Legislature(2007 - 2008)SENATE FINANCE 532
01/31/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview of Governor's Fy 08 Budget - Office of Management and Budget | |
| Overview of Governor's Fy 08 Budget - Division of Legislative Finance | |
| Adjourn | |
| Overview of Governor's Fy 08 Budget - Division of Legislative Finance |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
MINUTES
SENATE FINANCE COMMITTEE
January 31, 2007
9:01 a.m.
CALL TO ORDER
Co-Chair Lyman Hoffman convened the meeting at approximately
9:01:04 AM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Kim Elton
Senator Joe Thomas
Senator Fred Dyson
Senator Donny Olson
Senator Charlie Huggins
Also Attending: KAREN REHFELD, Director, Office of Management
and Budget, Office of the Governor; DAVID TEAL, Director,
Division of Legislative Finance
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
^Overview of Governor's FY 08 Budget - Office of Management and
Budget
Overview of Governor's FY 08 Budget
Karen Rehfeld, Director, Office of Management and Budget
David Teal, Director, Division of Legislative Finance
9:02:25 AM
Co-Chair Hoffman acknowledged that 40 to 45 days would likely
pass before the Palin Administration would submit proposals for
the $150 million spending reduction it intended to make to the
Fiscal Year 2008 (FY 08) budget. This delay should not stop the
budget subcommittees from undertaking efforts to determine
funding recommendations.
9:04:44 AM
Overview of Governor's FY 08 Budget
KAREN REHFELD, Director, Office of Management and Budget, Office
of the Governor, introduced Office of Management and Budget
staff members offering their expertise and announcing that they
could provide "a valuable resource" to the Committee.
Ms. Rehfeld recognized the importance of the work of the
Division of Legislative Finance in the budgetary process.
Ms. Rehfeld disclosed that the FY 08 budget proposal as
submitted by Governor Sarah Palin was a "working project" and
Ms. Rehfeld would appreciate efforts of Committee staff as well.
9:07:44 AM
Ms. Rehfeld expressed the Governor's budgetary goals and
philosophy to spend less to "control the growth of government",
to save surplus revenue and "to live within our means". Ms.
Rehfeld interpreted this as reviewing the projected revenue in a
given year and "building our budget within that projection."
9:08:14 AM
Ms. Rehfeld reported that, according to the Department of
Revenue forecast of December 15, 2006, a projected $3.9 billion
of general fund revenue would be available for FY 08 based on a
price per barrel of oil of $51.25.
9:08:42 AM
Ms. Rehfeld noted that revenue is declining and expressed intent
to continue to "balance the budget".
9:08:55 AM
Ms. Rehfeld told of surplus revenues of $1.4 billion from FY 07
and $500 million projected for FY 08, which the Governor's
proposed budget would deposit into the Constitutional Budget
Reserve Fund (CBR). This would increase the balance of the fund
to $4.3 billion.
9:09:17 AM
Ms. Rehfeld continued that an additional $1.3 billion of surplus
revenues would be deposited into the principal of the Alaska
Permanent Fund under Governor Palin's budget scenario.
9:09:28 AM
Ms. Rehfeld noted that $1.7 billion would be available for the
Alaska Permanent Fund dividend program and inflation proofing.
9:09:39 AM
Ms. Rehfeld outlined the appropriation legislation introduced at
the Governor's request.
9:09:57 AM
Ms. Rehfeld began by explaining that SB 52 would appropriate
funding for education. It would provide "full funding" of the
foundation formula program and pupil transportation costs for FY
08. Additionally, it would appropriate $35 million for
expenditure in FY 08 for one-quarter of the Institute for Social
and Economic Research (ISER) district cost factor study and
school improvement grants as was allocated in FY 07 but
specified at that time as a non-recurring appropriation. The
Governor's budget does not propose to increase the base student
allocation.
9:10:45 AM
Ms. Rehfeld furthered that SB 52 would also appropriate an
estimated $207.4 million to fund the Public Employees Retirement
System (PERS) and Teachers Retirement System (TRS) costs for
school districts.
9:11:04 AM
Ms. Rehfeld relayed Governor Palin's intent to pass this
legislation into law as soon as possible so school districts
could determine the amount of funding they would receive and
subsequently avoid notification of staff of possible layoffs.
9:11:34 AM
Senator Olson asked the distribution of the PERS and TRS costs
for the school districts.
9:11:37 AM
Ms. Rehfeld answered that approximately $270 million would be
TRS-related with the remainder attributable to PERS.
9:11:56 AM
Ms. Rehfeld next stated that SB 50 contained the FY 08 operating
budget appropriation and SB 51 the Mental Health Trust Authority
appropriation. The key elements of the operating budget included
retirement system increases of $77.5 million for local
governments and $178 million for State government, comprised of
the Executive Branch, the Legislative Branch, the Alaska Court
System and the University of Alaska. The Longevity Bonus program
would be restored and an estimated $33.7 million would be
appropriated for its expenses.
