Legislature(2023 - 2024)DAVIS 106
05/01/2024 06:00 PM House WAYS & MEANS
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| Audio | Topic |
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| Start | |
| Presentation(s): Long Term Fiscal Plan Model Update | |
| 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
May 1, 2024
6:01 p.m.
MEMBERS PRESENT
Representative Ben Carpenter, Chair
Representative Jamie Allard
Representative Tom McKay
Representative Kevin McCabe
Representative Cathy Tilton
Representative Andrew Gray
Representative Cliff Groh
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
PRESENTATION(S): LONG TERM FISCAL PLAN MODEL UPDATE
PREVIOUS COMMITTEE ACTION
No action to record
WITNESS REGISTER
ALEXEI PAINTER, Director
Legislative Finance Division (LFD)
Juneau, Alaska
POSITION STATEMENT: Provided a presentation, titled "2024
Update of Fiscal Plan Working Group Model."
ACTION NARRATIVE
6:01:21 PM
CHAIR BEN CARPENTER called the House Special Committee on Ways
and Means meeting to order at 6:01 p.m. Representatives Tilton,
McKay, McCabe, Groh, Gray, and Carpenter were present at the
call to order. Representative Allard arrived as the meeting was
in progress.
^PRESENTATION(S): Long Term Fiscal Plan Model Update
PRESENTATION(S): Long Term Fiscal Plan Model Update
6:01:57 PM
CHAIR CARPENTER announced that the only order of business would
be a presentation by Mr. Alexei Painter titled "2024 Update of
Fiscal Plan Working Group Model." He said the presentation
would cover the current budget and the direction the state is
heading in relation to long term fiscal plans and the options
that could be taken to fill a budget deficit going forward.
6:03:30 PM
ALEXEI PAINTER, Director, Legislative Finance Division (LFD),
provided a presentation titled "2024 Update of Fiscal Plan
Working Group Model" [included in committee documents]. He
noted that in updating the model from previously, there are
changes on both the revenue and budget sides.
MR. PAINTER turned to the revenue summary within the spreadsheet
and said the Legislative Finance Division (LFD) received the
Department of Revenue's (DOR's) spring forecast after this model
was last updated. That forecast, he stated, had slightly higher
oil prices for fiscal year 2025 (FY 25) with the projected price
of $76 going up to a projected price of $78. There was a bit
more of an increase in FY 24, he noted, but the change in the
out years of $1 or $2 more a year wasn't a major increase in
revenue compared to the previous model. The bigger changes are
on the budget side, he pointed out.
CHAIR CARPENTER drew attention to the bar chart titled "Revenue
Summary" and requested a characterization of the assumptions and
projections for the out years.
MR. PAINTER explained that this chart is the non-percent of
market value (non-POMV) draw of revenues, which is the state's
traditional oil and gas revenue as well as the existing non-oil
revenue. It is based on DOR's Spring Revenue Forecast, he said,
which calls for the expected price of $82.39 in FY 24 dropping
to the $70 range in the out years. He specified that the impact
of the forecast going above and below $70 is significant because
of the graduation requirement from the gross value reduction
(GVR) which depends on $70 oil. Along with the projected price
reduction to the $70 range, he continued, DOR is calling for an
increase in production (projected to be 470,000 barrels in FY
24) when the Pika Field comes online in FY 27-FY 28, plus a
further increase in FY 32-FY 33 when the Willow Field comes
online. Mr. Painter noted that revenue will start to increase a
bit at that point, but that the real revenue impact of those
fields will be after the carry forward losses have been
exhausted from Pika and right away with Willow. Despite the
increase in both revenue and production in the out years, there
is a period of flatter revenue, he advised, so overall for the
non-POMV revenue, no year in the forecast is higher than FY 24,
meaning the non-POMV revenue isn't keeping pace with inflation.
6:07:35 PM
CHAIR CARPENTER asked what the takeaway is with the assumptions
on where [the state] is headed with the POMV revenue.
