Legislature(2023 - 2024)SENATE FINANCE 532
01/24/2024 09:00 AM Senate FINANCE
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| Presentation: Fy 25 Budget Overview - Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
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SENATE FINANCE COMMITTEE
January 24, 2024
9:02 a.m.
9:02:17 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Alexei Painter, Director,
Legislative Finance Division.
SUMMARY
PRESENTATION: FY 25 BUDGET OVERVIEW - LEGISLATIVE FINANCE
DIVISION
Co-Chair Stedman relayed that the committee would hear an
overview of the governors FY 25 budget, presented by the
non-partisan Legislative Finance Division (LFD).
^PRESENTATION: FY 25 BUDGET OVERVIEW - LEGISLATIVE FINANCE
DIVISION
9:03:12 AM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
spoke to a presentation entitled "Overview of the
Governor's FY25 Budget" (copy on file).
Mr. Painter looked at slide 2, "Outline":
Update on Fiscal Situation
• Fall Revenue Forecast
• FY24 Update Energy Relief, Supplementals
• FY25 Governor's Budget
• Long-Term View
Mr. Painter spoke to slide 3, "UGF Budget & Revenue, FY19-
FY25 Governor's Budget," which showed a graph of the
revenue and budget since FY 19. He started with FY 19, as
it was the first year the state had a Percent of Market
Value (POMV) draw from the Permanent Fund. He noted that
the change was essentially when the states current fiscal
system started with the POMV draw as the largest revenue
source for most years. He pointed out that the area of the
graph in the background was revenue, while green was
petroleum revenue. The orange was indicative of the non-
petroleum revenue. The purple represented the POMV draw,
the bars in the front represented budgets for each year,
and the blue at the bottom was agency operations. Red
denoted statewide operations, including items that did not
fit into agency budgets such as state assistance to
retirement and debt service. The grey signified the capital
budget, and the light blue at the top was the Permanent
Fund Dividends (PFDs), including energy relief payments.
Mr. Painter discussed notable items from slide 3. He
thought since the POMV draw was started, the state had a
relatively stable fiscal situation. The state had surpluses
in FY 22 and FY 24, and had run deficits in FY 18 through
FY 21 as well as in FY 23. The governors FY 25 budget
proposed a deficit. He considered savings account balances
and thought the surpluses had somewhat made up for some of
the deficits. There was about $2.7 billion between the
Constitutional Budget Reserve (CBR) and Statutory Budget
Reserve (SBR) in FY 19, and the state had almost exactly
the same value at the end of FY 23 based on preliminary
numbers.
Mr. Painter summarized that the budget had been relatively
stable despite ups and downs through the year. He discussed
the concept of a structural deficit. He explained that the
legislature had roughly balanced the budget year by year
based on available revenue. He noted that the previous few
years the legislature had not had access to the CBR when
the budget was originally prepared, and in FY 23 there was
a supplemental vote to give CBR access. The legislature had
not had the option to run a deficit the previous few years,
as there was no savings to draw from to allow it, nor the
votes to access. The past few years had resulted in a
relatively stable fiscal situation, and the legislature had
varied the size of the capital budget and PFD each year
based on available funding.
Mr. Painter referenced slide 4, "Daily ANS Price, November
2021- January 2024," which showed oil prices starting in
November 2021 through Friday of the previous week. He noted
that oil prices were the most volatile part of the state's
revenue and had not been stable. He referenced prices going
from the $70/bbl range to a peak of $125/bbl. In the fall
there were prices nearing $100/bbl, which were now in the
$70/bbl range. He thought the volatility in oil prices had
not fully translated to the state's budget. He referenced
the legislatures response to oil price volatility through
sliding scale mechanisms. He mentioned energy relief checks
and funding to the Public Education Fund as examples of
measures for additional revenue.
9:09:02 AM
Mr. Painter turned to slide 5, "Investments: History and
Projections," which compared the performance of the Alaska
Permanent Fund Corporations (APFC) investments with the
Treasury's investments. He cited that investment revenues
had not been stable and had been incredibly volatile. The
graph used Public Employees' Retirement System (PERS) as
the largest asset to provide a clear comparison. He
identified that historically the two were very close year
to year, with the average for the Permanent Fund at 8.67
percent and the average for PERS at 8.53 percent. Going
forward, PERS had a slightly higher projected return of
7.59 percent, versus the Permanent Funds 7.20 percent from
FY 25 and beyond. He commented that if the state budgeted
based on returns there would be a lot of volatility, but it
had built in a mechanism to smooth the volatility with the
POMV draw.