9:12:30 AM
Ms. Rehfeld continued that the proposed operating budget would
provide $48.1 million for "local government support".
Additionally, $100,000 is included to fund an investigator
position within the Alaska Public Offices Commission (APOC).
9:12:53 AM
Ms. Rehfeld pointed out that the budget proposal did not include
intended efficiencies and spending reductions of $150 million.
These reductions had yet to be determined and would be submitted
as amendments.
9:13:01 AM
Co-Chair Hoffman, returning to the education funding
legislation, noted it would appropriate $207.4 million for
school district PERS and TRS expense increases. The obligation
was the responsibility of the local school districts rather than
the State's and the State did not provide for the increases
incurred for FY 07. He asked whether Governor Palin intended to
include State funding for this purpose in the FY 09 budget as
well.
9:14:02 AM
Ms. Rehfeld responded that the matter had not been decided. The
Governor is committed to providing support for local
governments, although the actual amount of assistance the State
would provide in future years had not been determined.
9:14:24 AM
Ms. Rehfeld disclosed that agency personnel had been directed to
review programs within their departments and advise the Governor
of potential savings. The results of past efforts in
establishing Missions and Methods as part of a performance based
budget methodology would serve as a "key tool" in the current
undertaking.
9:15:01 AM
Ms. Rehfeld shared that Office of Management and Budget had
prepared a booklet for legislators titled, "Missions and
Measures, Results at a Glance, State of Alaska, January 2007"
[copy on file], which provides summaries of the agencies. A more
detailed report of each department would be prepared and
distributed to the budget subcommittees.
9:15:45 AM
Ms. Rehfeld informed that agencies were provided with "budget
target" dollar amounts, and directed to identify increments and
budget item reductions to meet those targets. The total of the
targets exceed the $150 million the Governor proposed for
reduction in State spending. This over-calculation is intended
to provide options in determining how the actual reductions
would be accomplished. Governor Palin surmised that departments
should be given "a target to strive for".
9:16:47 AM
Ms. Rehfeld admitted the process would be "difficult". The
Office of Management and Budget and agency personnel would
collaborate in deciding what reduction proposals would be
forwarded to the Legislature. Final decisions would be made by
March 1, 2007. She understood the desire to receive these
amendments sooner and assured that efforts would be made to
accomplish the task as soon as possible; however she could not
commit to an earlier date.
9:17:26 AM
Ms. Rehfeld relayed that the Governor had requested the
Legislature, the Alaska Court System and the University of
Alaska to assist in identifying budget reductions within those
entities.
9:17:41 AM
Ms. Rehfeld then spoke to SB 53, the FY 08 capital appropriation
legislation. In its current form, the budget is "very very bare
bones" containing $81.1 million general funds necessary to
garner $710 million in federal funds, and $10.6 million for
Mental Health budget projects.
9:18:18 AM
Ms. Rehfeld reported that $134 million of general funds was
available for capital projects. Governor Palin was interested in
collaborating with the Legislature to develop priorities. The
intent was to submit a list of those priorities by March 1.
9:18:49 AM
Ms. Rehfeld then directed attention to SB 61, which she
characterized as an "early supplemental bill". It contains three
budgetary items, which should be funded in a timely manner. The
Division of Elections had submitted a request for approximately
$1.2 million general funds for the costs to conduct a special
statewide election in April on the issue of benefits for
partners of same-sex relationships. The Division is obligated to
prepare for that election.
9:19:36 AM
Ms. Rehfeld listed the request of $153 million for the Copper
River/Prince William Sound Regional Seafood Development
Association as another item included in SB 61. These funds have
been collected beginning in FY 05 in the form of taxation on
Association members with intended expenditure on Association
projects. However, authorization for such expenditure was not
granted in the initial FY 07 operating budget and is necessary
to allow the projects to commence in the upcoming construction
season.
9:20:23 AM
Ms. Rehfeld stated that the third component of the early
supplemental appropriation request is $12 million for
expenditure on potential litigation against the provider of
actuarial services to the State. The funds would be comprised of
$8.271 from PERS and $3.729 from TRS. The litigation process is
anticipated to last two to three years.
9:20:51 AM
Co-Chair Hoffman reminded of the FY 07 appropriation of $400,000
for this purpose. He requested an update on expenditure of those
funds.
9:21:04 AM
Ms. Rehfeld replied that an investigation was underway. The
total cost of the investigation is estimated to be $850,000,
which is included in the current request.
9:21:24 AM
Co-Chair Hoffman pointed out that expenditure authorization for
the requested $12 million would terminate in FY 09. He asked how
complete the litigation process would be at that time and
whether further appropriation requests should be anticipated.
9:22:02 AM
Ms. Rehfeld replied that the litigation could possibly be
completed by FY 09 and that the Department of Law would make
every effort to do so; however the actual time required could
not be predicted. This would be a "large case" and would "take
time".
