Legislature(2019 - 2020)SENATE FINANCE 532

01/23/2019 09:00 AM FINANCE

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Audio Topic
09:01:25 AM Start
09:04:40 AM Office of Management and Budget - Budget Development Process
09:54:49 AM Legislative Finance - Fy20 Fiscal Overview
10:45:12 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ - Office of Management & Budget: Budget TELECONFERENCED
Development Process by Donna Arduin, Director
+ - Legislative Finance: FY20 Fiscal Overview by TELECONFERENCED
David Teal, Director
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 23, 2019                                                                                           
                         9:01 a.m.                                                                                              
9:01:25 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:01 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
Senator Lyman Hoffman                                                                                                           
ALSO PRESENT                                                                                                                  
Donna  Arduin, Director,  Office of  Management and  Budget;                                                                    
David Teal, Director,  Legislative Finance Division; Senator                                                                    
Cathy Giessel;  Senator Chris Birch; Senator  Lora Reinbold;                                                                    
Senator    Mia    Costello;    Senator    Shelley    Hughes;                                                                    
Representative Tammie  Wilson; Representative  Cathy Tilton;                                                                    
Representative   DeLena   Johnson;   Representative   LeBon;                                                                    
Representative Sarah Vance;  Representative George Rauscher;                                                                    
Representative  Dan Ortiz;  Representative Jonathan  Kreiss-                                                                    
OFFICE  OF  MANAGEMENT  and   BUDGET  -  BUDGET  DEVELOPMENT                                                                    
LEGISLATIVE FINANCE - FY20 FISCAL OVERVIEW                                                                                      
Co-Chair  Stedman reviewed  the agenda  for the  meeting. He                                                                    
noted that  the upcoming  budget would  be available  on the                                                                    
13th of February.  The focus of the meeting would  be on the                                                                    
process of the  development of the budget  versus the number                                                                    
detail. He thought  it was important for the  public and the                                                                    
legislature to  be provided with the  thought process behind                                                                    
the budget. He  invited the Office of  Management and Budget                                                                    
director  to the  table  and requested  that  she provide  a                                                                    
brief background.                                                                                                               
^OFFICE  OF  MANAGEMENT  and  BUDGET  -  BUDGET  DEVELOPMENT                                                                  
9:04:40 AM                                                                                                                    
DONNA  ARDUIN, DIRECTOR,  OFFICE OF  MANAGEMENT AND  BUDGET,                                                                    
(OMB) introduced  herself. She  confirmed that she  would be                                                                    
presenting the governor's  budget for FY 20  on February 13,                                                                    
2019. She relayed that she  would be reviewing the processes                                                                    
employed by  OMB to  build the  budget in  her presentation,                                                                    
"State of  Alaska Office of Management  and Budget; Building                                                                    
the Budget: A Policy Driven Approach" (copy on file).                                                                           
Ms.  Arduin  reported  that  OMB  began  on  day  1  of  the                                                                    
administration  by eliminating  budget  silos, tearing  them                                                                    
Co-Chair Stedman  interjected asking  Ms. Arduin  to provide                                                                    
some  background information  about herself.  He thought  it                                                                    
was important  for the public  to know the new  director had                                                                    
some  background in  the  subject matter  she  was about  to                                                                    
present. Ms. Arduin conveyed that  she had served with seven                                                                    
different governors  in six  states. She  had been  a budget                                                                    
director  or deputy  director for  a  substantial amount  of                                                                    
time. She worked once in  the legislature for the Speaker of                                                                    
the House of Florida.                                                                                                           
Co-Chair  Stedman  queried  her background  outside  of  her                                                                    
experience  as a  budget director.  Ms. Arduin  relayed that                                                                    
prior  to  working  as  a  budget  director  she  worked  in                                                                    
investment banking.  Following her  service, she  started an                                                                    
economic consulting  firm with Dr. Arthur  Laffer, President                                                                    
Ronald  Reagan's economist,  and  Steve  [Stephan] Moore,  a                                                                    
prominent economist in Washington D.C.                                                                                          
Co-Chair Stedman  clarified that  Ms. Arduin had  been doing                                                                    
her   job  for   a   few  decades.   Ms.  Arduin   responded                                                                    
9:06:42 AM                                                                                                                    
Ms.  Arduin read  slide 2,  "Building the  Budget: Eliminate                                                                    
Budget Silos":                                                                                                                  
     ? Bringing Administrative Services Directors into OMB                                                                      
          ? Collaborating with and across departments                                                                           
          ? Identifying redundancies                                                                                            
     ? Establishing Policy Teams across Departments                                                                             
          ? Boards and Commissions                                                                                              
          ? Regulatory reform                                                                                                   
          ? Healthcare coordination                                                                                             
          ? State asset inventory and divestiture                                                                               
Ms. Arduin explained  that on December 14,  2018, OMB issued                                                                    
the fiscal summary shown next  to the governor's preliminary                                                                    
FY 20  budget on slide  3, "Building the Budget:  Define the                                                                    
Problem."  The Office  of Management  and Budget  started by                                                                    
using  the numbers  from the  Department of  Revenue's (DOR)                                                                    
updated  revenue   summary  book.  The   statutory  earnings                                                                    
reserve calculation was  added to DOR's numbers  to reach an                                                                    
unrestricted general fund (UGF)  revenue total of about $3.2                                                                    
billion.  The  Office  of Management  and  Budget  estimated                                                                    
about  a  $1.6  billion   UGF  deficit  using  the  previous                                                                    
administration's November 30th proposed  spending plan - the                                                                    
starting   place  OMB   used.  She   highlighted  that   OMB                                                                    
streamlined the  fiscal summary by condensing  the amount of                                                                    
line  items.  The information  still  existed  and would  be                                                                    
available to  legislators who requested it.  She argued that                                                                    
it would  be much easier for  the public to see  the revenue                                                                    
line, the expenditure line, and either a debt or a surplus.                                                                     
Ms. Arduin  addressed slide 4,  "Building the  Budget: Where                                                                    
is the  money going?"  She highlighted that  the legislature                                                                    
was accustomed to  the blue line chart.  However, she wanted                                                                    
to make sure  OMB was capturing everything going  out of the                                                                    
state's   treasury.  Therefore,   OMB  included   designated                                                                    
general funds (DGF) in addition  to UGF. All money was green                                                                    
and  should  be viewed  and  analyzed.  She thought  it  was                                                                    
important  to  look at  everything  the  state was  spending                                                                    
money on regardless of the funding source.                                                                                      
Ms. Arduin looked at slide  5, "Building the Budget: Combine                                                                    
UGF and DGF":                                                                                                                   
     ? The Alaska Constitution does not allow for                                                                               
     designated funds                                                                                                           
     ? State spending is State spending  all programs                                                                           
     should compete for available dollars                                                                                       
     ? Examples of designated funds:                                                                                            
          ? Alcohol Tax                                                                                                         
          ? Vehicle Rental Tax                                                                                                  
          ? Motor Fuel Tax                                                                                                      
          ? Fees                                                                                                                
Mr. Arduin  argued that the  programs that competed  for DGF                                                                    
should  be  scrutinized  because  all money  was  green  and                                                                    
belonged  to   Alaskans.  She  provided  some   examples  of                                                                    
designated funds.  The blue chart  on the slide  showed that                                                                    
as a  percentage of  the general fund  budget, DGF  had been                                                                    
increasing over the previous years.                                                                                             
Co-Chair  Stedman  commented  that   before  moving  to  the                                                                    
following  slide   he  highlighted   the  first   line  that                                                                    
indicated  the constitution  did  not  allow for  designated                                                                    
funds.  He  thought  the  word   that  should  be  used  was                                                                    
dedicated funds. Ms. Arduin agreed.                                                                                             
Senator   Micciche   noted    the   substantial   percentage                                                                    
difference between FY 14 and FY  18. He queried about the 80                                                                    
percent  increase from  10 percent  to 18  percent UGF.  Ms.                                                                    
Arduin agreed  to provide  a breakdown of  the point  of the                                                                    
analysis  to show  that it  was no  longer a  sliver of  the                                                                    
