Legislature(2023 - 2024)DAVIS 106
02/06/2023 06:00 PM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Fiscal Policy Working Group Spreadsheet Overview | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
February 6, 2023
6:00 p.m.
MEMBERS PRESENT
Representative Ben Carpenter, Chair
Representative Tom McKay
Representative Kevin McCabe
Representative Cliff Groh
MEMBERS ABSENT
Representative Jamie Allard
OTHER LEGISLATORS PRESENT
Representative Andrew Gray
Representative Andy Josephson
Senator Robert Myers
COMMITTEE CALENDAR
PRESENTATION(S): FISCAL POLICY WORKING GROUP SPREADSHEET
OVERVIEW
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
ALEXEI PAINTER, Director
Legislative Finance Division
Legislative Agencies and Offices
Juneau, Alaska
POSITION STATEMENT: Gave a presentation providing an overview
of the Fiscal Policy Working Group Spreadsheet.
ACTION NARRATIVE
6:00:11 PM
CHAIR BEN CARPENTER called the House Special Committee on Ways
and Means meeting to order at 6:00 p.m. Representatives McCabe,
McKay, Groh, and Carpenter were present at the call to order.
Also present were Representatives Gray and Josephson and Senator
Myers.
^PRESENTATION(S): FISCAL POLICY WORKING GROUP SPREADSHEET
OVERVIEW
PRESENTATION(S): FISCAL POLICY WORKING GROUP SPREADSHEET
OVERVIEW
6:01:18 PM
CHAIR CARPENTER announced that the only order of business would
be a presentation: Fiscal Policy Working Group Spreadsheet
Overview
6:03:09 PM
ALEXEI PAINTER, Director, Legislative Finance Division,
Legislative Agencies and Offices, gave a presentation [hard copy
included in the committee packet] providing an overview of the
Fiscal Policy Working Group Spreadsheet. He explained that this
is an updated version of what was created for the Fiscal Policy
Working Group (FPWG) in 2021. He offered information based on
the paragraphs under "Date Sources," on the first page, which
read as follows [original punctuation provided]:
The revenue figures are from the Department of
Revenue's Fall 2022 Revenue Sources Book. For
simplicity, this model assumes that the 5% Percent of
Market Value (POMV) draw from the Permanent Fund is
followed. LFD's full fiscal model can generate
scenarios with alternative Permanent Fund draw
structures. This model also uses DOR's 2022 Fall
Revenue Forecast and does not allow varied oil prices
or production. LFD's full fiscal model does allow for
variations on these items.
Most revenue estimates in this sheet were provided by
the Department of Revenue in 2021 and may not be up-
to-date with subsequent changes in the Alaska economy
since then. See DOR's August 2021 presentation to the
Fiscal Plan Working Group for details regarding those
revenue options:
https://www.akleg.gov/basis/get_documents.asp?session=
32&docid=57326. Income tax figures are a combination
of 2020 DOR estimates and LFD estimates.
Budget data is from the Legislative Finance Division's
fiscal summaries of the Governor's budget.
MR. PAINTER said the fall forecast is just one revenue picture;
it is not the only one. He talked about the division's ability
to run "Monte Carlo" plans. In response to Chair Carpenter, he
explained this means, essentially, that the division can run
thousands of scenarios of what potential oil prices, production,
and investment returns can do to the revenue picture. The model
will take the average of those and show the range of
distributions. This provides not only linear projections, but
also volatility. He said the Monte Carlo is more robust and
also more difficult to use. The version he is showing today is
much more simplified.
6:07:03 PM
MR. PAINTER showed "the revenue tab" [on page 3, which is the
second spreadsheet, titled "Non-Permanent Fund Revenue Detail"].
He pointed to "Existing Revenue," and he said this is non-
permanent fund revenue and does not include the percent of
market value (POMV) draw. He said another assumption made in
the model is that the POMV draw is "fixed in the forecast"; the
Department of Revenue (DOR) does not allow variation on that in
order to keep things simple. The model allows the user to
explore new options. He noted that many of the options were
presented by DOR in 2021 to FPWG, and many of the numbers shown
come from that presentation.