9:22:31 AM
Ms. Rehfeld reported that efforts were underway to draft the FY
08 supplemental appropriation request of a targeted $50 million.
The Governor intended to meet the statutory requirement to
submit it to the Legislature by the 30th day of the legislative
session, which in the current year is February 14. The process
is complicated by the unanticipated expenses of "disasters
beyond our control".
9:23:10 AM
Co-Chair Hoffman surmised the target amount was solely general
funds and that the aforementioned $12 million request for
litigation expenses was not included.
9:23:30 AM
Ms. Rehfeld affirmed.
9:23:34 AM
Ms. Rehfeld next addressed other components of the
Administration's budget "package" including SB 60, which would
repeal the tax on studded tires. Governor Palin intended to
remove this tax because it "affects the safety of families
traveling on roads."
9:24:05 AM
Ms. Rehfeld then noted that SB 66 would reduce the fee for
business licenses from $100 to $25 effective October 2008.
9:24:33 AM
Senator Dyson recalled intent that licensing fees for
professionals be of an amount adequate to cover the cost to
administer the program for which the license is issued. He asked
if business licenses were included in this.
9:24:52 AM
Ms. Rehfeld understood the revenue generated under the existing
business license fee structure is more than the cost of
administering the license program.
9:25:41 AM
Senator Dyson asked if reducing the fees would require
additional funding to operate the program.
9:25:48 AM
Ms. Rehfeld answered that general funds would be required to
supplement the license fee revenues.
9:25:58 AM
Senator Dyson surmised that the program would therefore not be
self sufficient.
9:26:05 AM
Ms. Rehfeld affirmed.
9:26:08 AM
Ms. Rehfeld continued explaining that SB 54 would appropriate
$1.3 billion to the principal of the Alaska Permanent Fund as
she mentioned earlier in her testimony. This action would
"leave" over $1.7 billion in the earnings reserve account of the
Fund to be available for inflation proofing of the Fund and
payment of dividends.
9:26:35 AM
Ms. Rehfeld reiterated that Governor Palin was "committed" to
working with the Legislature on the budget project to achieve a
sustainable budget.
9:26:52 AM
Co-Chair Hoffman spoke to the reinstitution of the Longevity
Bonus program and Revenue Sharing to local governments. The
Longevity Bonus program would be recurring but that the Revenue
Sharing program was not indicated as such. He asked if the
intent would be to make both programs recurring.
9:27:31 AM
Ms. Rehfeld replied that the Longevity Bonus program would
continue through its initially intended "phase out" in which no
new recipients would be added. Currently, the Governor did not
plan to continue the Revenue Sharing program in FY 09, although
the issue could be discussed.
9:28:14 AM
Senator Elton pointed out that the proposed spending reductions
were intended for the upcoming fiscal year but he questioned
whether the short term savings might only defer expenses. He
gave an example of proposed reductions to the Department of
Corrections programs, which could result in higher recidivism
rates and subsequently higher costs in the future. He requested
that potential long term costs be considered in conjunction with
immediate savings during the budget subcommittee process.
9:29:35 AM
Ms. Rehfeld agreed. Reductions of some services to contain costs
could be suggested; however other "ideas" would require more
than one fiscal year to accomplish.
9:30:26 AM
Senator Huggins remarked upon the part of the budget proposal,
which would eliminate the Education Fund. He predicted this
would "cost us money" and suggested that this should be
reconsidered.
9:31:08 AM
Ms. Rehfeld agreed to the importance of matter and relayed that
the Governor would be "open to that conversation." Ms. Rehfeld
expected that the deposit of surplus revenue to the CBR versus
the Education Fund would be discussed and debated.
9:31:31 AM
Senator Huggins surmised that most Alaskans consider action in
securing a natural gas pipeline project as a measurement of the
Legislature's progress this session. However, he asserted that
adequate infrastructure to facilitate the project was also
necessary. Efforts should not be limited to workforce training.
Funding for infrastructure projects must be considered
"proactively" despite intentions to minimize the FY 08 capital
budget appropriation.
9:32:43 AM
Senator Dyson emphasized the need to clarify that a $150 million
budget reduction would not be a reduction to the amount of the
FY 07 budget. Instead, the proposed FY 08 budget is $750 million
higher than the initial FY 07 budget appropriation. This must be
conveyed to facilitate the rebuilding of public confidence.
Efforts are necessary to ensure that the spending cuts are not
directed to the reduction of existing services.
9:34:25 AM
Ms. Rehfeld averred the Governor's "clear goal" to carefully
consider funding decisions. A savings account must be maintained
until increased revenue is generated from a natural gas
pipeline.
9:35:14 AM
Senator Dyson understood that the Department of Revenue was
unsure that the FY 07 budget with or without supplemental
appropriations would be sustainable according to the revenue
projections. He expressed concern that the FY 08 budget would
not be sustainable. He cautioned against reliance upon a future
increase in revenue.
