating Budget)
?$0.9 million UGF (0.1%) increase in last 10 years
?1,319 position reduction (7.1%) in last 10 years
CHAIR SPOHNHOLZ questioned what the number would be if the
retirement assistance were looked at over the last 10 years.
MR. STEININGER offered to follow up with the requested
information.
1:21:40 PM
MR. STEININGER advanced to slide 9, which provided a 10-year
outlook from December 2020. He highlighted the traditional
revenue that was projected for FY 22 of $1.2 billion, which was
expected to steadily increase through the end of the time
period. He noted that the significant reduction in the POMV
draw in FY 23 reflects the change to the dividend calculation
from the historical calculation to one based on 50 percent of
the POMV draw. The table also shows a return to a more "normal"
capital budget in FY 23 and onward. He emphasized the figures
labeled "other revenue sources," which reflects the state
deficit after accounting for other changes in the 10-year plan.
CHAIR SPOHNHOLZ inquired about the debt service payments
associated with the capital bonding.
MR. STEININGER said those would be incorporated under statewide
items.
1:24:40 PM
REPRESENTATIVE SCHRAGE asked whether the capital budget of $130
million [FY 24] would address the deferred maintenance.
MR. STEININGER explained that over the past several years,
deferred maintenance has been addressed by utilizing money in
the Alaska Capital Income Fund, which is sourced from the
Amerada Hess settlement [State v. Amerada Hess] portion of the
Alaska Permanent Fund and supplies $20-30 million per year to
address deferred maintenance. He acknowledged that additional
work is required to find a way, within a constrained revenue
situation, to address the much-needed maintenance at state
facilities.
1:26:36 PM
REPRESENTATIVE SCHRAGE asked if there are many completed capital
projects for which there are funds to reappropriate or move
around. Additionally, he asked what level of capital budget
funding would be required to start chipping away at the backlog
of deferred maintenance.
1:27:10 PM
MR. STEININGER said the ideal capital budget is a difficult
question to answer. He emphasized that slide 9 reflects the
amount necessary for basic federal matching on larger programs,
such as state highways or VSW. He indicated that they don't
necessarily address deferred maintenance backlogs in state
facilities; however, they do address other needs throughout the
state in addition to utilizing available UGF funds to maximize
the statewide benefit of federal funds.
REPRESENTATIVE SCHRAGE clarified his first question, asking if
there are any capital projects that came in under budget from
which there might be funds left over.
1:28:15 PM
MR. STEININGER explained that in prior years, there was more
available in reappropriations from years of large capital
budgets. As those projects completed, the availability of
reappropriations has decreased; however, "a couple million
dollars" can be found every year from money left over from
projects that have been completed in the past year.
CHAIR SPOHNHOLZ said she is familiar with the 90/10 match of the
federal highway fund. She inquired about the match requirement
for the village safe water program.
MR. STEININGER stated his belief that it's 25/75. He said he
would follow up with confirmation.
1:29:37 PM
REPRESENTATIVE EASTMAN asked to what extent the PFD amounts, as
shown on the bottom line of slide 9, differ from the historic
[dividend] calculation in statute.
MR. STEININGER explained that moving from a historic calculation
to a 50/50 POMV wouldn't necessarily always be higher or lower.
In looking at the historical calculation, he said, it's highly
volatile. Alternatively, the 50/50 POMV calculation is
inherently stable, as it is 5 percent of the five-year average.
He shared his understanding that the average PFD is slightly
over $1,000, so the figures [on slide 9] would represent a
higher PFD than average.
REPRESENTATIVE EASTMAN sought to clarify how the PFD
appropriations on slide 9 differ from the historic calculation.
CHAIR SPOHNHOLZ offered her understanding that the PFD amounts
in question are based on the new formula proposed by the
governor.
MR. STEININGER replied in the affirmative. He said the numbers
on the bottom row, in addition to the entire chart, are based on
the governors proposed changes.
CHAIR SPOHNHOLZ further clarified that on average, the historic
PFD has been closer to $1,600.
1:31:48 PM
MR. STEININGER resumed the presentation on slide 10, titled
"Material changes in budget picture since December," which read
as follows [original punctuation provided]:
Department of Revenue Spring update increases UGF
revenue forecast by $332 million in FY2021 and $460
million in FY2022
Just over $1 billion new federal funding to state
?Additional program-specific funding
?Working through details and waiting for specific
guidance
Despite these bright spots, structural fiscal deficit
persists
MR. STEININGER noted that the federal funding coming into the
state does not completely solve the problem, but it provides an
opportunity to work through the solutions necessary to solve the
existing fiscal problems.
1:32:48 PM
MR. STEININGER advanced to slide 11 and noted that it's similar
to slide 9 but reflects the new revenue estimates. He
highlighted that the "other revenue sources" figures are much
less than the prior slide, indicating that the revised revenue
estimates put the state in a better place compared to December.
He reiterated that they don't solve the entire problem, adding
that there's still more to be solved, including changes to the
PFD statute, increases in revenue, and continued constraint on
the operating budget.
CHAIR SPOHNHOLZ observed that a larger impact on the budget is
the increased revenue forecast. She pointed out that in FY 23,
there would still be a deficit of nearly $800 million based on
the governor's proposed 50/50 split.
MR. STEININGER confirmed that a significant fiscal gap would
remain. He conveyed that there are "several different areas of
outlays and inflows of money that have to be addressed in order
to solve this problem." He continued to state that there are
significant policy issues related to [the areas of concern] -
none of which could be solved unilaterally or in a budget
document.
1:35:04 PM
CHAIR SPOHNHOLZ agreed. She asked whether the administration
planned to introduce specific revenue measures for the next
fiscal year.
MR. STEININGER declined to speculate on what could be introduced
next year. Right now, he said, the focus is on protecting the
ERA with a constitutional amendment and making "necessary"
changes to the PFD calculation so that other policy discussions
can be addressed.
1:35:42 PM
REPRESENTATIVE SCHRAGE opined that resolving the dividend prior
to anything else "seems odd." He suggested addressing the
deficit ["other revenue sources" on slide 11] by introducing a
broad-based tax or continuing to deficit spend. [Tackling that
first], he said, would allow the legislature to better address
the capital budget and identify a proper level of spending. He
reiterated his belief that the state needs a broader, more
comprehensive plan that seriously addresses the existing
structural issues.
1:36:37 PM
CHAIR SPOHNHOLZ thanked both presenters and provided additional
closing remarks.
1:37:02 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
1:37 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD Budget and Revenue History 3.30.21.pdf |
HW&M 3/30/2021 11:30:00 AM |
|
| OMB 10 year plan 3.30.21.pdf |
HW&M 3/30/2021 11:30:00 AM |
|
| HR 6.pdf |
HW&M 3/30/2021 11:30:00 AM |
HR 6 |