Legislature(2009 - 2010)SENATE FINANCE 532
01/28/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Fy 2011 Budget Overview & Fiscal Summary | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 28, 2010
9:06 a.m.
9:06:36 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:06 a.m.
MEMBERS PRESENT
Senator Bert Stedman, Co-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
Senator Charlie Huggins, Vice-Chair
ALSO PRESENT
Senator John Coghill
David Teal, Director, Legislative Finance Division
PRESENT VIA TELECONFERENCE
None
SUMMARY
^FY 2011 BUDGET OVERVIEW & FISCAL SUMMARY
PRESENTATION: LEGISLATIVE FINANCE DIVISION
9:07:03 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
referred to a previous budget presentation by the Office of
Budget and Management (OMB) regarding the governor's FY 11
request. He clarified that Legislative Finance Division's
(LFD) role as a nonpartisan legislative agency was to add
context to the budget to facilitate good budget decisions.
He related that he would also bring perspectives from the
Department of Revenue (DOR).
9:11:21 AM
Mr. Teal stated that the legislative fiscal analyst's
overview of the governor's FY 11 request, as depicted in
the fiscal summary on page 2 of the document entitled, "FY
2011 Budget Overview", is in the "recast of general funds
format". The December 15 fiscal summary released by the
Office of the Governor used the old fund categorizations.
Since the LFD overview uses a new format, it does not agree
with the governor's version and comparisons cannot be made.
In the LFD general fund column, there is an extra $750
million showing. The focus is on the general fund column
because that is how the fiscal gap is determined - the
surplus or deficit. He suggested not focusing on the
differences in the fiscal summaries from OMB and DOR. He
reported that OMB has now revised their summary to match
LFD's recast version.
Co-Chair Stedman commented that it was thought that a
recast version would be launched during the last session,
but it was too complex. It was finished over the interim. A
goal for the next interim would be to recast several
previous years' budgets for comparison purposes. He related
the potential to share budget information in a standardized
format. He called it a work in progress.
9:13:59 AM
Mr. Teal offered to answer questions about the fiscal
summary.
Mr. Teal focused on line 10 of the summary, which shows an
increase in agency operating budgets of about 3.7 percent.
Co-Chair Stedman clarified that it was "non-formula in
agencies", a subcomponent of the agency operations. Mr.
Teal related that the governor has talked about holding
growth in the general fund budget down to under 3 percent.
The fiscal summary shows that it is over 3 percent, which
is a function of the recast. It's larger than OMB showed;
however, OMB now agrees with LFD's numbers. The important
point is to realize that 3.7 percent is smaller than it has
been in the past couple of years.
Mr. Teal emphasized that the smaller increase in general
fund is due to the omission of several items from the
budget, including labor negotiations. When a labor
agreement is reached, amendments will be put forth that
will increase this number, depending on what happens with
the extension of the Medicaid matching rate. If that rate
reduction is not extended, the state could be looking at a
$100 million increase in FY 11 just for that. He expected
the 3.7 percent to increase as the session progresses.
9:16:19 AM
Co-Chair Stedman pointed out that more data and amendments
would be available next week. He suggested discussing the
initial budget and updating it as more information is
forthcoming.
Senator Thomas asked if Co-Chair Stedman was referring to
supplemental amendments. Co-Chair Stedman replied that he
was talking about amendments from the administration for
the FY 10 budget. Senator Thomas wondered if the
supplemental budget would include non-formula items. Co-
Chair Stedman did not know. He reiterated that the numbers
could increase soon.
Mr. Teal agreed that the fiscal summary was a starting
point and would change as the supplemental budget and
amendments were offered. For example, there is a $35
million fire suppression supplemental that would increase
the FY 10 numbers, which reduces the difference between FY
10 and FY 11. He stated his goal was to look at the big
picture.
Co-Chair Stedman cautioned to keep in mind that adjustments
made to FY 10 changes the comparison to FY 11. It is
important to look back at previous budgets.
9:19:19 AM
Mr. Teal noted both an advantage and a disadvantage to
looking at graphs - a $35 million supplemental will not
show. The fiscal summary shows only the big items and
trends.
Mr. Teal turned to slide 3 - the fiscal sensitivity chart.
He explained that one axis is the price of oil and the
other is billions of dollars, which measures the height of
two curves on the chart. The two curves are expenditures in
revenue. The expenditure is a flat line because $4.1
million is the current FY 10 budget, no matter the price of
oil. At any price of oil, it is still $4.1 billion. The
revenue curve does change depending on the price of oil. He
gave examples: at $40 per barrel approximately $3.5 billion
is generated; as oil increases to $90, about $9 billion in
revenue is generated. It is a curve because of progressive
tax rates. The higher the price of oil, the higher the tax
rate, which makes it non-linear. He pointed out that the
breakeven point would be at $64 per barrel and $5.13
billion in revenue.
Mr. Teal noted that the budget of $4.1 billion passed last
year does not include forward funding of education at
approximately $1.1 billion. If that was funded, the
expenditure curve would shift up to $5.1 billion reaching a
breakeven point. He showed the results of oil at higher and
lower than $63 per barrel.
