Legislature(2017 - 2018)SENATE FINANCE 532
01/20/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Overview of the Governor's Fy 18 Budget Request | |
| 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 20, 2017
9:03 a.m.
9:03:00 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Mike Dunleavy
Senator Peter Micciche
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division.
SUMMARY
PRESENTATION: OVERVIEW OF THE GOVERNOR'S FY 18 BUDGET
REQUEST
9:03:32 AM
Senator Dunleavy made note of the recent United States
Presidential inauguration.
Co-Chair MacKinnon noted that the day was the first Friday
of the session in which the legislature honored Alaska
Natives by wearing the regionally distinct kuspuk [from the
Yup'ik 'qaspeq']. She discussed the history of "kuspuk
Friday." She felt privileged to wear a kuspuk.
^PRESENTATION: OVERVIEW OF THE GOVERNOR'S FY 18 BUDGET
REQUEST
9:05:19 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, stated
that he would present the Legislative Finance Division's
(LFD) perspective on the governor's FY 18 budget request.
He thought it was possible to do so with just a fiscal
summary, but he had additional information to add
perspective and information. He discussed the presentation
"Overview of the Governor's FY 18 Budget Request," (copy on
file).
Mr. Teal turned to slide 2, "Figure 1: Total Agency
Operating Budgets, Statewide Items and Capital Budget
Compared to Revenue." The slide showed a bar graph that
depicted a history of spending compared to revenue. He
qualified that the LFD fiscal summary did not differ
significantly from that of the governor. The summaries did
not match precisely, but that differences were more a
matter of where numbers were placed. He noted that there
was a new legal opinion pertaining to Rural Education
Attendance Areas that contributed to a recent change in the
summary.
Mr. Teal prefaced further discussion by pointing out that
revenue was represented by the solid line on the graph, and
the bars represented expenditures. He pointed out that the
expenditures trended upward from FY 07 to FY 14, and then
fell rapidly through FY 17 and FY 18. He remarked that FY
18 spending was indistinguishably similar to FY 17.
9:07:39 AM
AT EASE
9:09:57 AM
RECONVENED
Co-Chair MacKinnon discussed the materials provided by LFD.
Mr. Teal continued discussing slide 2, noting that there
were some key points to consider, including that FY 18 was
the sixth consecutive year of deficits. He suggested that
the deficits were not insignificant, but rather were fiscal
gaps known about in advance that could be termed long-term
"structural" deficits. He acknowledged that that state
continued to struggle with deficits despite the massive
spending reductions reflected on the chart. He pointed out
that the chart showed a $4.4 billion reduction in spending
from peak spending in FY 14 to FY 17.
9:12:05 AM
Mr. Teal moved to slide 4, "Figure 2: Total Operating and
Capital Budgets," to address Senator Micciche's question
about total spending. He discussed the drop in the price of
oil, and thought it was understandable that Alaskans would
have confidence that oil prices would recover. He thought
people may conclude that government spending had risen even
though revenue had been decreasing for the past 5 or 6
years. He noted that Figure 2 showed what had happened,
with blue bars representing Unrestricted General Funds
(UGF) and with other funds stacked on top. He noted that
the bars were consistently at about $6 billion. He drew
attention to the big jump in FY 15, which reflected the $3
billion deposit from the Constitutional Budget Reserve
(CBR) to retirement funds. He summarized that other than
the jump, the state had not continued to spend in total.
Co-Chair MacKinnon asked if Designated General Funds (DGF)
included receipts of the University for tuition.
Mr. Teal answered in the affirmative.
Co-Chair MacKinnon considered that some might think the
state should cut DGF; when in fact the funds were sometimes
revenue being generated from other sources to support
activities that might be discreet from agency operations.
Mr. Teal considered that the topic was complex, as there
were some designated funds that were unrestricted. He used
the example of the Alcohol Fund, which was a general fund,
and was money deposited and designated for certain
purposes. He explained that cutting such a fund was
equivalent to cutting UGF.
Mr. Teal elaborated that there were other examples (such as
park receipts in the Department of Natural Resources) which
simply covered the department's cost of doing business.
Similarly, the University used tuition. He was not sure how
students would respond to the legislature taking tuition
funds to use for ferry operations, for example. He stated
that designated funds were typically designated for a
reason, and often because of legislative intention to use
the money in a specific way.
