Legislature(2011 - 2012)SENATE FINANCE 532
01/27/2011 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Fy12 Budget Overview & Fiscal Summary | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 27, 2011
9:03 a.m.
9:03:29 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division
PRESENT VIA TELECONFERENCE
None
SUMMARY
^FY12 Budget Overview & Fiscal Summary
9:04:27 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
presented the PowerPoint presentation: "An Overview of
Alaska's Fiscal Situation, Senate Finance Committee."
Co-Chair Stedman remarked that he advised Mr. Teal to
highlight the basic aspects of the budget to help the
public understand the process. He stated that there could
be some redundant information for the committee members.
Mr. Teal presented slide 2: "Four Elements of Budgeting."
He stated that revenue had been a part of the budget in
years prior, but a deficit had persisted in the 1990s.
Budget discussions during the time of the deficit primarily
pertained to appropriations. The budget was so unbalanced
at the time of the deficit, there was little discussion
related to balancing the budget. In 2005, oil prices rose,
so revenue began to have an influence on budget
discussions. Reserves were met and some debts were paid,
because of the impact of revenue. Revenue influence also
brought increased capital spending. He stated that the
purpose for the budget reserves was for future planning and
spending. He stressed the importance of a discussion about
maintaining the reserve funds.
9:08:16 AM
Mr. Teal discussed slide 3: "Revenue Sources." The pie
chart displayed the Department of Revenue (DOR) fall
forecast of 2010, showing projected earnings for FY12. He
remarked that the chart was accurate, but the money
displayed did not represent potential for appropriations.
The total revenue shown was $13.3 billion, but the
governor's budget was only $11 million. The $3.5 million
represented in the pie chart under investment related
mostly to investment revenue from the Permanent Fund (PF)
and Constitutional Budget Reserve Fund (CBR). Approximately
$500 million of the $3.5 billion in investments would be
available for legislative appropriations. Oil revenue was
45 percent of the budget; non-oil revenue was 7 percent of
the budget; and federal revenue was 22 percent of the
budget.
Mr. Teal presented slide 4: "Revenue and Appropriations."
He stated that money was categorized based on the degree of
legislative spending discretion; therefore revenue and
appropriations were in the same categories: Unrestricted
General Funds (UGF), Designated General Funds (DGF), other
state funds, and federal receipts.
Mr. Teal explained slide 5: "Federal Receipts." The federal
receipts typically had specific requirements pertaining to
spending, so the legislature would have very little
discretion in the appropriation process. Federal receipts
frequently require state matching funds, and would be split
fairly evenly into thirds: Capital Budget, formula
programs, and agency operations.
Mr. Teal discussed slide 6: "Other State Funds." The year
prior, LFD presented a "Before Budget Clarification
Project." In the project, "other state funds" represented
approximately $3 billion. Currently the other funds held
about $500 million. There would be limited discretion in
how the other funds could be spent. The other funds
included international airport revenue, state corporation
receipts, trusts, and dedicated funds. Even though limited
discretion would be required when appropriating the other
state funds, the legislature could decide where and how the
money would be appropriated within the specific "other
fund" categories.
9:12:21 AM
Mr. Teal continued with slide 7: "Designated General
Funds." The designated general funds included university
receipts, Alaska Marine Highway (AMHS) receipts, and other
service fees charged by agencies. The legislature typically
follows statutory guidelines, because the law prohibited
spending program receipts outside the program that
generated the receipt.
Mr. Teal discussed slide 8: "Unrestricted General Funds."
The UGF revenue was mostly derived from oil revenue (88
percent). The legislature has complete discretion in
appropriating UGF. The UGF was typically referenced as the
measure of state spending, and was used to calculate the
fiscal surplus or deficit.
Mr. Teal displayed slide 9: "Revenue Sources-Degree of
Discretion." He stated that the PF is not included in the
UGF, because PF earnings are excluded from revenue. The PF
is excluded from appropriations, because it is excluded
from revenue.