Mr. Painter considered slide 6, "Percent of Market Value
Draw from Permanent Fund," which showed how POMV draws were
calculated. He noted that Co-Chair Hoffman had requested
the information from the Department of Revenue (DOR) and so
he had included the slide. He discussed calculation of the
POMV draw, which averaged five percent of the previous five
years, excluding the fiscal year that just ended as well as
some funds that did not qualify for the purpose of the
draw. He noted that FY 21 had huge investment returns and a
spike in the value of the fund. He explained that because
of the averaging, the POMV had not commensurately spiked.
Mr. Painter pointed out that the FY 24 value of the POMV
was not necessarily 5 percent of the present fund because
of the trailing average and as long as there was a growing
fund. The FY 24 POMV value was about 4.6 percent of the FY
22 value of the fund, rather than 5 percent of the average.
In a couple of years, the effective POMV rate might not be
lower due to no lower years in the average. The lower years
were helping to keep the draw lower, but future years might
see the real rate of the draw coming closer to 5 percent.
9:12:26 AM
Mr. Painter displayed slide 7, "Earnings Reserve Account
(ERA) Sufficiency":
• APFC's Statutory Net Income projection for FY25+ is
6.65%, compared to inflation of 2.50% and a 5.00% POMV
draw. This leads to a projected decline in the balance
of the ERA balance.
• LFD's probabilistic modeling shows an 54% chance of
having an insufficient ERA balance to make the full
POMV draw over FY25 FY33, assuming full inflation
proofing. If inflation-proofing is suspended when the
ERA balance drops below the following year's POMV
draw, that drops to 39%.
• As of June 30, 2023, $8.3 billion of the $11.9
billion (70%) of the unrealized gains were in
relatively illiquid assets (private equity, private
income, and real estate).
Mr. Painter discussed the Permanent Funds statutory net
income projection, which was the amount realized each year
and went into the ERA. The realized income was from selling
assets, dividends, or interest. He discussed the projection
that even with the forecast Permanent Fund returns, there
would be a decline in the ERA balance. He spoke to the
graph on the bottom of the slide, which was drawn from
projections from APFC. He pointed out the blue bar on the
bottom, which was next year's POMV draw. The red on the top
was the balance of the rest of the realized ERA balance,
which was the spendable balance of the ERA. He pointed out
that in FY 22, the total was close to $14 billion, dropping
to just over $8 billion by FY 33 if inflation proofing
happened each year.
Mr. Painter noted that in FY 24, the legislature capped the
inflation proofing transfer at the 2.5 percent inflation
level. The actual inflation for the U.S. Consumer Price
Index (CPI) was about 3.5 percent. He estimated that
capping the inflation proofing saved about $1 billion in
the ERA. He noted that LFD's probabilistic modeling showed
a 54 percent chance of not having enough funds for a POMV
draw in the ERA over the forecast period if there was
inflation proofing each year. If the legislature decided to
stop inflation proofing once the balance reached what was
shown by the blue bar (showing the following years POMV),
then the likelihood would drop to 39 percent. He thought
there was a large risk that the straight-line projections
did not necessarily show.
9:16:45 AM
Mr. Painter pondered the question of why the state did not
have more realized income. He thought much of the reason
was due to the nature of APFCs portfolio, which had $11.9
billion of unrealized gains as of the end of FY 23. He
continued that 70 percent of the amount was in illiquid
assets such as private equity, private income, and real
estate. He discussed the challenges of realizing income and
the potential exaggeration of unrealized gains.
Co-Chair Stedman commented that the previous year the
committee was looking at the cash flow for the state,
considering the Permanent Fund and oil and gas as a revenue
stream. He referenced measures in the previous year's
budget such as capping the inflation proofing. He noted
that the APFC would be coming to committee to discuss
historical inflation-proofing numbers since inception. He
thought the committee recognized that there was a
disconnect between what was going on in the legislative
arena or the states arena needing revenue from the
Permanent Funds asset allocation, and the structure did
not take into account the cash needs of the state. He spoke
to the ability to adjust inflation contributions during
times of tight budgets. He mentioned forward funding the
draw on the Permanent Fund.
