Legislature(2005 - 2006)SENATE FINANCE 532
02/14/2006 09:00 AM Senate FINANCE
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MINUTES
SENATE FINANCE COMMITTEE
February 14, 2006
9:04 a.m.
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:04:10
AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: DAVID TEAL, Director, Division of Legislative
Finance; JAMES ARMSTRONG, Staff to Co-Chair Wilken
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
Overview:
Senate Finance Snapshot
Of
The Governor's Budget Proposal
Co-Chair Wilken acknowledged the extensive discussion in the past
month about what Governor Murkowski's proposed budget "does and
does not do".
9:05:55 AM
Co-Chair Wilken gave his overview utilizing a presentation titled
"Senate Finance Snapshot of the Governor's Budget Proposal,
2/14/06" [copy on file].
Co-Chair Wilken requested Committee members focus on
"sustainability" when considering the funding requests.
9:06:25 AM
Co-Chair Wilken informed that the Governor was requesting 19.49
percent more general funds than the previous year appropriation. Of
that, $210 million, or eight percent of the proposed budget,
represents fixed cost increases that include insurance, contracts,
debt service and retirement.
9:07:09 AM
Co-Chair Wilken stated that over $272 million, or 10.4 percent, of
the proposed budget would be allocated for variable cost increases.
9:07:27 AM
Co-Chair Wilken noted that the FY 06 total appropriation amount
would be increased one percent, or $28 million, to implement
legislation sponsored by the Governor.
9:07:35 AM
Co-Chair Wilken qualified that this amount does not include any
funding for capital projects, only operating expenses.
9:07:56 AM
Co-Chair Wilken remarked that the question is whether such an
increase would be sustainable.
9:08:04 AM
Co-Chair Wilken identified approximately $17 million is proposed
for new foundations, projects and programs.
9:08:18 AM
Co-Chair Wilken stated that $60 million is requested to offset non-
general fund sources that would no longer be available.
9:09:02 AM
Page 2
Available to Spend - 24th Legislature - 2nd Session
[In millions]
A) FY 06 Surplus (1/10/06 estimate) $1,200
B) FY 07 Unrestricted General Fund Revenue 3,139
(Fall Revenue Forecast)
C) Total General Fund Revenue Available to Spend $4,339
(our checkbook)
Minus
Governor Proposed Spending Bills
D) Operating Budget FY 07 (SB 288 + K-12) $3,103.60
Minus
E) Energy Supplemental FY 06 (SB 232) 52.00
F) Capital Supplemental FY 06 (SB 233) 129.40
G) Regular Supplemental FY 06 (SB 263) 99.90
H) Fast Track Supplemental FY 06 (SB 264 13.50
Total Supplementals $294.80
Minus
I) Capital Budget (SB 231) $432.10
Minus
J) "Other" - Gas Pipeline Equity FY 07 $400.00
K) "Other" ~ Legislation (12/15 OMB handout) FY 07 28.00
L) "Other" ~ Budget amendments FY 07 -
Total "Other" $428.00
Minus
M) FY 07 Supplemental (estimate) $75.00
Leaves
O) Savings $5.50
[This spreadsheet also contains a column aligned with lines D
through O to reflect the actions of the Legislature after
consideration of the Governor's proposed spending bills.]
Co-Chair Wilken overviewed this spreadsheet. He noted the total
general fund revenue is "seeded" with surplus income for FY 06.
9:10:14 AM
Co-Chair Wilken stated the purpose of this spreadsheet is to
demonstrate the interaction of the amount of revenue available and
the amounts the Governor is proposing to spend.
Co-Chair Wilken supported the "mantra" that more funds would be
saved for after FY 07.
9:11:04 AM
Co-Chair Wilken pointed out that the proposed budgets contain no
appropriations for firefighting activities.
9:12:03 AM
Co-Chair Wilken remarked that this Committee, the House Finance
Committee and Governor Murkowski are faced with determining
priorities.
Co-Chair Wilken could support expending some of the funds on
deferred maintenance projects, as they would prevent additional
costs in the future and would not require future funding. However,
the governor's proposed budget legislation include all types of
spending proposals.
9:13:38 AM
Co-Chair Wilken noted the $75 million estimate given for the FY 07
supplemental appropriation is not representative of any
calculation. Rather the amount was chosen to represent the
assumption that a supplemental appropriation would be necessary.
9:14:13 AM
Senator Stedman commented that the submission of four supplemental
bills was "rather unusual". He assumed that the information on the
spreadsheet does not contain any "double counting" of funding
requests included in the governor's proposed FY 07 operating
budget.