9:15:56 AM
AT EASE
9:17:38 AM
RECONVENED
Co-Chair MacKinnon asked Mr. Teal to provide the committee
a chart that broke designated funds into categories. She
understood that University receipts were a large portion of
designated funds, and wanted more detail.
Mr. Teal agreed to provide the information.
Senator Micciche requested a detailed document of what
receipt authority was directly connected to corresponding
expenditures. He thought the committee would be spending
more time on looking at DGF than it typically had.
Co-Chair MacKinnon discussed the Revenue Sources Book for
2018, and thought the administration had done a good job
pointing out changes to the book, and had dedicated Chapter
1 to discuss DGF.
Mr. Teal commented that the previous interim LFD had made
note of designated funds that had been used for non-
designated purposes. He furthered that the occurrences were
now flagged within the budget. He continued that the graph
was not something he normally would have included, but he
thought it was a valid inquiry into what the state was
spending. He thought it was important to get on the record.
9:20:22 AM
Mr. Teal turned to slide 5, "Figure 3: FY07-FY18 Total
Budgeted Positions," which displayed a bar graph. He
specified that there was a peak of about 25,000 positions.
He qualified that the figure represented 25,000 budgeted
positions rather than paychecks, and the data would differ
than that the Office of Management and Budget (OMB)
provided. He continued that the number of positions was
down to 22,000 positions in the current year, which
signified a reduction of approximately 2,400 positions or
10 percent from the peak.
Mr. Teal turned back to slide 2, noting that at the same
time the expenditures declined by $4.4 billion, revenue had
declined by $5.1 billion. He reflected that during times of
high oil prices, a budget of $5 billion would have
typically produced a surplus of about $3 billion. Currently
the price of oil was accompanied by a deficit of $2.7
billion.
Mr. Teal did not believe that "crisis" was an inaccurate
way to describe the state's current fiscal situation. He
recounted that the state had built massive reserves during
the times when revenue was very high, and had been spending
the reserves quickly because of the large deficits. He
thought it was useful to look at the state's reserve
balances.
Mr. Teal turned to slide 7, "Figure 4: End-of-Year Reserve
Balances, FY07-FY18." The graph showed at one time the
between the CBR and the Statutory Budget Reserve Fund
(SBR), the state had over $16 billion in reserves. In FY 18
the reserves were down to approximately $2 billion, which
would be insufficient to get the state through FY 19, while
sticking to existing revenue sources and using the CBR to
plug the deficits that occurred.
9:22:53 AM
Senator Dunleavy asked if Mr. Teal's projected scenario
included reductions.
Mr. Teal answered in the negative.
Mr. Teal turned back to slide 2, noting that spending
included spending from the Earnings Reserve Account (ERA),
which included both dividends and inflation-proofing. He
recalled that the spending discussions in the recent
presentation by the OMB had excluded dividends. He thought
it was important to be consistent in comparing spending
over different years.
Mr. Teal informed that LFD had included dividends as GF
expenditures, because it was what the governor's budget had
done. He continued that to make it comparable to past
years, LFD had included dividends and inflation-proofing in
the expenditure bars for past years. He noted that the
revenue line was adjusted upward by the same amounts, and
in FY 17 and FY 18, the dashed line on the graph indicated
the addition of Percent of Market Value (POMV) payouts.
Mr. Teal discussed POMV payouts, explaining that the
percentage pertained to the market value of the Permanent
Fund specifically. He relayed that the governor's proposal
was to pay out a percentage (as drafted it was 5.25
percent) of the five-year prior balance of the Permanent
Fund. He specified that in FY 18, the total payout was
approximately $2.5 billion, after net dividends of about
$700 million there would be an increase in revenue of $1.8
billion.
Mr. Teal thought the most important issue in the governor's
budget was that the POMV payout was included as GF revenue,
and appropriations from the ERA were classified as UGF. He
thought in order to understand the meaning of the proposal,
one had to understand how spending from the ERA had been
treated in the past.