Co-Chair Stedman relayed that the legislature had multiple
tools, which it would discuss at length with APFC, and the
legislature would make a decision related to inflation
proofing at the end of the session. He thought there was a
timing issue to consider, and considered whether the
inflation proofing would be in the final budget or be
considered the following winter. He thought the legislature
could avoid the negative fiscal scenario on the slide if it
did its job.
9:21:29 AM
Mr. Painter commented that raising the issue now was not to
be doom and gloom, but rather so that the legislature as
policy-makers could take action. He thought the committees
action the previous year was an example.
Senator Bishop referenced lost opportunity cost of not
fully inflation-proofing.
Co-Chair Stedman clarified that the committee did not want
to erode the Permanent Funds purchasing power over time.
He mentioned the draw rate, asset allocations, and returns
over time that would be topics of further discussion along
with inflation proofing.
Co-Chair Hoffman asked if Mr. Painter could provide more
information on what other large funds did regarding
inflation-proofing.
Mr. Painter agreed to provide the information. He thought
it was generally unusual to have a separation of the
principal of the endowment and an income account. He
thought the structure was common in the 1970s and when the
fund was created, but was not common presently. He noted
that the Public School Trust Fund was previously in the
same structure, and then was collapsed in 2018 when the
opportunity was provided through statute.
Co-Chair Hoffman relayed that he brought up the topic
because individuals had investments all over the world and
did not inflation proof.
9:24:30 AM
Mr. Painter highlighted slide 8, "Fall 2023 Revenue
Forecast":
• DOR's Fall 2023 Forecast shows higher oil prices in
FY24 and FY25, but lower oil production, higher lease
expenditures, and higher transportation costs.
• The result is an increase in projected revenue, but
by less than price alone would explain.
Mr. Painter thought the forecast was interesting. He
thought DOR and the Department of Natural Resources (DNR)
had both indicated the state was moving into a new era
regarding oil revenue and where it came from. He directed
attention to the chart on the top of the slide and noted
that revenue in FY 24 was up by $221 million and in FY 25
was up by $79 million. However, the price was up in FY 24
by $9.39/bbl and $6/bbl in FY 25. The previous year the
budget showed that each marginal dollar of additional oil
price would yield about $70 million. Production was down in
both FY 24 and FY 25, and lease expenditures were up
significantly. In FY 24, lease expenditures were up $755
million, and in FY 25 the expenditures were up $1.6 billion
over the previous forecast. The lease expenditures were
normally deductions against the production tax and reduced
production tax liability. Much of the difference was around
the increased certainty of Willow and Pikka projects and
they moved forward. He summarized that the big picture was
that while prices were going up, there was a large shift
under the surface and less revenue for the price.
Mr. Painter looked at slide 9, "Fall 2023 Revenue Forecast
(cont.)":
• Fall 2023 forecast shows lower production in FY24-26
than the previous forecast, but higher production in
FY29-32. Lease expenditures are higher in all years in
the Fall 2023 forecast.
• Since lease expenditures are deductible from the
production tax, higher lease expenditures generally
mean less revenue. New production is also eligible for
the Gross Value Reduction (GVR), which reduces
production tax in the initial years of production.
Mr. Painter pointed out a graph on the right showing the
fall 2022 forecast, which showed relatively flat production
with a peak in 2027 to 2028. Fall 2023 showed lower
production in the near term and higher production in the
later term than previous forecasts. He pointed out that the
lease expenditures showed higher fall forecasts in every
year, particularly in FY 27 through FY 29, which showed
peak investments in the Willow field. Higher lease
expenditures generally meant less revenue to the state, and
would often bring a company down to the gross tax floor of
4 percent rather than paying based on profits. New
production was also eligible for the Gross Value Reduction
(GVR), which reduced tax in the initial years of
production. As more new production was coming in, it did
not necessarily signify more revenue right away, as there
could be deductions from previous years or GVR eligibility.
9:29:14 AM
Senator Merrick asked if LFD concurred with DOR's estimate
of $1 change in oil price equating to $45 million.
Mr. Painter answered "yes," based on the agencys forecast.
He noted that DOR had changed how it treated volatility
starting one year ago, in a way that he thought was more
accurate.