Mr. Teal summarized the "take away" points of the chart. As
expenditures increase, the expenditure line shifts upward
causing the breakeven point to increase. With an increase
from $4.1 billion to $5.1 billion, the breakeven price went
up $10. Every dollar change in the price of oil equals a
change of $100 in revenue. As the price of oil changes,
"you walk along the revenue curve rather than shifting that
revenue curve".
9:23:55 AM
Mr. Teal reported the good news that the breakeven price is
about $64 and the DOR projection for the price of oil is
$67, which puts the state into a surplus category of about
$450 million. Even better news is that the current price of
oil is up in the low $70's, which would lead to a surplus
of $2.2 billion. If education is to be forward funded, the
surplus falls to $1.1 billion.
Co-Chair Stedman asked what it would be at $80. Mr. Teal
calculated the surplus to be $2.5 billion after education
is forward funded. Co-Chair Stedman concluded that oil
prices need to be tracked in order to accurately deal with
the FY 10 budget.
9:26:02 AM
Mr. Teal spoke of the fiscal sensitivity of general fund
revenue in FY 11 - slide 4. He pointed out significant
differences between FY 10 and FY 11. The number for
expenditures went up to $5.6 billion from $5.1 billion
because total spending is up by $550 million, or 10.7
percent. He noted that revenue in FY 11 is different than
in FY 10; at $40 it is about $2.5 billion, instead of just
over $3 billion. At $90, instead of being $9 billion, it's
a little less than $8 billion. The breakeven point is now
$74.
Co-Chair Stedman pointed out that the industry is having
parallel concerns because of declining production.
9:28:32 AM
Senator Thomas asked if the decline in oil is the primary
component affecting the state. Co-Chair Stedman stated that
price and volume are the main components; however the state
is much more sensitive to price than to volume changes. As
volumes decline, cost factors per barrel rise. He suggested
that the state keep in line with the industry regarding the
breakeven point. Mr. Teal offered to provide more
information about that.
Mr. Teal shared the good and the bad news about the FY 11
budget. The breakeven point has gone up to $74 per barrel;
the price forecast is above $74. It is $76.35 which would
be a surplus situation. The governor shows a savings, in
addition to expenditures. The scholarship fund would affect
the expenditure line because it is money "removed from the
table", even though it does not leave the treasury.
9:31:32 AM
Mr. Teal highlighted key points in the sensitivity charts -
slide 5. A $1 change in oil price produces a $100 million
change in revenue - movement along a revenue curve.
Declining oil production is a double whammy - it shifts the
revenue curve downward and results in less oil and less
profit. Even if costs stay the same, as the number of
barrels falls there are fewer barrels to spread the costs
over. The average cost per barrel increases. As the cost
per barrel increases (OPEX and CAPEX), it reduces the per-
barrel profit and shifts the revenue curve downward.
Co-Chair Stedman noted that other presenters call it
"profit oil".
Mr. Teal stated that it is difficult to see on the
sensitivity charts that the revenue curve shifted downward.
Slide 6, a simplified chart depicting FY 10 and FY 11,
shows the point at which the budget and revenue curves
cross at $64. He described what would happen if the price
of oil shifts downward. He described the resulting breaking
point. Expenditures also shift upward in FY 11. He provided
various scenarios.
9:38:05 AM
Mr. Teal noted implications for the future. First, is that
the revenue curve will continue to shift downward as
production falls. Second, as expenditures increase, the
curve will shift up. Both make the breakeven price of oil
higher. The breakeven point will continue to increase. The
Department of Revenue predicts that production will fall by
about 4 percent. That impact translates to about $200
billion, which means the revenue curve will shift down each
year by about $200 million. The breakeven point is useful
for about a two-year analysis.
9:39:45 AM
Mr. Teal turned to a 10-year revenue and spending graph
provided by DOR. The purpose of looking forward is to add
context to the FY 11 budget. The graph shows that the
surplus continues to grow from FY 09 to FY 14 and then
tapers off to breakeven in FY 19. The reserve in 2020 will
be about $24 million under the DOR assumptions.
Mr. Teal stated that Legislative Finance revised the chart
in order to show why the fiscal surplus began to taper off.
He pointed out that the legislature's role is to make
appropriations and to control long-term revenues.
Mr. Teal explained slide 8, which shows the same data from
a different perspective over a greater period of time - FY
05 to FY 19. He pointed out large surpluses in FY 08. He
maintained that there is more to be seen than what is
depicted on the previous chart. Revenue tapers off and is
part of the problem. The price of oil, as projected by DOR,
continues to increase. In spite of that increase, the
revenue curve is turning downward. By 2014, the decline in
production has finally caught up. The downward shift in the
revenue curve is increasing faster than the price increase
of oil. The concern is that, in spite of increasing oil
prices, revenue is declining.
9:44:00 AM
Mr. Teal focused on the expenditure side of the chart.
Commissioner Galvin's chart was based on a 3 percent growth
in expenditures, which has also been incorporated into the
Legislative Finance chart. He called it an extremely
conservative view. He questioned what would happen if the 3
percent number is off.