budget. Instead,  it continued  to grow. She  concluded that                                                                    
the  portion   of  the  budget  that   had  been  relatively                                                                    
unscrutinized was growing and should not be off the table.                                                                      
Co-Chair  Stedman noted  that he  had  had some  discussions                                                                    
with  the OMB  director  about keeping  the  2 general  fund                                                                    
sources separate, but to analyze  both and put them together                                                                    
later if  desired by  the legislature. He  did not  want the                                                                    
committee  to  concentrate  on one  without  the  other.  He                                                                    
suggested  there would  be work  over the  interim regarding                                                                    
fund designations.                                                                                                              
Senator Micciche felt that it  was due largely to a function                                                                    
of the reduction in UGF.  He wondered about the constant and                                                                    
would wait for a response from OMB.                                                                                             
9:12:29 AM                                                                                                                    
Ms. Arduin  discussed slide 6, "Building  the Budget: Colors                                                                    
of Money."  She indicated  there were many  different colors                                                                    
of money coming into the  state. However, OMB considered all                                                                    
money green. The slide illustrated  that although there were                                                                    
receipts and  revenues coming in from  several sources, they                                                                    
all went to the same place and should all be scrutinized.                                                                       
Ms.  Arduin  highlighted  slide  7,  "Building  the  Budget:                                                                    
Guiding Principles":                                                                                                            
     ? Revenues = Expenditures                                                                                                  
     ? Maintain reserves                                                                                                        
     ? Department missions should drive Department programs                                                                     
     ? Statute and regulation reform to reduce or eliminate                                                                     
     ? Policy driven proposals                                                                                                  
     ? Doing less with less                                                                                                     
Ms. Arduin  indicated OMB was  building the budget on  a set                                                                    
of guiding principles. She noted  the governor talking about                                                                    
revenues and  expenditures remaining equal. In  other words,                                                                    
expenditures   should  not   exceed  statutorily   available                                                                    
revenues. Another of the guiding  principles was to maintain                                                                    
reserves. She  read the remaining guiding  principles listed                                                                    
on the slide.                                                                                                                   
Co-Chair  von   Imhof  appreciated   the  list   of  guiding                                                                    
principles.  She  pointed  to policy  driven  proposals  and                                                                    
department   missions  driving   department  programs.   She                                                                    
wondered how data fit into  driving proposals, programs, and                                                                    
resource  allocation. Ms.  Arduin  appreciated the  question                                                                    
and would  be addressing it  in one of the  upcoming slides.                                                                    
She confirmed that data was  a requirement for policy driven                                                                    
Senator Bishop  noted that the director  had mentioned doing                                                                    
less  with less  within departments.  He queried  Ms. Arduin                                                                    
about   how  the   principle   was   weighted  within   each                                                                    
department.  He  was  sensitive   to  the  issue  of  Alaska                                                                    
workforce  development   and  training.  He   mentioned  the                                                                    
governor's support of Alaska hire.  He asked if she intended                                                                    
to shut  down workforce  development, a critical  mission of                                                                    
the state, because revenues were down.                                                                                          
Ms.  Arduin replied  that the  detailed  proposals would  be                                                                    
available on February 13, but  she noted that the discussion                                                                    
of  a policy  driven approach  was  what OMB  used with  the                                                                    
agencies. She did not give  the agencies an across-the-board                                                                    
cut number.  Rather, she  asked agencies  to apply  a policy                                                                    
driven  approach. She  would review  the  approach OMB  used                                                                    
with each of  the agencies to determine  which programs were                                                                    
priorities,  core  services,  aligning  core  services,  and                                                                    
eliminating duplications. She would  be taking the committee                                                                    
through OMB's approach as she presented the slides.                                                                             
Senator  Wielechowski  reported  having asked  questions  of                                                                    
people from  the administration who deferred  to Ms. Arduin.                                                                    
He wondered if  the cuts were coming  from the commissioners                                                                    
and the administration, or whether she was proposing them.                                                                      
Ms.   Arduin   felt   that  the   commissioners   had   been                                                                    
consistently  describing OMB's  process which  was to  bring                                                                    
the  administrative service  directors to  OMB and  allowing                                                                    
the budget to be constructed  within OMB. The budget process                                                                    
was not strictly left for  the agencies to build. The office                                                                    
of Management and Budget had  been working with the agencies                                                                    
to  review and  identify the  core programs,  prioritize the                                                                    
core   programs,  and   to   ensure   programs  fit   within                                                                    
departments' core  missions and  business processes.  In the                                                                    
final analysis, OMB  was compiling the budget  with the help                                                                    
of the  agencies. Department  budgets were  not constructed,                                                                    
as in past years, solely by the agencies.                                                                                       
9:17:53 AM                                                                                                                    
Senator  Wielechowski expressed  concern, because  the State                                                                    
of  Alaska  had  commissioners  who  were  selected  by  the                                                                    
governor  and  approved  by the  legislature,  whereas,  Ms.                                                                    
Arduin  was not  approved by  the legislature  and had  only                                                                    
been in  Alaska for a  month or 6  weeks. He was  aware that                                                                    
she  would be  leaving Alaska  in the  following few  months                                                                    
after the legislature  was finished. He was  troubled by the                                                                    
amount  of  power  and  budget-creating  ability  was  being                                                                    
placed in  her hands.  He queried whether  commissioners had                                                                    
the ability  to argue that  decisions being made  would hurt                                                                    
their departments, or whether Ms. Arduin had the final say.                                                                     
Ms.  Arduin  replied  that she  worked  for  the  governor's                                                                    
office, and  all decisions were vetted  through the governor                                                                    
and   through    the   commissioners.   She    stated   that                                                                    
commissioners had  a say,  as they  were driving  their core                                                                    
programs  and services.  She emphasized  that  OMB had  been                                                                    
working very well with them.                                                                                                    
Senator  Olson  asked  about  Ms.  Arduin's  receptivity  to                                                                    
supplemental  budgets in  the  following  cycle. Ms.  Arduin                                                                    
responded  that  OMB  would  be  submitting  a  supplemental                                                                    
budget  for FY  19. However,  it  was not  her intention  to                                                                    
build a budget that would require a supplemental for FY 20.                                                                     
Co-Chair  Stedman  stated  that a  supplemental  budget  was                                                                    
historically  provided   to  address  the   previous  year's                                                                    
unforeseen events  such as forest fires  and earthquakes. He                                                                    
remarked that  there was a  hope to  have a budget  that did                                                                    
not require  a future supplemental. He  reported encouraging                                                                    
OMB  to  include statutory  language  that  would allow  the                                                                    
implementation of reductions in  their budget submission. He                                                                    
wanted to ensure  that the legislature did  not remove funds                                                                    
in  the  budget  that  were  statutorily  required  for  the                                                                    
governor to  implement. He  also asked  the OMB  director to                                                                    
provide a list of  statutorily structural changes that would                                                                    
be needed to implement the  budget. He hoped the information                                                                    
would  be delivered  on  February 13,  2019  along with  the                                                                    
Senator   Micciche  was   glad  Ms.   Arduin  had   previous                                                                    
experience  in other  states. He  anticipated issues  around                                                                    
Health  and Social  Services such  as  the federal  Medicaid                                                                    
requirements  and  the   Supplemental  Nutrition  Assistance                                                                    
Program (SNAP)  requirements. He queried about  Ms. Arduin's                                                                    
experience  in  delivering  reductions  and  about  tensions                                                                    
between  federal  requirements  and making  reductions.  Ms.                                                                    
Arduin  responded that  many states  had been  able to  work                                                                    
with   the   federal    government   to   receive   waivers,                                                                    
particularly  Medicaid waivers,  to implement  programs that                                                                    
