Legislature(2009 - 2010)SENATE FINANCE 532
02/17/2009 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview: | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 17, 2009
9:02 a.m.
9:02:04 AM
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee meeting
to order at 9:02 a.m.
MEMBERS PRESENT
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Kim Elton
Senator Donny Olson
MEMBERS ABSENT
Senator Ellis
Senator Thomas
ALSO PRESENT
David Teal, Director, Legislative Finance Division.
SUMMARY
^Overview:
Legislative Finance of FY10 Operating Budget
9:02:10 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
explained the role of the Legislative Finance Division as
analyzing the budget (LFD). He noted that LFD is a non-
partisan agency. He reported that LFD provides assistance to
the legislature as the governor's budget request is
reshaped. The budget request is received by LFD on December
th
15 and the following month is dedicated to correcting
details and reproducing the budget with the help of legal
services. He noted that LFD produces appropriation bills and
a series of reports that begin with a statewide summary.
Mr. Teal addressed four slides from the overview of the
governor's request. Slide 1 described the "Fiscal
Sensitivity" chart beginning at approximately $5 billion
with the sensitivity referring to oil prices. The state
breaks even at $74 per barrel of oil. The state possesses a
surplus if the price of oil is above $74 per barrel.
Currently, the state is in the red (fiscal gap) for the
first time since FY05. The state has $8 billion in reserves.
9:06:37 AM
Mr. Teal described Slide 2, the "Fiscal Sensitivity" chart
for FY09, with the general fund budget at $7.12 billion
instead of $5 billion. The FY09 budget is a result of the
$1.2 billion in savings and the $750 million resource
rebate.
Co-Chair Stedman asked when the resource rebate was
implemented in the FY09 budget cycle. Mr. Teal answered that
resource rebate was implemented in Special Session and the
FY09 budget process was and is still in progress. Typically
the budget is passed and then addressed with a supplemental
request. Every year has two live fiscal years. When the
legislature completes every supplemental bill then FY09 will
end.
9:09:02 AM
Co-Chair Stedman suggested that many legislators view the
budget cycle ending when session ends, with the supplemental
budget acting as a measure to backfill oversights or
changing economic scenarios. The legislature works to have a
relative amount of savings put away in relation to spending.
He maintained that it is difficult for the finance committee
to do budgetary work with a supplemental appropriation of
$750 million in August.
Co-Chair Hoffman added that with lower than predicted oil
revenues for FY09, the $750 million supplemental, and
appropriations to the Constitutional Budget Reserve (CBR)
require a committee vote.
Mr. Teal illustrated that the break even point for FY09
requires oil prices of $83 per barrel, yet the forecast
predicts an average price of $60 per barrel. He expounded
that FY09 shows a deficit of $1.8 billion. Revenue forecasts
predict a deficit of closer to $1.3 billion. He admitted
that the chart (Slide 2) was not particularly accurate, but
it gives the viewer an idea of how oil prices affect revenue
and the ability to balance the budget. Even if the price of
oil is up toward $70 per barrel for the remainder of the
year, the state faces a deficit. The Governor included a CBR
provision in the supplemental bill, which means that drawing
money from the CBR fills the gap.
9:13:00 AM
Mr. Teal addressed the "Fiscal Summary" (Slide 3). He stated
that the Office of Management and Budget (OMB) and LFD met
during the interim to develop a format that is clearer,
simpler, and more informative. Growth was interpreted
differently between LFD and OMB. The changes to the fiscal
summary include a division of agency operations, statewide
operations, capital appropriations, and savings.
Co-Chair Stedman asked to address Line 23, direct
appropriations to retirement accounts, on Slide 3. Mr. Teal
answered that direct appropriations to retirement refers to
the excess the state contributes to the retirement fund. The
state contributes necessary funds above 22 percent of
payroll. The state contributes the money directly into the
retirement account rather than giving it to school districts
and having them contribute the money. He stated that $450
million dollars was contributed last year because the rate
was 34 percent of payroll, which is a substantial amount
above the 22 percent stated in law. This year the actuarial
recommendations stated that the rate could drop to 27
percent of payroll, but the actuarial evaluation lags two
years. Since that time there were substantial losses in the
retirement accounts. The governor submitted a request for
$450 million which is approximately $160 million more than
the actuary's require meeting their calculated rate of
required contribution. He opined that the contribution to
retirement could possibly be reduced by $160 million and
still complies with the actuary's recommendations, but the
retirement fund lost approximately $3 billion last year,
which will not show up in rates for another two years. It is
the legislature's discretion as to which amount will be
chosen.