MR. PAINTER said there are a couple options that were not
presented at that time. The first is an income tax. He
mentioned three sources: a percentage of liability option,
which taxes a percentage of an individual's federal tax
liability; a flat tax on adjusted gross income; and a
progressive income tax option. He explained that these are all
static projections. The second option, he noted, is sales tax.
He mentioned the Wyoming sales tax as the narrowest based option
looked at by FPWG; it excludes many services and applies mostly
to goods. He mentioned a moderate option was also considered.
Additionally, FPWG considered South Dakota's sales tax, which is
probably the broadest in the country. Mr. Painter showed
examples of those three options using a 1 percent tax. He
emphasized that earnings on sales tax depends on what the base
is, and how narrow or broad the base is, is "a major policy
decision for the legislature." He noted that Alaska has a lot
of industrial purchases in the oil and other industries, and
decisions on how to tax those would have major impacts on the
fiscal note, in terms of sales tax.
MR. PAINTER said there are a number of other tax options. One
is motor fuel taxes, which would bring Alaska a national average
of 24 cents. He added, "Currently we have 8 cents." He said
another option is S-corporation income tax. He explained that
currently Alaska taxes only C-corporation income, which are
standalone corporations. He said the income from other
corporations flows through to shareholders; however, since
Alaska does not have an income tax, that income ends up not
being taxed. He said, "This would apply a tax just to those S-
corporations." He noted there is a margin of error related to
confidentiality. Mr. Painter said other options are gaming
revenues; highly digitized business tax; and carbon offsets. He
said the governor has current bills on carbon offsets, and those
bills have indeterminant fiscal notes; the numbers being applied
in the model are from two years ago. He noted there is also a
custom amount, which sets targets in the governor's 10-year
plan.
6:13:46 PM
CHAIR CARPENTER asked Mr. Painter to address what is actionable
and what is not on the spreadsheet.
MR. PAINTER pointed to yellow boxes on the revenue spreadsheet
where a user can enter any rate and "select the corresponding
item." He explained that there are no oil tax revenue options
on the spreadsheet, and the reason is that any price per barrel
chosen will quickly become out of date. He said a known oil tax
revenue amount could be entered as a custom revenue option on
the spreadsheet.
6:15:33 PM
MR. PAINTER moved on to the "Budget Detail" portion of the
spreadsheet. He noted that one of the first things FPWG did was
establish a budget "policy neutral" baseline. He talked about
the baseline chosen in this spreadsheet. Under "Agency
Operations," the number in fiscal year 2024 (FY 24) [$5,141.4]
is from the governor's proposed budget. He showed how various
amounts could be plugged in to the spreadsheet. He said that
the inflation assumption of the state's investment advisor,
Callan Associates, Inc., 2.5 percent starting FY 25, was used,
but any growth rate can be entered. He showed the growth rate
with the governor's 1.5 percent for 10 years. He stated that
that growth rate is a surprisingly powerful tool. He said the
difference between the 1.5 percent and 2.5 percent is $900
million by FY 32 a difference of nearly $400 million. He said
the power of compounding interest adds up to "a pretty
significant lever over time."
6:18:33 PM
MR. PAINTER, in response to Chair Carpenter, gave an example of
how numbers could be plugged in to result in a decrease to the
budget. Using a figure of $100 million and 2.5 percent growth,
he stated, "The true difference you're making is $100 million in
FY 24, and then that compounds to $121.8 million by FY 32, due
to inflation." He said the model is not robust enough to
provide department by department detail, but specifics could be
brought to the Legislative Finance Division for a more in-depth
view.
MR. PAINTER moved to "Statewide Items," on the budget
spreadsheet. He said these are items that do not fit into an
agency budget. The first on the list is school debt
reimbursement (SDR). He said current statute has a moratorium
on school debt that goes [to] July 2025; starting July 1, 2025,
districts can begin to bond again. He said the assumption shown
uses the current debt table, and then after the moratorium there
is an assumption that debt will resume to be accrued by
districts prorated to the lower reimbursement rate when the
program comes back. He said the moratorium could be extended,
in which case DOR could provide the numbers "to enable somebody
to put that into the model." He said another change could be to
the reimbursement level to increase or decrease the cost. He
pointed out "Other Debt Service" and said a couple of costs are
fixed. He said interest rates are currently high. Another item
that is fixed that has not been in the past is oil and gas tax
credits. He added, "The reason is we have about $43 million
left and then we're done."
