Legislature(2019 - 2020)SENATE FINANCE 532
07/09/2019 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Legislative Audit: Constitutional Budget Reserve and Reverse Sweep | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
SECOND SPECIAL SESSION
July 9, 2019
1:33 p.m.
1:33:02 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 1:33 p.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
MEMBERS ABSENT
Senator Peter Micciche
Senator Mike Shower
Senator David Wilson
ALSO PRESENT
Megan Wallace, Director, Legislative Legal Services, Alaska
State Legislature; Kris Curtis, Legislative Auditor, Alaska
Division of Legislative Audit; Senator Cathy Giessel;
Senator Chris Birch; Representative Sara Hannan.
SUMMARY
LEGISLATIVE AUDIT: CONSTITUTIONAL BUDGET RESERVE and
REVERSE SWEEP
Co-Chair Stedman relayed that the committee would continue
to discuss the Constitutional Budget Reserve (CBR) and the
reverse sweep. He explained that at the end of every fiscal
year there were some accounts that were zeroed out, and the
money was moved to the CBR if there was a debt to it. Any
appropriations out of the accounts the following day would
find that the accounts were empty or severely restricted.
Earlier in the day, the committee had heard from the
Legislative Finance Division (LFD) on the subject of the
reverse sweep and some of the state's account balances.
Co-Chair Stedman continued his remarks. He shared that the
committee would hear from the director of Legislative Legal
Services (LLS), as well as the Legislative Auditor.
^LEGISLATIVE AUDIT: CONSTITUTIONAL BUDGET RESERVE and
REVERSE SWEEP
1:36:05 PM
MEGAN WALLACE, DIRECTOR, LEGISLATIVE LEGAL SERVICES, ALASKA
STATE LEGISLATURE, discussed the presentation, "Sweep and
Reverse Sweep" (copy on file). She looked at slide 2,
"Constitutional Budget Reserve Fund Article IX, Section 17
of the Alaska Constitution":
Passed by the 16th Alaska State Legislature, HCS
CSSSSJR 5 (FIN) am H (1990), as an amendment to the
state constitution.
Approved by the voters 11/06/90 with 124,280 votes
for, and 63,307 against the amendment.
Ms. Wallace planned on discussing legislative history,
including a few Alaska Supreme Court decisions, which
explained how to interpret and carry out the sweep and
reverse sweep if appropriated each year.
Ms. Wallace highlighted slide 3, "Article IX, Section 17(a)
of the Alaska Constitution":
(a) There is established as a separate fund in the
State treasury the budget reserve fund. Except for
money deposited into the permanent fund under Section
15 of this article, all money received by the State
after July 1, 1990, as a result of the termination,
through settlement or otherwise, of an administrative
proceeding or of litigation in a State or federal
court involving mineral lease bonuses, rentals,
royalties, royalty sale proceeds, federal mineral
revenue sharing payments or bonuses, or involving
taxes imposed on mineral income, production, or
property, shall be deposited in the budget reserve
fund. Money in the budget reserve fund shall be
invested so as to yield competitive market rates to
the fund. Income of the fund shall be retained in the
fund. Section 7 of this article does not apply to
deposits made to the fund under this subsection. Money
may be appropriated from the fund only as authorized
under (b) or (c) of this section.
This subsection establishes the fund.
Ms. Wallace addressed slide 4, "Article IX, Section 17(b)
of the Alaska Constitution":
(b) If the amount available for appropriation for a
fiscal year is less than the amount appropriated for
the previous fiscal year, an appropriation may be made
from the budget reserve fund. However, the amount
appropriated from the fund under this subsection may
not exceed the amount necessary, when added to other
funds available for appropriation, to provide for
total appropriations equal to the amount of
appropriations made in the previous calendar year for
the previous fiscal year.
This subsection allows for an appropriation from the
CBRF by a simple majority vote if the amount available
for appropriation is less than the amount appropriated
for the previous fiscal year.
Ms. Wallace explained that in instances of a budget
deficit, the provision would allow the legislature to
access the CBR with a simple majority vote if the amount
available for appropriation was less than the amount
appropriated for the previous fiscal year. She stated that
the key element to the provision was the amount available
for appropriation. She referenced the Alaska Supreme Court
decision in Hickel v. Cooper [a 1994 case which arose out
of a legislative attempt to define terms pertaining
appropriation], which established that the Earnings Reserve
Account (ERA) was to be considered part of what was
available for appropriation. The legislature had hot been
able to access the CBR with a simple majority vote because
the balance of the ERA was too large to permit access under
the provision.
Ms. Wallace looked at slide 5, "Article IX, Section 17(c)
of the Alaska Constitution":
(c) An appropriation from the budget reserve fund may
be made for any public purpose upon affirmative vote
of three-fourths of the members of each house of the
legislature.
This subsection allows for any appropriation from the
CBRF with a supermajority vote.