9:18:30 AM
Co-Chair Stedman clarified that line 23 is comprised of two
components, one being the addition above the 22 percent of
payroll and the extra payment of $160 million.
Co-Chair Stedman asked for an explanation of Line 25 and the
oil and gas credits. Mr. Teal stated that Line 25 was an
estimate for gas and oil investment credits. He revealed
that the amount was $400 million and began as a $25 million
estimate. The administration requested increases and bumped
up to about $200 million by March. In March, the
administration requested another $200 million. He opined
that the administration had a difficult time determining how
much money was needed for tax credits. He did not know if
the difficulty was due to drilling or exploration activity.
The governor recently lowered the amount of oil and gas
credits to $200 million.
Co-Chair Hoffman asked if funds automatically lapse if a
budget is approved and the expenditure is not made. He
suggested that there is no significance in reducing the
budget from $400 million to $200 million because the money
remains with the general fund.
9:21:20 AM
Mr. Teal agreed in the case of operating budget and the
appropriations to agencies; any unspent money simply falls
back to the general fund. He said that the difference in
this case is that the appropriation is not drawn from the
general fund, but instead deposited into an oil and gas
credit fund. The unspent money sits in the fund. If the
money is not refunded to oil companies this year, it sits in
the fund and is available for future credits.
Co-Chair Stedman asked about the oil and gas credit referred
to on Slide 3 Line 25. He asked about the 25 percent capital
credit investment. Mr. Teal agreed that two different types
of credit exist. The state is not privy to information about
the amount of tax credit claimed by the major producers.
These credits on Line 25 are the transferable credits earned
by exploration companies and others who are not yet
producing. The exploration companies do not have a tax
liability and cannot net it out against their tax liability.
Therefore the exploration companies receive a credit that
they sell to an entity without a tax liability. The
legislature requires an appropriation for the smaller
credits.
Co-Chair Stedman stated that the committee struggled with
this issue for some time. The revenue number discloses the
value of the resource and how the amount of capital credit
flows. He explained that the process remains challenging
without an evident gross number. The Senate Finance
Committee (SFC) asked the Department of Revenue (DOR) to
organize the data for the public's benefit.
9:25:25 AM
Co-Chair Hoffman requested that Mr. Teal review the capital
appropriations before the meeting's end.
Mr. Teal referred the graph on Slide 4, "General Fund Budget
History." He explained that state savings from FY06-FY09 is
greater than usual. The savings accrued in early 1980s was
placed in the permanent fund. He informed that the state's
savings are negative for the first time in FY10.
Co-Chair Hoffman noted changes in tax structure and tax
progressivity causing the spikes in revenue observed in FY09
and FY10. Mr. Teal agreed that the progressive tax made a
considerable difference in revenue. Tax progressivity is
seen above $60 per barrel of oil. He suggested that DOR
provide details. He explained that in some years the capital
budget nearly vanishes on the graph as it is merely the
minimum amount to get a federal match. As revenue spikes the
capital budget grows. The state-wide expenditures are not
directly related to agency operations including retirement,
oil and gas credits, debt service and other capitalizations.
During the early oil spike, a couple of loan funds were
capitalized on.
Senator Huggins asked about the increase in the statewide
operations budget graphed in light blue.
9:30:10 AM
Mr. Teal acknowledged the tremendous and sudden growth in
the statewide operation budget. He explained that retirement
morphed from a fully funded program to $5 billion unfunded
liability in one year, which required substantial changes to
retirement systems. He elaborated that the state is now
paying $450 million per year into retirement costs where it
used to pay nothing. Oil and gas credits were zero and are
now $400 million per year. The resource rebate was a one
time $750 million expense. The issue with the retirement
cost had nothing to do with oil revenue, but resulted from
the stock market downturn and increased health care costs.
If oil had not spiked in price when it did, the state would
still face the $400 million cost of retirement systems
without funds to cover it. The state faced a serious
challenge buried by the high prices of oil.
