Legislature(2021 - 2022)SENATE FINANCE 532
02/10/2022 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Fiscal Scenarios - Legislative Finance Division | |
| 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
February 10, 2022
9:03 a.m.
9:03:39 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:03 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
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division;
Conor Bell, Fiscal Analyst, Legislative Finance Division.
SUMMARY
PRESENTATION: FISCAL SCENARIOS - LEGISLATIVE FINANCE
DIVISION
^PRESENTATION: FISCAL SCENARIOS - LEGISLATIVE FINANCE
DIVISION
9:05:03 AM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
discussed the presentation entitled "Fiscal Modeling:
Senate Finance Committee Scenarios" (copy on file). He
relayed that he would cover the LFD baseline assumptions,
compare those to the committee assumptions, and run various
fiscal models.
Mr. Painter looked at slide 2, "Outline":
?Review of LFD Modeling Baseline Assumptions
?Comparison of Senate Finance Committee assumptions to
LFD Baseline
?Fiscal Models Using Senate Finance Assumptions
Mr. Painter noted that the co-chairs had asked for
different assumptions to compare to the baseline. He said
that several fiscal models would be used to run different
assumptions, as well as stress tested.
Co-Chair Stedman reminded that there could be other
modifications to the modelling of the numbers.
9:06:10 AM
Mr. Painter spoke to slide 3, "Review of LFD Modeling
Baseline":
?Legislative Finance's fiscal model is designed to
show policy makers the longer-term impact of fiscal
policy decisions.
?The baseline assumptions are essentially that current
budget levels are maintained, adjusted for inflation.
Policy changes are then applied against that baseline.
?Our default is to assume that statutory formulas will
be followed.
Co-Chair Stedman thought slide 3 was routine for the
committee but was not routine for the public. He asked Mr.
Painter to go over slide 3 more slowly.
Mr. Painter reviewed slide 3. He stated that the LFD goal
was to show policy makers the long-term (next 10 years)
impact of proposed policies. He shared that the modelling
started with a policy-neutral baseline, in the case of the
presentation using the governors budget submission (which
was a policy proposal) and show how it grew with inflation.
He said that when scenarios were run, policy changes were
applied against the baseline. He relayed that the default
assumption was that the statutory formulas would be
followed and any deviation from statute would be reflected
as a change from the baseline.
9:08:25 AM
Mr. Painter referenced slide 4, "Review of Modeling
Baseline (cont.)":
Revenue Assumptions
?LFD's baseline revenue assumptions are the Department
of Revenue's Fall Revenue Forecast.
This assumes $71 oil in FY23, following futures
market thereafter.
DNR oil production forecast projects that Alaska
North Slope production will increase from 500.2
thousand barrels per day in FY23 to 586.2
thousand barrels per day in FY31.
?For the Permanent Fund, we use Callan's return
assumption of 5.86% total return in FY22 and 6.20%
thereafter.
9:09:24 AM
Mr. Painter turned to slide 5, "Review of Modeling Baseline
(cont.)":
Spending Assumptions
?For agency operations, these scenarios assume the
Governor's FY23 budget grows with inflation (2.0%).
?For statewide items, the baseline assumes that all
items are funded to their statutory levels beyond
FY23.
This includes School Debt Reimbursement, the
REAA Fund, Community Assistance, oil and gas tax
credits.
?For the capital budget, we assume the Governor's FY23
capital budget grows with inflation (2.0%)
?For supplementals we assume $50.0 million per year.
This is based on the average amount of supplemental
appropriations minus lapsing funds each year.
Mr. Painter noted that Callan had indicated the inflation
growth number in the first bullet would increase, which
would be reflected as 2.5 percent in the Spring Forecast.