9:14:39 AM
Co-Chair Wilken replied that the figures are listed "as presented".
He was unaware of any duplication.
9:14:51 AM
DAVID TEAL, Director, Division of Legislative Finance testified
that he had not identified any duplication. He noted that the
requests made in the FY 06 supplemental requests could be
appropriated July 1, 2006 and included in the FY 07 operating
budget.
9:15:31 AM
JAMES ARMSTRONG, Staff to Co-Chair Wilken, furthered that the items
included in the FY 06 Capital Supplemental would likely be included
in amendments to the other supplemental requests if denied in the
original legislation.
9:15:57 AM
Senator Hoffman commented that the proposed profit-sharing
production tax (PPT) would likely change the figures represented on
the spreadsheet. He understood the tax would be made retroactive to
January 2006 and would provide an additional $2 billion.
9:16:38 AM
Senator Stedman asked the source of the estimate of the $1.2
million FY 06 surplus, given the numerous variables including oil
prices.
9:17:11 AM
Co-Chair Wilken affirmed the estimates are "very much in flux". The
amounts listed on the spreadsheet are derived from the Department
of Revenue's revenue forecast of January 10, 2006 and the
Governor's proposed budget submitted on December 15, 2005.
9:17:41 AM
Mr. Teal added that the $1.2 billion surplus estimate is based on
the projected oil prices of $49 for FY 07 and $57 for FY 06. The
revenue forecast committee is scheduled to meet this week and the
estimates would be revised. He predicted the FY 06 projected
surplus could increase $150 million and the FY 07 forecasted
revenue could increase by as much as $500 million.
9:18:33 AM
Co-Chair Wilken stressed the importance of the relationship between
the revenues and the proposed spending.
9:18:44 AM
Senator Bunde reemphasized his concern with the approval of any
supplemental capital appropriations. This would create a new budget
category.
9:19:29 AM
Page 3
[Flow chart comprised of five boxes interrelating and with
dollar amounts reflected in millions:
Income
FY 06 Surplus (1/10/06 estimate) $1,200
FY 07 Unrestricted General Fund Revenue 3,139
Total Revenue $4,339
FY 2006
Gas Pipeline Equity $400
FY 06 Energy Supplemental (SB 232) 52
FY 06 Capital/Deferred Maintenance (SB 233) 129.4
FY 06 Regular Supplemental (SB 263) 99.9
FY 06 Fast Track Supplemental (SB 264) 13.5
FY 07 Legislation 28
Subtotal $772.8
FY 2007
FY 06 Base Operating $2,620
FY 07 Fixed Operating Increases 210
FY 07 Variable Operating Increases 273
FY 07 Operating Total $3,103.6
FY 07 Supplemental (estimate) 75
FY 07 Capital (12/15/05) 432
Subtotal $3,611
FY 2008
Education Fund $0
Debt Retirement Fund 0
Subtotal $0
Out Years
Permanent Fund Earnings Reserve
Constitutional Budget Reserve
Permanent Fund Principal
Subtotal $0
Total Proposed Spending $4,333.5
Savings 5.5
Surplus 0.0]
Co-Chair Wilken stated that this flow chart makes the situation
more graphic. Choices are available due to the surplus. The
unanticipated additional income could be expended on any of the
four categories of: FY 06, FY 07, FY 08 and Out Years. This policy
call would not be made during this meeting.
Co-Chair Wilken was not concerned whether the revenue was FY 06
surplus. This exercise assisted him in understanding "forward" and
"early" funding.
9:23:01 AM
Senator Bunde relayed observations predicting one scenario in which
the revenue and budgetary needs for FY 08 could result in a
deficit.
9:23:45 AM
Co-Chair Wilken agreed, noting he would address this matter later
in the presentation.
9:24:05 AM
Senator Stedman remarked that the FY 08 revenue forecast must be
reviewed. Gauging future oil prices is difficult.
9:24:35 AM
Page 4
Governor's Proposed FY 07 GF Increases
$ millions
[Bar graph depicting the amount proposed for agencies as
follows:
Health and Social Services $143.9
Education and Early Development 89.0
Fund Capitalization 55.1
Transportation and Public Facilities 44.7
University of Alaska 41.7
Debt Service 21.6
Corrections 13.7
Administration 13.1
Fish and Game 10.2
Public Safety 10.1
Labor and Workforce Development 8.6
Natural Resources 7.6
Alaska Court System 5.8
Office of the Governor 4.0
Commerce, Community and Economic Dev 3.3
Environmental Conservation 3.2
Law 2.4
Legislature 2.1
Military and Veterans Affairs 1.7
Revenue 0.8]
Co-Chair Wilken stated this graph answers the question of "where
the money is going."