were more  efficient and tailored  to a specific  state. She                                                                    
would pursue waivers for Alaska.                                                                                                
Senator Micciche  mentioned the maintenance of  effort being                                                                    
a challenge for  programs such as SNAP. He asked  if she had                                                                    
experienced   successes   with   other   public   assistance                                                                    
programs. Co-Chair Stedman asked  Senator Micciche to define                                                                    
SNAP  for  the  public. Senator  Micciche  responded,  "Food                                                                    
stamps, if you will, for the public."                                                                                           
Ms.   Arduin  relayed   that  every   state  had   different                                                                    
challenges.  She thought  maintenance of  effort was  likely                                                                    
more  challenging in  Alaska than  in other  states. It  was                                                                    
also  one  of the  items  on  her  discussion list  for  the                                                                    
commissioner  and   the  administration's  talks   with  the                                                                    
federal  government.  She  believed  OMB  would  be  seeking                                                                    
waivers  that  included  maintenance of  effort  in  certain                                                                    
9:24:16 AM                                                                                                                    
Ms. Arduin read  the list on slide 8,  "Building the Budget:                                                                    
A policy-driven approach":                                                                                                      
     ? Consistent policies                                                                                                      
     ? Core services alignment                                                                                                  
     ? Program Prioritization                                                                                                   
     ? Research: Metrics, Outcomes, Best Practices                                                                              
Ms.  Arduin   addressed  slide  9,  "Building   the  Budget:                                                                    
Consistent Policies":                                                                                                           
     ? Reducing Dependence                                                                                                      
     ? Business Process Realignment                                                                                             
     ? Unleashing entrepreneurialism                                                                                            
     ? Program Reform                                                                                                           
     ? Maximizing return on assets                                                                                              
     ? Outsourcing                                                                                                              
     ? Reducing regulatory burden                                                                                               
     ? Eliminate duplication                                                                                                    
     ? Non-essential programs                                                                                                   
     ? User pay                                                                                                                 
Ms.  Arduin  reviewed  a  list  of  examples  of  consistent                                                                    
policies  the  administration  was  employing  across  state                                                                    
government. She read the list.                                                                                                  
Ms. Arduin  discussed slide 10,  "Building the  Budget: Core                                                                    
Services Alignment."  she reported  asking all  the agencies                                                                    
to start with a core  services alignment. She pointed to the                                                                    
illustration   on   the   slide  for   the   Department   of                                                                    
Environmental  Conservation. She  emphasized the  importance                                                                    
for any  business or state  agency to analyze what  they are                                                                    
doing  and  why,  and  to  determine  their  most  important                                                                    
priorities. The  Department of  Environmental Conservation's                                                                    
core  services in  priority were  to  protect human  health,                                                                    
then  to protect  the environment.  There were  other things                                                                    
the  department  did  that  did not  fall  within  its  core                                                                    
services.  She thought  it was  a  good place  to begin  the                                                                    
Senator  Wielechowski  looked at  slide  9  and queried  the                                                                    
examination  of outsourcing  and  nonessential programs.  He                                                                    
also wondered  what areas the director  envisioned more user                                                                    
pay. Ms. Arduin replied  that the administration's proposals                                                                    
and  specifics  would be  available  on  February 13,  2019.                                                                    
There  were opportunities  across state  government for  all                                                                    
the items listed including  outsourcing. The slide described                                                                    
the administration's belief that  there should be consistent                                                                    
policies throughout state government.  She cited user pay as                                                                    
an  example.  She  posed  the  policy  question  about  user                                                                    
revenues  matching  expenditures   because  Alaska  was  not                                                                    
allowed to  have dedicated funds. Some  agencies were asking                                                                    
whether, for  a low  priority program,  the state  should be                                                                    
working with user  groups to determine if  they would rather                                                                    
pay for  the services  as opposed to  seeing them  drop from                                                                    
the state.                                                                                                                      
9:27:50 AM                                                                                                                    
Co-Chair von  Imhof referred to  the third item on  slide 9,                                                                    
unleashing  entrepreneurialism.  She  wondered,  within  the                                                                    
current labor laws and state  contracts with unions, whether                                                                    
the state could  offer things such as  merit pay, seniority,                                                                    
job-sharing,  the  ability  to  work from  home,  and  other                                                                    
innovation rewards.  The private sector engaged  in many her                                                                    
examples. She  wondered if  the state  could offer  the same                                                                    
things  within the  confines of  state government  and union                                                                    
Ms. Arduin  indicated OMB was  exploring some of  the things                                                                    
Co-Chair  von Imhof  mentioned.  There were  many facets  to                                                                    
entrepreneurialism. She argued that  the state should not be                                                                    
competing  with  the  private   sector  and  believed  state                                                                    
government should  encourage private enterprise.  She agreed                                                                    
that  the  businesses  that  stay  within  state  government                                                                    
should  be able  to reward  those employees  and departments                                                                    
who were  achieving their outcomes. She  could provide labor                                                                    
rule information to the committee.                                                                                              
Co-Chair  Stedman  looked  forward  to the  release  of  the                                                                    
information and supporting documents on February 13, 2019.                                                                      
Senator  Wilson  had  concerns  about  user  fees  and  user                                                                    
groups.  He wondered  if there  was  a process  in place  to                                                                    
properly identify  the user fees  if the state was  going to                                                                    
have  user groups  pay  for services.  He  wondered how  the                                                                    
services  would be  maintained without  being  able to  have                                                                    
designated funds in the budget.                                                                                                 
Ms. Arduin replied  that the details of the  budget would be                                                                    
out February 13, 2019. She  furthered that the issue was how                                                                    
the  state  would  treat  the related  policies.  It  was  a                                                                    
question the administration was  asking the legislature. She                                                                    
asked,  as a  policy, whether  the state  would continue  or                                                                    
have user  fees pay for  services. She wondered  if, because                                                                    
the state  did not have  designated funds, the  policy would                                                                    
be  not  to   require  user  fees  to   be  consistent  with                                                                    
expenditures. She was asking a policy question.                                                                                 
Senator Micciche clarified that he  was an avid supporter of                                                                    
government  not  competing  with   the  private  sector.  He                                                                    
favored privatization and outsourcing  when possible. He had                                                                    
researched  other  states that  had  taken  large swaths  of                                                                    
government and privatized them. Often,  within a year or two                                                                    
the government would  pull those services back  in when they                                                                    
could  not  be  offered  at  a lower  price.  He  asked  the                                                                    
director if she  had a team assembled  that would adequately                                                                    
analyze  whether privatization  of  services would  be at  a                                                                    
lower cost to the  state. Ms. Arduin responded affirmatively                                                                    
that  there  would  be  a  team  assembled  to  conduct  the                                                                    
necessary analysis.                                                                                                             
9:32:12 AM                                                                                                                    
Ms.  Arduin  highlighted  slide 11,  "Building  the  Budget:                                                                    
Program Prioritization."  She referred to the  core services                                                                    
of  DEC.  Protecting  human  health   was  a  priority  over                                                                    
protecting the environment. It did  not mean that protecting                                                                    
the environment was  not a priority. However,  in lining the                                                                    
priorities, human health came  first. She explained that the                                                                    
department  was asked  to prioritize  all its  programs. She                                                                    
reemphasized that  the highest priority programs  were those                                                                    