9:10:42 AM
Mr. Painter considered slide 6, "LFD Modeling Baseline,"
which had two graphs showing a fiscal model of the
baseline. He pointed out the surplus/deficit listed on the
top of the slide and pointed out a surplus of $279 million
starting in FY23, a statutory PFD payout of $2.76 billion,
with a deficit of $1.5 billion that would decrease overtime
to $1 billion by FY27. He relayed that the blue bars on the
UGF Budget/Revenue graph denoted traditional revenue, the
green bars was the POMV from the Permanent Fund, the yellow
bars reflected draws from the Constitutional Budget Reserve
(CBR) and Statutory Budget Reserve (SBR), the red bars were
unplanned draws form the Earnings Reserve Account (ERA)
necessary to balance the budget. The solid line showed the
budget in the scenario, the dotted line we the budget minus
the dividend.
Co-Chair Stedman asked about American Rescue Plan Act
(ARPA) funds.
Mr. Painter explained that the federal government had
provided an unusually flexible source of funds, due to the
pandemic. The ARPA had given the state $1 billion to spend
on items related to pandemic preparedness, economic
response to the pandemic, as well as replacing lost revenue
due to the pandemic. In FY 22, the legislature had used
$250 million of the funds to replace lost revenues, of
which there was a small surplus at the end of FY22. He
furthered that the governor had proposed to use another
$375 million for that purpose in FY23.
Co-Chair Stedman requested that Mr. Painter refrain from
using acronyms.
9:13:04 AM
Mr. Painter addressed the graph on the right, which showed
budget reserves and savings accounts. The yellow bars at
the bottom reflected the CBR and SBR. He noted that the
assumption was that $500 million, minimum, would be left in
the CBR to allow for cashflow for the state. He said that
the default assumption was that the CBR would not fall
below $500 million, rather the ERA would be used to fill
the deficit. He relayed that the green bars showed the
spendable amounts of the ERA, which was not a true budget
reserve, but was available for the POMV draw or to fill
deficits. He shared that along the bottom was the effective
POMV draw rate, which was meant to put the size of the
overdraw into perspective with the overall size of the
draw; the black numbers reflected the 5 percent draw, and
the black numbers indicated the overdraw.
9:14:44 AM
Mr. Painter displayed slide 7, "Senate Finance Committee
Scenarios":
Senate Finance Co-Chairs asked for modeling with the
following assumptions that differ from LFD's baseline:
?Capital budget baseline of $250 million (instead of
$154.7 million)
?Agency operations growing at 2.5% (instead of 2.0%)
?Assume expiring federal funds are replaced with UGF
and PERS healthcare is funded after FY23
?Varying PFD scenarios: statutory PFD, 50/50 of POMV,
75/25 of POMV
Mr. Painter noted that the scenario with a capital budget
baseline of $250 million incorporated more deferred
maintenance and matching funds for the federal
infrastructure bill. He noted that the governor had
proposed funding the Alaska Marine Highway System with
federal funds, which would run out in 5 years and would
have to be replaced general funds. He spoke to the PFD
scenarios. He noted that the 75/25 of POMV scenario was
similar to the version of SB 26 that the committee passed
in 2017.
9:16:52 AM
Senator Wilson asked whether the capital budget would
decrease after the federal match funds expired in 5 years.
Mr. Painter answered in the negative. He elaborated that
some of the matching funds would be temporary. He said that
the majority of the increase was presumably for deferred
maintenance.
9:17:50 AM
Mr. Painter highlighted slide 8, " Comparison of Senate
Finance Committee Scenario to LFD Baseline," which showed a
table listing dollar amounts and a bar graph. He shared
that the numbers reflected did not include the dividend
payout. He related that in the first year the difference
was the larger Capital Budget assumption going from $154.7
million to $250 million, in the following years the numbers
were a combination of the larger Capital Budget, UGF for
expiring federal funds, and the higher growth rate. He said
the jump between FY26 and FY27 was when the federal AMHS
funds would run out. He said that the assumption was that
the funds would have to be replaced with UGF in FY27. He
explained that the increasing gap reflected on the slide
was due to the half a percent increase in agency
operations. He noted that .5 percent did not seem like a
lot but ended up being a substantial difference over a 10-
year timespan.