6:22:10 PM
MR. PAINTER pointed to "State Assistance to Retirement," and he
said currently the state has "Normal Health Care Contributions,"
which follow the recommendations of the Alaska Retirement
Management Board (ARMB), [often referred to as "the ARM Board],
to make payments annually. He noted that in the last two years,
the board has decided to fund only the pension side, not the
health care side, "due to the health care funds being
overfunded" in both the Public Employees Retirement System
(PERS) and the Teachers Retirement System (TRS). He explained
there is a lever [in the spreadsheet] that allows the extension
of that policy choice across the years. Mr. Painter then spoke
about "Community Assistance," and he said the spreadsheet shows
statutory payments.
6:23:31 PM
REPRESENTATIVE MCCABE asked whether there could be a "dropdown"
put in place to reflect the options under "State Assistance to
Retirement."
MR. PAINTER answered yes, the division could "build in fiscal
notes for potential legislation." In response to a follow-up
question, he shared the current rule of thumb that for every
$100 in the base student allocation (BSA) "that would be $25.7
million."
CHAIR CARPENTER noted his intention that the committee discuss
the budget process "from a higher level perspective through this
spreadsheet" at a later date.
6:25:21 PM
MR. PAINTER continued with his explanation of the third
spreadsheet on the fourth page of the presentation, to the
"Community Assistance" program, which he said can be funded by
power cost equalization (PCE) funds if the money is available.
He defined a "waterfall" as investment earnings beyond what are
needed for the PCE program. He said 70 percent of the
additional allowance is available for appropriation, and up to
$30 million can go to the Community Assistance program. He
explained that the statutory option would be to fund the
unrestricted general fund (UGF), but because that is a variable
investment amount, there will be some years when there is
surplus. The model assumes this year there will be $30 million
of UGF, and nearly $30 million a year. The other option, as the
governor's 10-year plan assumes, is that the state will make
only the PCE payments and not the UGF payments. Mr. Painter
noted that the numbers in this field on the spreadsheet differ
greatly from what was there two years ago, and that is because
the model was made with the FY 21 result, prior to bad
investments made in FY 22. Further, the PCE program was
expanded last year, which made less money available for
Community Assistance.
MR. PAINTER pointed to other built-in fund capitalizations
included in the "disaster Relief Fund," for which the typical
deposit is $5 million average. He said the legislature, via its
FY 22 supplemental budget, put an additional $50 million in that
fund, which bolstered the fund; therefore, the governor did not
designate an amount in the fund for FY 24. He said the
assumption is that $5 million would go in, in FY 25; although he
pointed out the governor's 10-year budget shows the amount added
in FY 26.
MR. PAINTER said the final fund under "Statewide Items" is the
regional education attendance area (REAA) fund, which moves in
concert with the SDR, both funded at a similar percentage.
6:29:35 PM
MR. PAINTER moved on to the next item on the third spreadsheet:
"Capital Budget." He said the Fiscal Policy Working Group had
an assumption of $220 million on the capital budget. He noted
that a federal infrastructure bill passed a couple years ago
made that amount likely a low number; the governor's bill at
this point has a match of over $170 million, plus $100 million
more for discretionary projects. He anticipated an increase to
that amount in the governor's amended budget. He explained that
the model on the spreadsheet uses the governor's FY 25 budget as
the base, which he opined is "a pretty reasonable starting
point." A percentage increase can be added to that.
MR. PAINTER drew attention to the budgetary item on the third
spreadsheet: "Permanent Fund Dividend." He mentioned the
[percent of statutory net income], and he said the number in the
model is slightly different from that in the governor's budget;
the administration has a different assumption for investment
management fees in FY 23 than does the Legislative Finance
Division just $7 million. He said the actual will be much
further off, but "not a huge deal." He pointed out that the
rate is 50 percent of statutory net income, and that can be
changed. Another option offered in the model is to select a
fixed dollar amount or a custom formula.