that  protected  human health.  It  did  not mean  that  all                                                                    
programs  protecting human  health  were priority  programs.                                                                    
She pointed to  the right-hand side of the  list noting that                                                                    
some of the  programs were not a priority  because they were                                                                    
inefficient.  The  Office  of  Management  and  Budget  went                                                                    
through the  exercise of prioritizing programs  with all the                                                                    
agencies  to begin  to build  a budget  that focused  on the                                                                    
core programs that were most efficient.                                                                                         
Senator  Wilson  asked  if  the ranking  data  for  all  the                                                                    
departments  would be  available on  February 13,  2019. Ms.                                                                    
Arduin  indicated that  OMB would  have the  outcome of  the                                                                    
prioritization - the governor's proposed budget.                                                                                
Co-Chair Stedman added that the  subcommittees would be able                                                                    
to  ask  for the  information  when  doing the  subcommittee                                                                    
work. He  noted previous  struggles getting the  agencies to                                                                    
prioritize. Much  of the time  the agencies  prioritized all                                                                    
the programs as number 1.                                                                                                       
Senator  Wilson mentioned  that in  his tenure  he had  been                                                                    
trying to have  the departments develop a  priority list. He                                                                    
appreciated the current  administration doing so recognizing                                                                    
the  process of  ranking programs  was difficult.  He wanted                                                                    
some  of  the  related  details and  could  speak  with  the                                                                    
director offline.                                                                                                               
Senator Bishop  clarified that Ms. Arduin  was not lessening                                                                    
the  fact  that  protecting   the  environment  was  equally                                                                    
important.   Ms.   Arduin   replied  that   protecting   the                                                                    
environment was  important. However, if the  programs had to                                                                    
be prioritized,  protecting human  health was  DEC's highest                                                                    
priority. It did  not mean that the department  did not have                                                                    
a  priority of  protecting  the  environment. She  indicated                                                                    
that what was not shown  were things the department did that                                                                    
did  not  fall  into   either  category.  The  low  priority                                                                    
programs   were  identified   as   potential  programs   for                                                                    
elimination.  Senator  Bishop  commented  that  he  believed                                                                    
protecting  human health  and the  environment were  one and                                                                    
the same.                                                                                                                       
9:35:49 AM                                                                                                                    
Ms.  Arduin  displayed  slide   12,  "Building  the  Budget:                                                                    
Metrics, Outcomes, Best Practices."  She spoke of the metric                                                                    
analysis on the slide. She started  at a high level but took                                                                    
a deep  dive into all  the state programs. For  example, the                                                                    
total per  capital state spending in  Alaska was represented                                                                    
by the  yellow bar  and was higher  than most  other states.                                                                    
She continued  that on a  per capita basis Alaska  out spent                                                                    
other  states.  She  continued that  OMB  started  comparing                                                                    
across  facilities and  regions. From  there, OMB  looked at                                                                    
outcomes  and best  practices from  other states  and around                                                                    
the world. She relayed that  the metrics, outcomes, and best                                                                    
practice   analyses   would   be  used   to   finalize   the                                                                    
administration's budget proposal.                                                                                               
Co-Chair  Stedman suggested  looking  at  the Kaiser  Family                                                                    
Foundation analysis  in more  detail if it  was the  will of                                                                    
the committee.  However, he  believed Alaska  was structured                                                                    
much differently than  other states in that it  was the only                                                                    
state that owned  its subsurface held in  commons. Also, the                                                                    
state  did  not  have  counties  with  county  sheriffs  and                                                                    
courthouses.  He  thought  the  analysis would  have  to  be                                                                    
broken  down  for  an accurate  comparison.  He  noted  that                                                                    
Alaska had massive geographical  coverage with a very sparse                                                                    
population and an  underdeveloped infrastructure. He thought                                                                    
it  was  difficult to  compare  Alaska  to the  original  13                                                                    
colonies with  no federal  land but  basically owned  by the                                                                    
federal government.                                                                                                             
Senator  Wielechowski asked  if  the  chart calculation  for                                                                    
Alaska  included  appropriations   for  the  Permanent  Fund                                                                    
Dividend (PFD).  Ms. Arduin suggested  that since  the chart                                                                    
referenced  per  capita state  spending  it  likely did  not                                                                    
include the appropriation. However,  she would find out. She                                                                    
noted that  the chart  looked generally  the same  for every                                                                    
program  that  OMB  looked  at  comparing  Alaska  to  other                                                                    
states. Alaska,  in general, outspent  other states  in most                                                                    
programs. Co-Chair  Stedman requested  more detail  from OMB                                                                    
regarding  the  Kaiser  Analysis. Senator  Bishop  concurred                                                                    
with Co-Chair Stedman.                                                                                                          
9:39:07 AM                                                                                                                    
Ms.  Arduin  moved  to  slide   13,  "Building  the  Budget:                                                                    
Streamlining the Fiscal Summary."  She reported that OMB was                                                                    
streamlining the  fiscal summary. She noted  on the December                                                                    
14th summary  several lines were collapsed  leaving revenues                                                                    
and appropriations  and whether the  state was in  a deficit                                                                    
or  surplus circumstance.  In  addition,  in the  governor's                                                                    
February  13th release,  OMB would  also  be collapsing  UGF                                                                    
with  DGF  resulting  in  one  general  fund  category.  She                                                                    
suggested  that when  the general  funds were  combined into                                                                    
one  category there  would be  about $4.2  billion in  total                                                                    
general  fund  revenues  rather than  $3.2  billion  in  UGF                                                                    
revenues available  for spending. She also  reported that in                                                                    
the coming budget, there would not be a deficit for FY 20.                                                                      
Co-Chair  Stedman encouraged  OMB  to keep  all the  general                                                                    
fund classifications in their  fiscal summary. The Office of                                                                    
Management  and  Budget  could  comingle  them  in  an  easy                                                                    
statement like the one on  the slide. However, he noted that                                                                    
it  was  nice  to  have the  more  detailed  statement  with                                                                    
footnotes to be  able to compare OMB's  fiscal analysis with                                                                    
that  of  the  Legislative  Finance  Division  (LFD).  Going                                                                    
forward he would work with  OMB on potential classifications                                                                    
between  the two  categories over  the interim.  The current                                                                    
timeframe  did not  allow  for them  to  be clearly  defined                                                                    
during session.  He stressed that the  finance committee had                                                                    
no intention of  comingling the two fund  groups. He thought                                                                    
the distinction  should remain.  The committee  might target                                                                    
one general fund  group for a full analysis,  then the other                                                                    
-  bifurcating   the  two   and  reassembling   them  later.                                                                    
Otherwise, he  believed the complexity  would reach  a level                                                                    
that would  make it difficult for  legislators to understand                                                                    
what  was occurring  in the  budget process.  He would  work                                                                    
with OMB  on how  they presented data  to the  committee. He                                                                    
also pointed  out that in most  private enterprises forecast                                                                    
revenues were placed on top  and expenditures on the bottom.                                                                    
However, governments typically  presented the information in                                                                    
the opposite  order: Expenditures  were on top  and revenues                                                                    
were on the bottom.                                                                                                             
Senator Micciche noted that earlier  in the slide deck there                                                                    
was  a focus  on user  fees. He  cited an  example with  the                                                                    
University of  Alaska. He asked for  clarification regarding                                                                    
the delineation of  user fee funds. Ms.  Arduin replied that                                                                    
the point  of highlighting  the DGF expenditures  as general                                                                    
fund  expenditures along  with  everything else  was so  the                                                                    
public could  see the expenditures more  clearly. The budget                                                                    
would show everything that was  coming in, everything Alaska                                                                    
was paying,  and everything government  was spending  on the                                                                    
people's behalf.                                                                                                                