Ms. Wallace noted that the reverse sweep, which caused a
lot of confusion, was actually just an appropriation under
Article IX, Section 17(c).
1:39:58 PM
Ms. Wallace highlighted slide 6, "Article IX, Section 17(d)
of the Alaska Constitution":
(d) If an appropriation is made from the budget
reserve fund, until the amount appropriated is repaid,
the amount of money in the general fund available for
appropriation at the end of each succeeding fiscal
year shall be deposited in the budget reserve fund.
The legislature shall implement this subsection by
law.
This subsection is known as the "sweep" provision. The
sweep automatically occurs; no vote is required.
Ms. Wallace informed that the CBR was set up as a fund that
the legislature could borrow from, and the provision
provided that at the end of each fiscal year the money
available for appropriation in the General Fund (GF) was
swept back to the CBR. The sweep occurred every year. Prior
to FY 20, the legislature had appropriated a "reverse
sweep," sending the funds back to the accounts that they
originated from.
Senator Wielechowski thought the ERA was not swept into the
CBR.
Ms. Wallace replied in the affirmative. She noted that in
the Hickel v. Cowper case, the Alaska Supreme Court
articulated that the requirement for the sweep was that the
funds be in the General Fund and be available for
appropriation. Because the ERA was an account in the
Permanent Fund, the courts stated that the funds were not
subject to the sweep.
Senator Wielechowski thought the court had said that the
funds had been already appropriated by the legislature for
dividends and inflation proofing. He thought everything
outside of inflation proofing and dividends was available
for appropriation. He thought it was an important
distinction.
1:42:37 PM
Ms. Wallace stated that in the Hickel v. Cowper case, the
Supreme Court specifically stated (when it was discussing
the provisions in Section 17(d)):
"Available amounts outside the General Fund such as
the ERA need not be deposited in the budget reserve.
This additional limitation has no effect on funds
which exist within the General Fund."
Ms. Wallace discussed slide 7, "The 'Reverse Sweep'":
The "reverse sweep" is an appropriation from the CBRF
that returns swept funds back to the original sub fund
or account. The "reverse sweep" is an appropriation
under art. IX, sec. 17(c), and requires a 3/4 vote to
pass.
Standard "reverse sweep" appropriation language reads:
Deposits in the budget reserve fund (art. IX,
sec. 17, Constitution of the State of Alaska) for
fiscal year 2019 that are made from subfunds and
accounts other than the operating general fund
(state accounting system fund number 1004) by
operation of art. IX, sec. 17(d),
Constitution of the State of Alaska, to repay
appropriations from the budget reserve fund are
appropriated from the budget reserve fund to the
subfunds and accounts from which those funds were
transferred.
Ms. Wallace noted that the legislature considered the
language as part of the capital budget, but the provision
did not have enough votes to be successful. As of yet, the
legislature had not approved a reverse sweep for FY 20.
1:44:46 PM
Ms. Wallace addressed slide 8, "Hickel v. Cowper, 874 P.2d
922 (1994) What is "available for appropriation"?"
In summary, the "amount available for appropriation"
within the meaning of article IX, section 17 of the
Alaska Constitution includes all monies over which the
legislature has retained the power to appropriate and
which require further appropriation before
expenditure. In addition, all amounts actually
appropriated, whether or not they would have been
considered available prior to appropriation, are
available within the meaning of section 17. Illiquid
assets, such as land and unexploited natural
resources, are not available so long as they remain
illiquid. For these reasons, trust receipts are
available for appropriation, as are funds like the
Railbelt energy fund and the educational facilities
maintenance and construction fund, which are not
available for expenditure without additional
appropriations. In contrast, the oil and hazardous
substance release response fund is not counted as
available because the entire balance of the fund may
be expended at any time without further legislative
action. The availability of funds not specifically
discussed in this opinion must be determined in
accordance with this opinion. Finally, the permanent
fund earnings reserve account must be counted as
available for appropriation, because appropriations
may be made from it and it is not subject to
expenditure without legislative action.
Ms. Wallace detailed that the legislature had passed a few
provisions intended to implement the sweep. The provisions
were found in AS 37.10.420. She recounted that former
Governor Steve Cowper had challenged the constitutionality
of the enacted provisions. At the time, Governor Wally
Hickel defended the provisions. The Hickel v. Cowper case
extensively considered what was meant to be available for
appropriation under Article IX Section 17(b). The court had
found that the majority of the statutory provisions enacted
by the legislature were unconstitutional because they did
not include enough funds within the definition of
"available for appropriation."
Ms. Wallace continued to discuss slide 8. She stated that
the slide showed a quote that summarized the analysis of
the court. The bulk of the analysis in the court's opinion
(with respect to what it meant to be "available for
appropriation") was the simple access provision. Later in
the opinion, the Alaska Supreme Court specifically noted
there was no reason to give any different meaning to the
term "available for appropriation" in subsection (b) than
it was in subsection (d). The term had the same meaning
throughout the section.