Mr. Painter addressed slide 10, "Fall 2023 Revenue Forecast
(cont.)," which showed a table comparing the production by
unit in the Fall 2022 forecast to the Fall 2023 forecast.
He noted that fields with a significant reduction in
production were highlighted in red. In green were fields
that had production increase. Prudhoe Bay was the state's
largest legacy field, and the new forecast showed a
significant reduction in the fields production. It had an
outsized impact on the states revenue because it was a
legacy field with the lowest cost. There was an increase in
Prudhoe Bay satellites, and the new fields were listed at
the bottom of the slide. The new fields would make up for
the production difference, but some of the new fields may
not bring in quite as much revenue immediately.
Mr. Painter identified that Kuparuk, a legacy field, had
lower production year by year but Kuparuk satellites had
higher production throughout the forecast. He discussed the
Natural Petroleum Reserve-Alaska (NPRA), which was
comprised of the greater Mooses Tooth unit, where there
was a new unit with lower-than-expected production. In the
short term there was a big reduction in production in NPRA
but in the long term there was the increasingly certain
Willow project with increasing production. He cited that
total production in FY 25 was down by 39.5 thousand barrels
per day. The biggest impact of the reduction was in the
NPRA, for which the state did not receive royalties, so the
state had less of a revenue impact. He noted that the
changes were large but not necessarily in a consistent
direction. He reiterated that the changes were masked by
price. There was lower production in the legacy fields, and
higher production in new fields in the out years,
particularly with the Willow project coming online.
9:32:57 AM
Co-Chair Stedman discussed production and thought it would
be nice to put the information in historical per-barrel
production as well as forecasted barrels of production. He
thought the information would provide a view on magnitude.
Mr. Painter agreed to provide the additional information.
Mr. Painter advanced to slide 11, "Fall 2023 Revenue
Forecast (cont.)," which compared the last three fall
revenue forecasts for Fall 2021 through Fall 2023. He
thought the graph on the left showed a fairly big
difference in oil prices in the forecasts in the short
term, which diminished over time as the markets converged
on what the long-term view of oil was. There was a very
small band of revenue difference in the out years. He
thought that while it looked like the oil price showed a
great deal of revenue volatility, if one considered the
long-term forecast, there was relatively little difference.
For fiscal planning purposes long term, there was not a
great deal of volatility despite short term variations.
9:35:42 AM
Mr. Painter looked at slide 12, "Fall 2023 Revenue Forecast
(cont.)":
Key Takeaways:
The increased certainty of the Willow project is
evident in the forecast: increased lease expenditures
and increased future production.
• The revenue impact to the State is negative
while the project is under development and will
become positive after it enters production.
The Fall 2023 forecast anticipates lower production
from legacy Prudhoe Bay and Kuparuk units, as well as
Greater Moose's Tooth, and higher production from the
satellite units of those legacy fields.
Despite significant shifts in the fundamentals
behind the petroleum revenue forecast, overall
anticipated revenue in the medium to long term has not
changed substantially since the Fall 2021 forecast.
Mr. Painter showed slide 13, "FY24 Budget Update":
• The enacted FY24 budget had an estimated $293.2
million surplus based on the Spring forecast. It also
had a provision that split the first $636.4 million of
UGF revenue received above the Spring forecast 50/50
between an energy relief payment (to be paid with the
FY25 PFD) and the CBR.
• At the time, we estimated the energy relief payment
would kick in above $73 per barrel and max out (at
about $500 per person) at $83 per barrel. With the
updated revenue forecast, those trigger points have
shifted to $78 and $90, respectively.
• Based on the Fall forecast, we estimate about $110.6
million will go into each of the CBR and energy relief
payment, paying about $175 per person on top of the
FY25 PFD.
• There is still a budget surplus based on the Fall
forecast based on revenue received up to the Spring
forecast, now estimated to be $293.7 million. This is
available for appropriation this session, or it will
lapse to the CBR at the end of the fiscal year.
9:39:04 AM
Co-Chair Hoffman asked Mr. Painter to remind the committee
how much the governor had vetoed from the FY 24 budget.
Mr. Painter estimated that the number was around $200
million, and agreed to provide more detail at a later time.
Co-Chair Stedman referenced the third bullet on the slide
and clarified that the year was still open for
appropriation. He pondered the impact on the energy relief
payment if the legislature decided to appropriate the funds
elsewhere.
