Legislature(2015 - 2016)SENATE FINANCE 532
04/22/2015 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska's Fiscal Crisis | |
| 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
April 22, 2015
1:36 p.m.
1:36:02 PM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 1:36 p.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Kevin Meyer, Senator John Coghill, Senator Cathy
Giessel, Representative Sam Kito; Representative Andy
Josephson; Representative Cathy Giessel; Representative
Tammie Wilson, Representative Les Gara David Teal,
Director, Legislative Finance Division; Jerry Burnett,
Deputy Commissioner, Treasury Division, Department of
Revenue; Rob Carpenter, Budget Analyst, Legislative Finance
Division;
SUMMARY
^PRESENTATION: ALASKA'S FISCAL CRISIS
1:37:00 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
explained that he would be discussing Alaska's fiscal
crisis. He referred to the first graph on page 1, which
showed a line graph; the blue line represented unrestricted
general funds, the red line represented expenditures. He
said that the bar graph below showed the reserves balance
into 2025. He stated that the model was currently set at
the fall forecast, and at the Senate budget. He related
that the graphs did not illustrate an unmanageable fiscal
crisis. He pointed out to the committee that the billion
dollar gaps in the budget had been closed due to the budget
recently passed by the Senate. He relayed that the figures
were roughly $1 million below the governor's December 15th
budget.
1:39:26 PM
Mr. Teal presented Slide 2, "Figure 1, Forecast of Total
UGF Revenue - Fall 2014 vs. March 2015. He noted that the
blue line indicated the fall forecast and the red line
represented the spring forecast. In March the revised
forecast dropped approximately $400 million in FY 15,
stayed the same for FY 16, and then the gap closed in FY
20.
1:40:06 PM
Mr. Teal turned to Slide 3, which illustrated that at the
trajectory on Slide 2, the reserves were forecasted to be
used up by 2022. He clarified that he was speaking of the
constitutional budget reserve fund (CBR) and the statutory
budget reserve fund (SBR).
1:40:41 PM
Co-Chair Kelly asked what had changed from Slide 1 to Slide
3.
Mr. Teal explained that the fall forecast had been replaced
with the spring forecast on Slide 3.
1:41:05 PM
Co-Chair MacKinnon asked for the current price per barrel
of oil. She queried the price points per barrel of Alaska
North Slope (ANS) as projected past 2019.
Mr. Teal moved to Slide 4, "Figure 2. Alaska Unrestricted
General Fund Reserve (Left Axis) and Average ANS Price\bbl
(Right Axis)". He stated that the projected price was in
the mid-60's, rising to $130 by 2023. He said that the
problem was that the spring forecast, despite its downward
revision, remained optimistic. He relayed that the new
forecast listed prices never before seen. He opined that
not only did the slide illustrate a rapid recovery in
price, it went up beyond the highest average price the
state had experienced.
1:42:42 PM
Vice-Chair Micciche asked for explanation on how the price
ranges were determined.
Mr. Teal explained that Department of Revenue (DOR)
produced the forecast, and that many sat in on the
forecasting, including Legislative Finance Division. He
said that everyone involved turned in their best guess and
then left it to DOR to adjust the numbers as necessary
before releasing the forecast. He stated that the forecast
was DOR's best guess at oil price and oil production.
1:44:06 PM
Vice-Chair Micciche wondered why, historically, the state
had been above industry estimates for oil prices.
1:44:42 PM
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, confirmed that Department of
Administration used a variety of models and sources to
formulate the forecast. He continued that the estimates
were derived by the department's economic research group
with input from the commissioner and tax director, and were
similar to estimates from a number of outside sources. He
contended that the department's estimates generally
reflected industry estimates for oil prices.
1:46:44 PM
Co-Chair MacKinnon whether it was easier to project more
accurate numbers closer to real time rather than far into
the future.
Mr. Burnett replied that the department was much better a
predicting the numbers for the short run instead of the
long run. He said that sort range projections tended to be
consistent with the NYMEX strip and other market forces,
whereas the future projections were based on an economic
forecast over which no one had control.
1:47:52 PM
Vice-Chair Micciche stated that it seemed that there was a
level of conservatism lacking from the forecasts.
Mr. Burnett commented that over the last several years
there was additional conservatism built into the production
forecast. He reiterated the difficulty in projecting far
into the future. He directed committee attention to Slide
4, which he believed was a good linear interpolation of
where the prices were, compared to what was forecasted.