9:25:18 AM
Senator Bunde asked whether any portion of the aforementioned
amounts represents fixed increases or if the entire amounts
represent discretionary spending.
9:25:28 AM
Co-Chair Wilken replied that the information represents all general
fund spending.
9:25:33 AM
Senator Dyson asked if supplements for the Public Employees
Retirement System (PERS) and the Teachers Retirement System (TRS)
are included in these figures.
9:25:47 AM
Senator Stedman responded that funding is included for the PERS/TRS
targeted mandatory funding. However, the amount requested by the
governor is significantly less that the amount necessary to meet
the "targeted rate".
9:26:23 AM
Senator Stedman stated that although the listing of the amounts
requested for each agency is helpful, seeing the percentage
increases was "alarming". He recalled being told that the budget of
the previous year was a "catch up year" to offset several years of
minimum increases. However, the proposed FY 07 appropriation is
another 13 percent increase over last year.
9:27:10 AM
Co-Chair Wilken indicated he had additional information on this
that he would provide to members.
9:27:38 AM
Senator Bunde expressed interest in reviewing a comparison of the
requested funding increases to fixed cost increases.
9:28:00 AM
Co-Chair Wilken remarked that the fixed cost increases were
unavoidable and required.
9:28:09 AM
Page 5
Alaska North Slope Production Forecast
[Spreadsheet listing the following:
Fiscal Year: 2000
Total ANS: 1.040
Fiscal Year: 2001
Total ANS: 0.991
Fiscal Year: 2002
Total ANS: 1.004
Fiscal Year: 2003
Total ANS: 0.991
Fiscal Year: 2004
Total ANS: 0.980
Fiscal Year: 2005
Currently Producing: 0.917
Total ANS: 0.917
Fiscal Year: 2006
Currently Producing: 0.815
Under Development: 0.051
Total ANS: 0.866
Fiscal Year: 2007
Currently Producing: 0.724
Under Development: 0.114
Under Evaluation: 0.005
Total ANS: 0.843
Fiscal Year: 2008
Currently Producing: 0.658
Under Development: 0.138
Under Evaluation: 0.035
Total ANS: 0.831
Fiscal Year: 2009
Currently Producing: 0.602
Under Development: 0.146
Under Evaluation: 0.086
Total ANS: 0.834
Fiscal Year: 2010
Currently Producing: 0.555
Under Development: 0.149
Under Evaluation: 0.128
Total ANS: 0.832
Fiscal Year: 2011
Currently Producing: 0.514
Under Development: 0.145
Under Evaluation: 0.194
Total ANS: 0.853
Fiscal Year: 2012
Currently Producing: 0.479
Under Development: 0.136
Under Evaluation: 0.231
Total ANS: 0.846
Fiscal Year: 2013
Currently Producing: 0.449
Under Development: 0.127
Under Evaluation: 0.242
Total ANS: 0.853
Fiscal Year: 2014
Currently Producing: 0.423
Under Development: 0.121
Under Evaluation: 0.244
Total ANS: 0.788
Fiscal Year: 2015
Currently Producing: 0.400
Under Development: 0.118
Under Evaluation: 0.242
Total ANS: 0.762
Fiscal Year: 2016
Currently Producing: 0.380
Under Development: 0.114
Under Evaluation: 0.306
Total ANS: 0.800
The fiscal years 2007 through 2011 are highlighted
A notation reads as follows
Some of the oil forecasted in the Under Development and Under
Evaluation categories are from new projects in fields
currently producing.]
Co-Chair Wilken explained this spreadsheet is based on information
provided by the Department of Revenue and demonstrates the history
and the future of oil production. He noted the reduced production
of approximately 160,000 barrels per day from the fiscal year 2000.
Fortunately, production is estimated to be approximately 840,000
barrels per day for the next five years. However, the decline is
significant and "obviously, the less you pump the less you make."
9:29:20 AM
Page 6
Trouble Ahead…???
Fiscal Year 2008 (Estimated Fiscal Summary)
[Spreadsheet indicating the following in millions:
FY 07 Base Operating $3,103
Assumes Governor's FY 07 proposed operating budget is
adopted
FY 08 Fixed Operating Increases $220
Assumes 7% fixed cost increase.