Ms. Wallace noted that all funds that the legislature
retained the power to appropriate, that required further
appropriation, would be subject to the sweep. It notes that
illiquid assets did not have to be swept. While funds that
require further appropriations were swept, those that did
not (such as the Oil and Hazardous Substance Release
Response Fund) were not subject to the sweep because the
funds could be appropriated without legislative action
until there was no balance. The Supreme Court noted that
the ERA must be counted as available for appropriation.
While the Alaska Supreme Court identified certain funds
that were and were not available for appropriation, the
Supreme Court said that if there were funds not discussed
in the opinion, the question of whether they were available
for appropriation must be determined in accordance with the
opinion.
1:49:57 PM
Co-Chair von Imhof thought that "amount available for
appropriation" meant whether the money could be swept from
sub-funds into the SBR. She wanted to define the word
appropriation.
Ms. Wallace clarified that the quote gave guidance on how
the legislature determined which funds were available for
appropriation.
Co-Chair von Imhof reiterated that her question was about
the verb "appropriate," which she thought meant moving
money from one account to another.
Ms. Wallace replied in the affirmative. She stated that the
test was to determine whether or not funds were available
for appropriation by the legislature. Whether the funds
qualified to be calculated depended upon the analysis of
whether the funds could be expended without further
appropriation.
1:52:33 PM
Co-Chair von Imhof referenced Senator Bishop's comments
about sources of revenue in some funds that may have been
deposits made by private citizens. She thought what
triggered monies to be available by appropriation did not
necessarily sound like the source of income, but rather
whether the legislature had appropriating powers over the
money. She thought the question was if an account source
was private money (donations, matching funds by other
organizations) and whether it could be swept.
Ms. Wallace answered in the negative. She stated the monies
that were available for appropriation would come with
restrictions. If a fund consisted of private donations,
there were certain taxes or federal receipts that had
restrictions on how the funds could be used, and the funds
could not be expended without recognition of the
restrictions. The decision had not explored the nuances of
how to determine how private donations and other special
monies would be swept. She thought the matter was more of
an accounting determination. She thought the legislative
auditor could address how comingled funds could be swept or
not.
1:55:20 PM
Senator Wielechowski addressed what funds were available
for appropriation and quoted a sentence from the Hickel v.
Cowper ruling:
"Money in the ERA never passes through the General
Fund and is never appropriated as such by the
legislature. A percentage of the money in the ERA is
automatically transferred to the Dividend Fund at the
end of each fiscal year. After that transfer has been
made an additional amount is transferred from the ERA
to the principal in order to offset the effects of
inflation."
Senator Wielechowski stated that his interpretation of the
ruling was that the money for the dividend and inflation
proofing had already been appropriated by the legislature
and was not subject to the sweep. He thought it seemed that
the court had effectively stated that the entire ERA was
part of the GF; so, the whole ERA needed to get swept every
year. He was curious about Ms. Wallace's opinion.
Ms. Wallace stated that when the court was considering the
sweep provision while giving guidance for Hickel v. Cowper,
it specifically stated that the ERA wouldn't be subject to
the sweep because it was not in the General Fund. She
referenced the Wielechowski v. State case [a 2017 case to
effectively set aside the governor's veto a portion of the
appropriation of funds for PFD distributions in 2016]. She
pointed out that that in the Wielechowski v. State case,
the Supreme Court acknowledged that it was mistaken (in the
Hickel v. Cowper case) in terms of the legislature having
appropriated from the dividend.
Ms. Wallace discussed slide 9, "Hickel v. Cowper, 874 P.2d
922 (1994) What is subject to the sweep?":
We see no reason to give "available for appropriation"
a different meaning in subsection (d) than we did in
subsection (b). We recognize, however, that the
payback provision in section 17(d) is limited to only
those funds which are "available for appropriation"
and "in the general fund." Thus, available amounts
outside the general fund, such as the earnings reserve
account, need not be deposited in the budget reserve.
This additional limitation has no effect on funds
which exist within the general fund.
Ms. Wallace noted that the slide showed the quote she had
been referring to. The opinion stated that when considering
the payback provision, it was limited to the funds
available for appropriation and in the General Fund. The
Alaska Supreme Court had emphasized that when the
legislature was determining what should and should not be
swept; not only do the funds have to be available for
appropriation, but also had to be in the GF.
1:58:43 PM
Ms. Wallace looked at slide 10, "Wielechowski v. State, 403
P.3d 1141 (2017)":
Our decision today reinforces our holding in Hickel
that the earnings reserve "is available for
appropriation."
Co-Chair von Imhof looked at slide 9, and thought Ms.
Wallace was asserting that other funds such as the Higher
Education Fund were sub-accounts of the GF.