MR. PAINTER responded that that shows up on the budget side but
isn't shown separately. Addressing the [budget] summary, he
said the permanent fund's forecast slightly increased the spring
forecast, with a projection of over 7 percent return that rises
from about $3.65 billion in FY 25 to $4.3 billion by FY 33,
about the rate of inflation. Overall, he continued, the
projection is that Alaska's revenue will go from about $6.5
billion to $7.3 billion, with that increase mostly coming from
the POMV draw going up over time.
6:08:31 PM
REPRESENTATIVE GRAY observed that in FY 30 the price per barrel
[is projected to be] $69 and in FY 33 [projected to be] $73. He
asked how accurate the projections have been in the past at
predicting oil prices 6-9 years out.
MR. PAINTER answered, "Not very accurate, the oil market is
dynamic." He advised that [state] statute requires there be a
10-year plan so that's often the timeframe looked at, but in the
oil market 10 years is a very long time given that one or two
years can have significant volatility. Sometimes the goal of
fiscal planning, he stated, is to figure out how to ride through
that volatility. He noted that the forecast of $70 being close
to the 10-year average price is coincidental as there have been
years where the forecast was $100 per barrel and then prices
quickly dipped.
CHAIR CARPENTER pointed out that the heart of the conversation
is that assumptions must be made. He explained that if the
current assumptions of oil prices staying at about $70 a barrel,
production increasing, and the POMV continuing to increase, are
different than what happens, then the deficit information will
look much different.
6:10:55 PM
MR. PAINTER, responding to Representative Groh, stated that the
Pika and Willow oil fields are expected to come online around FY
27. Because DOR has a risking methodology, he related, DOR's
forecast doesn't say Pika goes from zero to full production in
FY 27, DOR spreads that over a few years. For production tax
during the initial years of field production, he explained, [the
producer receives] a gross value reduction (GVR) of 20 percent
and the per barrel credit is capped at $5 a barrel. He further
explained that the GVR lasts for three years if prices are $70
or above or lasts for seven years if prices are below $70. If
the forecast was run at $70 in FY 30 and FY 31, he continued,
there would be higher revenue because that field would graduate
from the GVR sooner and would pay more in tax. He noted that a
new operator developing a field, such as Pika's operator that
has no existing large field, cannot deduct costs and instead
losses and credits are carried forward for use against the new
operator's production when the field comes online. He further
noted that an operator that has an existing field, such as
ConocoPhillips at the Willow Field, can take those deductions as
the operator goes. So, Mr. Painter continued, the revenue
impact of the Pika Field isn't seen year one but rather a few
years later, and for Willow there is a negative revenue impact
until it hits production and then there is positive revenue
impact.
MR. PAINTER, responding to Representative Groh, confirmed that
the [projected] FY 33 production of 633,000 barrels a day (as
depicted in the graphic) is far below the production of two
million barrels [a day] in the late 1980s. Responding further,
Mr. Painter explained that a breakeven price, the price of oil
that would make the budget balance, is not included under
revenue but rather under the fiscal summary for each given year.
CHAIR CARPENTER noted that, in the past, a breakeven point was
not had on the size of a dividend or how much of the permanent
fund earnings were being spent towards the state budget.
REPRESENTATIVE GROH asked about the breakeven price for [FY 24]
and [FY 25].
MR. PAINTER replied that it depends on where the budget lands.
Responding further, he calculated in his head that the breakeven
price for FY 24 is about $76 under the new forecast for the
appropriated budget and before supplementals. There are costs
from the Willow Field against the production tax in [FY 24], he
said, and the [permanent fund] dividend is 75/25. In future
years, he continued, the breakeven price depends on what is
being assumed.
6:17:19 PM
MR. PAINTER addressed supplementals under "budget detail" on the
spreadsheet which includes the supplementals in the governor's
amended budget, the House supplementals which are very similar,
and the Senate supplementals and capital supplementals. He
related that since putting together this model last week, the
House Finance Committee has released its capital budget which
matches the supplementals in the Senate's capital budget. He
explained that as he goes forward [and makes the calculations
being displayed onscreen for the committee], he will use the
Senate Finance Committee's number as the placeholder. The
assumption is about $50 million a year in supplementals, he
continued, and this year is currently at $337 million. He said
the largest supplemental this year is the Senate's supplemental
of $35 million for fire suppression for the upcoming year to get
out of the cycle of supplementals and move towards an average
funding. The next largest supplemental is from the Department
of Corrections, he stated. Mr. Painter explained that the
budgets of both bodies include significant increases that are
fractions to get their FY 25 budgets to match their FY 24 with
supplementals; the last few years their budget after
supplementals has been higher than their budget for the upcoming
year. He said the disparity is significant despite actions
taken in the FY 25 budget to reduce supplementals in the future.