Senator  Wielechowski asked  Ms. Arduin  if she  was looking                                                                    
into Alaska  tax credits or  deductions. Ms.  Arduin replied                                                                    
that it was the  administration's policy for expenditures to                                                                    
match  statutory revenues  which would  be reflected  in the                                                                    
budget being  released on February 13th.  The administration                                                                    
was not proposing to change any statutory revenues.                                                                             
9:44:38 AM                                                                                                                    
Co-Chair  Stedman referred  to the  previous question  about                                                                    
combining  the  two  general fund  categories.  Joining  the                                                                    
categories would  provide a sense of  the overall government                                                                    
spend.   He   relayed   that    for   numerous   years   the                                                                    
administration  had   talked  about   DGF  going   down  and                                                                    
operating  budgets going  down. In  reality, they  were both                                                                    
going up.  He noted that  most of  the sound bites  from the                                                                    
press  reflected expenditures  dropping. However,  they were                                                                    
going up.  He suggested that combining  the categories would                                                                    
provide  a  clearer  overall picture.  He  reemphasized  the                                                                    
committee  would be  looking at  the categories  separately,                                                                    
then  combined. He  wanted to  be  able to  fix the  problem                                                                    
before the state ran out of cash.                                                                                               
9:46:08 AM                                                                                                                    
Senator  Shower asked  Ms. Arduin  to review  her philosophy                                                                    
about an UGF approach and why  it was a flawed approach. Ms.                                                                    
Arduin echoed  what the chairman  iterated about  being more                                                                    
transparent.  She  thought some  games  had  been played  in                                                                    
terms of  moving funds  back and  forth to  misrepresent the                                                                    
size  of state  spending  in Alaska.  In  addition to  being                                                                    
transparent, the  administration believed that  all revenues                                                                    
coming  into  the state  treasury  should  be available  for                                                                    
review  and  that  some  programs   should  not  be  treated                                                                    
differently  than others.  They should  have their  spending                                                                    
scrutinized  from year-to-year  to determine  how money  was                                                                    
being  spent.  She  thought  that  all  spending  should  be                                                                    
accounted for, rather than only UGF.                                                                                            
Senator  Shower  asked  Ms.   Arduin  to  elaborate  on  her                                                                    
experience.  He  wanted  to   assure  the  public  that  her                                                                    
approach  had been  successful in  other states.  Ms. Arduin                                                                    
clarified  that she  had never  been asked  whether she  was                                                                    
planning  to stay  in Alaska,  nor stated  that she  was not                                                                    
planning on  staying in the  state. She reported  that other                                                                    
states  had  had  tremendous   success  in  working  through                                                                    
budgets  with  the  processes  she   was  applying.  In  her                                                                    
experience,  to  attain   a  sustainable,  predictable,  and                                                                    
affordable budget,  a policy  driven approach  was required.                                                                    
Programs  were reviewed  for  efficiencies and  prioritized.                                                                    
She  emphasized that  continuous  review  was necessary  for                                                                    
Co-Chair von Imhof  returned to slide 5. She  thought it was                                                                    
okay to  combine UGF and  DGF in reporting. She  agreed that                                                                    
if UGF spending  decreased it could be propped  up with DGF.                                                                    
She drew  attention to the  examples of designated  funds on                                                                    
the slide  which included  taxes and  fees. The  state might                                                                    
have to increase user fees,  or the University might have to                                                                    
increase tuition  if it received less  general fund dollars.                                                                    
She argued that, although it was  fine to report UGF and DGF                                                                    
combined,  it  was important  to  be  able  to look  at  the                                                                    
numbers  separately.  She  wanted   the  information  to  be                                                                    
available to the Senate Finance Committee when requested.                                                                       
Co-Chair  Stedman  remarked  that the  legislature  and  the                                                                    
governor's   administration    were   equal    branches   of                                                                    
government. The  governor and OMB  did not  have dictatorial                                                                    
control  over  how the  information  would  be handled.  The                                                                    
legislature would  be working  with the  Legislative Finance                                                                    
Division (LFD) and OMB to  make sure there was a transparent                                                                    
result.  He did  not  mind the  OMB  director combining  the                                                                    
numbers  in her  presentations  from time-to-time.  However,                                                                    
the legislature could not manage  the resources of the state                                                                    
without  separating  the  numbers.  He  remarked  that  both                                                                    
columns should be watched. He  commented that the press only                                                                    
looked  at  one  column  or the  other.  He  continued  that                                                                    
without providing a whole picture,  the public would be left                                                                    
with a distorted picture.                                                                                                       
9:52:19 AM                                                                                                                    
AT EASE                                                                                                                         
9:53:41 AM                                                                                                                    
Co-Chair Stedman invited  Mr. Teal to come to  the table and                                                                    
to provide the committee some background information.                                                                           
^LEGISLATIVE FINANCE - FY20 FISCAL OVERVIEW                                                                                   
9:54:49 AM                                                                                                                    
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
discussed   his  background.   The  primary   role  of   the                                                                    
Legislative  Finance  Division  was  to  assist  the  entire                                                                    
legislature in crafting a budget.                                                                                               
Co-Chair Stedman asked Mr. Teal  the length of his tenure at                                                                    
Mr. Teal responded approximately 20 years.                                                                                      
Mr.  Teal  discussed  the  presentation,  "Overview  of  the                                                                    
Fiscal  Summary  and  Alaska's Fiscal  Situation"  (copy  on                                                                    
file).  He explained  that the  statutory  deadline for  the                                                                    
governor to submit a budget  was December 15th of each year.                                                                    
For  a sitting  governor  that was  usually  not a  problem.                                                                    
However,  an  incoming  governor, particularly  one  from  a                                                                    
different party, had 2 weeks  from the time of taking office                                                                    
to the deadline  to prepare a budget. No one  expected a new                                                                    
governor  to submit  a budget  reflecting  his policies  and                                                                    
priorities  in such  a short  amount of  time. He  continued                                                                    
that  usually a  place holder  budget was  submitted by  the                                                                    
deadline and an amended  budget followed. Currently, members                                                                    
had a  place holder  budget in front  of them.  He suggested                                                                    
that analyzing  a place holder  budget was possibly  a waste                                                                    
of time. The chairman  requested he discuss some alternative                                                                    
topics, specifically the fiscal  summary with an emphasis on                                                                    
the find  source classification.  Secondly, he was  asked to                                                                    
discuss the state's fiscal situation.                                                                                           
Mr. Teal looked at slide  2, "State of Alaska Fiscal Summary                                                                    
- FY  19 and FY 20  (Part 1)." He indicated  that the fiscal                                                                    
summary  was the  budget on  one  page. It  was the  highest                                                                    
level of report LFD produced.  The summary had a significant                                                                    
amount of numbers and information.                                                                                              
Mr. Teal  turned to  slide 3, "Short  Fiscal Summary  FY19 -                                                                    
FY20 UGF Only." He reported  that LFD used a shorter version                                                                    
of the  fiscal summary. Frequently the  short fiscal summary                                                                    
was produced daily  near the end of session  because it gave                                                                    
the chairman a  status check based on  any suggested changes                                                                    
to the budget.                                                                                                                  
9:59:11 AM                                                                                                                    
Mr.  Teal switched  back to  slide  2. He  relayed that  the                                                                    
longer version was  produced twice per year -  once when the                                                                    
governor  submitted  a  budget   and  once  the  legislature                                                                    
finished its  deliberations. It was also  produced after the                                                                    
governor vetoed things. It was a reference document.                                                                            
Mr.  Teal  continued  that  the   most  common  question  he                                                                    
received was  why there were  so many lines and  columns. He                                                                    
responded  that   the  summary  provided   detail  including                                                                    