Ms. Wallace agreed that the Higher Education Fund was part
of the General Fund but thought the PCE Fund was more
difficult to analyze. The PCE Fund was an account in the
Energy Authority, and there was no court decision about
whether the PCE Fund was sweepable. In another footnote
from Hickel v. Cowper, the Alaska Supreme Court looked at
the receipts of the Alaska Housing Finance Corporation
(AHFC) and the Alaska Industrial Development and Export
Authority (AIDEA) when considering what was available for
appropriation. The court had stated that only those funds
that had been appropriated and made its way to the General
Fund from the public corporations would be considered
available for appropriation.
Ms. Wallace continued to address Co-Chair von Imhof's
question. She stated there was an open question as to
whether the funds that sat in accounts of public
corporations were in the General Fund and subject to the
sweep. She had not seen additional legal analysis on the
issue from the administration.
Senator Wielechowski asked if there was a definition of the
General Fund in statute or in case law.
Ms. Wallace deferred to Ms. Curtis.
2:01:52 PM
KRIS CURTIS, LEGISLATIVE AUDITOR, ALASKA DIVISION OF
LEGISLATIVE AUDIT, stated that the constitution mandated
that available funds be swept to repay the CBR. She stated
that according to the Supreme Court, the determination of
whether a fund could be swept depended upon whether the
funds balance could be spent without further appropriation.
A fund that could be spent without further appropriation
was considered non-sweepable; and a fund that could not be
spent without further appropriation was considered
sweepable.
Ms. Curtis highlighted slide 11, "Sec. 37.10.420. Sweep and
'available for appropriation' defined":
(b) If the amount appropriated from the budget reserve
fund has not been repaid under art. IX, sec. 17(d),
Constitution of the State of Alaska, the Department of
Administration shall transfer to the budget reserve
fund the amount of money comprising the unreserved,
undesignated general fund balance to be carried
forward as of June 30 of the fiscal year, or as much
of it as is necessary to complete the repayment. The
transfer shall be made on or before December 16 of the
following fiscal year.
(c) In this section, "unrestricted revenue accruing to
the general fund" or "unreserved, undesignated general
fund balance carried forward" is money not restricted
by law to a specific use that accrues to the general
fund according to accepted principles of governmental
or fund accounting adopted for the state accounting
system established under AS 37.05.150 in effect on
July 1, 1990.
Ms. Curtis informed that the determination of the amount
available to be swept was an accounting process. The DOA
Division of Finance accountants were responsible for
calculating the sweep as part of preparing the state's
financial statements, which were referred to the
Comprehensive Annual Financial Report (CAFR). The CAFR must
be prepared in accordance with generally accepted
accounting principles and must be audited by the
legislative auditor in accordance with generally accepted
auditing standards.
Ms. Curtis looked at slide 12, "What is the General Fund?"
The general fund is the State's primary operating
fund.
? It accounts for all public monies and revenues
coming into the State treasury not specifically
authorized by statute to be placed in another fund.
? There are several accounts and funds created by law
that are considered a part of the general fund. These
are treated as subfunds of the general fund and are
reported as part of the general fund.
Ms. Curtis stated that generally accepted accounting
principals defined the General Fund in the same manner. The
General Fund was the fund that accounted for activity that
was not required to be accounted for in some other fund and
was residual. She noted that sub funds were accounted for
separately in the accounting system but were reported as
part of the general fund in the financial statements.
Co-Chair von Imhof asked for some definitions and a list of
sub funds.
Ms. Curtis knew that for FY 18 there were 79 sub funds that
had available balances in them. She stated she would
discuss the sub funds later in the presentation.
2:05:20 PM
Senator Wielechowski asked if Ms. Curtis did not consider
the ERA to be part of the General Fund.
Ms. Curtis stated that the ERA was not a sub fund of the
General Fund, and it was maintained by the Permanent Fund.
Senator Wielechowski asked for Ms. Curtis to define General
Fund.
Ms. Curtis defined the General Fund as the fund that
accounted for all the activity that was not required to be
accounted for in some other fund by law. Because of the
prohibition of dedicating revenue, there had been a
proliferation of sub accounts that were created as funds
within the general fund that tracked a specific activity.
She reiterated that there were many sub funds of the
General Fund.
Co-Chair von Imhof believed that the ERA was established by
the constitution separately by law and was defined
specifically. She thought the ERA was established as a
separate account.
Ms. Curtis had not researched the ERA and could not
comment. She knew that the court had stated the ERA was not
part of the General Fund.
Senator Wielechowski thought the court's statement had been
reversed and thought all the income from the Permanent Fund
went into the General Fund unless provided by law. He
thought there was a likelihood that the ERA was part of the
General Fund and subject to being swept into the CBR. He
thought Alaskans would be shocked and concerned if the ERA
was swept and there was no money for dividends or
government.
Ms. Curtis addressed slide 13, "How the Sweep Works":
? Department of Administration, Division of Finance
accountants calculate the sweep while preparing the
Comprehensive Annual Financial Report (CAFR). The
sweep represents unreserved, undesignated fund balance
of the general fund subfunds.