MR. PAINTER covered the final category on the third spreadsheet:
"Fund Transfers." He pointed out $10.6 million American Rescue
Plan Act of 2021 (ARPA) revenue replacement funds [for FY 24]
remaining, and said if the governor were to use them all, he
could "zero that out and use them for another purpose."
6:33:18 PM
REPRESENTATIVE GROH asked Mr. Painter whether he would
characterize what he had shown the committee as "structural
deficit."
MR. PAINTER answered yes. Using the governor's budget as the
baseline, and assuming all statutory formulas are followed, the
division shows deficits starting at a bit under $4 million in FY
24 and expanding because of a forecasted slight drop in oil
revenue, "while the budget grows with inflation." He said FPWG
looked at the average surplus deficit. Based on this baseline,
the average debt is $1.2 billion.
6:34:51 PM
MR. PAINTER, in response to a request from Chair Carpenter,
defined structural deficit. He then drew attention to an item
on the second spreadsheet: "CBR/SBR Ending Balance." He said
it is the cumulative gap after drawing from savings. He said in
this case, the $1.2 million deficit would "eat through" the
remaining balance of the constitutional budget reserve (CBR) and
the statutory budget reserve (SBR), which is about $2.3 billion
combined, and starting FY 26, the state would have an unfilled
deficit. He explained that the legislature could fill that
through a number of sources, but the division is not identifying
that in this spreadsheet. He noted that what the balance should
be is a subject point. He said he does not know that FPWG came
up with a number for how much should be left in the CBR, but
"this is just the gap after you draw that to zero."
6:38:06 PM
CHAIR CARPENTER questioned why, if constitutionally required,
the balance is subjective.
MR. PAINTER explained that the state has a constitutional
requirement to pay back the CBR by means of surpluses when
available. That includes subaccounts to the general fund. That
is what occurred in FY 22, when the state had a surplus of
between $900 million and $1 billion that remained in the GF at
the end of the year. Currently the state owes approximately $12
billion to the CBR. He said FPWG considered the possibility of
a constitutional amendment to create a more formal reserve so it
is not just tied to whatever has been drawn out in the past.
6:40:27 PM
MR. PAINTER drew attention to the "Savings Balances" of the CBR
and SBR, shown as yellow bars per fiscal year. He then
highlighted the bar chart on the lower portion of the second
spreadsheet, and drew attention to the line, which he said
reflects the budget, including the permanent fund dividend
(PFD). He showed varying factors. He said the baseline remains
constant when trying out different scenarios, so that makes it
clear what the changes are. He noted there is a cover page in
his presentation that gives more instructions on the use of the
spreadsheets. He noted that he had worked closely with FPWG
members on all the scenarios they tried during Interim; however,
he remarked that it would not be possible for him to work that
closely with all 60 legislators during session.
6:43:01 PM
CHAIR CARPENTER requested committee members submit their budget
scenario ideas through his office.
6:43:26 PM
REPRESENTATIVE GROH asked what caused Alaska's current
structural deficit.
MR. PAINTER replied that Alaska has had a structural deficit for
at least the last decade, and he speculated that his
predecessor, David Teal, would have placed the start of the
deficit in 1989, when oil production peaked and has since been
declining. He noted that as long as the population increases,
inflation also increases, which applies outward pressure to
revenue, while the production decline has a downward pressure.
He said the legislature responded in the '90s, and for nearly 15
years, by holding the budget flat, despite inflation/population
growth. By the early 2000s the state had exhausted most of its
reserves. The oil prices temporarily spiked and "bailed the
state out." Then in 2014, oil prices decreased, and there have
been nine years of deficits from FY 13 through FY 21, then one
year of surplus, and back to deficits in the governor's budget.
He said there have been more years since 1989 with deficits, and
the structural balance comes down to oil being a volatile
commodity and declining resource. A reliance on a finite
commodity sets the state up to have a structural deficit, he
concluded.
REPRESENTATIVE GROH summed up that the state had gone through
three fiscal systems in the last 45 years, and he outlined the
ups and downs during that period.
MR. PAINTER responded that is a fair assessment.
REPRESENTATIVE CARPENTER thanked Mr. Painter for his
presentation.
6:47:55 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
6:48 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Fiscal Working Group Worksheet - 2-23 Update - PDF.pdf |
HW&M 2/6/2023 6:00:00 PM |