sub-allocations   among  the   three   main  categories   of                                                                    
expenditures.  He  reviewed  the categories  which  included                                                                    
agency operations, statewide items,  and the capital budget.                                                                    
Statewide items consisted of things  that did not have to do                                                                    
with   day-to-day    government   operations.    They   were                                                                    
expenditures  that were  difficult  to  avoid. He  expressed                                                                    
that  there  was  a  tremendous loss  of  information  in  a                                                                    
Mr. Teal spoke to the  number of columns which accounted for                                                                    
FY 19  and FY 20. He  highlighted the columns for  FY 20. He                                                                    
noted  the earlier  discussion about  consolidating UGF  and                                                                    
DGF into a single column  of general funds. He recalled that                                                                    
the OMB director thought it  was more transparent to combine                                                                    
all general funds, as they  were all green. He disagreed and                                                                    
presented an  example for  clarification. He  suggested that                                                                    
if he  was given a  $10 bill to purchase  a bag of  chips at                                                                    
the  lounge,  he  would  come  back with  a  bag  of  chips.                                                                    
However, if he  went down to the lounge with  a $10 Monopoly                                                                    
bill,  he was  not sure  he would  come back  with a  bag of                                                                    
chips. He equated DGF to  Monopoly money - it was authorized                                                                    
to  be  spent.  However,  the  authorization  was  worthless                                                                    
unless  the receipts  were collected  to spend.  He asserted                                                                    
that authorized  money was not  real money but  could become                                                                    
real  money.   In  other   words,  all   appropriations,  or                                                                    
authorizations, were not green.                                                                                                 
Mr. Teal continued  with his example. If he  were to collect                                                                    
$15  dollars,  he would  only  be  able  to spend  $10,  the                                                                    
authorized amount. He  conveyed that UGF could  be spent any                                                                    
time for  any purpose.  Whereas, designated funds  could not                                                                    
be spent  unless they  were converted  to receipts,  such as                                                                    
university tuition,  snow mobile trail receipts,  and ticket                                                                    
sales  for  the  Alaska  Marine Highway  System  (AMHS).  He                                                                    
furthered that  DGF was money  that, if collected,  could be                                                                    
spent. The reason  a separate category, DGF,  was needed was                                                                    
to prevent  games. He suggested  that combining DGF  and UGF                                                                    
into a single category had  the opposite effect. He returned                                                                    
to  Senator Micciche's  example of  university tuition.  The                                                                    
University  might have  $30 million  DGF in  surplus tuition                                                                    
authorization on its books. If  the Senate Finance Committee                                                                    
were  to cut  $30 million  out of  the budget,  it would  be                                                                    
cutting $30 million in  hollow authorization - uncollectable                                                                    
receipts.  In  other  words,  the  committee  would  not  be                                                                    
preventing the University from spending  money, and it would                                                                    
not change the  deficit. However, it would appear  as if the                                                                    
committee reduced the budget by  $30 million. If the reports                                                                    
were combined it  would reflect a $30  million reduction. He                                                                    
explained   that  it   would  be   very  different   if  the                                                                    
legislature cut $30 million in UGF.                                                                                             
Mr. Teal suggested that the  subcommittees should be looking                                                                    
at the  impact of  any reduction. For  example, it  would be                                                                    
helpful  to look  at  whether a  reduction  would result  in                                                                    
increased  tuitions  or the  loss  of  grant monies  without                                                                    
matching  state funds.  He indicated  that the  subcommittee                                                                    
should  be  asking  questions  to  help  their  analysis  of                                                                    
reductions. He believed a combined  fund source made it more                                                                    
difficult to  analyze. He favored  simplifying things  if it                                                                    
helped legislators  make decisions  but believed  they would                                                                    
have an easier time making  decisions if they understood the                                                                    
fund sources.                                                                                                                   
10:08:47 AM                                                                                                                   
Mr. Teal  expounded that over-simplifying fund  sources lead                                                                    
to  unintended consequences.  As  an example,  he cited  the                                                                    
Pioneer Homes.  There was  a waiting list  for rooms  in the                                                                    
Pioneer Homes  at the  same time  there were  vacancies. The                                                                    
cause  had  to  do  with not  understanding  the  difference                                                                    
between DGF and UGF.                                                                                                            
Mr.  Teal  continued to  address  slide  2. The  concept  of                                                                    
spending being  limited to the  lessor of  the authorization                                                                    
or  what  could be  collected  applied  to the  other  state                                                                    
funds.  International  airport  funds,  the  permanent  fund                                                                    
operating budget,  and retirement funds, for  example, could                                                                    
not be  used for anything  other than the purpose  for which                                                                    
they  were  dedicated.  He discussed  federal  funds,  which                                                                    
often had  requirements attached  and were  only to  be used                                                                    
for  specific  purposes.  The legislature  had  very  little                                                                    
discretion  in spending  federal  funds.  Other state  funds                                                                    
were often dedicated monies.                                                                                                    
10:11:55 AM                                                                                                                   
Mr. Teal  reiterated that discretion was  necessary with DGf                                                                    
- unlike UGF  that could be spent anytime,  for any purpose,                                                                    
for any  amount. If the state  could not spend more  than it                                                                    
received in  federal, other, or  designated funds,  it could                                                                    
not have a  deficit in those fund categories.  A deficit was                                                                    
only possible within UGF.                                                                                                       
Mr. Teal  asserted that the  summary helped him to  keep the                                                                    
numbers  straight. He  suggested that  it was  important for                                                                    
legislators to  understand how the  funds were used  and for                                                                    
what purpose.  Decisions would be  easier and  better during                                                                    
the subcommittee  process. The long summary  was produced in                                                                    
the overview  LFD produced each  year. He remarked  that the                                                                    
summary was thin  in the current year because  there were no                                                                    
narratives  included  for each  agency.  They  could not  be                                                                    
produced  because the  budget was  not out.  An introduction                                                                    
was included which discussed the state's fiscal situation.                                                                      
Mr. Teal  moved to slide  3: "Short  Fiscal Summary FY  19 -                                                                    
FY 20 UGF Only".  He indicated that the short  summary was a                                                                    
good reference document.  It could be used if  the focus was                                                                    
to balance the budget. He  highlighted that the short fiscal                                                                    
summary was only UGF, as it  was the only fund category that                                                                    
could  have a  deficit. The  slide  conveyed that  in FY  20                                                                    
there was a  deficit of $1.6 billion.  The deficit reflected                                                                    
two   sides,  expenditures   and  revenue.   He  recommended                                                                    
legislators  asking whether  the deficit  problem had  to do                                                                    
with  revenues or  expenditures and  about how  to tell  the                                                                    
difference. He pointed out the  traditional revenue, such as                                                                    
oil, was down by about $400 million  from FY 19 to FY 20. He                                                                    
explained that the reason for  the revenue change was due to                                                                    
an expected  change in oil price  from $68 per barrel  in FY                                                                    
19 to  $64 per barrel  in FY 20. He  thought it was  safe to                                                                    
assume that future  years would look like FY 20  in terms of                                                                    
traditional revenues.  He wondered if expenditures  were the                                                                    
root of the problem.                                                                                                            
10:16:00 AM                                                                                                                   
Mr. Teal  moved to the  chart on  slide 4, "Real  Per Capita                                                                    
Unrestricted    General   Fund    Revenue/Budget   History."                                                                    
Adjustments  had to  be  made when  looking  at an  extended                                                                    
period. The chart went back  to FY 76. He mentioned starting                                                                    
with the  State of Alaska  in 1978 making $25,000  per year.                                                                    
Currently, he  would not  want to live  on that  amount. His                                                                    
point was that numbers had  to be adjusted for inflation and                                                                    
a growing  population. He reported  that the  state provided                                                                    
services to more  that twice the number of people  as in the                                                                    