? Division of Finance accountants calculate the sweep
in September as the CAFR is prepared yet the amount of
the sweep is posted in the financial records as of the
end of the fiscal year (June 30th).
? After the CAFR is prepared (historically by the end
of October), the CAFR is audited by the legislative
auditor. The sweep amount is adjusted as necessary.
Ms. Curtis relayed that when the audit was conducted, the
audit was adjusted for errors in the sweep calculation
itself or in part of the financial statements that impact
the sweep. The last thing that auditors did was to prepare
the final adjustment to the sweep amount.
2:10:00 PM
Ms. Curtis highlighted slide 14, "How the FY 18 Sweep
Worked":
? At Fiscal year-end (FYE) 18 there were 71 general
fund subfunds (excluding the CBRF) with a fund
balance.
? Of the 71 individual subfunds at FYE 18 -
? 32 were deemed sweepable, meaning the remaining
fund balance cannot be spent without further
appropriation.
o All but one of the 32 sweepable funds,
Aviation Fuel Tax Account, had a remaining
undesignated, unreserved fund balance
available for the sweep calculation.
o A total $202,684,000 fund balance of the
sweepable funds was reported as nonspendable
or committed, meaning that, although the
funds were sweepable, portions of the funds'
balances were not available for sweep.
? 39 were deemed non-sweepable as the remaining
fund balance can be spent without further
appropriation.
o The $880,313,000 fund balance total of the
non-sweepable funds was reported as either
nonspendable, restricted or committed.
Ms. Curtis referenced Co-Chair von Imhof's remarks
pertaining to certain restrictions on fund balances by
different provisions for donations or encumbrances.
Co-Chair Stedman asked if sweepable and non-sweepable funds
were the same from year to year, or if the decision had to
be made each year. He asked how much political influence
went into the calculations.
Ms. Curtis stated that the analysis of the funds was
extensive when the court decision came out. The Division of
Legislative Audit had conferred with the Department of Law
and LFD as to how the funds should be classified. Every new
fund was reviewed, and the possibility of changes to other
funds was considered.
Co-Chair Stedman asked about when it was possible to know
if a new fund was subject to the sweep or not.
Ms. Curtis stated that the division went through the
analysis in the months of September and October and looked
at new funds before statements were available.
Co-Chair Stedman asked if Ms. Curtis had been asked to do
any new reviews on funds that had not swept before the
current year.
Ms. Curtis answered in the negative and asked where such a
request would come from. She asked if Co-Chair Stedman was
thinking the request would come from the executive branch.
Co-Chair Stedman answered in the affirmative and stated he
was thinking about the PCE Fund or the education endowment.
Ms. Curtis stated that the division had not been asked to
review the funds.
Senator Hoffman asked what category the PCE fell in when
the division determined what funds were subject to the
sweep in FY 18.
Ms. Curtis stated that the PCE Fund was part of AEA, which
was audited by outside auditors and was outside the scope
of the review. She noted that the PCE Fund was not listed
in the following list of funds. She noted that the PCE Fund
had not always belonged in AEA, and had been moved there.
The division believed the fund was sweepable.
Senator Hoffman asked why the PCE Fund was moved to AEA.
2:13:49 PM
Ms. Curtis conjectured that the PCE Fund was moved to AEA
so that it was not considered within the General Fund.
Senator Hoffman thought that because the PCE Fund was part
of AEA, it should have some protection if the list did not
have the PCE Fund as a sweepable item. He stated that when
reviewing legislation, he did not recall there was going to
be judgement made by a specific governor as to what would
be subject to the sweep and what would not. He opined that
if the list from FY 18 did not list the PCE Fund as a
sweepable item, it should be so for FY 19 as well and not
left to the discretion of whomever was governor. He
stressed that the discretion was not granted when the CBR
was created. He wondered why the FY 19 list would be
different if the law had not changed.
Ms. Curtis shared that LAW had a firm stance over the years
that the PCE Fund was not sweepable.
Senator Hoffman asked how many governors had made the
determination.
Ms. Curtis had to check records. She relayed that the
division did not always confer with LAW and had stopped
asking the question of whether the PCE Fund was subject to
the sweep. She continued that the question about whether
the PCE Fund was subject to the sweep had been asked
routinely through FY 10, and there were records through
that time that the executive branch had the position that
the PCE Fund was not sweepable.
2:17:08 PM
Ms. Curtis discussed slide 15, "How the FY 18 Sweep Worked
(Continued)":
? FYE 18 sweep balance totaled $431,688,000 (rounded
to thousands) from 31 subfunds.
? FYE 18 sweep posted to the financial records as of
June 30, 2018.
? FYE 18 sweep was reversed by Chapter 17, SLA 18,
Section 29 (a) and effective as of July 1, 2018. This
means that the amounts swept were returned to the
funds effective the first day of FY 19.
Ms. Curtis addressed slide 16, "FYE 18 Sweep Balance by
General Fund Subfund," which listed all the funds that were
swept and the amounts that were swept in FY 18, which
totaled just over $431 million.
