Legislature(2021 - 2022)SENATE FINANCE 532
03/04/2021 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Alaska's Fiscal Position, Look Back, and Projections – Legislative Finance | |
| 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
March 4, 2021
9:02 a.m.
9:02:02 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson (via teleconference)
Senator Natasha von Imhof (via teleconference)
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division;
Conor Bell, Fiscal Analyst, Legislative Finance Division.
PRESENT VIA TELECONFERENCE
Megan Wallace, Director, Legislative Legal Services.
SUMMARY
^ALASKA'S FISCAL POSITION, LOOK BACK, AND PROJECTIONS
LEGISLATIVE FINANCE
9:05:03 AM
Co-Chair Stedman discussed the background and anticipation
for the topic of the meeting. He noted that the
presentation was not a reflection on the budget itself. He
thought the Office of Management and Budget (OMB) had done
a good job putting agency budgets before the legislature.
The budget subcommittees had not finished budgetary
reviews. The committee would be working on how to fix the
structural deficit, pay a dividend to the people, and not
deplete the Permanent Fund. He noted that the large amount
of federal funds currently coming into the state could make
many underlying budget issues seem to go away for one or
two years.
Co-Chair Stedman relayed that the committee was striving to
provide clarity on the budget, and there would be several
more presentations on the topic. He mentioned addressing
the erosion of the Earnings Reserve Account (ERA). He
described the presentation as less of a dissection of the
governor's budget, and more of a consideration of budget
history.
9:07:10 AM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
discussed the presentation, "Alaska's Fiscal Position Look
back, and Projections" (copy on file).
Mr. Painter highlighted slide 2, "Outline":
? Budget changes since FY15 (our peak agency
operations budget year)
? Where we are now
? Looking forward
? Note: scenarios and adjustments in this presentation
were requested by the co-chairs.
LFD is policy neutral and does not endorse a
particular fiscal plan.
Co-Chair Stedman clarified that the committee had requested
the following scenarios to be presented: the statutory
dividend, a 50/50 split dividend on the 5 percent payout, a
$1,000 dividend, and a $500 dividend. He had selected the
scenarios because the first was in statute, the second was
proposed by the governor, and the third and fourth could
provide a baseline. He asserted there was no policy
information therein, but the scenarios would help to start
a discussion.
Mr. Painter addressed slide 3, "Why Unrestricted General
Funds (UGF)?":
? The budget deficit exists solely in UGF excess
appropriations of other fund sources cause "hollow"
funding but not a deficit
? Narrowing the focus to UGF spotlights the State's
general fund cashflow issues
? This focus does not mean other funds should be
ignored: DGF sources can contribute to revenue because
of lapsing funds, and there are policy calls to make
across all fund sources
? All Funds reports illustrate the size of government,
but this presentation is focused on the deficit
Mr. Painter highlighted slide 4, "Agency Budget Changes
Since FY15":
? See Handout A for larger font
? Key points: $661.2 million of UGF budget reductions
were made from FY15-18, with every agency's budget
going down
? Since FY18, reductions in some areas have balanced
out increases elsewhere are we at the "floor" for
our current government structure?
? Major legislation would be needed to make further
significant reductions
Mr. Painter referenced "Handout A," which was titled "UGF
Budget Changes, FY15 - FY22" (copy on file) and would
reflect the information on the next few slides.
Mr. Painter pointed to slide 5, "Agency Budget Changes
Since FY15." He noted that FY 15 had been chosen for
comparison as it was the highest year for agency operations
spending. He pointed out that overall, spending was down
about $700 million in Unrestricted General Funds (UGF)
between FY 15 and the governor's FY 22 budget request. The
total budget was down nearly 50 percent, also due largely
to the one-time funding for retirement. For statewide
items, the difference was much larger, mostly due to the
one-time funding for retirement in FY 15. He thought the
key takeaway from the slide was that almost every agency
was down significantly throughout the period.
9:11:30 AM
Mr. Painter looked at slide 6, "Agency Budget Change, FY15-
18." He proposed that the time period being considered on
the slide could be segregated into two slices. During the
period FY 15 through FY 18, every single agency saw
reductions. Collectively there was a nearly 15 percent
reduction in agency operations for a total of $663 million.
He pointed out that the Department of Transportation and
Public Facilities (DOT) was down by over 50 percent. During
the period there were across-the-board budget cuts that
significantly reduced the agency operations budget.
Senator Hoffman asked about the slide and the corresponding
handouts.
Mr. Painter stated that slide 6 corresponded to page 2 of
Handout A.
Senator Hoffman thought page 2 showed something different
than the slide.
Mr. Painter clarified that the handout had more rows that
were not included on the slide.
Senator Wilson asked if the numbers were real numbers with
inflation adjustments.
Mr. Painter relayed that the numbers were nominal numbers
with no inflation adjustments.
Co-Chair Stedman thought the slide showed agency operations
were down $663 million from FY 15 to FY 18, which was a
drop of 14.7 percent. He thought when retirement and debt
service and other items were added in, the slide showed a
reduction of 4.1 billion. He thought $2 billion of the
amount was for retirement contribution for the unfunded
pension and healthcare plan. He thought in total the budget
was down roughly 24 percent.
Mr. Painter agreed and explained that in the statewide
items the big reductions were to retirement as well as oil
and gas tax credits. He pointed out the 'Fund
Capitalizations' line, which showed the FY 15 amount as
over $700 million. The bulk of the $700 million was oil and
gas tax credit payments. There was a much smaller payment
in FY 18, which accounted for one of the primary reductions
in statewide items.