(PERS/TRS, Health Insurance, Debt Service & Fund
Capitalization, Contracts)
Estimated Major FY 08 Variable Operating Increases $150
Medicaid ~ $50 million
K-12 formula ~ $50 million
Agencies/U of A increments ~ $50 million
FY 08 Operating Total $3,473
FY 07 Supplemental (estimate) $75
Estimated Placeholder (this year FY 06 = $294 million)
FY 08 Capital $133
Minimum GF Match for Federal road funds
Total FY 08 Spending $3,681
FY 08 Revenues $3,000
Estimated at $49 dollars per barrel @ .831 barrels/day
(Dept. of Revenue Fall Forecast)
Surplus? $0
Assumes no carryforward (surplus) from FY 07
Surplus/Deficit ($681)]
Co-Chair Wilken remarked that these are valid assumptions. The
amounts listed on the spreadsheet are conservative and incorporate
the increases in which the legislature has no control, $150 million
in increases for other programs and a capital appropriation of
nothing more than the amount necessary to provide matching funds
for federal projects. The FY 07 Governor's proposed budget is $450
million out of balance. No surplus funding would be available
because it would all have been appropriated in FY 06 and FY 07.
9:32:38 AM
Co-Chair Wilken acknowledged that some of the figures shown could
be challenged, however, most are "conservative at best".
9:33:14 AM
Mr. Teal affirmed the figures are nearly accurate.
9:33:21 AM
Senator Stedman commented on the eight percent fixed rate of
growth. Although it is primarily formula based, it must be reduced
eventually.
9:33:50 AM
Co-Chair Wilken recalled when he first was elected to the
legislature and efforts were made to implement relatively minor
cost containment measures for the Medicaid program. The lawmakers
received significant pressure to not eliminate services. One of the
services under consideration was reimbursement of prescription
eyeglasses and understandably, many people argued to the importance
of their ability to have corrected vision.
9:34:16 AM
Senator Bunde calculated that a deficit could occur even if $2
billion was generated from a change to tax on oil production.
9:35:01 AM
Page 7
Projected Fiscal Gap/Surplus at Various Year-End Average ANS
Crude Prices
$3.1 Billion FY 07 General Fund Operating Budget with
FY 03 - 08 Breakeven Points added
[Graph detailing Dollar Per Barrel of Oil ranging from $25 to
$69 with FY 03 through FY 08 indicated, and the amount of GF
Revenue, Fiscal GF Gap and Fiscal Surplus ranging from ($2
million) to $5 million for each price.
Notations read:
Current Price: 1/10/06 $60.62/bbl
Average price to date: 1/10/06 $59.05/bbl - $1.2 billion
surplus
Assumes $60 million placeholder for supplemental
appropriations.
Unrestricted GF Revenue required for government operations,
includes revenues not directly affected by fluctuations in oil
prices. Assumes DOR Fall 2005 Revenue Forecast.]
Co-Chair Wilken remarked that this graph demonstrates the
importance of sustainability.
Co-Chair Wilken clarified that the variegated red, orange and
yellow "Fiscal GF Gap" field on the colored graph should be red up
to the point of zero to indicate the deficit. Technical
difficulties prevented the accurate portrayal.
Co-Chair Wilken acknowledged that some would project that oil
prices would remain at $60 per barrel. However, he and others
predicted the prices would decrease to an average of $40 per
barrel. He cautioned against "praying to the oil gods that prices
would stay high."
Co-Chair Wilken stressed the need to rely on the information and
experts. If prices did not remain relatively high, the legislature
would again be forced to consider taxes on residents, visitors and
services.
9:40:23 AM
Senator Bunde asked about historical budget increases before FY 03.
9:40:55 AM
Co-Chair Wilken replied that the issue could be studied.