Co-Chair Stedman understood the 2 percent was what was used
by LFD in the scenario.
Mr. Painter answered "yes." He said that the division used
2 percent, the slide reflected 2.5 percent, and the
governor used 1.5 percent.
9:19:45 AM
Mr. Painter looked at slide 9, "Stress Tests":
?Two types of stress tests performed:
Budget stress test: grow agency operations
and capital budget by 3.5% per year instead
of 2.5%
Revenue stress test: use probabilistic
modeling to simulate a range of possible oil
prices and investment returns
?For each PFD scenario, we will show the non-
stressed model output and the two stress tests
Co-Chair Stedman presumed that the non-stress test was a
linear extrapolation without variability in the economy or
financial markets.
Mr. Painter answered affirmatively. He noted that the
division did not have to be a combined stress test; there
was no budget and revenue stress test. He said that in the
real world it was expected that the legislature would
respond to changes in revenue, spending less when revenue
was low and more when revenue was high, that budget lines
would stay constant so that the impact of policy could be
seen as revenue varied.
9:21:40 AM
th
Mr. Painter thought that slide 10 was an example of a 25
percentile scenario.
CONOR BELL, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION,
th
Mr. Bell addressed slide 10, " Stress Test: 25 Percentile
Example":
?Example of a single case, for which 25% of total
cases see greater overall deficits.
?Example case has average oil price of $58 and average
Permanent Fund
Mr. Bell stated that 2000 different trials were run for
each scenario, using different assumptions for oil prices,
oil production, ad permanent fund market returns. He stated
that the intent was to get a sense of the range of
different possibilities. He relayed that there was a lot of
sensitivity as to how the inputs were set; oil prices were
set by historical variations over time. He related that DOR
based their out years on options markets. He stated that
the slide showed a single trial, out of 2000, and based on
the metric of total deficits run, 25 percent of trials
looked worse, and 25 percent looked better. The chart
showed the left reflected the oil price over time, with the
price of oil averaging out to approximately $58/bbl. He
said the other chart showed the Permanent Fund total
return. He relayed that FY23 showed a negative 7 percent
return, with several lackluster years before regaining
strength in the later years. He said that the average
return of 5.4 percent was not much lower than Callans
projected return of 6.4 percent. He said that the poor
performance in the early years meant that there was no
compounding growth, which was not ideal.
9:25:49 AM
Senator von Imhof appreciated the clarification that 25
percent of the total cases were worse than shown on the
slide, and 75 percent of cases were better.
9:26:43 AM
Mr. Bell advanced to slide 11, " Scenario 1: Statutory PFD
Normal Model Output," which showed two graphs from the
output described by one of the scenarios using the SFC
baseline of 2.5 percent agency operations inflation
assumption and the larger $250 million Capital Budget
starting FY23. The first several years showed about $1.5
billion deficits. He pointed out the red bars on the left
indicating ERA overdraws. He thought in practice the
legislature could react in the situation by cutting budgets
or raising revenue, but for modeling purposes it was
assumed the gap would be filled with the ERA.
Mr. Bell pointed out that that the ERA dropped to $6
billion over time, and one reason for the resiliency of the
ERA after a yearly deficit was the strong unrealized gains
balance of the Permanent Fund that supplemented the
account. He explained that the effective draw rates were 7
percent under the scenario.
9:29:21 AM
AT EASE
9:29:45 AM
RECONVENED
Senator Hoffman noted that in FY23, there was substantial
draw from the CBR which would require a three-quarters vote
of the legislature. He thought the public should be aware
that the ERA could be accessed by the legislature with a
simple majority.
Co-Chair Stedman asked Mr. Bell to explain the small amount
left in the CBR reflected on the slide
Mr. Painter explained that currently there was a bit over
$1 billion in the CBR. He said that the scenario assumed a
surplus in FY22 of $279 million before money was
transferred from revenue replacement, the American Rescue
Plan, and the SBR. He explained that the scenario assumed
there would be no supplemental dividend spending in FY22,
so the surplus repaid the CBR for spending in FY23.