Senator von Imhof appreciated the slides. She thought the
next slide would illustrate changes in total state
spending. She thought slide 6 did not tell the whole story.
9:16:18 AM
Mr. Painter discussed slide 7, "Agency Budget Change, FY18-
22," which showed a table. He noted that the slide
corresponded to page 3 in Handout A. The slide compared the
FY 18 final budget to the governor's amended budget. He
commented that using a final budget that included
supplementals to compare to a budget that did not include
supplementals could often be misleading. The alternative
was to compare with the management plan, which also had
distortions. He thought the final budget gave the best idea
of the true total budget for the year.
Mr. Painter observed there was a much smaller reduction of
$41 million (1.1 percent). He noted that some agencies were
increasing over the period, such as the Department of
Corrections and the Department of Public Safety (DPS).
Other agencies were decreasing over the period; most
notably the University at $60 million, and the Department
of Health and Social Services (DHSS) at $54 million. The
reductions counterbalanced the increases and led to a
relatively flat budget over the period.
Senator von Imhof wondered whether if Mr. Painter was just
talking about UGF.
Mr. Painter agreed.
Senator von Imhof pondered that the Walker Administration
was FY 18 and FY 19 and the Dunleavy Administration was FY
20, FY 21, and FY 22.
Mr. Painter agreed.
Senator von Imhof observed there was a 1.1 percent decrease
from FY 18 to FY 22 over the two administrations.
Mr. Painter agreed.
9:18:52 AM
Senator von Imhof wondered whether Mr. Painter would
address how some of the UGF had been offset by Designated
General Funds (DGF) or other state funds.
Co-Chair Stedman replied in the affirmative. He stated the
committee would also address COVID-19 funds and one-time
funding. He pointed out that during FY 18 and FY 20 there
were different administrations as well as different
legislatures. He pointed out that during the time there
were two different governors, there had been three
different legislatures; and during that time the
legislature had been unable to change agency operations
spending very much. He used the example of the University
decrease offset by an increase in the Department of
Corrections.
Co-Chair Stedman continued his remarks. He noted that debt
service payments had gone down by $104 million, fund
capitalization decreased by $85 million, all while pension
payments had increased by $178 million. He commented on the
lack of significant change in spending despite the work of
the committee. He thought there needed to be statutory
changes to deal with agency spending. He thought the point
of the slide made it apparent that while there were
significant budget reductions previous to 2018, there had
not been much forward progress since. He added that there
was additional data going back to 2005 that was available
in budget subcommittee materials.
Senator von Imhof asked about employee counts over the time
frame of the slide.
Mr. Painter did not have the information readily available
but had looked at filled position counts over the same time
periods. The information had used personnel data from OMB
and did not included entities outside the personnel system,
such as the University. The data showed a reduction of
about 2,000 filled positions across state government
between FY 15 and FY 18. Between FY 18 and FY 20, there was
a small decrease of about 100 positions. He offered to
follow up with the information as requested by Senator von
Imhof.
9:23:28 AM
Co-Chair Stedman pointed out that the legislature had
reduced Department of Health and Social Services by almost
$54 million, or a little over 1 percent per year over the
previous several years. He commented that DHSS was the
state's second largest agency and was difficult to deal
with. He stated the legislature had been working on finding
reductions and cautioned against expecting the budget
subcommittee to bring back significant changes. He
reiterated the need for statute changes.
9:24:34 AM
Mr. Painter pointed to slide 8, "Where Are We Now?
Governor's FY22 Budget," which was a fiscal summary of the
governor's proposed budget. He highlighted that the
encircled numbers were the deficit. He highlighted that the
deficit in FY 21 was projected to be about $900 million,
and about $93 million in FY 22.
Co-Chair Stedman asked Mr. Painter to indicate what part of
the chart he was speaking to.
Mr. Painter agreed. He noted he was addressing line 16 on
slide 8, which showed the 'Pre-Transfer Surplus/(Deficit).'
The amount was before the governor filled part of the
deficit out of the ERA. He pointed out that there was a
$2.1 billion deficit each year. Part of the deficit would
be filled from the ERA: $1.2 billion in FY 21, and $2
billion in FY 22. The amount coming from the CBR on line 21
was $900 million in FY 21 and $93 million in FY 22.
Mr. Painter drew attention to the other circled box
entitled 'Reserve Balances (EOY),' which was a change from
previous fiscal summaries. The numbers presented for the
Constitutional Budget Reserve (CBR) were significantly
lower. The previous week LFD had received the comprehensive
annual financial report of the state, which was a post-
audit actual financial statement for FY 20. The report had
shown a lower CBR balance of $1.4 billion than the $1.8
billion projected in December. In previous fiscal summaries
the CBR amount projected in FY 21 and FY 22 was about $900
million, and now it was close to $500 million because of
the reduction. He reiterated that the changes were due to
receiving the audited FY 20 financials.
9:27:26 AM
Co-Chair Stedman reminded that the CBR was getting down the
minimum balance that would be prudent. He thought the
committee could soon expect commentary from OMB regarding
the recommended cash balances to operate the state. He
mentioned that the balance had at one time been $12
billion.
Co-Chair Bishop commented that the governor's proposed
budget would take the projected balance of the ERA for FY
22 down below the minimum amount recommended by the Alaska
Permanent Fund Corporation (APFC).
Mr. Painter agreed. He noted that the number was the
realized amount for the ERA only, not including unrealized
gains. He stated that the figures were based on APFC's
projected returns in FY 21. The actual returns had been
greater than what was projected. When the actual returns
were incorporated, APFC expected to include a lower future
projection, which would balance the amount out.