9:15:02 AM
Mr. Teal discussed slides 10 and 11: "Part one of the State
of Alaska Fiscal Summary-FY11 and FY12." He pointed out the
categories of funding: unrestricted, designated, other,
federal, and total. He also noted the four categories
related to the fiscal summary: Revenue, operations,
statewide operations, and capital. He remarked that revenue
was about $300 million more than FY11; however GF spending
was up by about $400 million. Agency operations held at
about $167 million, and he noted a 3.8 percent increase
from FY11. The statewide operations were up $122 million,
which was an 11.5 percent increase from FY11. The capital
had a $112 million increase, or an 18.4 percent from FY11.
He noted a cash-flow deficit of $25 million. He stated that
the governor had requested a transfer of a net of $310
million out of savings, giving a surplus of $284 million.
He stated that the summary showed a deficit in FY11, but
that the deficit could be inaccurate.
Co-Chair Stedman pointed out line 36, and asked for further
explanation. Mr. Teal stated that line 36 displayed a cash
flow deficit of $26 million. He remarked that the governor
would withdraw $310 million from savings accounts, which
would give a surplus of $284 million for FY12. He referred
back to FY11, and remarked on a deficit of $14 million. He
stated that the $14 million deficit was inaccurate because
it was only a projection. He stated that the management of
spending was easier than spending, because revenue is
uncontrollable.
9:18:03 AM
Mr. Teal discussed slide 12: "Fiscal Summary Key Points."
He stated the FY12 revenue would be $328 million above FY11
revenue, but spending is $400 million higher. Agency
operations would be up $167 million (3.8 percent),
statewide spending would be up $122 million (11.5 percent),
and capital spending would be up $112 million (18.4
percent). There would be a cash-flow deficit of $25
million, but in fiscal terms the $25 million would be a
rounding error. The governor would remove a net of $310
million from savings accounts, but the FY11 surplus would
still remain uncertain.
9:23:28 AM
Co-Chair Stedman recalled conversation about the growth of
agency operations. He referred to line 8 on slide 10, and
wondered if there should be a concern beyond what the state
controlled. Mr. Teal encouraged the committee to pay
attention to all operations. He stated that the committee
had the most control over the agency operations, but
assured the committee that they had control over all the
other items, including retirement spending and statewide
debt.
Co-Chair Stedman looked at the 5.2 of the total operations
in slide 11, and wondered if a 3 percent expectation would
be reasonable. He also queried the impact of various
expectations based on the growth of the prior five years.
Mr. Teal replied that some later slides might address the
concerns.
Senator Thomas wondered if the FY11 surplus calculations
incorporated the governor's capital budget vetoes. Mr. Teal
replied that they did, but did not include the supplemental
budget.
9:27:45 AM
Mr. Teal presented slide 13: "Reserves-the Third Element of
Budgeting." Alaska has reserves unlike any other state.
Excluding the PF, which cannot be spent, Alaska had over
$14 billion in reserves. Some funds would be difficult to
access due to extensive restrictions: the permanent fund,
the employee retirement accounts (Public Employee
Retirement System [PERS] and Teachers Retirement System
[TRS]) and the CBR. There is no disagreement on accessible
cash of about $1.5 billion.
Co-Chair Stedman wondered if there was a projection for the
end of FY12. Mr. Teal replied with slide 14: "Part two of
the State of Alaska Fiscal Summary-FY11 and FY12." He
stated that the PF would be difficult to access for
political reasons, and the CBR would require a three
quarter majority vote to access. Some of the designated
savings were lumped into the GF. Some of the designated
savings would not be considered savings, because while they
are continually spent every year, the funds are refilled
each year to accommodate the spending.