Ms. Curtis looked at slide 17, "FYE 18 General Fund Subfund
- Non Sweepable," which showed over $880 million in funds
that were not swept.
Co-Chair Stedman asked when Ms. Curtis would become aware
if there was any change in the definitions between sub
funds that were subject to the sweep or not.
Ms. Curtis stated that if the division became aware of an
issue by any means, it would inquire into the matter.
Immediately when staff began to work on the CAFR project,
the division would reach out to see what funds were
intended to be swept and if the division was in agreement.
Co-Chair Stedman asked what would happen if the division
was not in agreement.
Ms. Curtis stated that the accountants would ask for an
audit adjustment posting, without which there would be a
misstatement in the financial statements, which would be an
issue in the General Fund. The misstatement would have to
do with Footnote 2 to the financial statements, which
described the CBR borrowing and the sweep and the repaying.
Depending up on the amount, the misstatement had the
potential to be a material misstatement, which would lead
to a qualified opinion.
Co-Chair Stedman asked Ms. Curtis to provide an explanation
of a qualified opinion in common language.
Ms. Curtis stated that an auditor provided an opinion on
financial statements as to whether the statements were free
from material misstatement; which was the purpose of an
audit. She disclosed that she wrote the report. The opinion
was included in the CAFR each year and was relied upon by
various stakeholders such as debt-rating agencies,
underwriters, and the public as to whether they could
depend upon the financial statements.
2:20:38 PM
Co-Chair Stedman asked about the SBR, which was one of the
state's two primary savings accounts and was subject to the
sweep. If the committee appropriated money out of the
account, it would be immediately recognizable if there was
no reverse sweep and there was a fund shortage.
Ms. Curtis noted that the list on slide 17 was non-
sweepable funds. She used the example of the Higher
Education Fund.
Co-Chair Stedman discussed the use of the Higher Education
Fund. He asked how the legislature would know if the
definition was changed and the fund was considered subject
to the sweep.
Ms. Curtis replied that if funds were swept, the monies
were not available as of July 1. If the executive branch
knew it was sweeping the funds and there were no available
monies, immediate notification of anyone with contact with
the appropriation should be notified. She referenced
statute that stated that DOA must certify that there was a
valid appropriation and that there was a fund balance
before expenditure can happen. If the executive branch knew
there was money in the fund, there should be no obligation
to the fund.
2:24:03 PM
Co-Chair Stedman asked that if DOA knew a fund would be
swept because of a change in policy, when and how would
notification be provided to the legislature.
Ms. Curtis replied that currently the legislature should
know that there was no reverse sweep for the funds swept in
FY 18. If the executive branch was going to expand the
funds that were swept, it needed to communicate it to the
legislature and all agencies immediately.
Co-Chair Stedman asked when the legislature would be
informed.
Ms. Curtis opined that there should be an immediate alert
as to a change in funds that were subject to sweep.
Co-Chair Stedman asked who the executive branch would
notify.
Ms. Curtis cited statute that dictated that DOA must
certify there was an available balance in a fund before an
expenditure could happen. She emphasized that DOA should
know the information and should communicate.
Co-Chair Stedman was concerned that the committee know
about potential reclassification of funds well in advance
of closing out budgets. He thought Ms. Curtis' earlier
comments indicated she had not heard of any
reclassification of sub-funds.
Ms. Curtis thought Co-Chair Stedman had valid concerns and
had heard rumors on the subject. She had observed the
administration re-interpreting law and would not be
surprised if there was re-classification of sub-funds.
2:28:25 PM
Senator Hoffman asked if the legislature would be in a
position to file an injunction to stop a sweep from
happening after a re-classification of sub-funds. He asked
about legal avenues to ensure adherence to past practice;
he did not think the decision should be an arbitrary one
made by the executive branch.
Ms. Wallace stated that the Senate Finance Committee and
other legislative committees had the ability to request
that the administration come to the table and provide the
answers asked of the auditor. The legislature held subpoena
power and could compel the administration to produce the
records regardless of the accounting timeframe of whenever
financial statements were prepared or reports were
available. By operation of the constitution, the sweep
occurred on June 30.
Ms. Wallace continued to explain that as appropriators, the
legislature should be notified immediately if there had
been change in policy with regard to sweepable and non-
sweepable funds. The more drastic options of filing
litigation or injunctive relief would be a decision that
was up to the legislature, and the remedy may be available
if the legislature received information that previously
non-sweepable funds had been re-classified. Not only may
the legislature be the appropriate body to file the
challenge, but it could also come from outside entities
that were equally interested in the change in policy.
Co-Chair Stedman confirmed that he had no intention of
submitting subpoenas to the Office of Management and Budget
to explain to the committee if funds were being
reclassified as sweepable. He thought there should be a
more open system, and the legislature should be notified in
order to look at other funding mechanisms. He stressed that
OMB had been invited to come speak to the committee and
would not be subpoenaed. He stated that reclassification of
non-sweepable funds was of concern, particularly the Higher
Education Fund and the PCE Fund, because of the significant
financial impact to the state.