Senator von Imhof looked at line 10 on slide 8, which
showed a lean capital budget, which was not consistent with
previous years. She found line 17, showing a draw from the
ERA, to be concerning. She thought the line showed an ad
hoc draw of $1.2 billion for FY 21, and $2.0 billion for FY
22.
Mr. Painter agreed and explained that the amount was beyond
the level of the percent of market value (POMV) draw limit
in statute.
Senator von Imhof thought if line 17 was added to the
regular draw on line 3, there would be a total of a $6.3
billion draw at once.
Mr. Painter agreed.
Senator von Imhof asked about the ERA balance if the
proposed draws were taken.
Mr. Painter noted that line 21 showed that the realized ERA
balance would go below $10 billion in FY 22 based on APFC's
projections with the draws.
Senator von Imhof asked if the $9.3 billion projected
balance would be after the proposed draws to the ERA were
taken.
Mr. Painter replied in the affirmative.
Senator von Imhof asked if upcoming slides would show the
impact of the draws on the ERA and POMV draw.
Mr. Painter replied in the affirmative.
9:31:28 AM
CONOR BELL, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION,
displayed slide 9 titled "About the LFD Fiscal Model." He
relayed that LFD modeled fiscal scenarios at the
legislature's request. He detailed that the modeling was
based on the Department of Revenue's fall revenue forecast.
He noted that because oil prices had increased
significantly since the fall forecast, LFD had incorporated
more recent futures market data with updated oil price
assumptions. He reported that the FY 21 oil price forecast
in the fall Revenue Sources Book was $45 per barrel and
more recent futures markets priced the amount at $52 per
barrel; likewise, the FY 22 forecast had increased from $49
per barrel to $59 per barrel. Consequently, forecasted UGF
revenue had increased by $249 million in FY 21 and $293
million in FY 22. He added that LFD had not changed its
assumptions for Permanent Fund earnings returns. He noted a
difference between the fiscal modeling and fiscal
summaries: the modeling included an assumption of $50
million in supplementals per year, which was money spent
after the enacted budget.
Mr. Bell relayed that the modeling assumed draws in excess
of revenue would be taken from the CBR; however, there was
a minimum CBR balance of $500 million and any excess
deficits would be taken from the Permanent Fund (ERA). He
reported that the governor's proposed budget took the
Permanent Fund Dividend (PFD) amounts for the FY 21
supplemental and the FY 22 budget from the ERA, which was a
slight difference. He informed the committee that LFD
provided a more simplified model directly to legislators
that they could use to model their own scenarios. The more
complex model in the presentation showed a streamlined
version of LFD outputs.
9:34:13 AM
Mr. Painter addressed slide 10, "Fiscal Summary with
Updated Revenue Assumptions." The slide included a table
showing a different version of the fiscal summary that
incorporated the adjustment in revenue of $249 million in
FY 21 and $293 million in FY 22 (shown on line 3 and
circled in red). He pointed to the bottom of the table and
detailed that the change reduced the pre-transfer deficit
to $1.8 billion for FY 21 and FY 22 (line 17) and the
amount coming out of the CBR in FY 21 would be $660 million
instead of $900 million. There would be a post-transfer
surplus in FY 22 after the direct draw was taken out of the
ERA; however, because the ERA spending constituted deficit
spending, the deficit would be $1.8 billion. He moved to
line 21 and explained that the higher revenue figures meant
there was more in the CBR - the slide showed a balance of
$780 million in FY 21, and due to the post-transfer
surplus, the balance was $1 billion in FY 22.
9:35:48 AM
Mr. Painter turned to a 10-year model of the governor's
amended budget before the PFD payment on slide 11. The
slide removed the PFD in order to clearly show the pre-PFD
deficit the governor's budget paid for directly from the
ERA. He clarified that the slide was not meant to suggest
no PFD, it was merely to demonstrate what the fiscal
situation would look like prior to considering the
dividend. He noted that the deficit numbers were slightly
different than the fiscal summary because of the annual $50
million supplemental assumption used in the presentation.
The previous slide showed a $200 million surplus, while
slide 11 showed a surplus of $150 million. He expounded
that based on the higher price forecast, there would be
annual surpluses and an increase in balances if the
legislature accepted the governor's budget as written.
9:36:46 AM
Mr. Painter discussed slide 12, "Unusual Fund Sources in
Governor's Budget: Total of $241.0 Million." He explained
the intent was not to judge the proposals as bad, but to
point out that they were an unusual use of funds and
unconventional budgeting tactics, which in some cases were
not designated by statute. He noted that in some cases the
fund sources were temporary and were not repeatable in
future years. He stated that the methods may make the
deficit appear smaller than the reality.
Mr. Painter began with the first example of using lapsing
balances in place of FY 22 appropriations. He remarked that
the committee had talked extensively about the $35 million
in lapsing balances from Medicaid that the governor's
budget would carryforward into FY 22. He explained that the
action lowered the FY 22 budget. He stated there were two
other unusual uses of lapsing balances. The first was the
use of potential lapsing balances of fire suppression
activity funding, which would be reappropriated to fire
break construction. He detailed that the prior year, fire
break construction had been a UGF capital budget project.
He pointed out that using lapsing balances was not a bad
idea, but it was not necessarily the most transparent
budget method compared to the previous year. The second was
the OMB proposal to use lapsing balances to smooth funding
for rate setting agencies. He detailed that in order to
ensure rate setting agencies did not experience a sudden
shortfall in collections, the governor's budget would
spread out $5 million in lapsing balances. He reported that
the goal could be accomplished by appropriating $5 million.