Co-Chair Stedman remarked that most states have tight
budget issues, so they strictly deal with budgetary issues
on a month to month basis. He wondered if Mr. Teal was
familiar with that practice. Mr. Teal replied that other
states could not measure reserves in terms of years because
they had substantially smaller reserves. He stated that the
other states look at liquidity needs. He stated that if
Alaska were to have no revenue whatsoever, Alaska could
function for two years because of its substantial reserves.
He alleged that the recession proved the wisdom of
reserves.
9:33:22 AM
Senator Thomas pointed out the forward funded education
fund, and wondered if LFD classified it as reserves. Mr.
Teal responded that the balance was always the same, year
to year, because it is continually funded.
Mr. Teal addressed slide 15: "The Value of Reserves."
Reserves allow comfort and flexibility. There was language
in the budget that withdraws money from the CBR to
compensate for possible overspending.
Mr. Teal presented slide 16: "FY2011 Unrestricted General
Fund Revenue - Fiscal Sensitivity." The chart showed what
happens to revenue when the price of oil changes.
Expenditures would not waiver, because they were not based
on the price of oil. The revenue was dependent on the price
of oil, and it is an upward curve because it is a
progressive tax. The breakeven point on the graph was the
point where expenditures are equal to the price of oil. In
FY11, the budget was $3.5 billion and the breakeven point
was 77 dollars per barrel. The forecast price for oil was
78 dollars per barrel, which would give the UGF a surplus
of $50 million before transfers.
In response to a question by Co-Chair Stedman, Mr. Teal
stated that expenditures did not depend on the price of
oil. The revenue curve was not flat, and it curves because
there was a progressive tax scheme. He remarked that the
graph did not include the pipeline shutdown.
9:38:40 AM
Mr. Teal continued with slide 17: "FY2012 Unrestricted
General Fund Revenue-Fiscal Sensitivity." The chart
displayed the upward shift in expenditures from FY11, by
approximately $400 million. He remarked that the $27
million fiscal gap would disappear if the price of oil was
25 cents higher than was projected. The charts represented
rough estimates and generalizations.
Co-Chair Hoffman requested a chart with FY12 showing the
parameters of the governor's new tax structure. Mr. Teal
agreed to provide that information.
Mr. Teal displayed slide 18: "Key Points." A one-dollar
change in oil prices would produce a $100 million change in
revenue. Declining oil production, additional tax credits
and/or declining profitability shifts the revenue curve
downward, so reserves could vanish very quickly.
9:42:17 AM
Mr. Teal discussed slide 19: "FY11/12 General Fund - Fiscal
Sensitivity Overlay," representing the FY11/12 revenue. A
higher expenditure curve with a lower revenue curve makes
for a higher breakeven cost: 83 dollars per barrel. The
breakeven price in FY10 was about 64 dollars per barrel.
Mr. Teal showed slide 20: "Why the Revenue Curve Shifts
Downward Over Time." Typically, a revenue curve would shift
downward because of a decline in production, but the
forecast for FY12 was up one percent. The change from FY10
to FY11 was more than the change from FY11 to FY12. Even
though the production forecast was up one percent, the
curve still turns downward. The revenue curve shifts
downward if the nontransferable tax credits were increased.
The downward revenue curve may also be because of lower
profitability. Profitability was affected by higher
production costs with less oil. Less profit per barrel
would cause the revenue curve to shift downward, making the
breakeven price of oil higher.
9:47:25 AM
Mr. Teal showed slide 21: "Why Expenditures Shift Upward
Over Time." Formula programs like K-12 education and
Medicaid increase every year, and seem to have an
inexhaustible demand. Incremental budget processes and
simply reviewing the increments ultimately increases the
budget. Debt service and tax credits were consequences of
past legislation, so therefore would have an impact on
expenditures.
Mr. Teal discussed slide 22: "State Assistance to
Retirement." The current payment toward PERS and TRS was
less than $400 million per year, with a projected growth of
up to $1.4 billion year in 2029. He pointed out that in
2030 there would be a substantial drop to just over $600
million. He encouraged further discussion regarding
retirement payments.