MR. PAINTER drew attention to agency operations, which he stated
is the basis government plus the amendments received as of
4/9/24. The operating budget numbers do not include four union
contracts that are outstanding for FY 25, he pointed out, so
those numbers will likely go up as those contracts are worked in
at conference committee. The Senate Finance committee's budget
of $4.6 billion was not amended on the Senate floor, he noted,
so the House and Senate budgets are very close. The House and
Senate budgets are about $250 million above the governor's
budget, with $175 million of that coming from outside the
formula money for education.
MR. PAINTER moved to statewide items and specified that a big
change is the disaster relief fund, with the governor putting in
$5 million and both the House and Senate putting in $20.5
million. Both bodies, he stated, are trying to reduce the
amount of future supplementals and $20.5 million represents the
average spend from the disaster relief fund, so the governor's
number may have resulted in the need for a supplemental. The
House number is a bit higher, he explained, because the House
put in the amount needed to get community assistance back to an
$80 million balance. The Senate number is higher, he further
explained, mostly because the Senate moved fire suppression from
the Department of Natural Resources (DNR) to an old fund for
fire suppression that was used prior to 1989, which moves that
expense from agency operations down to statewide items.
6:22:46 PM
MR. PAINTER addressed the capital budget and noted he is using
the most recently passed version of the budget. He reported
that the governor's capital budget number is $297.4 million with
amendments, down from the $305 million that it was before. The
Senate's budget was at $271 million, including the mental health
capital budget, he further reported, but today the Senate and
House finance committees added $103 million, so the real number
is likely going to be about $374 million. Capital projects, he
advised, exist for the entire life of the project or for five
years if they aren't making progress. He said the Senate funded
its additions to the capital budget as supplements, and the
House included its additions to the capital budget in FY 25.
Mr. Painter advised that usually the most accurate way to look
at the capital budget is session by session because when there
are spikes in revenue that get spent, the spend is across the
two fiscal years, not just the current fiscal year. That is a
challenge for modeling here, he explained, where our baseline is
this year's capital budget grows with inflation, but if the
modeling is this session's capital budget grows with inflation
then the $371-plus is seen. [This model] is reflecting the FY
25 grows with inflation, he continued, but to reflect the size
of this capital budget going forward, the Senate and House
finance committees' addition of $193 million in supplementals
needs to be added to this. If that isn't done, he cautioned,
then the capital budget going forward is decreasing from what
was agreed to this year. The capital budget tends to shift
based on how much available revenue there is, Mr. Painter noted,
so higher oil prices today with the projections going down
probably indicates a smaller capital budget. He stated that the
capital budget is a significant challenge for fiscal planning
because the capital budget crosses fiscal years and varies based
on revenue rather than a baseline based on needs. Mr. Painter
said he is flagging this as a concern for those members trying
to do fiscal planning to figure out what's a reasonable size of
a capital budget to assume going forward. The Legislative
Finance Division (LFD), he added, doesn't know what a baseline
capital budget is, LFD just knows what [the legislature] spends
when it has a given amount of revenue.
6:26:12 PM
MR. PAINTER, in response to Chair Carpenter, confirmed that
money was appropriated to the FY 24 budget from the capital
spend, and that that's reflected in the supplementals.
Responding further, Mr. Painter confirmed that both capital and
operating are included in the supplemental numbers at the top of
the spreadsheet.