He observed that using the lapsing balance made the budget
look a little smaller.
Mr. Painter continued to review slide 12. He highlighted
the governor's use of fund sources for non-designated
purposes. The largest was the use of $60 million in Alaska
Industrial Development and Export Authority (AIDEA)
receipts (instead of UGF) for oil and gas tax credits. He
detailed that the $60 million was the statutory calculation
under the fall forecast. The governor's budget used $10.5
million in Power Cost Equalization (PCE) funds for Alaska
Energy Authority (AEA) capital projects. The proposal was
not a designated use of the PCE Fund and it was beyond the
fund's statutory draw. The supplemental budget included $4
million of Higher Education funds for prosecutor
recruitment and housing. He noted that the proposed
expenditure had no real relation to the Higher Education
Fund. Additionally, the FY 22 budget included two fund
source changes - one in AEA and one in the Alaska
Commission on Postsecondary Education (ACPE) that were
consistent with the purpose of the funds, but were not
statutorily designated purposes.
Mr. Painter reviewed two one-time or temporary fund
sources. The largest was the Alaska Housing Finance
Corporation (AHFC) bond package of $104 million in the
capital budget. The second used $16.3 million of Mental
Health Trust Reserve funds, $6 million of the total was
used in the supplemental and $10.3 million was in the FY 22
budget. He stated that all of the items on slide 12 were
examples of using unusual and temporary fund sources that
LFD did not necessarily recommend building into the budget
every year going forward. He noted the next slide would
adjust for the issue.
9:40:38 AM
Senator von Imhof asked if the $10.5 million [for AEA
capital projects] would come from the PCE principal or
annual earnings.
Mr. Painter replied that PCE was a single fund with no
separate earnings fund. He explained that while statutes
directed the use of earnings, there was no distinction in
the fund between principal and earnings.
Senator von Imhof asked if LFD tracked the amount taken
from PCE. She asked if the amount was generally over
5 percent with the extra $10.5 million.
Mr. Painter responded that LFD did track the amount taken
from PCE. He was not certain whether the proposed amount
was over 5 percent. He elaborated that there was a statute
that limited the amount going to the PCE program to a POMV
of 5 percent; however, the other part of the statute
referring to other purposes was based on prior year
earnings. The governor's proposal went beyond the amount of
spendable prior year earnings. He did not know where the
proposal would put the POMV.
Co-Chair Stedman remarked that the committee would get a
clarification on the PCE.
Co-Chair Bishop asked for verification that the governor's
proposal overdrew the PCE fund. He believed $10.5 million
constituted an overdraw with the multiplier.
Mr. Painter confirmed that the proposed draw was beyond
what was dictated by the statute governing the use of
earnings.
Senator Wielechowski asked what rate of return AIDEA would
get for the $60 million in oil and gas tax credits.
Mr. Painter answered that he did not know how AIDEA
invested the money. He detailed that AIDEA had a cash
reserve and he was not sure if the governor's proposal
would mean money would have to be taken out of other AIDEA
investments. He would follow up with additional
information.
Senator Wielechowski asked if AIDEA would get anything in
return for the $60 million such as a 2 percent, 5 percent,
or 10 percent rate of return.
9:43:15 AM
Mr. Painter responded that he was not certain because AIDEA
kept a cash amount for making investments. He did not know
whether AIDEA would have to replace the cash by taking
other investments out. He would have to check with AIDEA to
determine how they would handle the draw. He would follow
up with the information.
Senator Wilson asked about the impact of the statutory
calculation for the oil and gas tax credits and the
increase in the price of oil.
Mr. Bell replied that the statute designated the amount at
10 to 15 percent of production taxes levied, which the
Department of Revenue (DOR) interpreted as production tax
levied pre-credits. Consequently, at $59 per barrel the $60
million would increase to about $122 million and at $60 per
barrel the amount would increase to $80 million. He
explained that at oil prices above $60 per barrel, the rate
decreased from 15 percent to 10 percent.
Mr. Painter discussed slide 13, "Fiscal Summary: Governor's
Budget with Typical Fund Sources." The table replaced the
atypical fund sources with UGF (indicated with blue
arrows). He detailed that the supplemental budget used $6
million from the operating budget and $4 million in the
capital budget [in FY 21]. In FY 22, there was $56.5
million in agency operations, $60 million in statewide
items, and $114.5 million in the capital budget. He
followed up on an earlier comment about the size of the
capital budget by pointing to line 12 and explaining that
switching the fund sources to UGF would result in a $176.7
million capital budget, which would be the highest since
FY 15.
Mr. Painter directed attention to the total CBR draw shown
on line 22 of slide 13. He explained that making the
changes went from a post-transfer surplus of $200 million
to a post-transfer deficit of $31 million in FY 22. He
elaborated that the CBR balance was lower at $770 million
in FY 21 and $774 million in FY 22 (shown on line 21).
9:46:36 AM
Co-Chair Stedman pointed out the POMV draw on lines 4 and
18 [of slide 13] and explained that the two numbers needed
to be combined to get the total draw from the Permanent
Fund.
Mr. Painter agreed. He pointed to the pre-transfer deficit
on line 17 of $1.86 billion in FY 21 and $2 billion in FY
22.
Mr. Painter advanced slide 14 titled "Fiscal Model:
Governor's Budget with Typical Fund Sources." The
adjustments showed the state in deficit spending in FY 21
and FY 22 with surpluses in the outyears. He noted that the
slide did not include a PFD payment. The addition of a PFD
brought the budget up and created a deficit situation;
however, the expectation of rising oil prices in the future
still resulted in additional money available in future
years.