Mr. Painter relayed that the legislature could appropriate
$293 million without changing the trigger points, and it
could also change the trigger points.
Co-Chair Stedman pondered if the legislature appropriated
the $220 million, and asked what impact it could have on
the dividend portion.
Mr. Painter answered that there would be a conflict of
appropriations since the funds had already been
appropriated to the CBR and energy relief payment, which
could result in a deficit. He recalled that there had been
no successful vote to access the CBR in 2024.
Co-Chair Stedman brought up the topic because when the
supplemental budget was being considered, it would have
the added complexity of considering the trigger mechanism.
Co-Chair Hoffman brought up the supplemental budget for FY
24. He asked if Mr. Painter was indicating that the $110
million would still go into the CBR regardless of how large
the supplemental was.
Mr. Painter relayed that as long as the legislature spent
$292 million of UGF or less in the supplemental, there
would be no impact on the transfer to the CBR or the energy
relief payment. If more was spent, it could have an impact
because there would be a deficit.
9:42:38 AM
Mr. Painter referenced slide 14, "FY24 Budget Update
(cont.)," which showed a graphical version of what he had
discussed earlier. The blue portion of the graph showed UGF
revenue, which would go to the budget. If prices were below
$71/bbl, there was not a deficit-filling mechanism aside
from $20 million in the SBR, so there would be an unfilled
deficit. If prices went down the next few months, a
potential CBR-access vote would be needed to fill the
deficit. The previous year required a CBR vote to access
the funds to fund the budget. This year the trigger point
number was $71/bbl, and the forecast was for $72/bbl. If
revenue came in at the spring forecast or above, the state
would have $292 million in surplus, beyond which the funds
would be split. He pointed out the orange line denoting the
energy relief payment and the green denoting the CBR. The
spendable surplus was shown by the yellow bar, and it did
not change as the price went up, because the previous
years budget reserve appropriated all the funds above the
amount.
Co-Chair Stedman understood that $71/bbl was a break-even
amount to balance the budget. He thought the three-quarters
vote in the normal budget process would take place in May,
and he pondered not having the votes to access the CBR by
the end of the fiscal year in June.
Mr. Painter thought that if the legislature was in regular
session, it could deal with a lack of CBR access through
negative supplementals and reducing or shifting
appropriations. If the legislature was not in session, the
governor would have to try and take action by calling a
special session or restricting expenditures on existing
appropriations as needed to balance the budget. He thought
it would take a pretty big swing in oil price to bring
about the situation.
Mr. Painter turned to slide 15, "FY24 Budget Update
(cont.)":
• The Governor's initial budget release included some
supplemental requests, but more are expected on the
15th day of the legislative session.
• The Governor's FY24 supplemental requests total
$17.0 million UGF and $19.7 million all funds,
including:
o $8.9 million ($6.0 m UGF Match) for SNAP
backlog
o $5.0 million to Wrangell for dam safety and
stabilization improvements
o $3.0 million UGF for support of food banks and
pantries
o $2.5 million UGF for Ranked Choice Voting Media
and Education
o The Governor's fiscal summary includes a placeholder
of $61.0 million for fire suppression, based on a
preliminary estimate by the Department of Natural
Resources.
Mr. Painter thought the full amount of $61 million for fire
suppression may not be needed, depending on how much
federal money the state received. The estimate was from
August, which he considered to be quite dated. He
anticipated supplementals in the Department of Corrections
and the Department of Health for Medicaid based on
projections showing the state was a little short. He
thought there could be additional supplemental the
following week.
9:47:21 AM
Mr. Painter considered slide 16, "FY25 Adjusted Base":
The starting point for the next year's budget is the
Adjusted Base, which is the prior year's budget less
one-time appropriations plus current statewide policy
decisions (such as salary adjustments and formula
changes) needed to maintain services at a status quo
level.
• For FY25, LFD modified the Adjusted Base to include
formula changes. Previously, it was difficult to
distinguish policy changes from changes in formula
amounts. Now, formula-driven adjustments (for items
like the K-12 formula, debt service, or retirement
payments) will be reflected in the Adjusted Base,
making policy changes by the Governor easier to see.
• For formula items funded at a partial amount (such
as the PFD), the
Adjusted Base would be the same formula carried
forward into the next year (25% of FY24's POMV draw in
becomes 25% of FY25's POMV draw).