Mr. Teal  reported having shown  the graph  on slide 4  to a                                                                    
group  of  university  students. They  were  surprised  that                                                                    
expenditures  had  not  increased  as  they  expected.  They                                                                    
concluded  that   the  state  was  not   spending  any  more                                                                    
presently than  historically. He referenced a  chart the OMB                                                                    
director had shown of the  expenditures per capita in Alaska                                                                    
and  in other  states.  He looked  at his  chart  as a  more                                                                    
valuable way of looking at expenditures.                                                                                        
Mr. Teal  continued that expenditures  had fallen  in recent                                                                    
years, particularly  in capital  and statewide  spending. If                                                                    
the legislature was looking to  fix the deficit, the capital                                                                    
budget (represented  by the  yellow bars)  could not  be cut                                                                    
much  more  than   it  had  been.  The   [light]  blue  bars                                                                    
represented statewide  expenses such  as debt  service which                                                                    
could not  be reduced.  The operating  budget was  often the                                                                    
focus of cuts and was represented by the dark blue bars.                                                                        
Mr.  Teal reported  that  the class  could  see the  state's                                                                    
expenditures had fallen  in recent years and  that they were                                                                    
historically  low. However,  revenue per  capita had  fallen                                                                    
even faster  below historic lows.  The class  concluded that                                                                    
the state did not have  an expenditure problem but a revenue                                                                    
problem.  They  asked  why the  legislature  was  not  doing                                                                    
something about  revenue. His response  to the  students was                                                                    
that  the  legislature  had  responded.   He  noted  he  was                                                                    
finished with the slide and was open to questions.                                                                              
Senator Wielechowski  asked if  the Permanent  Fund Dividend                                                                    
(PFD)  and  inflation  proofing included  in  the  chart  on                                                                    
slide 4. Mr. Teal responded that  inflation was included but                                                                    
the PFDs  were not.  He explained that  it was  difficult to                                                                    
include because  the fund source  had changed over  time and                                                                    
people's view  of the  PFD as  a government  expenditure was                                                                    
different currently than in the past.                                                                                           
10:21:21 AM                                                                                                                   
Senator  Olson respected  Mr. Teal's  opinions based  on his                                                                    
experience. He wondered if the  students had any ideas about                                                                    
solving  the   state's  fiscal  crisis,   especially  around                                                                    
revenues. Mr. Teal replied that  they did, but he would wait                                                                    
to   respond.  He   was  reluctant   to  talk   about  their                                                                    
conclusions which border on political statements.                                                                               
Senator Olson  had been looking at  slide 2 and slide  3. He                                                                    
remarked that  in studying the categories,  the numbers were                                                                    
off by  about $1 billion.  He noted other  discrepancies and                                                                    
asked  for clarification.  Mr. Teal  remarked  that the  PFD                                                                    
would not  be in  the fiscal  summary, as  it was  neither a                                                                    
revenue    or    an    expenditure   [according    to    the                                                                    
administration].  The  Legislative Finance  Division  showed                                                                    
the  PFD  as a  revenue  and  an expenditure.  It  increased                                                                    
revenue by  $1.9 billion and increased  expenditures by $1.9                                                                    
billion resulting in the same deficit of $1.6 billion.                                                                          
Co-Chair Stedman invited Mr. Teal to continue to slide 5.                                                                       
10:23:48 AM                                                                                                                   
Mr. Teal  returned to slide 3.  He did not have  anything to                                                                    
say about the  expenditure line, as the  legislature did not                                                                    
have a budget worth discussing  yet. However, on the revenue                                                                    
side the  dividends were  listed. They  were also  listed on                                                                    
the  expenditure  side. The  dividends  plus  the share  for                                                                    
government  totaled $2.9  billion, about  $200 million  more                                                                    
than the  previous year. He  noted the state was  down about                                                                    
$200  million in  revenue after  considering the  percent of                                                                    
market value (POMV). He answered  the question as to how the                                                                    
state went  from a surplus of  $300 million to a  surplus of                                                                    
$1.6  billion. He  highlighted the  $300 million  deficit in                                                                    
FY 19  and added  $200 million  in  expenditures along  with                                                                    
another $200  million in revenue losses.  The amount totaled                                                                    
$700  million.  He  commented that  $700  million  was  much                                                                    
different  than   $1.6  billion.   He  explained   that  for                                                                    
dividends, the  state spent $1  billion last year,  and $1.9                                                                    
billion was  proposed for  the current  year resulting  in a                                                                    
reduction of $900 million in  revenue. He added $900 million                                                                    
to $700 million totaling $1.6 billion.                                                                                          
Mr. Teal provided an explanation  of the POMV. He elaborated                                                                    
that Senate  Bill (SB) 26  [Legislation passed in  2018] set                                                                    
up the  Permanent Fund endowment  type of fund.  However, it                                                                    
was  not  strictly  an  endowment   fund  because  only  the                                                                    
earnings from  the earnings reserve  account (ERA)  could be                                                                    
spent.  The principle  of the  Permanent Fund  could not  be                                                                    
touched.  In a  regular  endowment, the  principle could  be                                                                    
used if  needed and paid  back over time. He  suggested that                                                                    
there  was  no difference  in  the  two  models if  the  ERA                                                                    
contained money. However, a payout  could not be made if the                                                                    
ERA ran out of money.  The state's current model reflected a                                                                    
separation  of  principle  from  earnings.  The  legislature                                                                    
chose  a sustainable  payout  rate of  5.25  percent in  the                                                                    
first  year  and  dropping  to  5  percent  after  that.  He                                                                    
suggested that without  a POMV payment of  $2.9 billion, the                                                                    
state deficit would  be higher by an  additional $1 billion.                                                                    
He detailed that out of  the $2.9 billion, $1.9 billion went                                                                    
to  PFDs with  a net  gain of  $1 billion  into the  general                                                                    
fund.  He elaborated  that  SB  26 read  that  once the  PFD                                                                    
payment  was calculated  the  government  received what  was                                                                    
left. He concluded that without  the POMV, the state deficit                                                                    
would be  $1 billion  higher, and  the state  would be  at a                                                                    
$2.6  billion deficit,  comparable to  the previous  several                                                                    
years.  There  was   not  a  real  change   to  the  state's                                                                    
circumstances other  than using  revenue from  the Permanent                                                                    
Fund to reduce dividends.                                                                                                       
10:28:31 AM                                                                                                                   
Senator   Shower  asked   whether   the  numbers   reflected                                                                    
inflation   proofing    and   repayment   back    into   the                                                                    
Constitutional  Budget  Reserve  (CBR). Mr.  Teal  responded                                                                    
that  inflation  proofing  was   considered  an  intra  fund                                                                    
transfer going  from one  account in  the Permanent  Fund to                                                                    
another  account  in  the Permanent  Fund.  The  Legislative                                                                    
Finance  Division considered  the  transfer  off budget.  In                                                                    
other words,  it was not  considered an expense and  was not                                                                    
treated  as  revenue.  He   responded  to  Senator  Shower's                                                                    
question about repayment  into the CBR. The  numbers did not                                                                    
reflect  a  repayment of  the  CBR.  He explained  that  the                                                                    
constitution required a  repayment at the end  of each year.                                                                    
The repayment occurred  if there was any excess  left in the                                                                    
general fund or  subaccount in the form of a  sweep into the                                                                    
CBR. He relayed that when the  state had a deficit there was                                                                    
no  money  to be  swept  in  the  general fund.  There  were                                                                    
subaccounts in the general  fund. Typically, the legislature                                                                    
followed  the constitution  and the  money was  swept. There                                                                    
was  a provision  in  one of  the  appropriation bills  that                                                                    
stated that the  sweep was reversed placing  money back into                                                                    
several sub funds in the  general fund. He concluded that no                                                                    
money was  going to the  CBR and inflation proofing  was not                                                                    
Co-Chair Stedman directed Mr. Teal to continue.                                                                                 
10:30:13 AM                                                                                                                   
Mr. Teal  continued to  discuss slide  3. He  specified that                                                                    