2:32:24 PM
Senator Hoffman asked how OMB had responded to the
committee's invitation.
Co-Chair Stedman replied that he had hoped that OMB would
be there later in the afternoon, but the office had
scheduling issues. He hoped that OMB would be in committee
as soon as it could accommodate a meeting, but he had no
intention of slowing down the budgetary process.
2:33:15 PM
AT EASE
2:52:25 PM
RECONVENED
Co-Chair Stedman apologized for the interruption and
reminded that there were many moving parts in the budget.
He explained that the committee had been discussing non-
sweepable funds, which were listed on slide 17. He
continued that the legislature had been progressing in
putting a budget document together with the assumption that
the non-sweepable funds were still non-sweepable absent any
formal notification. He revisited the topic of
notifications of fund classification changes. He asked Ms.
Curtis if she could recall a fund being reclassified as
sweepable, and what process of notification she would
expect.
Ms. Curtis did not recall any funds that had been
reclassified as sweepable. She had looked through permanent
files in the agency and had not seen any indication of
reclassification.
Co-Chair Stedman thought rumors had been swirling for the
past month regarding reclassification of funds. He thought
there was a high likelihood of one or more of the funds
being reclassified, and asked Ms. Curtis to notify the
committee so as to make a historical note.
Senator Wielechowski asked if Ms. Curtis was aware of any
notices provided to her or the public in general as to
whether any of the funds on slide 17 would be swept.
2:55:00 PM
Ms. Curtis was not aware of any notices from the executive
branch.
Co-Chair Stedman thought there may be a forthcoming public
release of information, which would be a surprise to
members. He was concerned about advance notification of any
possible fund reclassification so the committee could take
rectifying action to ensure what the legislature could fund
what it had decided to fund. He emphasized that the
legislature was the appropriating body and could not do its
work if it was not in session.
Senator Hoffman recalled that Ms. Curtis had testified that
any such notification should be immediate before any
reclassification of funds took place.
Ms. Curtis stated that it was her opinion.
Senator Hoffman asked for Ms. Wallace's opinion.
Ms. Wallace relayed that there was nothing by law that
dictated a timeframe for notification but concurred that as
a matter of practice that notification to the appropriating
body should be immediate.
Senator Hoffman asked who could institute (on behalf of the
legislature) the action to stop the fund reclassification
once the notification was given.
Ms. Wallace stated that the initiation of action would be a
policy decision for the members of the legislature to
determine by committee or the whole body.
Co-Chair Stedman asked Senator Hoffman to repeat his
question.
Senator Hoffman asked hypothetically who would be able to
take action to exercise the rights of the legislature (as
mentioned by Ms. Wallace) if the Higher Education Fund was
reclassified as sweepable. He thought Ms. Wallace had
stated that the committee or the legislature as a whole
could take action.
Ms. Wallace stated that there was a multitude of ways the
reclassification could be challenged; whether it was a
member or a committee that voted to proceed. She stated
there were broad-standing rules in the state and any member
of the public or citizen taxpayer could challenge a change
in policy decision.
Senator Hoffman asked if the same entities would have the
authority to stop the outright transfer of funds through
injunctive relief.
Ms. Wallace informed that injunctive relief was another
kind of relief that was sought from the court; and whatever
plaintiff were to potentially initiate litigation with
respect to the reclassification would likely seek relief,
otherwise the decision would be under the courts' review
and not be timely enough to remedy the impacts of not
having the funds available in the current fiscal year.
3:00:19 PM
Senator Hoffman thought there were several members that had
expressed concern during Senate floor session earlier in
the day regarding the Higher Education Fund and the PCE
Fund. He emphasized the importance of the two funds and
thought it was crucial that the legislature could verify
that there had to be notification of any reclassification
as soon as possible. He had heard that the administration
did not plan on informing of any fund reclassifications
until mid-August, which he felt was unacceptable.
Co-Chair Stedman asked about the mid-August timeline as
referenced by Senator Hoffman, and if it had to do with an
accounting process.
Ms. Curtis relayed that the August timeline had to do with
the end of the reappropriation period. After the end of the
fiscal year on June 30, the state had two months to pay
bills as invoices came in from the previous fiscal year,
and code the expenditures for the previous fiscal year. She
thought the process should have no bearing on whether a
fund would be swept, but that it did have bearing on how
much would be swept.
Co-Chair Stedman asked the decision to sweep a fund that
had been historically been non-sweepable could be made in
August and backtracked.
Ms. Curtis stated that the decision to sweep a fund or not
had no bearing on the calendar.
Co-Chair Stedman asked if a reclassification of funds would
have to be made before the end of the fiscal year.
Ms. Curtis stated that the decision to reclassify funds as
sweepable at any time; however, if one was trying to get
legal analysis to support the opinion early summer might be
the timeline.