6:27:14 PM
MR. PAINTER discussed the permanent fund dividend. He said
using the governor's number of 50 percent of the statutory net
income and the legislature's budget in the Senate results in a
$1.3 billion deficit that grows significantly over the years
because the assumptions are that the budget grows with
inflation, but revenue does not. In a scenario of 50 percent of
the POMV and the Senate's budget starting point, he stated, the
deficit is about $900 million in FY 25 and an average deficient
from FY 25FY 33 of about $1.45 billion. He said a scenario
that uses the Senate's proposed 25 percent of the POMV leaves a
surplus in FY 25 and deficits in the outgoing years assuming the
capital budget is kept at the same level as this year and the
operating budget grows with inflation. He added that a scenario
which does the FY 25 level, not the "24 session level" has
smaller deficits of about $250 million a year.
MR. PAINTER offered to review the comparison he put together at
Chair Carpenter's request between the model a year ago and the
model now.
6:28:55 PM
CHAIR CARPENTER, for the sake of argument, requested that the
$193 [million] stay in going forward.
MR. PAINTER pointed out that the House's boost for energy relief
in FY 24 uses that FY 24 surplus and doesn't have any impact
going forward, but it does have an impact on the reserve level.
In further response, he related that oftentimes the conference
committee ends up higher than either body's budget. That isn't
possible this year, he explained, because that will leave a
deficit and so it will have to go below the Senate number since
the contracts and fiscal notes have yet to come in. Mr. Painter
then displayed calculations using the Senate Finance Committee
budget, which doesn't include fiscal notes, as a base. He added
in the fiscal note of $39.4 million for the "Broadband bill"
that the legislature has already passed and the fiscal note of
$23.5 million for the "senior benefits extension" that appears
likely to pass. He noted that these two bills total almost $63
million and will be ongoing spending going forward. He next
added in the four union contracts using a low-end figure of $27
million to act as a placeholder. Mr. Painter then added in $13
million for the fiscal notes of other bills that might pass and
$103 million as a placeholder for the capital fiscal note of the
"elections omnibus bill" that might pass. He pointed out that
the conference committee needs to get below the Senate number in
the operating budget because, including supplementals and the
Senate's dividend, the calculations show a small deficit [in FY
25].
6:31:57 PM
MR. PAINTER, in response to Chair Carpenter, confirmed that the
aforementioned are recurring costs, not one-time costs. He said
projections are hard because of not having all the information.
It is significant, he stressed, that a conference committee must
get closer to the House budget or at least below the Senate's.
6:32:54 PM
MR. PAINTER moved to the summary page and explained that the bar
graph at the bottom is without those additions. He specified
that the model he presented to the committee a year ago versus
this model is a reasonable ballpark. He explained that the
lines on the bar graph are the budget including the PFD and the
bars are revenue that makes up to that budget. He noted that
the traditional revenue and POMV draw are insufficient to meet
the spending in this scenario. Draws from the Constitutional
Budget Reserve (CBR) and (indisc.) would be needed, he
continued, and unfilled deficit would start somewhere in FY 30.
Right now, he added, there is not an assumption that that gets
filled with the Alaska Permanent Fund Earnings Reserve Account
(ERA). Using the assumption that the deficit will be filled
with the ERA, he related, will eat into what's available in the
ERA balance going forward. He said [the graph] looks weird
because inflation proofing must be stopped to make room for that
or otherwise it goes negative.
6:34:13 PM
MR. PAINTER, in response to Chair Carpenter, said the PFD split
is 75/25 in those out years where there is a deficit.
CHAIR CARPENTER asked what the split of the permanent fund
earnings would need to be for a balanced budget in those out
years if the operation and capital spending are similar to this
year.
MR. PAINTER estimated that a balanced budget would be about an
11 percent POMV based on the higher capital budget that includes
the contracts and fiscal notes. That shows significant surplus
this year, he said, but because the budget is shown growing with
inflation and revenue not growing with inflation, it goes to a
deficit, although over the period it is about a balanced budget.
He noted that an 11 percent POMV would be a PFD of about $600
per person a year.
CHAIR CARPENTER asked what the options would be to fill the
budget deficits in the out years if the PFD split was returned
to 25/75 and the budget assumptions stayed the same.
MR. PAINTER answered that that scenario would leave new revenue
of some sort.
