Legislature(2011 - 2012)SENATE FINANCE 532
01/24/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Fy 13 Budget Overview and Fiscal Summary: Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
January 24, 2012
9:01 a.m.
9:01:26 AM
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee
meeting to order at 9:01 a.m. Co-Chair Stedman discussed
the agenda for the meeting.
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
SUMMARY
Legislative Fiscal Analyst's Overview of the Governor's
FY13 Budget
^FY 13 BUDGET OVERVIEW AND FISCAL SUMMARY: LEGISLATIVE
FINANCE DIVISION
9:02:40 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION (LFD),
agreed with comments made by Office of Management and
Budget (OMB) Director Karen Rehfeld who had discussed the
governor's FY 13 operating budget the prior day. He
explained that LFD agreed with the governor's presentation
of the budget; the OMB fiscal summaries matched on a fund
group and dollar basis. He stressed that his intent was
neither to defend nor present the governor's agenda. He
would provide a technical perspective.
Mr. Teal began a PowerPoint presentation titled
"Legislative Fiscal Analyst's Overview of the Governor's FY
13 Budget" and relayed his intent to look at the budget in
the context of Alaska's future. He informed the committee
that the LFD Legislative Fiscal Analyst's Overview of the
Governor's Request for the FY 13 budget was available on
the LFD website (copy on file). The book included capital
and operating budget fiscal summaries and agency operating
budget details.
Mr. Teal believed the LFD report contained a significant
amount of good news. There was a $3.7 billion surplus that
consisted of $1.9 billion from FY 12 and $1.8 billion from
FY 13. He relayed that the current surplus was "huge"
compared to budget surpluses in past years. He elaborated
that in the prior year the total FY 11/FY 12 surplus had
initially been $25 million. The FY 12 surplus had grown
above $400 million and high oil prices had increased it to
$1.9 billion. He expounded that the available $3.7 billion
surplus was over 25 percent of the $14 billion that had
been set aside beginning in 2005.
Mr. Teal shared that it was good news that the governor's
operating budget growth rate was 3.2 percent and not the
7.8 percent rate that had been in place since 2005.
Mr. Teal pointed to slide 1 titled "Unrestricted General
Fund Revenue/Budget." The chart illustrated what would
happen if agency operating budgets continued to grow at 7.8
percent, capital budgets were $882 million beginning in FY
13, and costs stayed flat statewide (with the exception of
retirement). He discussed that under the scenario, deficits
would occur beginning in 2015 and would ultimately reach
approximately $3 billion; financial reserves would be
exhausted by 2025. He communicated that the 3.2 percent
growth rate would result in a substantial drop in reserve
declines and would come close to balancing the budget. He
explained that the capital budget would not remain at $882
million during a deficit. He provided a hypothetical
scenario in which the capital budget was reduced to $500
million, which would have helped to balance the budget.
Mr. Teal continued on slide 2: "Projected Reserve
Balances." The chart illustrated how reserve balances would
be impacted by a growth rate of 7.8 percent versus a growth
rate of 3.2 percent. With a 7.8 percent growth rate,
reserves were rapidly depleted and would be gone by 2025;
however, with a growth rate of 3.2 percent, reserves
remained at approximately $20 billion. He stressed that a
growth rate of 7.8 percent was not sustainable. He
communicated that the governor's budget made a strong
effort to reign in the operating growth.
Co-Chair Stedman wondered if the presented status included
the $2 to $4 billion contribution in the Public Employee
Retirement System (PERS) and Teacher Retirement System
(TRS); $4 billion in equity for the construction of the
Watana hydroelectric project; $4 billion for an instate gas
line; and construction of multi-billion dollar ports. Mr.
Teal responded that almost none of the mentioned projects
were included in the status of his presentation. He
furthered that the ports might be considered part of the
projection, because of a $350 million bond issue in the
governor's budget. However, that bond issue was considered
future debt service.
Co-Chair Stedman pointed out that the public bond proposals
for the Anchorage and Mackenzie ports did not provide
enough money to complete the projects. Mr. Teal agreed, and
furthered that while $3.7 billion was considered a
substantial amount of money, it would not fully pay for the
Watana hydroelectric project or an instate gas line.