1:49:26 PM
Co-Chair MacKinnon asked whether the state had shifted to a
different type of forecasting prior to 1999.
Mr. Burnett said he could not speak to any change that had
been made. He shared that the department engaged in a range
of forecasts and probability levels resulting in a point
price forecast for the Revenue Sources Book.
1:50:28 PM
Co-Chair Kelly commented that the department had done a
fine job at forecasting a volatile commodity. He countered
that the recent projections were too optimistic, given the
current state of the market.
1:51:10 PM
Senator Dunleavy reiterated Co-Chair Kelly's comments about
the overly optimistic oil prices used in the budget
projections.
1:51:48 PM
Co-Chair Kelly thought as a product of the current meeting,
the committee would further understand the forecast model
and how different prices and different production levels
would affect the money available for state operating
expenditures.
1:52:21 PM
Mr. Teal referred back to Slide 4. He said that the
difference between the revenue line and the price line was
not an error; it illustrated that price and revenue
correlated. He relayed that when the price was low, but
production was high, the state still generated significant
revenue. He asserted that it would not matter what the
price was if there were little production. He said that,
taking the DOR projection as a given variable, determining
the most attractive price was impossible. He felt that the
advantage of the forecast model was that the overly
optimistic revenue forecast could be changed to reflect a
more conservative price.
1:54:40 PM
Mr. Teal referred back to Slide 3, and adjusted the graph
based on a hypothetical scenario of a $70 price per barrel
of oil. He pointed out that the fiscal crisis would be
solved under the budget that the Senate passed depending
whatever price you chose for the projection.
1:55:48 PM
Co-Chair MacKinnon asked what the forecast would look like
using the current price of $65 p/bbl.
Mr. Teal input the number and pointed out that the graph
did not register a great deal of change.
1:56:45 PM
Mr. Teal referred to a Fiscal Sensitivity Chart (copy not
on file). He explained that the revenue did not respond
significantly until prices reached above $80 p/bbl.
1:57:51 PM
Senator Bishop queried the number of barrels of oil
produced daily in the state.
Mr. Teal responded that production was at approximately 500
p/bbl.
1:58:10 PM
Senator Meyer stated that he had heard rumors concerning
increased levels of production. He thought that it would be
interesting to see what would happen when production
increased. He held high hopes that production would
increase before the price increased.
Mr. Teal said that he had no ability to predict the future;
DOR crafted the production forecast based on field by field
analysis, the Legislative Finance Division (LFD) did not
have any data that would allow for the questioning of the
production forecast. He asserted that price was really
anybody's guess; but if the priced remained where it was,
even if production were to be substantially increased,
there was not much per barrel at the current price. He
reiterated that at current prices the state was not making
much revenue.
1:59:55 PM
Senator Meyer reflected that the current problem mirrored
financial issues from the late 1980's, except back then
production was over a million barrels per day. He asserted
that production mattered a lot.
Mr. Teal said that the rule of thumb in the 1980's was that
for every $1 change in the price of oil, the change in
revenue was approximately $150 million. He said that now
for every $1 change in the price of oil, the state saw
roughly $20 million. He contended that the difference was
significant.
2:00:59 PM
Vice-Chair Micciche referred back to the sensitivity chart.
He asked why the incline increased so dramatically at $80
p/bbl.
Mr. Teal responded that that was how the production tax was
designed. He added that the chart reflected the revenue at
various prices.
2:01:44 PM
Mr. Teal referred back to Slide 3, and the hypothetical
scenario of oil priced at $70 per barrel. He said that were
the price to be at $70, there should be concern about a
fiscal crisis because the fiscal gap would bur reserves
rapidly. He stated that things could be done to ease the
fiscal gap; the revenue curve could be increased, or the
expenditure curve could be decreased - if they coincided
the budget would balance. He understood that some might
label the current climate and Expenditure Crisis".
2:03:09 PM
Senator Hoffman understood that at $70 per barrel, reserves
would be depleted by FY 18. He asked by how much the state
would be short in FY 18 to meeting a balance budget.
Mr. Teal stated the state would be short approximately $3
billion dollars.
Mr. Teal explained that at $70 p/bbl, after the budget that
the Senate passed in FY 16, the fiscal climate would be
flat; no growth, no decline. He said that the state could
not operate at the deficit projected using those numbers.