Senator Dyson continued that previous gubernatorial
administrations failed to prioritize budget items as required by
statute. He acknowledged that the Palin Administration had not
had an opportunity to complete this undertaking.
9:36:42 AM
Ms. Rehfeld agreed to the intent of prioritization and indicated
that a process existed to accomplish this.
9:37:13 AM
Senator Dyson realized it would be difficult but stressed that
if budget reductions were to be made, the opinions of department
staff on what actions would have the least impact should be
known. Additionally, many funding decisions "cross over" to
other departments. Senator Elton gave the example of future
impacts to the social system from reduced efforts to
rehabilitate offenders.
Senator Dyson offered to assist in the prioritization effort.
9:38:34 AM
Co-Chair Hoffman furthered the concern of the Committee that
sufficient funds be available to "carry through" until the
natural gas pipeline increased the State's income. He was also
uncertain about "locking away" funds in the corpus of the Alaska
Permanent Fund.
9:39:22 AM
Co-Chair Stedman noted the multiple ways in which to save
current surplus funding including the CBR account and school
funding.
Co-Chair Stedman then pointed out that decisions would be made
for a budget year starting in June utilizing revenue forecasts
written six months prior.
9:40:21 AM
Co-Chair Stedman furthered that the funding source of the $12
million appropriation for the litigation against the former
actuary is proposed as being the "trust account" of PERS and
TRS. The Committee would discuss whether this option is
"appropriate".
9:40:46 AM
Co-Chair Stedman spoke to "formula drivers" impacting State
spending. The increases in these formulas could not continue.
One half of the increase was due to the retirement fund "issue"
and the Committee would review the formula drivers of other
programs. His intent was to maintain the operating budget until
natural gas pipeline revenues were generated without
implementation of an income tax or sales tax.
9:42:08 AM
Co-Chair Hoffman announced that although funding for PERS and
TRS was included in the operating budget, which he oversaw, he
would assign these programs to Co-Chair Stedman for review and
to recommend a feasible plan to address the $8-10 billion
unfunded liability. The previous Legislature passed SB 141 to
change the retirement system for newly hired employees and to
reduce new debt. Co-Chair Hoffman asked if the Palin
Administration would also undertake this effort.
9:43:13 AM
Ms. Rehfeld replied that the Office of the Governor was
collaborating with the Department of Administration and the
Department of Law to identify potential options. She would
include Co-Chair Stedman and the Legislature.
9:43:37 AM
Senator Elton asked how committed the Palin Administration was
to the plan to save excess revenues, suggesting those revenues
could be utilized to "buy down" the unfunded liability of PERS
and TRS.
9:44:18 AM
Ms. Rehfeld relayed that the Office of the Governor would be
willing to consider the suggestions. The budget requests as
submitted were intended to "frame a starting point" in
discussions; it would not preclude consideration of other
options.
^Overview of Governor's FY 08 Budget - Division of Legislative
Finance
9:45:07 AM
DAVID TEAL, Director, Division of Legislative Finance,
introduced staff members recently added to the Division. His
presentation utilized a handout titled "Putting the FY 08 Budget
in Perspective" [copy on file].
9:46:57 AM
Page 1
1. Where have you been?
2. Where are we now?
3. Where are we going?
Mr. Teal stated that this presentation was intended to address
the three questions.
9:47:07 AM
Page 2
General Fund Budget
[Bar and line graph showing Operating, Capital, Savings,
Revenue and GF to CBRF for the FY 99 through FY 08 and
projected for FY 09 through FY 12. A notation reads,
Projections: The operating budget increases at 4% annually
and the capital budget is a constant $200 million. Other
notations list dollar amounts from certain accounts as
follows:
FY 05
PEF (Public Education Fund): $417
FY 06
PEF: $657
ADRF (Alaska Debt Retirement Fund): $26
AHFC (Alaska Housing Finance Corporation): $300
FY 07
PCE (Power Cost Equalization): $187
PEF: -$565
ADRF: -$26
FY 08
PEF: -$509]
Mr. Teal outlined the graph. The GF to CBRF line demonstrates
the surplus or deficit for each of the fiscal years and would be
referred to as the CBR draw or surplus. He spoke as follows.
Before 2004, draws from the CBR were routine. In fact that
goes all the way back to '91 when the Reserve Fund was
created. What that really means is that revenue here was
less than the budget. There was a deficit - structural
deficit.
Having a deficit like that puts pressure on you to hold the
budget down; and in fact the budget was very flat from [FY
99] through FY 05. It ranged between two and 2.5 billion
dollars.
Mr. Teal noted the increase of the budget from $2.5 billion in
FY 05 to a proposed $4 billion for FY 08. He informed, "It began
rising rapidly in '05. And you can see that we've gone from a
2.5 billion operating budget to a 4 billion capital."