Co-Chair Stedman mentioned that there would be discussions
in committee related to cash flow in the retirement funds.
9:51:08 AM
Mr. Teal displayed slide 23: "The Fourth Element of
Budgeting-A Plan." The governor's FY12 budget was balanced,
and reserves were sufficient to handle basic circumstances.
The governor's budget seemed to encourage production. Mr.
Teal encouraged the legislature to consider short term
gains and decreases in revenue, and note that the tax
structure does not guarantee steady cash-flow. There would
be a guaranteed downward shift in revenue, and the
legislature must decide if there could be sufficient
reserve funds.
Mr. Teal discussed slides 24 and 25: "Unrestricted General
Fund Revenue/Budget History." Appropriations were fairly
even from about 1993 to 2004 because there was little
money. When revenue expanded, so did expenditures.
9:56:41 AM
Mr. Teal showed slide 26: "Growth in Agency Operating
Budgets." He stated that projections were based on a
constant capital budget of $500 million. He felt $500
million was a reasonable expectation of capital spending.
Statewide operating costs were currently about $1.2
billion, with added retirement costs included. Agency
operations were difficult to predict, but they were
projected to increase at a rate of 7.6 percent each year.
The agency operations predictions were based on the growth
from FY06 to FY11. The Department of Health and Social
Services and the Department of Education and Early
Development accounted for 52 percent of the growth in the
operating budget. Restraining the growth of the Operating
Budget is difficult, because more than half the growth was
in Medicaid and K-12 education. The revenue curve would
shift downward and the combination would require reserve
spending, if oil production projections could not meet
expectations, oil tax rates were not reduced, and
expenditure growth was difficult to control.
Mr. Teal referred back to slide 25. The chart showed a
surplus until 2017, but there would be a distinct deficit
in 2020.
9:59:31 AM
Mr. Teal displayed slide 27: "Wrap Up." The fiscal
situation was expected to be strong for FY12, because of a
balanced budget and solid reserves. After 2012, there would
be inevitable downward shifts in the oil revenue curve,
upward shifts in the oil expenditure curve, and the
retirement system unfunded liability would require greater
payments. This combination would deplete the reserves
rapidly. He pointed out that the reserves had been built up
since 2005.
Co-Chair Stedman remarked that OMB projections were
different than the LFD projections, and wondered if there
had been any reconciliation. Mr. Teal replied that OMB was
using the ten-year projections with a 3 percent growth
rate, because the instructions were to increase the budget
at 3 percent. He furthered that the 3 percent growth rate
was in keeping with inflation.
Co-Chair Stedman expressed concern about the dialogue in
the press related to growth rates, which gave the
impression that the rate of change in the operating is not
accurate. He pointed out that this was because the press
was not including statewide operations. Mr. replied that
LFD accounted the last five years, and chose to merely
continue that trend in their projections.
Co-Chair Stedman requested a projection at 3 percent
growth, and then apply the retirement related to Medicare
issues. Mr. Teal replied that that LFD had a model to
determine that growth, but anticipated that the model would
not provide much more information.
10:04:24 AM
Co-Chair Hoffman felt the projection from 2013 to 2010 was
too conservative in slide 25, based on historical projects.
Senator Olson referred to slide 22, and queried the
significant decline in 2033 to 2040. Mr. Teal replied that
projections state what it pays for a certain number of
years. The drop is because of what is considered to be the
last payment in 2029.
Senator Olson wondered what percentage of reliability could
be assumed in slide 22. Mr. Teal replied that other factors
were other considered like health care and mortality rates,
but the main factor for the gap was due to investment
drops. He alleged that the chart understates the severity
of the financial situation.
10:11:45 AM
Co-Chair Stedman stated that he anticipated the 8.25
percent growth rate be adjusted downward.
ADJOURNMENT
The meeting was adjourned at 10:12 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012711 LFD SFC-budget overview.pdf |
SFIN 1/27/2011 9:00:00 AM |