9:41:38 AM
Page 8
Alaska General Fund Expenditures
[Graph detailing the expenditures for FY 03 through FY 06 and
projected expenditures for FY 07 through FY 15 for seven
categories, and the annual breakeven price of oil necessary to
fund the steady increases. The FY 03 expenditure and projected
FY 14 expenditure are listed for each category in billions as
follows:
Criminal Justice
FY 03: $.3
FY 14: $.6
K-12 Funding
FY 03: $.7
FY 14: $1.6
University of Alaska
FY 03: $.2
FY 14: $.6
Health & Social Services
FY 03: $.5
FY 14: $1.0
Resources
FY 03: $.1
FY 14: $.2
All Others
FY 03: $.3
FY 14: $1.0
Capital Projects
FY 03: $.1
FY 14: $.3
The annual breakeven prices of oil are as follows:
FY 03 - $35.75
FY 04 - $30.75
FY 05 - $35.75
FY 06 - not listed
FY 07 - $55.25
FY 08 - $56.50
FY 09 - $60.50
FY 10 - $65.00
FY 11 - $70.00
FY 12 - $75.00
FY 13 - $80.75
FY 14 - $86.75
FY 15 - $93.25
A notation reads:
Projected appropriations increase at the rates of growth
experienced from FY 03 to FY 07, except capital is a constant
$300 million. The "breakeven price of oil assumes constant
production at the FY 06 level.]
Co-Chair Wilken stated that Mr. Teal provided this information.
9:42:06 AM
Mr. Teal informed that this graph was prepared in response to
questions from legislators about sustained increases. This chart
extends the growth rates based on historical increases. The rates
are conservative, not solely reflective of the 15 percent growth of
the past two years, but rather a nine percent average of the years
dating back to FY 03. The growth rates of FY 00 through FY 03 were
"fairly flat". Some components increase at different rates and the
increases would be sustainable if oil prices increased
approximately $5 per barrel each year and assuming production was
unchanged.
9:44:54 AM
Senator Hoffman remarked, "It's obvious to anyone looking at these
charts that there's no way we can cut ourselves out of this
problem." One solution, which Governor Murkowski is currently
considering is a profit-sharing production tax (PPT). Alaskans must
insure the State is receiving its fair share of resource
development. British Petroleum reported profits of $22 billion and
Exxon reported $36 billion. Corporations are profiting
significantly from oil in Alaska.
Senator Hoffman noted that $1 to $2 billion in additional oil tax
revenue is absent from the projections given in this presentation.
However, he urged caution because oil prices could still drop and
the additional revenue would be insufficient to avoid a deficit.
Further savings must be implemented for the future to ensure
sustainability. Immediate relief would be realized with the receipt
of "our fair share" of taxes. Accomplishing this would be an
appropriate goal for this legislative session.
9:48:29 AM
Senator Stedman stated that oil company profits and assets should
not be factored. Rather the State must consider Alaska in relation
to the oil reserves in the rest of the world and how other
countries divide proceeds between government and industry. The
current royalty tax utilized in Alaska is regressive. Other
countries have adopted different methods, which creates a
competitive environment. He did not begrudge the oil companies for
making a profit. They should stay in business to allow for
continued oil production in Alaska.
Senator Stedman predicted that the current Economic Limiting Factor
(ELF) system of determining royalties would likely be eliminated.
He did not disagree with the proposal to make a new tax system
retroactive to January 1, 2006.
9:50:48 AM
Senator Stedman identified the primary issue as the need to save
for the State's future. The estimates given in Co-Chair Wilken's
presentation are not unreasonable.
Senator Stedman considered the proposed $400 million investment in
a natural gas pipeline to be a savings rather than an expenditure.
If the gasline were not constructed, the funds would be returned to
the general fund to be appropriated for other purposes.
9:52:07 AM
Co-Chair Wilken concluded his presentation was intended to explain
the situation. Senate Finance departmental subcommittees would
begin meetings the following week and budgetary guidelines would be
forthcoming soon after. He predicted that the amounts requested by
the Governor would not be approved and that some revenue would be
put aside as a savings. The subcommittees must ascertain whether
the proposed funding increases would serve Alaskans or were
proposed only because surplus funding was available. The Finance
Committee must consider the possible financial situation for FY 08
and FY 09 so future Committee members would not be forced to
address a deficit.
9:53:45 AM
Senator Hoffman remarked that his intent was not to cause hardship
for oil corporations. However they are earning significant profits
while needs of Alaskan residents are not being met, including
education, consequences of increased fuel costs and municipal
revenue sharing. If the PPT were $2 billion, the companies would
still earn a profit of $56 billion.
9:55:23 AM
Co-Chair Wilken interjected that the issue of the proposed PPT
would be debated in future meetings.
9:55:57 AM
Senator Bunde opined that Alaskan's "appetite for spending" would
encompass any increase in revenues.
9:56:24 AM
Senator Hoffman agreed.
9:56:32 AM
Co-Chair Wilken intended for the presentation to make the issue
less complicated and more challenging.
9:56:38 AM
Co-Chair Green thanked Co-Chair Wilken for the presentation.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 9:56:48 AM
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