Senator Elton asked where in the graph the prefunding for
education was illustrated. Mr. Teal answered yellow because
it was considered savings. He detailed that the color yellow
represents savings of approximately $1 billion into the
public education fund, $300 million into the (Alaska Housing
Finance Corporation (AHFC), $1 billion into the Statutory
Budget Reserve (SBR), and $5.8 billion into the
Constitutional Budget Reserve (CBR).
Co-Chair Stedman readdressed the light and dark blue portion
of the graph and asked if minus the one time resource
rebate, the remaining expenses were ongoing. He asked if
every portion was a financial state obligation.
Mr. Teal answered that a reduction to the operating budget
was possible but the dark blue line representing the agency
operating budget grew rapidly with revenue and then
flattened out as opposed to the savings and capital budget
which declined. If revenue is flat, then the expectation is
that the operating budget will flatten as well. Once the
operating budget grows it tends to stabilize at the peak and
then grow again with the return of revenue. He did not know
how much the operating budget could be cut. The growth is
between 10 and 14 percent. In 2010, growth drops to 2.7
percent.
9:35:29 AM
Mr. Teal addressed Line 11 on the spreadsheet. The operating
budget for education has increased by $92 million in 2010.
Of that $92 million increase, $85 million was predetermined.
Legislation was passed last year that increased education
cost by $51 million. Salary increases were also approved of
about $31 million. One bill reduced business license taxes
adding another $3 million. He cautioned that there was more
than $7 million worth of growth in the operating budget. He
mentioned two large FY09 expenses including $23 million for
Power Cost Equalization (PCE) and a $44 million
appropriation to agencies paying for high fuel costs. Both
of these expenditures could back out of the FY10 budget.
Mr. Teal discussed statewide operations in line 20 and a
reduction of $840 million. He informed that $750 million of
the reduction included the resource rebate and another $100
million was the oil credit. The capital budget for FY09 was
$670 million, which dropped to $535 million. The Governor's
budget is typically a starting point with the legislature
adding capital projects.
9:38:59 AM
Co-Chair Hoffman asked for a comparison of the Governor's
FY09 and FY10 requests for capital budget appropriations.
Mr. Teal stated that Governor's capital budget last year
equaled the minimum required to obtain federal match. She
had a small budget in her original request, which grew
substantially during the legislative process both with
governor amendments and legislative add ons. At $535
million, the capital budget is substantial considering the
fiscal situation.
Co-Chair Hoffman asked if the stimulus package, which equals
approximately $1 billion of which the vast portion is
capital. Mr. Teal expressed uncertainty as to whether the
stimulus package includes federal funds on top of general
fund expenditures. He stated that it remains unknown whether
the stimulus package will result in reductions to the
general funds budget. He informed that major contributions
to education are coming through the stimulus package. The
state formula says that state aid is basic need minus
federal funds. The stimulus education package could simply
replace general fund dollars.
Co-Chair Hoffman countered that the funds identified in the
Governor's FY10 budget of $1.1 million of federal funds lack
funds from the stimulus package.
9:41:55 AM
Mr. Teal agreed with Co-Chair Hoffman. The FY10 budget is
th
the Governor's proposed budget as requested on December 15,
although substantial changes are expected as a result of the
stimulus package for both the operating and capital budgets.
Senator Elton asked if LFD was working on rules for stimulus
dollars and the substituting of stimulus dollars for general
fund dollars. Mr. Teal stated that he read the stimulus bill
recently and it gave little indication of what will happen
with federal dollars. He understood that the money is
designed to supplement as opposed to supplant general funds.
The money cannot be referred to as stimulus if it only helps
states in need. The LFD is working on the stimulus bill but
much work is necessary. A large number of projects must be
submitted and evaluated quickly due to severe time
constraints on spending the money. Unless the legislature
has some way of quickly analyzing the administration's
proposals, the projects will not proceed to a bill. A new
fund code was created for the stimulus package not only to
track the stimulus money, but to ensure that legislature has
some control over the money. He stated that the Department
of Transportation and Public Facilities (DOT) has
substantial federal authorization right now that allows them
to approve projects because they have federal authorization
to spend the money if it comes in.