Mr. Teal turned to slide 7, "Figure 5: Past Treatment of
Appropriations from the Permanent Fund Earnings Reserve
Account." He explained that the data was taken from FY 16,
but was the same as all prior fiscal summaries for many
years. He drew attention to line 55, which reported $941
million in spending of DGF. On the line beneath, it
indicated that there was approximately $1.4 billion in
spending on the Permanent Fund. He emphasized that the $941
million of DGF did not include the $1.4 billion, and that
signified that the ERA expenditures (dividends and
inflation-proofing) had been off budget. The items had been
excluded from expenditures and excluded from revenue, and
were not rolled in to any totals.
9:26:34 AM
Mr. Teal tuned back to Figure 1 on slide 2, observing that
the combined $2.5 billion POMV payout and $700 million in
dividends created a $1.8 billion difference shown between
the solid and dotted line. He remarked that the governor's
budget along with the proposed Permanent Fund Protection
Act (PFPA) meant that revenues covered about 84 percent of
revenue instead of approximately 30 percent of revenue, and
filled a tremendous amount of the deficit. He noted that FY
17 looked the same as FY 18, as the governor had also
requested a POMV payout from the Permanent Fund earnings.
Mr. Teal had many questions about the POMV payout. He
stated there was nothing illegal about requesting a
supplemental appropriation. He noted that despite the fact
that the PFPA did not pass the previous session, the
governor had taken steps to implement it anyway. The first
step was vetoing dividends back to the level that would
have been funded in the governor's proposal. The second
step was in submitting the FY 18 operating budget, in which
the governor asked for the payout that would have occurred
in FY 17 had his proposal passed via legislation.
Mr. Teal referred to a question by Senator Dunleavy and
mentioned the legislature's supermajority vote to access
the CBR for FY 17. Normally the state would expect to take
about $3 billion from the CBR. With a $2.5 billion payout
from the ERA in FY 17 to the General Fund, the FY 17
deficit was close to $500 million rather than $3 billion.
He stated that the CBR balance was essentially $2.5 billion
higher than it would have been otherwise. He expressed that
the state didn't really need to take money from the ERA and
put it in the General Fund in FY 17; it would have been
just as effective to take money from the ERA and deposit it
directly into the CBR.
Senator Micciche suggested that the funds would have been
just as easy to deposit in the CBR, but not quite as easy
to extract.
Mr. Teal agreed, and reminded that the ERA could be used
with a simple majority vote, while the CBR required a
supermajority three-quarters vote.
Vice-Chair Bishop asked about the 84 percent differential
increase in the budget. He asked if there was $75 million
in gas tax increase included in the amount.
Mr. Teal answered in the affirmative, and clarified that
revenue had covered 84 percent of expenditures. Without the
POMV payout, revenue would cover approximately one-third of
expenditures. He affirmed that the gas tax was built in to
the governor's budget; and would add $35 million in the
current year, and an additional $35 the following year.
9:30:57 AM
Senator Dunleavy mentioned OMB Director Pat Pitney, and
thought that there appeared to be (on paper) a shift in
philosophy. The previous year there had been discussions
about moving money in to the Permanent Fund to endow it;
while the proposed budget appeared to be moving money out
in to the CBR.
Mr. Teal reiterated that he was able to report what the
administration had done, and what the effect was; but he
could not comment on motivation. He posited that the ERA's
off-budget status had been a reporting problem since the
inception of the Permanent Fund. The courts had clearly
stated that the ERA was available for appropriation for any
purpose, any time. He thought the statement would normally
cause the state to classify the ERA as UGF. He thought it
would be problematic that even in deficit years that the $8
billion to $10 billion that was in the ERA balance would
show as revenue in FY 18.
Mr. Teal thought it would be very distorting to present
budget documents each year that showed massive surplus. He
related that the reporting decision had been set as a
precedent before he was employed at LFD. The decision was
in response to trying to report what was available to spend
without causing the state to spend more than it actually
had. He did not think having the Permanent Fund earnings
and the balance omitted from GF revenue was the best method
of accounting. He continued that as soon as the funds were
reclassified from DGF to UGF, there were huge implications.
He thought the committee might want to discuss the
implications with OMB Director Pitney.