Co-Chair Stedman asked if the executive branch could make
the decision to reclassify funds after the end of the
fiscal year.
Ms. Curtis stated that reclassification could be done after
the fact if there was a reverse sweep in place. If a
reverse sweep did not happen, then there would be a trigger
to inform of the decision to reclassify funds.
3:04:29 PM
Co-Chair Stedman pondered the issue of no reverse sweep due
to lack of a three-quarters vote. He wondered if a decision
to reclassify funds for political purposes could be made
after the end of the fiscal year.
Ms. Curtis thought any decision could be made for political
reasons and clarified she would not weigh in on such a
decision.
Senator Wielechowski used the example of the University
Scholarship Fund. He assumed the funds would be distributed
in the following six weeks. He supposed the governor had
deemed the funds were sweepable and wondered if the
students would have to pay the money back.
Ms. Curtis stated that only unreserved undesignated funds
could be swept. If the funds were already expended, one
could not retrieve the funds.
Senator Wielechowski thought the executive branch's
argument for sweeping the funds would be that the
constitution required the funds to be swept and that the
funds were unconstitutionally paid out to the students,
therefore there would be a required payback.
Ms. Curtis stated that the amounts unreserved and
undesignated as of June 30 were swept.
Co-Chair Stedman thought the administration would be
notified not to put out any new grants.
Ms. Curtis noted that the sweep was not of money that had
been paid out, but rather money that would be paid out in
the future.
Co-Chair Stedman thought a sweep would stop new funds from
going out on July 1.
3:07:19 PM
Co-Chair von Imhof noted that the legislature was in the
middle of a five-day window for a veto override. She did
not think there was an opportunity for consideration of a
reverse sweep because it was immediate. She thought it
appeared that sweepable fund would be swept as well as some
non-sweepable funds that would leave holes and unfunded
programs in the state budget. She questioned whether the
legislature could muster a three-quarter vote at any point
to force a reverse sweep after the five-day period. She
questioned what the legislature's options would be after
five days.
Ms. Wallace stated that the veto override consideration was
separate from the sweep issues being discussed. The
legislature could pass a reverse sweep in an appropriation
bill with the approval of three-quarters of each body. The
legislature could make the appropriation retroactive to
July 1, 2019; and the state would see relatively no impact
from the sweep. If the legislature acted expeditiously, the
act would occur before even the accounting sweep on paper
would occur. If the legislature did not pass a reverse
sweep in an appropriation bill, and there were funds that
were reclassified as sweepable, at that point the
legislature or a member of the public or interested
organization would need to make a decision on whether the
grounds articulated by the administration were justifiable
or needed challenge and court intervention.
3:11:25 PM
Senator Bishop looked at slide 16 and commented on the
seriousness of the issue. He wondered how he could execute
his mission between three divisions if there was no reverse
sweep. He thought the issue needed to be rectified.
Ms. Curtis highlighted slide 18, "Final Sweep Take-Aways":
? The first sweep occurred for FYE 1995.
? All amounts borrowed from the CBRF were repaid by
the end of FY 10. The general fund did not borrow from
the CBRF from FY 11 through FY 14. Borrowing commenced
for FY 15 and the sweep resumed for FYE 16. The sweep
was reversed every year until FY 20.
? The reverse sweep was not approved for FY 20. This
means that all funds swept as of June 30, 2019 will
remain in the CBRF. As of July 1, 2019 those funds
will have no balance available for appropriation.
? According to AS 37.05.170, payment may not be made
and obligations may not be incurred against a fund
unless the Department of Administration certifies that
its records disclose that there is a sufficient
unencumbered balance available in the fund. The sweep,
in effect, creates a zero available balance in these
funds as of July 1, 2019.
Senator Hoffman asked if the legislature could take action
and give LLS the authority to file an injunction if the
legislature was notified in August that any items that were
not sweepable were deemed sweepable by the administration.
Ms. Wallace stated that her office would undertake
litigation at the direction of Legislative Council. The
legislature, while in session, would need to make a
decision whether or not to pursue litigation in the
interim. There were certain committees that had the power
to sue on behalf of the legislature, including Legislative
Council and Legislative Budget and Audit. The way the
legislature was to proceed would be determined by the time
of year.
Senator Hoffman thought Ms. Wallace had expressed that the
legislature would have to depend upon the chair of
Legislative Council to file suit after the legislature
adjourned.
Ms. Wallace stated that Senator Gary Stevens, as chair of
Legislative Council, could consider the suit; as well as
the chair of the Legislative Budget and Audit Committee.
She clarified that LLS would need direction from
Legislative Council to undertake litigation.
ADJOURNMENT
3:15:39 PM
The meeting was adjourned at 3:15 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 070919Leg Audit Leg Legal Presentation sweep final.pdf |
SFIN 7/9/2019 1:30:00 PM |
2020 Capital Reverse Sweep |