Mr. Teal attributed the increase in part to expenses related to
PERS, TRS and to other factors.
Mr. Teal emphasized that the budget is "a two-year cycle".
9:48:53 AM
Mr. Teal exampled that during this legislative session, the
Committee would address not only the upcoming FY 08 budget, but
also supplemental appropriations to the FY 07 budget. At the
time the FY 04 budget was adopted, it was unknown that a revenue
surplus would occur. He spoke to the legislators' efforts during
the FY 05 budget cycle saying the following.
Again, you didn't know a surplus was going to occur when
you did the '05 budget. It was really in the '06 budget
cycle that you were first aware of a large surplus from
'05. That revenue resulted in a larger capital budget, and
for the first time, some savings.
Mr. Teal reminded:
You put $417 million in Public Education Fund. Then you
came back in the '07 cycle and again had a large surplus.
The capital budget grew again and you saved about $1
billion.
Mr. Teal informed that a surplus of approximately $1.35 billion
would be available for the FY 08 budget cycle. He defined
surplus as "money on the table now - the '07 surplus and the '08
surplus".
9:50:40 AM
Mr. Teal shared that future revenue would be "fairly flat",
while the budget would be in the amounts established by the
Legislature and the Governor. The four percent projected budget
increase appears "relatively slow growth compared to the recent
years." If growth continued at the current rate, the operating
budget would amount to over $7 billion by FY 12. Increases of
"that magnitude" would not be expected because "PERS/TRS is a
big driver of these increases in recent years" and the maximum
contribution rate had been reached. The expenses would continue
but not at higher rates.
Mr. Teal informed that he selected a growth rate of four percent
for the purposes of this presentation. He stressed, "Even at
that lower growth rate, revenue is insufficient and again you're
back to CBR draws."
9:51:51 AM
Co-Chair Hoffman referenced the $207 million appropriation
proposed by Governor Palin for school districts' obligation of
PERS/TRS as well as the $77 million proposed appropriation for
political subdivisions' obligations. He asked if this expense
had been factored into the projected budgets of FY 09 through FY
12.
9:52:21 AM
Mr. Teal answered that the appropriations were included in the
calculation of future projections. The projections were based on
the proposed FY 08 budget in its current form.
9:52:34 AM
Co-Chair Stedman requested an amended projection including "the
imbedded drivers" of "formula driven programs" but not including
the PERS/TRS costs. The purpose would be to determine the
"forced" rate of growth excluding the PERS/TRS expenses.
9:53:38 AM
Mr. Teal estimated approximately "eight percent". He qualified
that the State had "little option but to pay" the PERS/TRS costs
of the school districts and of the State. However, the State has
no legal requirement to provide "Revenue Sharing" to municipal
governments. Additionally, the State has no legal requirement to
reinstate the Longevity Bonus Program. These expenses "certainly
cause budget increases" and could be considered formula
programs. Such formula programs could be discretionary and thus
the calculations Co-Chair Stedman requested would be difficult
to ascertain.
9:54:38 AM
Co-Chair Stedman surmised therefore that a four percent growth
rate would be considered conservative and would require effort
to attain.
9:55:00 AM
Mr. Teal stated that the four percent equals approximately $150
million to $200 million annually. The increase of the FY 08
budget proposal was approximately $600 million over the FY 07
budget. A four percent growth rate would be a significant
reduction to the growth rates between FY 05 and FY 08. The level
of future increases would be dependant upon the amount of
federal funding allocated in the future. If the allocation was
reduced, State general funds would likely be utilized to
"replace" the loss.
Mr. Teal indicated that he chose the growth rate of four percent
because he considered it "reasonable growth." Regardless of
whether four percent was a conservative estimate, withdrawals
from the CBR would be significant, reaching $1.5 billion by FY
12. A deficit would still be incurred even if "you're able to
hold the budget flat."
Mr. Teal gave a perspective of the current balance of the CBR of
$2.5 to $3 billion. According to the data of the Department of
Revenue 2006 Revenue Forecast and "this spending scenario", the
balance of the CBR would be depleted by FY 12.
Mr. Teal clarified that the information presented reflected
projections and was not intended to predict future financial
situations.
9:57:01 AM
Co-Chair Hoffman asked if the projected depletion of the CBR by
FY 12 included the Governor's proposed deposit to the Fund for
FY 08.
9:57:15 AM
Mr. Teal answered it did not; however, the issue was irrelevant.
Governor Palin's FY 08 budget request proposed a withdrawal from
the Public Education Fund (PEF) in an amount greater than the
deposit to the CBR and therefore the savings would be negative.
He qualified, "Negative savings only in the sense that you're
pulling money from the PEF but that savings goes right into the
CBR. So it's a net zero; it's not saving any more money it's
just saving it in a different place."
9:57:48 AM
Co-Chair Hoffman clarified that the balance of the PEF would be
zero by FY 08 and the CBR balance would be zero by FY 12.