Co-Chair Stedman presumed that the intent was to maintain a
half billion in the CBR, as was recommended by OMB.
Mr. Painter answered affirmatively.
9:32:04 AM
Senator von Imhof discussed unrealized revenue versus
realized revenue. She thought unrealized gains calculated
today could possibly not be there in the years to come. She
commented on the success in the recent market. She asked
whether the fiscal gap could close in a few years.
Mr. Painter replied in the affirmative. He shared that the
state had two kinds of unrealized gains: real estate that
was illiquid, which would be difficult to realize in full
value; equities could be sold without impacting value and
private equities, which were often long-term investments.
There was a mix of investments that yielded various returns
on various timelines. He said that it would be difficult to
value assets until they were realized.
9:34:03 AM
Senator von Imhof did not feel comfortable assuming that
the decline reflected by the green bar would be boosted by
the sale of state assets. She asserted that the unrealized
potential that existed today might not be there in 2027.
Mr. Painter thought Senator von Imhof made a good example
of why LFD had changed to the probabilistic modeling for
the stress tests. He thought switching to that modeling
allowed for the capture of the volatility in the Permanent
Fund returns in the unique situation where there was such a
large unrealized balanced. He stated that the run up in the
market of the pervious year had led to an unprecedented
unrealized balance. He shared that the probabilistic
modeling was more realistic than using historical numbers.
9:35:39 AM
Mr. Bell looked at slide 12, "Scenario 1: Statutory PFD
Budget Stress Test," which showed two graphs with a
statutory PFD and used the SFC baseline assumptions. He
noted that the agency operations were reflected as growing
at 3.5 percent, which created a larger delta in the later
years. He observed that the ERA was drawn down
significantly to below $5 billion in FY31.
Co-Chair Stedman commented that there was currently an
inflation spike of 7.5 percent. He thought there was
clearly upward pressure on inflation, and the 1 percent had
been added to get an idea of the variability.
9:38:27 AM
Mr. Bell showed slide 13, "Scenario 1: Statutory PFD
Revenue Stress Test," which was the probabilistic modelling
running 2,000 different scenarios, selecting oil price for
each year and Permanent Fund returns randomly from a bell
curve distribution. The top of the chart showed the median
surplus deficit, which was slightly different than the
scenario on slide 11. He discussed the variation in numbers
at high oil prices versus low oil prices.
He commented on the chart on the left, which showed the
range of fiscal year end realized ERA balances in millions.
The blue line was the same as the surplus/deficit numbers
th
on the top of the slide, and the yellow bars were the 25
th
and 75 percentile. He relayed that 50 percent of the cases
were within and 50 percent were outside of the yellow
th
lines. He said that the vertical back line showed the 10
th
to 90 percentile. He noted that the distributions were
sensitive to the inputs. He shared that DOR was comparing
options to future markets, which gave them a wider price
span. He reminded the committee that the slide was an
illustration of potential outcomes.
9:42:43 AM
Mr. Bell addressed the chart on the right of slide 13,
which showed the range of realized ERA balances. He
discussed the range of percentiles and noted that the ERA
would be drained by FY28. On the high end there was a
possibility for the ERA balance to remain at $20 billion;
the graph showed the range of uncertainty when trying to
predict what would happen in the future.
Mr. Bell drew attention to the bottom of the slide, which
had a table showing CBR balance possibilities. He said that
the first row showed the likelihood of the CBR balance
falling below $2.5 billion. The bottom line depicted the
probability of the recommended $500 million in the CBR
balance over time. He stated that approximately 75 percent
of the time in the first two years, the CBR went below the
minimum amount. He stated that the gap would need to be
filled with some other source once the CBR hit $500
million.
9:45:42 AM
Co-Chair Stedman asked for a definition of the median.
Mr. Bell explained that the if there were 100 different
instances of something, the median was whatever the value
is of number 50. The median can be different than the mean
if the distribution was skewed. He said that in many of the
scenarios the mean and median value differed.