9:47:43 AM
Mr. Painter looked at slide 15, "How Federal COVID-19
Relief Impacts Alaska's Budget." He referenced a
presentation by OMB a couple of weeks earlier on
Coronavirus Aid, Relief, and Economic Security (CARES) Act
funding and COVID-19 relief from the federal government.
The federal funding had a number of impacts on Alaska's
budget, the most notable was the Federal Medical Assistance
Percentage (FMAP) increase from 50 percent to 56.2 percent
for non-expansion population. He reported that the change
saved Alaska $15 million to $17 million UGF per quarter in
the Medicaid program. The assistance was likely to be
extended through end of calendar year 2021. The LFD
modeling included an adjustment for the federal assistance
in the previous section by taking out the $35 million
adjustment.
Mr. Painter continued to review slide 15. The state had
received $1.25 billion in the Coronavirus Relief Fund (CRF)
in 2020. He explained that the funding had often been used
before state funds, which created lapsing funds in FY 20
and possibly in FY 21. He stated that DOT was receiving a
substantial amount of federal funding through several
different avenues - some of the funding was going towards
airports, highways, and some through Federal Transit
Authority (FTA) grants. The governor's budget included
$14.6 million in fund source changes away from UGF to
utilize some of the federal funding. The action would lower
the budget at present, but when the federal funding ceased
it would require an increase in UGF or agency reductions in
order to maintain the funding level. He relayed that the
next couple of slides would show adjustments back to UGF in
order to see the true size of the long-term budget.
9:49:38 AM
Mr. Painter addressed slide 16, "Fiscal Summary: Governor's
Budget without COVID-19 Funding." The slide showed prior
adjustments made [shown on slide 13] and added an
adjustment of $14.6 million shown in green. He noted the
adjustment was fairly small and did not "move the needle"
significantly. The $2 billion deficit remained the same on
line 17. The total CBR draw was slightly higher at $45.8
million and the total balance on line 21 was slightly
lower.
Mr. Painter highlighted slide 17, "Fiscal Model: Governor's
Budget without COVID-19 Funding." He explained that the
data shown in the graphs was very similar to previous
graphs [on slide 14] because of the small adjustment. The
deficit would be slightly larger in FY 22 with smaller
surpluses in the outyears.
9:50:25 AM
Mr. Painter pointed to slide 18, "FY18-22 Spending with
Adjustments for Fund Sources and COVID-19." He remarked
that the slide referred to Handout B in members' packets
(copy on file). The two-page document showed the full FY 15
through FY 22 look and FY 18 through FY 22 only. He noted
the slide on the screen contained a couple of minor errors
in the totals (totals were correct in members' packets). He
pointed to the last column showing the governor's amended
budget with the exception of the changes to fund sources.
Instead of being down 1.4 or 1.1 percent, agency operations
were up 0.5 percent from FY 18 through FY 22. The
difference was not huge, but it did shift from small cuts
during the period to a small increase.
Senator von Imhof asked about a scenario where the federal
Coronavirus Aid, Relief, and Economic Security (CARES) Act
Act funds disappeared in a couple of years. She asked how
much the state was ramping up agencies in terms of
additional employees and programs. She wondered what it
would look like in a couple of years when the funds were no
longer available. She asked how the state would unwind from
additional spending.
Mr. Painter replied that where all of the funding was going
was an important question. The DOT funding was primarily
being used to shore up lost revenue in the Alaska Marine
Highway System (AMHS) by using FTA grants. He explained
that it would not expand service in a sustainable way but
it would help AMHS backfill from the lost revenue due to
the loss of service from COVID disruptions. Most of the
funding in the budget was coming either in place of general
funds, like the $14.6 million, and some was going to
increases in activity. He referenced the revised program
legislative (RPL) from a couple of months back that was
used to reopen some maintenance stations. The stations had
been closed due to budget cuts and had been reopened with
federal funds; therefore, when the federal funds ran out,
the maintenance stations would need to find an alternate
funding source.
9:53:48 AM
Mr. Painter moved to a list of some of the state's
obligations and funding needs on slide 19. The list totaled
about $12 billion and was not exhaustive. He noted that the
items were not all things that the state had to fund, but
they included obligations with some expectation of funding.
The largest item was the Public Employees' Retirement
System (PERS) and Teachers' Retirement System (TRS)
unfunded liability to which the state was constitutionally
obligated. Based on a payment plan, the state would make
annual payments through FY 39 and the FY 22 payment was
$336 million.
Mr. Painter continued to review the items on slide 19. The
second item was $1.1 billion in general obligation bonds
and state supported debt through lease purchase agreements
and other similar things. The debt service for the longest
of the cycles would extend to FY 41. He relayed that the
governor's FY 22 budget included over $90 million for the
purpose. He noted that payment of the specific debt was not
optional. School debt service of $789 million was subject
to appropriation to reimburse municipalities. The
governor's budget included 50 percent of the full $84
million. He explained that the current issued debt had
payments through FY 39. A moratorium on new debt had been
in place since FY 15, which had been extended through FY
25; however, if the moratorium expired and new debt was
issued, the obligation would extend beyond FY 39.
Mr. Painter highlighted an estimated $760 million in oil
and gas tax credits on slide 19. The statutory payment plan
included deposits to the Oil and Gas Tax Credits Fund.