Mr. Teal explained that slide 9 helps to answer that
question. It depicts growth in agency operating budgets for
FY 06 - FY 11. In FY 06 $3.1 billion was spent, which
increased to $4.2 billion by FY 11. The next column shows
the change in expenditures. He described each column -
annual growth rate, share of growth, and cumulative share
of growth - and showed the difficulties of maintaining a
3.3 percent growth rate. He questioned if funding should be
dependent on a targeted growth rate.
9:48:50 AM
Co-Chair Stedman speculated what would happen with Military
& Veterans Affairs under that scenario.
9:50:06 AM AT-EASE
9:51:01 AM RECONVENED
Mr. Teal plugged a 6.6 percent growth rate - the historical
growth rate - into the chart to demonstrate how problems
would result in 2016. He concluded that the scenario would
be worse than that of today, where there is a healthy
fiscal situation. He stressed the importance of surplus and
deficit under different scenarios.
Co-Chair Stedman questioned if this year's growth rate is
10.7 percent. Mr. Teal demonstrated the results of a 10.7
percent growth rate. Once the operating budget is
increased, it is difficult to move it back down. Decisions
made in the FY 11 budget process impact the amount of money
in the future.
Co-Chair Stedman commented on adding a $300 million capital
budget into the mix. Mr. Teal saw the merits and
consequences of both growth rates. He opined that compound
growth rates are bad in the long run. An attempt to avoid
compound rates was the use of one-time increases. He
stressed the importance of revisiting one-time items every
year. He spoke of the importance of considering the impacts
of growth rates.
Mr. Teal wondered how much faith should be put into revenue
forecasts.
10:00:06 AM AT-EASE
10:01:11 AM RECONVENED
Mr. Teal continued to elaborate on the question as to how
much faith the legislature should put in revenue forecasts.
He turned to slide 10 - monthly oil revenue volatility. In
a given month the revenue can change drastically, by as
much as $1 billion. The forecast (July - June) from DOR
predicted $3.2 billion in oil revenue. The DOA forecast
(June - May) predicted $4.2 billion in oil revenue. The
issue is oil revenue volatility from month to month. Oil
revenue can vary from $1.2 billion to $46 million a month.
The point is that oil revenue is unpredictable.
Co-Chair Stedman noted that PPT and ACES were calculated
using four scenarios; however, a $100 change in oil price
was never expected.
Senator Thomas did not understand how there could be such a
variety of revenue prices. Co-Chair Stedman explained that
progressivity kicks in and distorts the curve, particularly
at prices of $80 and higher. Senator Thomas remembered that
chart. Co-Chair Stedman suggested looking at PPT in FY 09
to see how the tax kicked in at various prices.
Progressivity is intended to "capture the spikes".
10:06:35 AM
Senator Ellis requested charts to show the budget with and
without PPT. Co-Chair Stedman said that could happen
appropriate to ELF, as well as PPT and ACES. Senator Ellis
shuddered to think where the state would be if it had not
changed its oil taxes. Co-Chair Stedman mentioned that the
production sharing arrangement is used globally now. He
announced that a consultant, David Wood, would be
addressing that issue shortly. He thought standard
deductions, excluded expenditures, base tax, and
progressivity, would be included in the presentation.
Senator Ellis asked if it was possible to find out how much
was paid out in production credits last year and what is
projected for this year. Co-Chair Stedman said it was
possible to obtain that information. He also wished to see
where the 20 percent credit went. He thought there would be
confidentiality issues, but the issue of credits should be
examined.
Senator Ellis asked for that information before the
committee considers the governor's request for more
credits. Co-Chair Stedman agreed. He wanted to do the
analysis first on ACES, before individual proposals would
be looked at. He informed the committee that the consultant
has been hired and the model has been built. The industry,
legislature, and DNR are all working on testing the model.
10:13:30 AM
Mr. Teal commented that tax credits shift the revenue curve
downward. He questioned if the credits produce enough
production in the future to shift the revenue curve upward,
offsetting the short-term downward curve. He emphasized the
importance of considering their affect on the curve. To
ascertain that information, industry projections have to be
relied upon. He discussed the relationship of the forecast
to the process. He stressed that timing is important when
the oil revenue is counted, as oil price is very volatile.
He concluded by emphasizing that budget decisions need to
include a long-term look.
10:17:47 AM
Co-Chair Stedman highlighted a communication problem when
providing budget information to the public. He thought the
solution would be to synchronize numbers between the
various entities; DOR, OMB, and the legislature. He
suggested that everyone needs to work together to present
consistent information to the public.
Senator Ellis discussed a concern about the negative tone
related to formula programs. He termed the need for them a
"natural progression". He suggested being mindful of that
when attempting to control spending. Co-Chair Stedman added
that education also falls into that category.
Mr. Teal commented that the formula programs are increasing
and will continue to increase; therefore, there will be
less money available. He was not suggesting that the
formula programs needed to be reduced, but rather that they
made budget decisions more difficult.
ADJOURNMENT
The meeting was adjourned at 10:20 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 1-28-10 Handout Version.ppt |
SFIN 1/28/2010 9:00:00 AM |
FY11 LFD Overview |