He said that there would be $6 billion in reserves that
would be accessible, but they would only last for 2 years.
2:05:02 PM
Mr. Teal summarized that the legislature needed to decide
whether the expenditures line decreased or the revenue side
increased.
2:05:48 PM
Mr. Teal presented Slide 5, "Figure 3. Per Capita
Unrestricted General Fund Revenue and Budget History
Adjusted for Inflation". He said that the slide reflected
real per capita spending. In FY 16 the state spent roughly
$5000 per person, which was lower than almost any time in
the past 40 years. He asserted that the legislature had not
"spent their way into the problem".
2:07:25 PM
Senator Bishop asked whether part of the reason that
departmental budgets had grown was because of deferred
maintenance.
Mr. Teal stated that deferred maintenance was expensive to
avoid, and that funding could be put into the capital and
the operating budgets. He said that budget growth was due
to deferred maintenance and unmet needs in the operating
budget.
2:09:36 PM
Vice-Chair Micciche asked for a comparison of the fiscal
crisis in the 1980's versus the current climate.
Mr. Teal surmised that without savings, there is no choice
but to cut expenditures. He said that in 1991, the CBR was
established to act as a shock absorber for budget
reductions. He relayed that some would argue that the
reserve had not acted as was intended because court cases
and various interpretations had made it difficult to
access.
2:11:37 PM
AT EASE
2:12:32 PM
RECONVENED
Mr. Teal discussed slide 6, "Figure 4. Cost Drivers--Agency
Operations Contribution to Budget Increases FY06 to FY15 ($
millions) $1.9 Billion Total UGF Increase". He related that
a common question was what had caused the growth in state
expenditures. He noted that the chart illustrated the 4
primary budget drivers; K-12 Education, Medicaid, Salaries
and Benefits, and Other Program Expansion.
2:13:12 PM
Co-Chair MacKinnon asked how much debt service was inside
of the 34 percent for Other Program Expansion.
Mr. Teal explained that the slide was simply agency
operations and did not include debt service. He added that
debt service was classified statewide and was approximately
$230 million per year; while debt service had grown over
the years it was still too small a driver to be considered.
He concluded that some of the driver depended on the size
of the program, as well as the rate of growth in the
program.
2:14:14 PM
Co-Chair MacKinnon mentioned that debt service had been a
huge issue in the past.
Mr. Teal clarified that Co-Chair MacKinnon was referring to
state assistance for retirement as opposed to general
obligation debt service. He said that the actions that the
legislature had taken in the previous year by paying $3
billion into the retirement trust and refinancing the debt,
reduced the state assistance to retirement from what would
have been $1 billion, to $250 million. He furthered that,
because of those actions, retirement assistance was no
longer a cost driver. He suggested that the $250 million
could grow, but would most likely decline because
healthcare costs were less than the retirement actuarial
model showed them to be.
2:15:54 PM
Senator Dunleavy expressed concern about the lack of
control over the fluctuating price of oil and the
historically optimistic budgeting practices. He said that
on July 5, 2008, the price of oil hit $153 p/bbl; six
months later the price was $40 p/bbl. He shared some
historical figures regarding the fluctuating price of oil.
He reiterated the importance of applying conservative
numbers to future budget projections.
2:18:13 PM
Mr. Teal referred to Slide 7, "Agency Operations,
Percentage of Agency Operations budget (UGF Only)". He
noted the roughly 30 percent of agency operations money
went toward education, approximately 30 percent went to
health and social services - much of that was Medicaid. He
explained that between those two items was 6 percent of the
budget, and then things dropped off to under 10 percent. He
related that no much had changed from FY 15 to FY 16.
2:19:25 PM
Mr. Teal referred to Slide 8, "Agency Operations; Nominal
$". He said that the slide reflected the Senate's operating
budget and that the highlighted cells noted the most
comparable year. He said that the Senate had unwound 4
years of growth in a single year, which was a large
accomplishment. He relayed that the level of reduction was
deep and affected every agency.
2:21:23 PM
Mr. Teal looked at Slide 9, which illustrated the same
numbers as slide 8, with the addition of FY 09. He did not
believe that many more cuts could have been made in the
current operating budget.
2:21:49 PM
Co-Chair MacKinnon asked whether the spreadsheet would
reflect differently if a federal overlay were applied, or
other receipts. She inquired whether departments were
responding by partnering with other sources, either through
increasing their own receipt authority, or through federal
government receipts.