9:44:53 AM
Mr. Teal suggested that with the new fund code, projects can
not proceed with out the opinion and evaluation of the
legislature. Once projects are evaluated by the legislature,
a bill is drafted. He stressed that a considerable amount of
work exists prior to drafting the bill.
Co-Chair Stedman asked how the fund code is created and who
is in control of the creation of the fund code. Mr. Teal
answered that LFD creates the federal fund code and the
legislature can use it as they use any other fund code
simply by specifying that the code signifies the money spent
in a particular bill. Normally federal projects are coded
with revenue specifically related to the stimulus bill just
passed. The stimulus money is a completely separate form of
federal receipts giving the legislature complete authority
over which projects receive money.
9:47:46 AM
Co-Chair Stedman clarified that LFD is the execution arm
that places the legislature in the position of having review
and authorization authority over a particular fund code, in
this case the stimulus money.
Mr. Teal reminded that the legislature has the power of
appropriation. The function of the legislature is to
determine the amount and type of funds spent. Co-Chair
Stedman agreed with Mr. Teal.
Mr. Teal addressed savings, which equaled approximately $1.2
billion last year. This year the Governor pulls $238 million
from savings. The proposal is to spend money from the Alaska
Housing Finance Corporation (AHFC) savings account and the
legislature, again determines whether the governor is
allowed to proceed. The legislature can change the fund
code, delete the projects, and either way LFD observes the
budget differently than OMB does. He stated that OMB says
that the $238 million does not appear in the general fund
column, it appears as other expenditures and remains in the
"other column." He continued that LFD interprets that the
AHFC money was placed temporarily in the savings account. If
the money is spent, it cannot be deemed non-general fund,
but instead must be pulled out and placed into the general
fund. In this case, the action is withdrawing money from a
savings account and adding it to the general fund. He
stressed that LFD disagrees with OMB on this point.
9:50:33 AM
Co-Chair Stedman states that the $238 million out of AHFC
was set aside for an event of revenue shortfalls. If the
$238 million was removed from general funds would this
budget show a deficit?
Mr. Teal addressed line 46 and the pre-savings surplus of
$147 million dollars. He stated that LFD counted the
projects proposed by the Governor from the AHFC account as
general funds showing surplus of $147 million. The
Governor's fiscal summary shows the surplus as $382 million,
but LFD interprets the surplus as $147 million. If the $238
million is taken from the savings account the surplus can be
seen as $382 million, but really the surplus of current year
money is $147 million. The 2010 forecast is for the price of
oil at $74 dollars a barrel, but the revised forecast is due
tomorrow and if it is below 70 dollars a barrel the state
has a deficit in 2010.
Senator Huggins stated that he had seen oil priced at $40
dollars per barrel that morning. He recalled that the AHFC
savings had been set aside for gasline activities.
Mr. Teal answered that the money was set aside for gasline
and other purposes.
Senator Huggins expressed confusion with the gasline as the
number one priority, why would the money be appropriated
elsewhere.
9:53:41 AM
Mr. Teal stated that if oil is priced at $40 per barrel,
then the state will show a deficit of $3 billion. Fiscal
summary is positive now, whether you look at pre or post
savings surplus, but it is likely to go negative tomorrow.
The options are to increase revenue, spend less, or use
reserves. He surmised that using reserves is the simplest
option, but reserves will not last more that 3 years. He
recalled that this was not the first time these predictions
existed.
Co-Chair Stedman asked about the budget fund history. He
asked when the state had faced revenue shortfalls of $2-$3
billion dollars in the past. He asked when the legislature
should concentrate on a break even rate.
9:56:18 AM
Mr. Teal stated that the legislature may achieve some
operating reductions. One option is to spend less. In the
past, the legislature found it difficult to reduce the
operating budget. The governor's operating budget was
restrained with 2.7 percent growth. He opined that the
legislature will have a difficult time removing the
increments allowed because agencies probably requested much
more than the governor passed on to the legislature. He
assured that 2.7 percent is small, relative to past years.
Changes in tax credits and retirement could cause rate
decline.
Mr. Teal suggested that the capital budget could be reduced
and is probably the simplest reduction. He noted that a
reduction in the capital budget may also prove simple given
the stimulus package. He asked about the FY07 budget
presented by the previous administration. Mr. Teal responded
that agency operations have increased substantially.