9:34:16 AM
Mr. Teal thought a change to accounting practices should
have been made long ago; but there had not been a pressing
issue when the CBR balance was high, when there were
surpluses, and when the ERA account was only used for
dividends and inflation proofing. By statute, the ERA was
designated as such, and was used for nothing else. He
thought that under the governor's budget it was unavoidable
to make the reclassification, because the ERA was now UGF
because there was no inflation-proofing, and the dividends
came from GF rather from the ERA. Neither of the designated
uses for the ERA were in effect; and the only use of the
ERA was to put it into the UGF. In the governor's
presentation of the budget, there was essentially no choice
but to call the earnings reserve UGF.
Mr. Teal looked at slide 9, "State of Alaska Fiscal Summary
- FY17 and FY18 (Part 1)," and discussed four categories of
funds: UGF, DGF, Other State Funds, and Federal Funds. He
noted that the fund types were in decreasing order of
flexibility. The state could spend UGF for anything, while
conversely federal funds generally had a very specific
purpose. He explained that the fiscal summary also included
four categories of expenditures: Agency Operations,
Statewide Items, the Capital Budget, and the Permanent
Fund. He thought the most significant number was the $121.5
change in funding Agency Operations from FY 17 to FY 18.
9:37:08 AM
Mr. Teal showed slide 10, "Figure 6: Partial View of the
Fiscal Summary." He commented that the state budget from
the previous session (after vetoes) had been $3.9 billion.
The governor built from the previous budget using the
incremental model, and there was a $63 million reduction to
start FY 18. There were some temporary increments. He
mentioned maintenance increments that were related to
obtaining a supermajority vote the previous year. He noted
that generally salary increments were contractual
agreements, but for FY 18 most of the $15.8 million in
salary increases was comprised of health insurance
increases. The health insurance increases were not
contractual, but not funding them would be the equivalent
of taking an unallocated reduction and would hit all
agencies with staff equally.
Mr. Teal continued discussing slide 10, noting that the
governor's proposed budget started with a $30 million
reduction from FY 17. He observed that the governor had
added another $38 million in decrements, offset by $31
million in increments. There had also been fund changes,
which were the largest of the actions represented on the
data table.
Mr. Teal discussed DGF, and referenced a committee
discussion as to how the funds might be the same as GF and
in some cases, UGF. He thought Department of Fish and Game
funds were a good example. The legislature raised hunting
and fishing license fees. There was additional federal
money flowing in to the Fish and Game Fund, which was
classified as "Other" funds. The reason the fees were
raised was so that the Fish and Game Fund could be used to
fund more activities, and as a result UGF spending was
reduced. Some of the fund change was due to the change in
fees, but most (roughly $70 million) was due to the motor
fuel tax. The governor's budget request was approximately
$3.7 billion and was a $121 million decrease from the FY 17
budget for agency operations.
9:40:39 AM
Senator Dunleavy recounted that during a special session
the previous year, the legislature was asked to appropriate
$50 million for an insurance issue. He asked if the funding
was reflected in the current budget proposal.
Mr. Teal recalled that a $55 increment was in the budget
for a fund to subsidize health premiums for people with
high health risk. He explained that there was an ongoing
deposit, and the law stipulated that $55 million of
insurance premiums were deposited into the fund on an
annual basis. The money in the fund could be used to pay
claims. In the current year's budget, there was a switch
from appropriations (by fiscal year) to the need for the
premiums (by calendar year).
Senator Dunleavy asked if that the expense was considered
part of an ongoing effort.
Mr. Teal answered in the affirmative.
Co-Chair MacKinnon conveyed that there would be more
discussion on the matter, as they committee had
specifically communicated it would not fund the amount
repeatedly.
Mr. Teal added that the members should be aware that pupil
transportation was not fully funded, and could not be seen
on slide 10 or on the fiscal summary. Pupil transportation
was funded at the same level as it was funded in FY 17, and
in FY 17 there was a $6.35 million veto of transportation
funds.
Mr. Teal showed slide 11, "Figure 7: Partial View of the
Fiscal Summary." He stated that debt service related to
school funding, and the governor had vetoed school debt
reimbursement. In the FY 18 budget, school debt
reimbursement was restored, and debt service was up.
Community assistance was zero in the FY 17 management plan,
and was funded in other ways. He noted that there was no
funding of any kind for community assistance in the FY 18
budget.