6:36:08 PM
MR. PAINTER brought attention to the comparison of the 4/28/23
model to the 4/26/24 model [included in committee packet] and
noted that the spending additions he has put in so far are not
included. Regarding revenue, he said this year's revenue
forecast is slightly higher than last year's forecast, with
about $200 million more in revenue in FY 25 and decreasing to
under $100 million by the end of the modeling period. Regarding
budget, Mr. Painter stated that the budget in FY 25 going
forward is about $350-$400 million higher than what had been
assumed a year ago based on the Senate's budget. Most is on the
capital side, he added, some is on the operating side, with both
being significantly higher than they were a year ago. When the
two are netted, he continued, the higher revenue with the higher
budget means a lower surplus before the PFD is considered.
6:37:59 PM
The committee took an at-ease from 6:37 p.m. to 6:39 p.m.
6:39:38 PM
MR. PAINTER resumed his comparison of the two models. He said
the higher budget and higher revenue net out to a difference in
FY 25 of $172 million as well as on average between periods, and
about a $233 million larger deficit before the PFD. If a 50/50
PFD is included, he related, the difference grows to about $400
million a year because the assumption is better returns in the
permanent fund and therefore higher PFDs from the 50/50 or a
75/25. With the 50/50 a year ago, he noted, a deficit of $660
million [was projected] with an on average deficit of $800
[million] over the period, but now [the projection is] a deficit
of about $1.2 billion on average. With a 75/25 a year ago, he
continued, [the projection was] an average surplus of about $205
million, now [the projection is] an average deficit of $227
million, a difference of roughly $400 million. He explained
that's because now it is a higher revenue but also significantly
higher spending which leads to a deficit and so additional
actions will now be needed. A year ago, he said, the POMV going
with the dividend would give an average zero deficit with about
9.5 percent. But, he stated, this year with those assumptions
without the additions he discussed it would be about 19 percent,
and if the contracts, fiscal notes, and this year's higher
capital budget, it could drop to about 11 percent assuming no
other changes.
6:42:06 PM
REPRESENTATIVE GROH requested an explanation of what percentage
to POMV dividend for zero means.
MR. PAINTER explained that if the assumptions are the budget
doesn't change, revenue changes, and the goal is an average
deficit of zero from FY 25-FY 32, then that would be on average
a balanced budget for the modeling period. In further response,
he confirmed that that would be zero average deficit. To
balance the budget on average last year, he stated, 29.5 percent
of the POMV draw would be put towards the dividend, but now that
number is more like 19 percent. That number could be lowered
even more, he continued, if the contracts and such are added to
the baseline assumptions. The core reason, he added, is that
revenue is not increasing as fast as inflation. He concluded
his presentation by pointing out that when assuming the budget
grows with inflation, but revenue doesn't, then there is
increasing deficits going forward.
6:43:58 PM
REPRESENTATIVE GROH offered his thanks for the information
provided to the committee. He inquired about what Chair
Carpenter thinks is occurring here.
CHAIR CARPENTER replied that the graph on the summary page of
the model worksheet is what he has been speaking to for a couple
years now. Without systemic change to the current budgeting
process, he said, the permanent fund dividend will be consumed.
Oil prices, production amounts, and returns from the stock
market, will likely be different than what is projected, he
stated. What it means to him, he explained, is that continuing
to balance the budget on the back of the dividend, because
that's what's easiest, will eventually result in not enough
permanent fund earnings to balance the demands for spending. If
things stay the same, he cautioned, in just a couple years the
legislature will have to decide whether to continue to spend at
a certain level and increase revenue, or to live within our
means without a dividend and adjust the spending.
CHAIR CARPENTER thanked Mr. Painter for his work on the modeling
and thanked committee members for their work. He expressed his
hope that there will be future conversations about this in
future legislatures because Alaskans will be unhappy if the
legislature continues what it is doing while knowing there will
be deficits in the future if nothing is changed structurally.
6:47:46 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
6:47 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HWAM Worksheet- 4-26-24 Update.pdf |
HW&M 5/1/2024 6:00:00 PM |