9:58:03 AM
Mr. Teal affirmed this would occur under the provisions of the
Governor's budget plan. He corrected his estimate predicting
that the CBR fund would "last" until FY 13.
9:58:17 AM
Mr. Teal again posed the first question of the presentation,
"Where have we been?" and answered, "Structural deficits." To
the question "Where are we now?" he replied, "A temporary
surplus." He emphasized "Temporary surplus - because if you look
at where we're going, we're right back where we were, which is
structural deficits."
9:58:35 AM
Page 3
The FY 08 Budget Cycle
· The Legislature's savings plan set aside nearly $1
billion last year:
o $509 million to the Public Education Fund
o $300 million to a capital savings account in AHFC
o $183 million to the Power Cost Equalization
Endowment
· The Governor's spending plan eliminates accumulated
savings in the Public Education Fund and effectively
transfers the balance to the Constitutional Budget
Reserve Fund:
o $565 million in FY 07
o $509 million in FY 08
· From the FY 07 Base, the Governor's general fund
operating budget adds $750 million.
· Without depleting savings balances, the Governor's FY
08 budget shows a surplus of about $140 million.
· This $140 million surplus is based on
o Achieving $150 million in operating budget
efficiency reductions.
o Avoiding additional appropriations for K-12
education, Medicaid and other programs.
o Holding the capital budget to $92 million.
Mr. Teal overviewed this information.
10:00:29 AM
Page 4
Categorization of the Governor's FY 08 GF Increments
($750.8 Million Total from FY 07 Base)
[Pie Chart showing the following:
Increments with Little Discretion
$496.8 million 66%
School District TRS/PERS $207.4 29%
Agency Retirement, Health & Wage Increases
$186.4 25%
Medicaid $46.8 6%
PPT Tax Refunds $25.0 3%
Prison Population $9.7 1%
Fuel/Utilities $21.5 3%
Governor's Promises
$159.3 million 21%
Political Subdivisions PERS $77.5 10%
Local Government Assistance $48.1 6%
Alaska Longevity Bonus $33.7 4%
All Other Increments
$94.7 million 13%]
Mr. Teal noted this information reflected the operating budget
and "categorizes the $750 million increments from the '07 base."
The increments are listed in order of "decreasing discretion"
which he detailed as follows.
In that sense the School District TRS/PERS $207 million -
you have very little, if any, choice in whether to pay
that. Similarly, the $190 million that's going towards
State employees' retirement, health care and wages
increases. These are not the contracts under negotiations
now. These are the single class increases like nurse
reclassification and some auditors - pretty small
reclasses. Nevertheless, they're contractual arbitration
awards so we put those in as this lump of State employee
compensation.
That, as Senator Stedman pointed out earlier, is half, in
fact more than half, of the total $750 million in
increases.
10:01:49 AM
Mr. Teal continued:
Moving to Medicaid - it's an entitlement program. While you
have some discretion and some control over eligibility and
other payments, the regulatory process to make those
changes is very long. Any changes in '08 would be hard to
reach. If you wanted to make savings in Medicaid it would
probably take until '09 to do that.
10:02:14 AM
Mr. Teal noted that the $25 million Petroleum Profits Tax (PPT)
refunds increment was an estimated figure. The exact amount was
unknown.
Mr. Teal characterized the Prison Population and Fuel/Utilities
increments as "perhaps unavoidable".
Mr. Teal informed:
So all together, you have these increments with little
discretion totaling two-thirds of the total increases -
$500 million.
10:02:45 AM
Mr. Teal listed the increments that he deemed more
discretionary. The three items, Political Subdivisions PERS,
Local Government Assistance, and Alaska Longevity Bonus, were
included in the budget proposal submitted by Governor Palin.
Mr. Teal then remarked on the remaining section of the pie chart
in the amount of $94.7 million in which budget reductions could
be made.
Page 5
Conditions for an FY 08 Surplus
1. Achieving $150 million in operating budget efficiency
reductions.
- A difficult task that will require reductions in
existing programs-not merely denying increments
2. Avoiding additional appropriations for K-12 education,
Medicaid and other programs.
3. Holding the capital budget to $92 million.
Mr. Teal overviewed the situation.
10:04:04 AM
Co-Chair Hoffman, returning to Page 4, totaled the $159.3
million Governor's Promises and $94.7 million All Other
Increments, and noted that the proposed reductions of $150
million could only be taken from this $253 million. If the
entire All Other Increments portion were eliminated, an
additional $59 million would still need to be identified.
10:05:18 AM
Page 6
Issues Not Addressed in the Governor's Operating Budget
· Additional K-12 funding
o Base Student Allocation $??
o District Cost Factors $75 million for full
implementation
o Medicaid Match $37 million
o State Employee Contracts $30 million??
o Retirement System Unfunded Liability $??