Senator Dunleavy asked if Mr. Teal saw any funding
reflected for trails money from receipts from snow machine
purchases. He recalled there had been a veto the previous
year.
Mr. Teal stated that the funds were restored in the capital
budget.
Mr. Teal continued discussing Figure 7, recalling that the
governor had vetoed oil and gas tax credits down to the
statutory minimum the previous year. In the current year,
the tax credits were increased by $44 million. He discussed
funding for other statewide items. He recalled that the
previous year about $90 million in higher education funds
were used to pay a portion of state assistance to
retirement. The expectation had been that state assistance
would fall by $90 million, but it had only fallen by about
$30 million.
9:45:46 AM
Mr. Teal showed slide 12, "Figure 8: Partial View of the
Fiscal Summary." He noted that the capital budget grew from
$96 million the previous year to $115 million in the FY 18
proposed budget. He continued that the increase was not a
surprise; it was known the previous year that there were
some fund sources used that would not be available the next
year. The budget was the minimum required to match federal
money. He pointed out total spending of $4.3 billion, and a
deficit of $2.7 billion.
Mr. Teal showed slide 13, "Figure 9: Accounting for the
Reclassification of the Permanent Fund Earnings Reserve
Account from Designated General Funds to Unrestricted
General Funds," where it was possible to see the base
scenario and the governor's request while discussing the
Permanent Fund. He pointed out that the base was defined;
and was revenue excluding the POMV payout and additional
royalties under the PFPA. He explained that the PFPA
repealed the statutory 25 percent on new oil fields that
was deposited to the Permanent Fund (roughly $55 million
annually).
Mr. Teal continued discussing slide 13, explaining that the
governor's proposed spending, with dividends classified as
DGF, led to a $2.7 billion deficit. He looked at the
governor's request; which reflected an additional $2.5
billion payout from the ERA, the extra money that flowed to
the General Fund rather than to the Permanent Fund, and the
same level of expenditures. To this amount was added the
expenditures for dividends, the Capital Income Fund
(another fund loaded from the ERA), and some other
expenditures. There was a resultant deficit of less than $1
billion.
9:48:21 AM
Mr. Teal turned to slide 14, "Figure 10 Potential Spending
Increases," and thought the committee might want to look at
what the governor's proposed budget did not contain. He
thought the slide listed items that the committee might
want to address as it went through the budget process. He
addressed the proposed motor fuel tax, which if not adopted
would increase GF spending by $70 million.
Mr. Teal continued discussing Figure 10 on slide 14. He
indicated that community assistance was not funded. He
recalled that the committee had previously mentioned the
possibility of funding community assistance with a
supplemental budget. He thought the committee was well
aware that a supplemental appropriation did not really
address the problem, because the funds would not be there
when the communities were developing budgets. Communities
would receive $30 million distributed in FY 18, but if the
legislature did not put $30 million back in the
distribution, in FY 19 the distribution would fall to $20
million.
Mr. Teal continued discussing potential spending increases
as listed on slide 14. He stated that if the legislature
were to replace the monies to the Higher Education Fund
(used for retirement assistance with UGF), it would cost
$58 million. There was no money in the budget for deferred
maintenance or education projects of any kind at the K-12
or university level. If it was desired to pay more than the
minimum $74 million for oil tax credits, there would be
additional expenditures to consider. He summarized that
there was a total of $150 million to $250 million that the
legislature could be forced to address and thus bring the
deficit up to slightly over $1 billion.
Senator Dunleavy asked if Mr. Teal considered the
governor's proposed budget to be a fully funded and
balanced budget, with expenditures matching existing
revenues and/or projected revenues.
Mr. Teal answered in the negative, and thought it was not a
balanced budget on a cash-flow basis. There was a deficit
of $1 billion, filled in the governor's budget with a draw
from the CBR accessed by a required supermajority vote. He
thought in that sense one could say it was a balanced
budget.
Senator Micciche indicated he would meet with Mr. Teal
later, and commented on the two spending increase items on
slide 14 listed as "other."
Co-Chair MacKinnon discussed the agenda for the following
week.
ADJOURNMENT
9:52:27 AM
The meeting was adjourned at 9:52 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012017 SFC LFD FY18 Overview.pdf |
SFIN 1/20/2017 9:00:00 AM |
Operating Budget FY18 |