Statewide operations have also increased substantially as a
result of pre-retirement and pre oil tax credits.
Expenditures have increased by $800 million since 2007.
10:00:16 AM
Senator Huggins asked if the savings was going into the
principal of the permanent fund. He requested review of this
issue.
Mr. Teal replied that the Governor proposed making deposits
to the permanent fund principal or to the earnings reserve.
The savings would not be available if the deposits had been
made.
Senator Huggins expressed appreciation. He asked for
clarification on loss of money in the budget reserve or sub-
account and he requested the impact on the reserve account.
Mr. Teal responded that the statutory budget reserve account
neither gains nor loses because it is a sub-account of the
general fund. The interest accrues in the general fund as
opposed to the reserve account. The sub-account has not
declined with any losses; the general fund has in fact
absorbed the losses.
Mr. Teal elaborated that the constitutional budget reserve
account (CBR) is complicated because the Department of
Revenue placed approximately $4 billion of the CBR into a
sub-account which then lost close to 30 percent or roughly
$1 billion. The state reserves declined by approximately $1
billion.
10:04:15 AM
Co-Chair Hoffman stated that the committee will address the
CBR discussion tomorrow.
Mr. Teal informed that there is approximately $6.8 billion
left in the CBR instead of the $7.8 billion that might be
expected.
Senator Olson queried the effect of change in defined
contribution benefits and the effect.
Mr. Teal answered that a change in defined benefits would
have very little effect. The change from defined benefit to
defined contribution is something that takes years current
employees are not affected only new hires.
Co-Chair Stedman recalled the interest in a sweep into the
permanent fund, but an interest in an endowment created for
DOT and some other endowment work which would contribute to
the loss of liquidity if the proposal was implemented
instead. In retrospect, he opined that the committee did
make the right decision. He proposed that the calculations
be run.
Mr. Teal explained that the third option is to increased
revenue. The legislature has never been successful with
personal or sales tax. He cited a recent legislative act to
increase petroleum taxes, but anything done in terms of
revenue changes would take a few years to implement. The
most effective means of increasing revenue is to increase
oil prices, but there is no guarantee that it will happen.
The other option is to spend less. He suggested that it is
impossible for the legislature to spend less and eliminate
the deficit, which leaves no choice but to use reserves. He
cautioned that the legislature must monitor the rate that
reserves are spent and endeavor to minimize spending.
Co-Chair Hoffman recalled national school districts that are
transitioning to a four-day school week, eliminating 20
percent of operating costs for education. Mr. Teal noted
that some states have opted for four day weeks for state
workers.
10:08:16 AM
Co-Chair Stedman recognized that the legislature can access
the earnings reserve, but he asked the amount available for
appropriations in the earnings reserve. Mr. Teal thought the
amounts were $3 billion in cash and $13 billion in
unrealized losses. The unrealized losses become realized
losses as soon as soon as the legislature sells to generate
the money. He suggested focusing on cash as opposed to the
unrealized. The legislature may be left with $1-2 billion of
cash in the earning reserve account. The account depends on
the market which could turn around rapidly or continue to
sink.
Co-Chair Hoffman noted Line 61; the legislature will spend
an estimated $25 million more in the dividend program. He
interpreted this as an increase in the amount of budgeted
money for PFDs. Mr. Teal responded that the PFD is an open-
ended appropriation. The appropriation follows the statutory
formula, not the specific amount noted in Line 61.
10:11:12 AM
Senator Elton recalled the state fiscal summary and the
governor's proposed capital of $535 million in general
funds. He asked what percentage of the $535 million is
necessary for federal match. Mr. Teal estimated $150
million.
ADJOURNMENT
The meeting was adjourned at 10:11 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LFD Overview Chart 1.pdf |
SFIN 2/17/2009 9:00:00 AM |
|
| LFD Overview Chart 2.pdf |
SFIN 2/17/2009 9:00:00 AM |
|
| LFD Overview Chart 3.pdf |
SFIN 2/17/2009 9:00:00 AM |
|
| LFD Overview Chart 4.pdf |
SFIN 2/17/2009 9:00:00 AM |