9:11:41 AM
Mr. Teal addressed slide 3 titled "Projected Direct State
Contributions to PERS and TRS," and relayed that retirement
contributions also had an impact on the future budget. He
referred to the state's decision to cap the Teachers'
Public Retirement System (TRS) and the Public Employees'
Retirement System (PERS) at 12.56 percent and 22 percent
respectively. He discussed that the state had initially
believed the costs would be approximately $200 million,
that they would decline rapidly, and that it would be out
of the business of state assistance by 2020 or so; however,
poor investment returns beginning in 2008 had resulted in
lost revenue. The losses led to revised future earnings and
actuarial assumptions and an increased unfunded retirement
liability of $450 million or more in FY 12 and over $600
million in FY 13. He elaborated that the liability would
reach approximately $800 million by FY 16 and would grow to
approximately $1.2 billion per year in subsequent years. He
emphasized the large size of the numbers and noted that
current K-12 education funding was approximately $1.2
million.
Mr. Teal informed the committee that there was some good
news related state retirement costs. He explained that
Alaska's system had unique characteristics that made the
standard actuarial analysis obsolete. He furthered that
Buck Consultants, the state's actuary, had modeled an
alternative concept showing that a single $2 billion
contribution to PERS would be sufficient to fund all future
benefits without additional state contributions. He
communicated that the $2 billion payment to PERS would
result in a savings of approximately $400 million per year.
The state would see its $2 billion investment returned in
five years and by 2025 the savings would be above $4.8
billion. He stressed that the total operating budget
reduction would be over $7 billion by the time the unfunded
PERS liability had been paid off. Under the Buck scenario,
the state would spend $2 billion upfront, but it would have
more reserves in 2025 than it would if it continued to make
annual contributions.
Co-Chair Stedman wondered if it were possible to include $2
billion for PERS and $1 billion for TRS, in order to
observe their effect on the budget. Mr. Teal responded that
if the money for PERS and TRS were included, the savings
would be about half of what was represented. He stated that
retirement was a big "driver" in the budget, and
contributions would become a big problem when looking at a
deficit.
9:16:49 AM
Mr. Teal discussed reasons LFD analysts were pessimistic
about the future on slide 4 titled "FY 12/13 General Fund -
Fiscal Sensitivity Overlay." He explained that the revenue
curve was dependent on price of oil; however, each year as
production declined the revenue curve shifted downward. The
curve was approximately $900 million less in FY 13 than it
had been in FY 12 under any given price of oil; with oil at
$95 per barrel revenue was approximately $7 billion in FY
12, but it was under $6 billion in FY 13. Production
decline would lead profit loss due to lower tax revenue
combined with higher capital and operating costs. The
revenue curve would shift downward and the breakeven price
of oil would continue to increase; the breakeven rate had
been $94 per barrel in FY 12 and would be approximately
$100 per barrel in FY 13. He added that the revenue curve
shown on slide 1 took the declining production into
account. The decline was partially offset by the increased
price of oil.
Mr. Teal relayed that the second issue was related to the
governor's proposed 3.2 percent agency operations growth
rate, which would be difficult to achieve. He expressed
skepticism about the plausibility of the proposed $882
million capital budget. He believed it would be hard to
stay at the proposed level because there were several items
missing from the budget. Education funding for K-12 was
flat from the prior year's budget and typically every $100
increase in the Base Student Allocation (BSA) cost $25
million; school boards had discussed a $300 increase in
BSA, which equated to approximately $75 million. The Alaska
Gasline Inducement Act (AGIA) had been short funded by
approximately $100 million. He communicated that the fuel
trigger was at the same level as the prior year and stopped
at $100; however, the projected price of oil was $109 per
barrel. Extending the fuel trigger up to the projected
price of oil would cost approximately $9 million.
Additionally, the proposed budget did not include $3.5
million in actuarially required Judicial Retirement System
(JRS) contributions.