9:46:43 AM
Mr. Bell referenced slide 14, "Scenario 2: 50/50 PFD Normal
Model Output," which included 2.5 percent agency operations
growth. The deficits were significantly smaller because of
the smaller PFD amount. The ERA was overdrawn beginning in
FY25 but buoyed by unrealized gains. He mentioned that LFD
assumed a constant function for the realizing of earnings
which was based on 2 percent of the prior years total fund
balance, 20 percent of the prior years unrealized gain
balance, and 20 percent of a given years total returns.
The function created somewhat more certainty.
9:48:42 AM
Mr. Bell turned to slide 15, " Scenario 2: 50/50 PFD Budget
Stress Test," which showed graphs depicting the growth of
the surplus/deficit in millions, the UGF budget/revenue in
millions, the budget reserves fiscal year ending balance in
millions, and the effective POMV draw rate through FY31. He
pointed out that the ERA was overdrawn beginning in FY 25,
and there was a greater draw down of the ERA.
9:49:29 AM
Mr. Bell considered slide 16, "Scenario 2: 50/50 PFD
Revenue Stress Test," which showed what the governor was
proposing in his current budget. He said that it was
entirely possible that there was a surplus under the model,
and it was also possible the there would be fiscal gaps
that would need to be filled. He pointed to the realized
ERA balance which reflected a 10 percent likelihood of the
ERA going to zero, which meant there would be no money from
the Permanent Fund that could be spent constitutionally. He
furthered that the POMV would not be drawn for government
th
services. He said that under 25 percentile the ERA emptied
out in FY31, meaning there would be a 1 in 4 chance that
the ERA would de drawn down entirely by that point. He
discussed inflation proofing the said that LFD assumed that
it only occurred when there was enough money left in the
ERA to pay the current and following years POM draw.
9:52:54 AM
Co-Chair Stedman thought it was important to remember that
if the ERA went to zero there would be no PFD. He had
requested the chart on the right, which he thought was a
good way to get a high-level feel of the risk level.
9:54:10 AM
Senator von Imhof appreciated the bugle charts Co-Chair
Stedman had requested be included on the stress test
slides. She thought that the 2000 trials provided a more
accurate forecast. She observed that the median was the
most common number, which she noted held steady or declined
on the slides. She considered the impact of other
consequences and further policy the legislature would be
forced to make to backfill deficits, which could compound
the economic impact.
9:55:48 AM
Mr. Bell displayed slide 17, "Scenario 3: 75/25 PFD Normal
Model Output," which showed the normal output with the 2.5
percent agency operations growth with the POMV at 25
percent. There were small to moderate surpluses in the
first several years. There were no overdraws of the ERA
during the period. He noted that right hand chart showed
substantial growth in the CBR/SBR and realized ERA. Under
the assumptions there was a significant budget reserve nest
egg, with substantial growth in the ERA.
Co-Chair Stedman explained that the statutory dividend was
roughly $4,200 per person. He furthered that a 50/50
dividend was roughly $2,600. He continued that under the
75/25 split depicted on the slide, the dividend would be
$1,300. He thought that it was important for the public to
realize the scale of individual dividends.
9:58:38 AM
Co-Chair Bishop complimented Co-Chair Stedman for
establishing for the public the definition of median. He
considered that the slide reflected for the first time the
ERA meeting the guideline of four and a half times the draw
amount in reserves.
9:59:31 AM
Senator von Imhof thought it was refreshing to see that the
75/25 scenario working on slide 17 without deficits. She
thought it was important to include the total cost to the
state treasury when discussing the amount of the PFD for
each Alaskan resident. She asked about the yellow bars
showing the CBR/SBR on the right-hand graph and pondered
whether it presumed a spending cap and excess money was
being put in the CBR rather than agency funding. She asked
if the model assumed the reverse sweep did not occur and
all those funds went into the CBR.
Mr. Painter relayed that the scenario assumed the baseline
budget with agency growth at 2.5 percent. The scenario
assumed there was no reverse sweep, as it was not
considered in the governors budget. He said that
regardless of the reverse sweep, the surpluses went back to
the CBR by default.