There had been an attempt to set up a bonding proposal,
which had been ruled unconstitutional. The governor's
budget included $60 million, the statutory amount under the
fall forecast, which may change in the spring forecast. The
state had a $2 billion backlog of deferred maintenance,
including the university and state buildings. He elaborated
that the payment plan was annual appropriations to the
Capital Income Fund; however, the amount flowing into the
fund on its own was about $30 million annually, which was
not sufficient to make a dent in the total. The amount
reflected about one-third a percent of the asset value,
which was far below the standard. The governor's budget
included over $50 million, which was still below the amount
needed to reduce the backlog.
Mr. Painter moved to the last two items on slide 19. The
state's share of the School Major Maintenance and
Construction Lists was $350 million if funded. There was no
direct funding for the item; however, the Regional
Educational Attendance Area (REAA) Fund could be used for
some of the projects. The governor's budget included $17
million or 50 percent funding. He detailed that the funding
could not be used for all of the projects because some were
outside the REAAs. He added that funding for non-REAA
projects had not been deposited into the fund in several
years. The Department of Environmental Conservation (DEC)
had reported $1.8 billion in rural sanitation needs. He
explained that rural sanitation was funded annually through
the Village Safe Water Program. The state's FY 22 share was
$18 million, which leveraged federal funding for a total of
$71 million. He noted that even at that rate it would take
quite some time to get to the full $1.8 billion of
underserved communities.
9:58:10 AM
Senator Hoffman referenced the rural school construction
list and highlighted an existing decree that the state had
signed off on. The decree included a compilation of
percentages the state paid for school bond indebtedness. He
believed the decree required state spending of about $34
million annually. He pointed out that the state was
currently in noncompliance with the decree and the case
could be reopened. He referenced Mr. Painter's statement
there were no plans for funding the projects. He
underscored that there was a plan, which the state had
signed off on. He reiterated that the state was in
noncompliance with the decree and was subject to
potentially having a court case reopened that penalized
rural students from receiving adequate classroom space
under new construction.
Mr. Painter explained that that the REAA fund could be used
for many projects on the list, but not all. He noted that
there were municipal projects on the major maintenance
list, which did not have a formula. He agreed that there
was a formula through the REAA fund for the majority of the
projects.
10:00:15 AM
Mr. Painter highlighted slide 20, "Governor's Budget and
Statutory Formulas":
? Governor funds School Debt Reimbursement at 50
percent of statutory level
100 percent funding would add $41.8 million to
the FY22 budget
? Governor funds Regional Educational Attendance Area
(REAA) Fund at 50 percent of statutory level
100 percent funding would add $17.1 million to
the FY22 budget
? Governor funds Community Assistance at $12.4
million, versus the $30.0 million statutory deposit
100 percent funding would add $17.6 million to
the FY22 budget
? Governor does not fund municipal project debt
service
100 percent funding would add $2.4 million to
the FY22 budget
Senator von Imhof remarked that the legislature had heard
that it was important to follow statute when paying the
PFD. She remarked that the presentation had four examples
of the administration not following the statute.
Mr. Painter agreed.
Co-Chair Stedman explained that it was typical in any
budget year to override statutes in a given year. He used
the example of the $150,000 exclusion for senior citizens'
property tax, which had not been funded for many years.
10:04:28 AM
MEGAN WALLACE, DIRECTOR, LEGISLATIVE LEGAL SERVICES (via
teleconference), pointed to slide 21, "Legislative Power of
Appropriation":
? "No money shall be withdrawn from the treasury
except in accordance with appropriations made by law."
(Article IX, sec. 13). The dedicated funds prohibition
(Article IX, sec. 7) prevents the legislature from
dedicating the proceeds of any state tax or license to
any special purpose.
? An appropriation is required to carry out any
statutory formula.
? In Wielechowski v. State, the Alaska Supreme Court
held that the legislature's use of permanent fund
income is subject to the normal appropriation and
budgetary veto process. Thus, each year, the
legislature may appropriate from the earnings reserve
account to the dividend fund any amount, regardless of
the language in statute.
? Unless an exception to the dedicated funds
prohibition applies, each year, the legislature may
appropriate money from any available source, for any
public purpose, as it deems appropriate. Statutory
formulas serve as guidelines or policy suggestions for
the legislature to follow.
? In general, each year, all state programs are
subject to appropriation.
Co-Chair Stedman wondered whether the legislature did not
have the authority to violate the constitution.
Mr. Wallace replied in the affirmative. She explained that
the constitution was the primary legal and enforceable
provision as it related to the power of appropriation. She
stated that Article 9 Section 13 would trump or override
any statute that recommended or provided that a certain
amount of money be appropriated or set aside for a certain
program.
Co-Chair Stedman wondered whether there could be an
initiative to appropriate out of the treasury.
Ms. Wallace replied that an initiative could not be used to
make an appropriation.
Co-Chair Stedman thanked the testifier.
10:09:25 AM
Mr. Painter looked at slide 22, "Fiscal Summary: Governor's
Budget with Statutory Funding of Statewide Items", which
showed the full statutory funding of statewide items. He
noted that the next couple of slides would show the graph,
but would not show statutory funding. He remarked that line
17 showed the deficit increases in FY 22.
Mr. Painter discussed slide 23, "Fiscal Model: Governor's
Budget with Statutory Funding of Statewide Items." He noted
that the $70 million impact was the largest impact expected
going forward.
Mr. Painter pointed to slide 24, "Fiscal Model: Budget with
Typical Fund Sources, No COVID Offsets, Statutory PFD." He
explained that the slide showed the governor's numbers with
using the LFD model. He discussed the slide further. He
stressed that there was not enough funding to meet the
budget - following the model.