9:22:06 AM
Mr. Teal discussed that a number of funds spent more than
they brought in including, fish and game, oil and
hazardous, worker's safety, Alaska Marine Highway System,
the Department of Natural Resources land disposal, and
others. He discussed that agencies typically had to request
additional general funds when their normal fund source was
depleted. A solution to the structural problem could take
up to $20 million for a one-time fix and significantly more
for a longer term solution. Unlike other states, Alaska did
not have sales and income taxes to fix the bulk of its
revenue problems. Alaska currently depended on oil revenue;
however, the resource-generated revenue only lasted as long
as the resource itself. He communicated that without
additional oil production the state would be forced into
watching its revenue decline. He compared the state to an
individual near retirement who would have to rely on
savings.
Mr. Teal emphasized that increased current savings improved
the likelihood that the state could avoid income and sales
taxes and losing the Permanent Fund Dividend in the future.
He did not believe the FY 13 budget process would involve
dissecting the governor's increments because there were not
many increments on a department-by-department level. He
thought the budget process would focus on the decision to
spend versus the decision to build reserves. He believed
that the combined importance of the revenue and expenditure
decisions made the FY 13 budget cycle critical to Alaska's
future.
Co-Chair Stedman wondered what would happen if $4 billion
for the Watana hydroelectric project; $4 billion for the
instate gas line; $1 billion for the ports; and $2 billion
for TRS were included in the projection. Mr. Teal replied
that if $11 billion were taken out of the reserves, the
savings would remain virtually "flat." He remarked that he
could not accurately calculate the projection, because his
program displayed the retirement funding as incorrect.
Co-Chair Stedman wondered if the $11 billion for the
projects and retirement funding could be included in future
presentations of projections. Mr. Teal agreed to provide
that information.
9:28:10 AM
Senator Thomas surmised that the $3.7 billion determination
was concluded because of the addition of and unanticipated
oil revenue increase of $1.9 billion from FY 12, and
additional $1.9 from FY 13. Mr. Teal replied that at the
end of the prior session the legislature had left $400
million of FY 12 spending "on the table." He added that the
FY 12 surplus had grown since the April prior, because the
price of oil had increased substantially from $400 million
to $1.9 billion. The FY 13 projection had oil at $109 a
barrel for continued prices. He pointed out that the result
was approximately $900 million left in revenue, however the
governor's budget was several hundred million lower than
that on the capital side. He stressed that there would be a
surplus of $1.8 billion in FY 13, for a total of $3.7
billion.
Senator Thomas looked at the Alaska Gasline Inducement Act
(AGIA) shortfall and the K-12 flat funding, resulted in
$600 million. Mt Teal state replied that it would be
closer to $200 million.
Senator McGuire inquired the location of the offset of
earnings from Alaska's investments. Mr. Teal responded that
the reserves were first taken from the Alaska Housing
Finance Corporation (AHFC) account; when that account was
emptied, the money was taken from the Statutory Budget
Reserve (SBR); and then the money was taken from the
Capital Budget Reserve (CBR).
Co-Chair Stedman asked if the Permanent Fund was taken into
account, after the CBR was emptied. Mr. Teal replied in the
affirmative, but stressed that his current focus was only
on the AHFC, SBR, and CBR. He pointed out that the
Permanent Fund was an undesignated savings account, so the
money could be spent however the State wanted. However,
that step had never been taken.
Co-Chair Stedman declared that he did not want to rely on
the Permanent Fund as reserves.
9:33:25 AM
Co-Chair Stedman thanked Mr. Teal for his presentation, and
stated that he wanted to see dialogue that included capital
projects. He continued to discuss housekeeping.
Senator Olson wondered when a hearing when be held on the
large capital projects. Co-Chair Stedman stated that he
wanted to get a holistic view of the capital projects and
get "everything on the table at once", before discussing
the larger projects in detail. He announced that the
committee needed to decide how to prioritize the State's
expenses.
Co-Chair Stedman discussed the agenda for the following
meeting.
ADJOURNMENT
9:39:46 AM
The meeting was adjourned at 9:39 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| FY 13 SFIN LFD Budget Overview.pdf |
SFIN 1/24/2012 9:00:00 AM |
Budget Overview - LFD |