Mr. Teal stated that federal receipts had been fairly
steady, and after 2008 they had stopped increasing. He
continued that other receipts had been relatively constant,
but fees had not been raised in a number of years. He
offered to calculate the total funds including the federal
receipts.
2:23:37 PM
Co-Chair MacKinnon appreciated that the information would
be provided at a later date.
2:24:08 PM
Vice-Chair Micciche pointed out the two biggest cost
drivers on the slide were 2010 and 2012. He asked what the
state should use as a metric for an acceptable level of
spending per capita.
Mr. Teal stated that the per capita spending comparisons
were available, but they were difficult to compare to
Alaska due to great differences in the level of county and
city involvement. He guessed that the state was likely on
the high side of per capita spending.
2:26:34 PM
Co-Chair Kelly agreed that it would be difficult to compare
Alaska with other states.
2:27:08 PM
Mr. Teal referred to a slide not in the packet "Figure
11.'Hard to Cut' Items in the Operating Budget". He
stressed that cuts to the budget were difficult. He
asserted that for long-term sustainability, the gap between
expenditures and revenue needed to be smaller.
2:28:53 PM
AT EASE
2:29:35 PM
RECONVENED
Co-Chair MacKinnon commented that the legislature had been
exploring the cost drivers for some time; for example, SB
64 had highlighted debt service pertaining to school
construction. She asked what the legislature could do to
drive down the total debt service number.
Mr. Teal said that the debt service was roughly $230
million (UGF), the debt service reimbursement was general
fund dollars and was included in the $230 million. He
stated that if school debt reimbursement were to be
modified, debt service would fall. He believed that DOR did
an excellent job at refinancing and refunding debt, and
keeping the debt service as low as it could be given the
level of debt outstanding.
2:31:36 PM
Co-Chair MacKinnon asked whether the school bond debt
reimbursement was $118 million.
Mr. Teal stated he did not have that number with him.
ROB CARPENTER, BUDGET ANALYST, LEGISLATIVE FINANCE
DIVISION, confirmed that it was approximately $118 million.
[Mr. Carpenter gave this information from the staff table
behind Co-Chair MacKinnon]
Co-Chair MacKinnon concluded that half of the debt service
that the state was carrying was on school construction.
2:33:35 PM
Co-Chair MacKinnon asked if Mr. Teal had any recommendation
on the remaining $260 million in retirement benefits to be
paid into the system by the state.
Mr. Teal said that the number for the retirement system
would have been slightly over $750 million in 2014. He
stated that the cost of retirement assistance would be $257
million for 2015. He relayed that without the action taken
by the legislature in 2014, the retirement assistance would
have gone over $1 billion in state assistance. He noted the
$500 million in savings would be a reoccurring savings. He
explained that the state was currently looking toward a
payment stream that would be between $250 million and $300
million over the next several years. He related that in
looking at the reduction of retirement assistance, the
state was picking up the cost for PERS and TRS employers,
there were many options.
2:38:32 PM
Co-Chair Kelly asked if Mr. Teal could quantify recurring
future cuts.
Mr. Teal referred to the $500 million cut from the capital
budget from the previous year, leaving only $100 million.
He argued that it would be difficult to cut another $500
million from a $100 million dollar budget, which meant that
future cuts from the operating budget would be the only way
to reduce expenditures in the future. He warned that a
capital budget below $100 million would mean that the state
would not be making use of federal matching funds, and
would not pay for deferred maintenance or emergencies.
2:41:07 PM
Mr. Teal spoke to the cuts to the operating budget. He
discussed the cuts made to all four of the cost drivers,
and referred back to Slide 3, explaining that even if the
committee were to cut each category 10 percent each year
through to 2024, budget reserves would still be exhausted
by 2019.
2:43:16 PM
Senator Meyer asked for the current level of reduction.
Mr. Teal stated it was approximately 9 percent.
Senator Meyer asked about the oil tax credits, and whether
they would they would sunset in the near future.
Mr. Teal stated that the tax credits for the current year
totaled approximately $750 million and were expected to be
$250 million within the next few years. He said that the
model included the reduction to $250 million per year tax
credit after 2017.
2:44:45 PM
Co-Chair Kelly asked whether the cuts that the Senate had
made to the budget had been considered in the model
reflected in the current presentation.