Co-Chair Stedman queried the estimate of the gap between
the dotted line and the top of the red bar on the slide.
Mr. Painter clarified that the slide said billion where it
should have said million. He stated that the gap in FY 30
was approximately $1.5 billion. He said that there was an
expectation of some excess earnings in the ERA that could
be overdrawn again to empty out completely.
Senator von Imhof noted that the ERA could be depleted and
25 percent of the fund would be gone. She wondered how it
would affect the annual draws of the POMV. She asked
whether that was factored into the model.
Mr. Painter replied that it had been factored into the
model. He noted that deficits increased because the
overdraw of the ERA decreased the POMV draw and decreased
the earning power of the fund. He stated that because the
POMV draw had a lag, there was not an immediate impact on
the POMV, however there was an impact on the earning power
of the fund. He stated that the ERA balance declined faster
than the POMV draw.
10:15:17 AM
Co-Chair Stedman noted that it would be discussed on slide
30.
Senator Hoffman noted that each billion dollars drawn out
of the ERA meant that there was $50 million less to spend
each year thereafter.
Mr. Painter displayed slide 25, "Fiscal Model: Budget with
Typical Fund Sources, No COVID Offsets, and 50/50 POMV
Split." He stated that the current PFD statute was 50
percent of statutory net income. He explained that the
governor had proposed to change that to 50 percent of
market value draw, which would decrease the dividend by
approximately $400 million per year compared to the current
statute. He noted that compared to the last slide, there
were smaller deficits in FY 23 and beyond. He pointed out
that the ERA lasted slightly longer in the model.
Co-Chair Stedman pointed out that there had been a
discussion at the beginning of the meeting about two
different governors and three different legislatures. He
felt that the future legislatures and governors may have a
difficult time under some of the scenarios.
Senator Hoffman queried the amount of the PFD under the
50/50 POMV scenario.
Mr. Painter replied that it would be approximately $2400
per year on average.
Co-Chair Stedman reminded the committee that LFD could run
any scenario. He stressed that the committee was not
advocating any positions, rather the presentation was meant
to be informational.
Senator von Imhof commented that the 50/50 dividend could
be examined two different ways. She remarked that there
could be an examination of actual cash received by each
individual, which was approximately $2400. She emphasized
that it cost the state $1.5 billion to pay that amount,
which was almost 25 percent of the UGF budget. She stressed
the importance of noted the actual cost to the state.
Mr. Painter looked at slide 26, "Fiscal Model: Budget with
Typical Fund Sources, No COVID Offsets, and $1,000 PFD." He
noted that there was a small persistent deficit under the
model. He remarked that there was a $775 million cost in FY
22 decreasing over time, because it was a one cost nominal
dividend. He remarked that it would still lead to ERA
overdraws, and a declining ERA balance. He stressed that
LFD was not suggesting that the plans were not possible,
rather it showed the "size of the hole" that needed to be
filled in order to support the dividend without overdrawing
the ERA.
10:20:30 AM
Co-Chair Stedman furthered that it also did not show
expense reductions or new revenue. He stressed that there
needed to be a change because the state must meet payroll.
Senator Hoffman noted that under the scenario in the
current slide, by FY 30 the fund would still $12 billion.
He wondered whether there was a scenario that showed a
complete depletion of the ERA.
Mr. Painter replied that the previous two slides showed the
scenarios with a complete depletion of the ERA. He stated
that the smaller overdraw in the current slide would
maintain the ERA.
Senator Hoffman surmised that the ERA may exist through
2060.
Mr. Painter responded that he would need to examine the
exact amount that would last, based on the draws.
Senator Wielechowski commented that it would be interesting
to factor in the historic 26 percent of the value of oil,
instead of the current lowest share of 13 percent.
Co-Chair Stedman restated that LFD could run that model.
Senator von Imhof wondered whether the slide showed that
the state was taking above 5 percent in all the years,
which was worrisome because of the slow erosion of the ERA.
She remarked that other sovereign wealth funds generally
had a 5 percent match annual fund.
Mr. Painter replied in the affirmative.
Senator von Imhof noted that it had not been historically
fiscally viable over time. She did not believe that any
other sovereign wealth fund took more than 5 percent.
10:25:47 AM
Co-Chair Stedman remarked that the Alaska Mental Health
Trust Authority (AMHTA) took 4.25 percent, and they had
good performance in their markets.
Senator Hoffman remarked that many Alaskans supported a
PFD. He recalled that a $1000 PFD had been in place for
several years. He queried the additional revenue needed for
a $1000 to level the draw in the ERA in the out years.
Mr. Painter replied that, based on the revenue forecast
beyond FY 22 and FY 23, $300 million in revenue would be
sufficient to avoid overdraws and pay a $1000 PFD with the
budget assumptions.
Senator von Imhof pointed out that the budget assumptions
required further reductions of 5 percent each year and a
very anemic capital budget. She wondered whether it
included any CARES Act money or money taken from DGF.
Mr. Painter replied that the version already made those
adjustments and assumed a $150 million capital budget
growing with inflation.
Senator von Imhof wondered whether the scenario required
the legislature to cut the budget by a certain amount each
year.
Mr. Painter replied that the scenario assumed growth with
inflation of 2.25 percent.
Co-Chair Bishop observed that the scenario was considered a
$150 million capital budget, assuming the federal match
from FHWA. The result would be a cumulative total capital
budget of over $1 billion each year.
Mr. Painter agreed.
Co-Chair Stedman stressed that the scenario did not
reference the full capital budget, rather the general fund
portion.