Mr. Teal outlined this information, noting that the Governor's
proposed budget would provide no additional "money in the
classrooms."
Mr. Teal furthered that the proposed budget included a $25
million appropriation to the "district cost factors", which
provide additional funding to school districts in areas with
higher costs of living. This was the amount appropriated for FY
07; however, that budget was to fund the cost for the final
quarter of the year. To fully fund the increment in FY 08 an
additional $75 million was necessary.
10:06:16 AM
Mr. Teal reminded that federal funding for Medicaid was
scheduled to "decline" or be reduced for FY 07. A reprieve was
issued, but the reduction had been rescheduled to begin this
year. In discussions with Janet Clarke of the Department of
Health and Social Services, he learned that another delay was
less likely. This was due to the changes to the membership of
the US Congress. The states that would benefit from a delay no
longer had lawmakers in the majority party.
10:07:28 AM
Mr. Teal informed that eight of the 11 collective bargaining
unit contracts for State employees were scheduled for
renegotiation this year. The $30 million amount shown on the
page was an estimate of the addition costs the new contracts
would incur.
10:07:48 AM
Mr. Teal also noted that Governor Palin's budget proposal did
not include any additional appropriation for the unfunded
liability of the PERS/TRS funds.
Mr. Teal warned that rather than a budget reduction of $150
million, budget increases could be necessary.
10:08:07 AM
Page 7
Capital Budget
"Bare Bones"
· Minimum level of state funds to maximize federal
funding ($92 million GF)
· Federal Funding Concern
o Potential Highway Trust Fund problems
o Senator Stevens no longer Chair of Appropriations
Committee
Mr. Teal outlined this information.
10:08:44 AM
Page 8
What's not addressed?
· Deferred Maintenance
o ">$950 million and growing"
ƒBuildings, Roads, Harbors, Rural Airports,
Parks, AMHS Vessels
· State Funded Road Program
o Fed funds drying up?
· School Construction
o DEED's Construction and Major Maintenance
Priority Lists total - $921 million
ƒExcluding the $90 million from last year
· University
o Board of Regents Request - $431 million
· Local Issues/Community Grants
Mr. Teal characterized the current capital budget proposal as a
"work in progress".
Mr. Teal overviewed the items in which appropriations were not
included.
Mr. Teal noted that of the University of Alaska, Board of
Regents funding request, only approximately $40 million was
included in the Governor's proposed capital budget.
10:09:45 AM
Senator Elton asked whether an analysis had been done on the
impact of "the continuing resolution issue in Congress and
whether or not that's going to add additional costs or loss of
services in this fiscal year and maybe in fact next fiscal
year."
10:10:09 AM
Mr. Teal had not conducted such analysis and deferred pertinent
questions to the Department of Transportation and Public
Facilities.
10:10:33 AM
Page 9
How much is available to spend/save?
[Spreadsheet listing the following:
Available to Spend (unrestricted GF)
Fall Revenue Forecast for FY 08 $51.25 $3,936
FY 07 Surplus (Fall forecast) $59.15 1,351
Total Available for this budget cycle $5,288
Spending
FY 08 Operating $3,734
FY 08 Capital 181
New Legislation 25
FY 08 Supplemental Placeholder 60
Total Spending $4,000
Potential Spending/Savings $1,288
A notation reads: The amount available excludes $509
million in the Public Education Fund]
Mr. Teal qualified that the Department of Revenue forecast would
change. The amount available to "spend" included the FY 07
supplemental appropriation and FY 08 regular appropriations.
10:11:54 AM
Co-Chair Stedman asked the impact of a change in the price per
barrel of oil by one dollar to the total revenue.
10:12:26 AM
Mr. Teal responded that such calculations had been simple, with
$1 per barrel of oil equaling $60 million in State revenue. The
relationship under the PPT method is not linear. Although higher
oil prices generate increased gross revenue for the producer,
net revenue must be determined. The credits and deductions are
not known in advance. He estimated the "rule of thumb" to be
nearer $100 million increase revenue per $1 increase in the
price of oil.
10:13:40 AM
Co-Chair Stedman stated, "In a simplified world, which we don't
operate in, that's pretty close to $4 billion in revenue and $4
billion in expenses, with just a slight variation in price." He
asked, "The effect of the Petroleum Profits Tax … on not only
revenue but the potential impact of credits how is that being
dealt with in the forecast? In the modeling forecast are they
looking at a positive effect of that credit scenario or possibly
a negative or are they ignoring it or how are they handling that
in the modeling when it's so early in the implementation of that
tax change?"
10:14:34 AM
Mr. Teal was unable to answer. He would be present when the
Spring 2008 Revenue Forecast was announced and at that time he
would discuss the matter with the Department of Revenue
economists. Currently, the economists were "netting out" a
portion of the refunds, $25 million. He opposed this practice
because the Legislature should be aware of the gross revenue,
since payment of the credits requires an appropriation. If the
Legislature appropriated these funds, legislators should know
"exactly how much you're appropriating." He pointed out, "Right
now, by netting it out of the revenue forecast it's difficult
for you to see how much money you've got and how much money you
can afford to give in refunds."