Mr. Teal answered in the affirmative, and referred to Slide
9. He continued that if 10 percent were to be cut from the
K-12 budget each year, K-12 would drop to under $500
million, Medicaid would drop from $650 million to $250
million. He thought that reaching those levels of
expenditure would be difficult.
2:45:35 PM
Mr. Teal believed that the revenue measures should be
looked at during the interim and carefully considered. He
said that the cuts that the senate had made were deeper
than he had imagined that they could be, he did not think
that they were repeatable.
2:46:48 PM
Co-Chair Kelly asked Mr. Teal to compare the budget from
the previous year to the budget that recently had been
passed by the senate.
2:47:12 PM
Mr. Teal referred to Slide 3, and illustrated the scenario
on the graph. He further adjusted the graph to depict the
gap between revenue and expenditures to reflect having not
made cuts the current senate version. He said that there
was not a large difference in term of reserve burn even
with the senate cuts, the reserves would still be up by
2018. He relayed that the difference could be seen in the
long run; the $4 billion gap became a $3 billion gap.
2:49:23 PM
Co-Chair Kelly understood that in 2016, when the
legislature returned to craft the FY 17 budget, the
reserves would be depleted.
Mr. Teal replied no. He explained that the reserves would
last through 2017. He warned that at that point
expenditures would need to be drastically reduced, or
revenue would need to be enhanced through taxes, or found
in the earnings reserve, or other ways of using permanent
fund earnings.
2:50:13 PM
Co-Chair MacKinnon understood that there would be some
reserves left in 2017.
Mr. Teal agreed that the reserves would be end of year
reserves and would not carry the state through 2018.
2:51:16 PM
Vice-Chair Micciche asked Mr. Teal to project the model
with price sensitivity; what would the model look like at
$80 p/bbl.
Mr. Teal adjusted slide 3 to reflect $80, $90 and $100
p/bbl. He said that things looked positive at $110 p/bbl.
Vice-Chair Micciche queried the current methodology for the
state's budget projections.
Mr. Teal responded that the state budgeted on the mean, and
was unsure why the department had moved away from the high,
medium, low forecast. He thought it was because the mean
was used more often in budgeting causing people to lose
interest in the high and the low numbers.
2:53:22 PM
Vice-Chair Micciche asserted that cuts needed to be made
but other options should be explored. He felt that the
problem was understanding how the state could operate
efficiently while still delivering quality essential
services.
2:54:03 PM
Co-Chair MacKinnon shared that the committee had examined
the many difference cost drivers, addressing one component
at a time.
2:55:26 PM
Vice-Chair Micciche queried for the logic behind the three
quarters vote required to use the CBR.
2:55:59 PM
Senator Hoffman interjected that when the constitutional
amendment was drafted, he was chairman of the House Finance
Committee. He related that at the time the legislature had
wanted a higher level of agreement, and it had been the
position of the majority that it should be a two-thirds
vote. He furthered that the republican minority had not
wanted the number to be so low, so in order to get the
votes the three-quarter number was instituted.
2:56:54 PM
Mr. Teal added that the framers of the amendment had
intended it be to a "shock absorber" of sorts; the
legislature could access the CBR with a simple majority
vote, as long as no more money was spent than had been
spent in the prior year. He said that in FY 17, the
legislature should, without a supermajority, be able to
draw as much as was needed from the CBR as long it does not
exceed the FY 16 budget. He related that the courts
involvement and subsequent ruling had led to a confusing
interpretation and had led to the need for the
supermajority vote because they counted the earnings
reserve balance as available to spend.
2:58:54 PM
Senator Olson referred to Slide 6, and asked how much
health insurance contributed to the cost of benefits.
Mr. Teal specified that approximately $150 million of the
figure on Slide 6 was health insurance.
2:59:36 PM
Senator Olson asked about the rate of inflation from 2006
to 2015.
Mr. Teal thought health costs had increased more rapidly,
much more so than inflation. He said that there were
periods of time that healthcare had risen by double digits,
while inflation was only 3 percent. He stated that
healthcare costs had risen tremendously; the state
currently spent $1200 per employee, per month, on
healthcare costs. He noted the $350 million increase in
roughly 10 years.
ADJOURNMENT
3:02:49 PM
The meeting was adjourned at 3:02 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 4-22-15 Teal SFC Presentation.pdf |
SFIN 4/22/2015 1:30:00 PM |
HB 72 |