Mr. Painter pointed to slide 27, "Fiscal Model: Adjusted
Budget with $500 PFD." He noted the deficits in FY 22 and
FY 23. He stated that FY 24 had oil prices projected to be
higher, so there would be small surpluses and a balanced
budget moving forward with no additional revenue or budget
cuts. He commented that the scenario had very small
overdraws from the ERA in FY 22 and FY 23 to meet the
deficits. He explained that the slightly declining ERA
balance was due to the Permanent Fund earnings forecast of
6.75 percent, which was not quite sufficient to keep up
with inflation. He remarked that switching to the updated
forecast of 6.2 percent going forward, the base scenario
would also have a decrease in the ERA balance. He stressed
that the paying inflation proofing and POMV draws based on
the forecast would still show a slightly declining ERA.
10:30:46 AM
Senator Hoffman recalled the last position that the senate
took on the PFD, which was in SB 26. He wondered whether
the dividend amount in that bill was $1100.
Mr. Painter replied in the affirmative.
Mr. Painter discussed slide 28, "Fiscal Model: Budget with
Typical Fund Sources, No COVID Offsets, 50/50 POMV PFD,
FY21 Supplemental PFD." He explained that the slide showed
the statutory dividend in FY 22, and the 50/50 POMV going
forward. The scenario also added the FY 21 supplemental
dividend proposed by the governor.
Mr. Painter pointed to slide 29, "Swoop Graph Including
FY21 Supplemental PFD." He stated that the slide showed the
typical swoop graph showing all the agencies' UGF funding.
Co-Chair Stedman wondered whether the large bar on the
graph of over $3 billion would be equivalent to all of the
agencies, except for DEED.
Mr. Painter replied in the affirmative. He explained that
the bottom row showed the cumulative budget.
Co-Chair Stedman felt that the slide referenced some
members' previous questions.
10:34:15 AM
Mr. Painter displayed slide 30, "Impact of FY 21-22
Overdraws on ERA Balance and POMV Draw." He stated that the
ERA balance comparison was the bars. He stated that the
blue bars showed the ERA balance following the POMV, and
the green showed overdraws only in FY 21 and FY 22. He
noted that there was an immediate difference in the ERA
balance in FY 22, and the difference was more than $2
billion. He stressed that the ERA balances did not quite
match the fiscal summary, because it included unrealized
gains. The ERA balance difference was immediate, and the
POMV difference took more time because of the five-year
average and the lag in the average. He stated that the
impact would not be seen until FY 23, but would get larger
as it was worked into the average. He explained that by FY
30 there would be a $200 million a year difference in the
revenue based on the overdraw. He stated that cumulatively,
over the period, there would be nearly a $1 billion
difference in revenue. He stated that the $200 million
difference was essentially a need to find another $200
million of either budget cuts or new revenue in the future
for a balanced budget. He noted that it showed the
assumption of no change in the Permanent Fund investment
strategies.
Co-Chair Stedman commented that the intention was to set up
a base for the operating budget procedure.
10:37:12 AM
Senator von Imhof surmised that slide 30 showed the green
bar beginning to go down, because the ERA eroded over time.
She looked at slide 26, and noted that spending $650
million had an impact. She looked at FY 26, FY 27, and FY
28, which had reduced ERA balances. She wondered whether
the POMV draw would begin to reduce, so the deficit would
increase due to the total value of fund.
Mr. Painter replied that the draws affected the POMV draw,
but examining the petroleum revenue forecast over that
period had increases that were faster than the rate of
inflation. He explained that relatively minor increases in
price resulted in greater than inflationary growth in
revenue.
Mr. Bell furthered that beginning in FY 25 there was an
assumption of inflation proofing from the ERA to the
principal of the Permanent Fund of approximately $1 billion
per year. He explained that, based on statutory intent,
there was not assumption of inflation proofing for FY 22
through FY 24.
Senator von Imhof assumed that the price of oil would
continue to increase even through there move toward
renewable energy. She wondered about market corrections and
the impact. She felt that there were many variables that
could drastically affect the model.
10:40:22 AM
Senator Hoffman wondered whether other funds in the world
utilized inflation proofing or whether their increases were
from the markets.
Mr. Painter replied that Alaska's structure of a separate
ERA for a fund was unusual for an endowment. He stated that
most would set a draw at a rate of 5 percent or less, which
theoretically accounted for inflation. He explained that
the transfer between two funds to account for inflation was
unique to Alaska.
Senator Hoffman wondered whether there would be a
consideration to change to one fund.
Co-Chair Stedman replied that it would be discussed when
there was a more in depth conversation about the dividend.
He stressed that the change would require a constitutional
amendment to remove any funds from the corpus. He noted
that there would also be a conversation about inflation
proofing, and recalled that the committee had expressed
concern related to the AMHTA about inflation proofing their
fund. He stated that he would work with committee members
on a schedule, and encouraged members to submit any
modeling request to ensure a robust discussion on the
policy moving forward.
ADJOURNMENT
10:44:23 AM
The meeting was adjourned at 10:44 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 030421 Handout B - FY15-22 Budget Changes with Adjustments (002) - Copy.pdf |
SFIN 3/4/2021 9:00:00 AM |
Alaska's Fiscal Position LFD |
| 030421 Handout A - FY15-22 Budget Changes.pdf |
SFIN 3/4/2021 9:00:00 AM |
Alaska's Fiscal Position LFD |
| 030421 LFD Fiscal Model Presentation.pdf |
SFIN 3/4/2021 9:00:00 AM |
LFD Fiscal Model |