Mr. Painter continued that when the legislature had
surpluses in the past, they did not always direct it to the
CBR. He concluded that in the case of the model on the
slide the assumption was, absent of any policy call by the
legislature, the money would be deposited into the CBR.
10:02:16 AM
Co-Chair Stedman interjected that when the remaining
account balances were transferred, or swept, at the end
of the year, any money owed to the CBR was repaid. He said
that the sweep was to get the funds back out and use the
funds for the beginning of the fiscal year balanced for
those sweepable funds.
10:02:56 AM
Mr. Bell highlighted slide 18, "Scenario 3: 75/25 PFD
Budget Stress Test," which showed the same 75/25 PFD
scenario. He noted that there were still surpluses, but
eventually they went to zero in the out years. He pointed
out the absence of ERA overdraws and the limited CBR
growth. He stated that the ERA was unaffected and behaved
in the same way as the scenario on slide 16.
10:04:11 AM
Mr. Bell looked at slide 19, "Scenario 3: 75/25 PFD Revenue
Stress Test," which showed $200 million in surpluses at the
median level, approximately $500 million in deficits in the
early years at the 25 percent level, and nearly $1.5
billion surplus at 75 percent. He noted the wide band of
uncertainty reflected on the slide. He stated that the
expected surplus did rise in the later years. He noted that
the ERA could go to zero even without overdraws, simply
based upon poor performance of the Permanent Fund. He
offered that there was about a ten percent chance that the
ERA was entirely depleted by FY29.
10:06:05 AM
Senator von Imhof wanted to marry the two charts. She
thought the chart on the left showed the median was above
zero from FY23 to FY 31. She understood that the median was
then reflected on the thick black line on the bugle chart
on the right-hand side. She pondered that whether the state
was running at a surplus in the median then the ERA would
remain stable.
Mr. Bell thought the graph showed the risk of volatility.
The previous year LFD had shown volatility of the returns
by using historical returns and projecting them upon future
scenarios. He noted that the median line represented the
median amount for every year. He continued to discuss the
possible scenarios and the varying fiscal outcomes of the
projected numbers.
10:08:55 AM
Co-Chair Bishop asked about the inflation rate as shown on
slide 18.
Mr. Bell stated that agency operations growth in the budget
stress tests was either 2.5 or 3 percent. He said that the
model assumed inflation for the principal inflation
proofing at 2 percent. He said that the assumption was that
the budget was growing faster than the inflation proofing
transfer.
Co-Chair Bishop asked for the inflation rate for scenario
3, at the normal model output.
Mr. Bell stated that the model used 2.5 percent for agency
operation growth and 2 percent for inflation.
Co-Chair Bishop asked whether the stress test on slide 18
was running at 3.5 percent.
10:10:31 AM
Senator Hoffman looked at slide 18 and observed that the
CBR was still owed $18 billion from the state.
Mr. Painter stated that the number was subject to dispute
between executive branch and the Division of Legislative
Audit.
Senator Hoffman explained that the action had been taken in
the past to substantially pay back the CBR and bolster
state savings.
10:11:52 AM
Mr. Painter commented on Senator von Imhof's earlier
question. He stated that one of the reasons that the median
had the ERA shrinking slightly was that the 6.2 percent
return and the 2 percent inflation resulted in only a 4.2
percent return above inflation. He said that a 5 percent
draw of the fund would drain the fund.
Co-Chair Stedman said that other scenarios could be
considered.
Co-Chair Stedman thanked Mr. Painter and Mr. Bell for the
time spent on modelling the scenarios. He expected that
there would be many legislators requesting the slides for
study.
Co-Chair Stedman discussed housekeeping.
ADJOURNMENT
10:14:09 AM
The meeting was adjourned at 10:14 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021022 SFIN Fiscal Modeling Presentation 2-10-22.pdf |
SFIN 2/10/2022 9:00:00 AM |