10:15:35 AM
Co-Chair Stedman agreed, "We need all the numbers on the table,
and not netted numbers." The Committee should "pay close
attention to the affect of that credit, not only in the refunds,
the checks that we send back for it, but also the impact on
drilling and exploration, which is the reason it's there."
10:16:05 AM
Co-Chair Hoffman also agreed. He furthered that 14 oil companies
were active in Alaska, but only ten were eligible to receive
those credits. Each year, those eligible companies could claim
up to $25 million in credits.
10:16:29 AM
Mr. Teal affirmed.
10:16:32 AM
Co-Chair Hoffman clarified that the current allotment was only
$25 million total.
10:16:42 AM
Mr. Teal affirmed. The estimation could be accurate; however,
there was "no way of knowing".
Mr. Teal emphasized that significant savings for FY 08 would be
unlikely. If the $150 million in reductions were would not made,
if the capital budget were higher or other spending increased,
the fiscal year would be a deficit.
10:18:33 AM
Co-Chair Stedman relayed that the production forecast for the
Alyeska Pipeline for FY 08 was 782 million barrels per day at a
forecasted price of $51.25 per barrel. Revenue is therefore a
combination of production rates and price.
10:19:39 AM
Senator Elton furthered that "large assumptions" were made about
the effect of PPT on revenue and which credits and deductions
would be applied. The producer's interpretation of the new tax
laws, as well as the credits and deductions claimed, could
become evident by April.
10:20:34 AM
Mr. Teal affirmed that the production and price determined
revenue under the previous tax system. Under the new system,
production, price and credits/refunds determine revenue. The
impact of the credits and deductions on development activities
would not be known "even in April". The Committee had requested
from the Department of Revenue a report on the impact of the
credits and refunds on development. This report should also
include the amount of credits or refunds offered. He recommended
the Committee request this information be provided in advance of
the report deadline.
10:21:45 AM
Co-Chair Stedman informed that he had already submitted such a
request.
10:22:14 AM
Mr. Teal then pointed out that the credits earned this year
would not expire and do not need to be claimed in the year
earned. They could also be sold. He stressed, "You don't know
when they're going to hit; conceivably, a company could simply
not turn it its credits for three years and then they'd all hit
at once." He questioned why a company would do this, but advised
that it is possible.
10:23:00 AM
Co-Chair Hoffman requested a brief summary of "the terms and the
rates between communities in the State - who's paying for what
over the past four or five years."
10:23:45 AM
Co-Chair Stedman directed attention to tables depicting the
balance of the CBR on pages 18 and 19 of the Revenue Source
Book. He recommend Members review past issues of the publication
for comparison.
10:24:31 AM
Mr. Teal, returning to Co-Chair Hoffman's question, informed
that local communities' PERS and TRS rates were "based on
individual experience" and therefore rates range from 15 percent
to over 180 percent. Rather than including the local rate in his
presentation, he utilized the rate of 44 percent that applies to
State government.
Mr. Teal reiterated that all the figures "are pretty rough". He
detailed the following.
"But just to illustrate the point that you're trying to
make is that: if 14 percent were the normal rate … that's
what communities and the State paid in FY 05. The State
contributed nothing toward the local community payments.
10:25:56 AM
Mr. Teal continued:
Then in '06 was the first year of the increase. It was
limited to five points. The communities paid the 14 that
they had paid before and the State paid the increase if you
recall that. In money terms, the State contributed about
$18 million. I don't know what the communities paid back
then but probably something in excess of $15 million.
In '07, you again paid five points. You picked up the
increase but not the whole increase; you just picked up the
increase from '06. So the communities' rate went from 14 to
19, the State still paid five for a total rate of 24. And
again the State paid $18 million or 78 percent of the total
cost of the local government PERS.
In '08, the way the language is drafted is that you pick up
the increase from '07. That total was 24 points. So it's
not that you picked up the entire increase from FY 07. The
communities again will get an increase from 19 to 24. The
State picks up the difference and you can then see that the
total local PERS cost is now near $160 million.
Two sides of this - one is the State is paying much more
than they used to, but so are the communities. In
percentage terms, the community contribution has fallen
from 78 percent to 51 percent.
10:27:49 AM
Co-Chair Hoffman noted Mr. Teal's explanation provided the
Committee "a brief history of what happened" and is continuing
to occur in "both percentages and in dollars on PERS and TRS for
communities." The Committee should realize that $77 million for
PERS "is the smaller portion of the obligation" of the State's
contribution in comparison to the $207 million the State is
contributing for school districts' costs.
^
ADJOURNMENT
Co-Chair Lyman Hoffman adjourned the meeting at 10:27:47 AM
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