given the sequence  of events where dividends  were paid out                                                                    
and the  rest was kept  for government expenditures,  it was                                                                    
easy  to  recognize  the importance  of  the  split  between                                                                    
dividends and  the general fund.  The split was  critical to                                                                    
the  state's   fiscal  situation.   Every  dollar   paid  as                                                                    
dividends was a  dollar that did not wind up  in the general                                                                    
fund as revenue. A dollar  missing from general fund revenue                                                                    
was a  dollar added to the  deficit. He remarked that  to be                                                                    
fair,  the   opposite  was  true:  every   dollar  spent  on                                                                    
government services was a dollar  that could not be spent on                                                                    
dividends.  He  summarized   that  the  competition  between                                                                    
dividends  and government  services  created  a huge  fiscal                                                                    
problem for legislators.  The state would have  a surplus of                                                                    
$300 million if dividends were not  paid out at all. If $1.9                                                                    
million was paid out in  dividends, there would be a deficit                                                                    
of $1.6 billion for FY 20.                                                                                                      
Mr. Teal continued that there  were several people including                                                                    
some  legislators  that  do  not  think  much  of  having  a                                                                    
deficit. The state has had  deficits year-after-year with no                                                                    
apparent  ill  effects. He  posed  the  question as  to  why                                                                    
everyone  was  suddenly  so  concerned  about  deficits.  He                                                                    
suggested  that  the fiscal  impacts  of  deficits had  been                                                                    
hidden by the  legislature's ability to draw  money from the                                                                    
CBR.  The Constitutional  Budget  Reserve  started out  with                                                                    
about $15  billion. The  effect of  year-after-year deficits                                                                    
had drained  the fund  down to about  $2 billion.  He feared                                                                    
that  people  did  not  understand   that  deficits  were  a                                                                    
significant  problem,  because  the   state  no  longer  had                                                                    
reserves. Budgets  would have to balance  because they could                                                                    
no longer be filled with savings.                                                                                               
Mr.  Teal   queried  about  being   out  of   reserves.  The                                                                    
Constitutional  Budget Reserve  account  had an  approximate                                                                    
balance of $2  billion. The amount was just  enough to cover                                                                    
PFDs but not  enough to fill a deficit if  the state did not                                                                    
have a POMV payout. Legislators could  opt to use the CBR to                                                                    
fill the deficit one more  year. However, the Constitutional                                                                    
Budget Reserve would no longer  be a shock absorber. Revenue                                                                    
could fall  by several hundred  million dollars with  a drop                                                                    
in  oil prices.  In  such circumstances,  most states  would                                                                    
have to call  a special session to address such  a change in                                                                    
revenue.  They  would  have   to  revisit  the  subcommittee                                                                    
process  looking  for  areas  to  make  cuts.  Alaska's  CBR                                                                    
allowed  the   legislature  to  fill  the   deficit  without                                                                    
reconvening. He  thought the account  was a  necessary shock                                                                    
absorber given the volatility of state revenues.                                                                                
Mr.  Teal  continued  that the  revenue  stream  had  become                                                                    
significantly  less volatile  with a  POMV payout.  He noted                                                                    
that more  money was available  with a POMV payout  than the                                                                    
traditional structured payout as seen  on slide 3. The state                                                                    
received more  money from  the POMV  payout of  $2.9 billion                                                                    
than it received  from oil revenues [in FY  20]. The percent                                                                    
of market value  payout was determined in advance  and was a                                                                    
known number providing more confidence in a revenue stream.                                                                     
Mr. Teal  suggested that the ERA  could also be viewed  as a                                                                    
source of  reserves. Both  chairs were  on record  that they                                                                    
did  not intend  to  have the  ERA  go the  way  of the  CBR                                                                    
account being used  in a period of 5 years  - going from $15                                                                    
billion down to $2 billion.                                                                                                     
10:36:07 AM                                                                                                                   
Mr. Teal  continued that his  interpretation of  the remarks                                                                    
of the co-chairs was that the  ERA would not be available to                                                                    
fill  deficits.  He explained  that  drawing  more than  the                                                                    
sustainable  amount  was the  equivalent  of  eating a  seed                                                                    
corn. The  fewer kernels available  to plant, the  lower the                                                                    
harvest  would  be. Taking  money  beyond  the planned  draw                                                                    
would reduce the  seed corn or principle.  He continued that                                                                    
with a lower  market value of the Permanent  Fund, the lower                                                                    
the earnings  would be. Lower  earnings would lead  to lower                                                                    
dividend payments, a lower balance,  and a lower payout from                                                                    
the  POMV.   As  the  payouts  declined,   without  lowering                                                                    
expenditures, the  deficits would increase.  Larger deficits                                                                    
would lead to unplanned draws  in the following year to fill                                                                    
the deficits. He  thought the legislature would end  up in a                                                                    
death spiral.                                                                                                                   
Mr. Teal  explained that  although it  seemed like  it would                                                                    
take a long  time to use the  ERA, it did not.  The model by                                                                    
LFD showed that the ERA would  be empty by FY 28. The danger                                                                    
of having an  empty ERA would result in no  dividends and no                                                                    
payout  for services.  He furthered  that  without a  payout                                                                    
additional  cuts would  have to  be  made in  the amount  of                                                                    
approximately  $2   billion.  He  reiterated   that  without                                                                    
reserves only the 2 standard  deficit filling tools would be                                                                    
available - raising revenues  or cutting expenditures. Taxes                                                                    
were  not  currently  an  option.  Therefore,  cutting  $1.6                                                                    
billion in expenditures  from the budget appeared  to be the                                                                    
next course.                                                                                                                    
10:39:32 AM                                                                                                                   
Mr. Teal discussed  slide 5, "Balancing the FY  20 Budget by                                                                    
Reducing  Expenditure Items  (Small  to  Large)." The  slide                                                                    
provided  some perspective  on the  size of  a $1.6  billion                                                                    
reduction. He  pointed to the  blue bars on the  graph which                                                                    
represented  Governor  Walker's  budget  containing  a  $1.6                                                                    
billion  deficit.  If  the  legislature  were  to  fill  the                                                                    
deficit  by eliminating  all general  funds in  the smallest                                                                    
expenditure  items including  PFDs, statewide  items, agency                                                                    
items, and  capital items,  UGF would  be eliminated  in all                                                                    
the agencies. He reported that  when the university students                                                                    
looked at  the chart, they  were surprised to find  out that                                                                    
the state  spent 37  percent of its  revenues for  PFDs. The                                                                    
payout of  dividends was the  largest expenditure  the state                                                                    
had and  far outweighed what  the state spent  on education.                                                                    
The   students  commented   that  the   legislature  thought                                                                    
dividends were  more important than education.  He continued                                                                    
to  discuss the  student's comments  about dividend  payouts                                                                    
compared to education and other state services.                                                                                 
Mr. Teal reported being curious  about the governor's budget                                                                    
proposal in  terms of dividends, services,  and revenues. He                                                                    
reiterated that  the legislature  would have to  make policy                                                                    
decisions and  LFD could provide information,  including his                                                                    
model,  that could  be used  to help  with the  process. The                                                                    
Legislative Finance Division was  available to help with the                                                                    
normal analysis  subcommittee work as the  legislature moved                                                                    
through the  budget process. He hoped  the legislature would                                                                    
have a short and productive session.                                                                                            
Co-Chair Stedman thanked Mr. Teal  for his presentation. The                                                                    
committee would invite LFD back  after the governor's budget                                                                    
was released. He reviewed the agenda for the following day.                                                                     
10:45:12 AM                                                                                                                   
The meeting was adjourned at 10:45 a.m.                                                                                         

Document Name Date/Time Subjects
012319 OMB presentation to SFIN.pdf SFIN 1/23/2019 9:00:00 AM
Operating Budget
012319 CORRECTED SFC FY20 Overview.pdf SFIN 1/23/2019 9:00:00 AM
Operating Budget
012319 1.23.19 OMB Response.pdf SFIN 1/23/2019 9:00:00 AM
SB 20