• The Adjusted Base now aligns with LFD's former
"current policy"
Mr. Painter discussed changes in the adjusted base process.
He discussed changes in funding that did not signify
changes in policy from the previous year. The goal was to
make it easier to identify the governors policy changes by
building more formula items into the adjusted base. He
thought the new process would make the process easier and
was a positive change that would reduce confusion. He noted
that the Office of Management and Budget (OMB) had also
agreed to use the adjusted base in its comparisons.
9:51:34 AM
Mr. Painter displayed slide 17, "FY25 Adjusted Base
(cont.)":
• Largest One-Time Item removed in Adjusted Base is K-
12 Additional Foundation Funding ($87.4 million),
accounting for over half of the total.
• The OTIs are a mix of items requested by the
Governor as permanent items that were converted by the
legislature to one-time funding, onetime legislative
additions, and multiyear appropriations that started
in FY24 but will be spent over several years.
Mr. Painter relayed that he would walk through the changes
made to the adjusted base. He used the example of Alaska
Marine Highway System (AMHS) backstop funds, which had been
a result of backstop language contingent upon federal
funding. He pointed out the table on the top that showed
the removal of $165 million from the adjusted base.
9:53:11 AM
Mr. Painter highlighted slide 18, "FY25 Adjusted Base
(cont.)," which showed the next series of changes:
• K-12 Formula reduced due to increased required local
effort (-$12.2m), increased deductible federal impact
aid (-$15.8m), and student count changes (-$2.2m),
increased by Pre-K funded in Alaska Reads Act
(+$3.0m).
• Retirement contributions up due to higher PERS and
TRS past service costs based on June 30, 2022,
valuations.
• School debt reimbursement continues to decline due
to ongoing (FY16-26) moratorium on new debt.
Mr. Painter discussed the reductions to the K-12 formula.
He noted a projected decrease in student count, which was
partially offset by a higher number of special needs
intensive students and higher number of correspondence
students. There was a net $27 million deduction of all
state funds to the K-21 formula. There was an increase in
the Public School Trust Fund amount, so the GF amount was
down by $30 million. The changes did not decrease funds to
districts, but rather shifted to more funds from the
federal government, more by local governments, and less by
the state. He highlighted that because of the decreased
student count, pupil transportation was to go down $2
million. The moratorium on new school debt since 2015 was
scheduled to end the following year. Starting in July 2025,
districts were able to start bonding again and adding debt,
which could turn the formula around.
Mr. Painter noted that other debt service was up in other
funds, but down in UGF. State contributions to retirement
were up nearly $46 million in GF, and the amount on the
slide only indicated the amount paid by the state on behalf
of other employers. There was an additional amount that
would be shown on a subsequent slide. He explained that the
amount went up due to a higher unfunded liability amount.
The Regional Education Attendance Area (REAA) Fund
capitalization was down slightly, which was a function of
school debt going down as the two were tied together.
9:57:54 AM
Senator Merrick asked how districts could start bonding
again in 2025 if the moratorium ended in 2026.
Mr. Painter explained that the moratorium was through FY
26, and the moratorium ended July 1, 2025. Depending upon
municipal elections were, bonds could go out fall 2025. The
state would not incur costs right away, because the bonds
would not be reimbursed right away, but the state could see
some added costs as early as FY 27.
Senator Merrick asked if there was a way to calculate how
many years of moratorium would be needed to totally exhaust
the debt.
Mr. Painter answered affirmatively and needed to examine
the debt schedule. He offered to get back to the committee
with the information.
Co-Chair Stedman thought at some point there would be a
presentation of the entire debt schedule for the state,
including schools.
9:59:22 AM
Mr. Painter looked at slide 19, "FY25 Adjusted Base
(cont.)":
• Three unions are currently negotiating: the
Supervisory Unit, the Alaska Correctional Officers
Association, and the Labor, Trades and Crafts Unit.
All may have additional amendments for salary
adjustments.
• Previous legislative intent was for exempt employees
to follow changes in the Supervisory Unit, but that
would take legislation once that agreement is in
place.
Mr. Painter explained that the state as an employer paid
the new rates of salary adjustments each year. The increase
was due to higher retirement rates in the current year.
There were increases in health insurance, and from several
unions for past years contracts that were already
authorized. So far there had not been any new agreements,
but there were three unions negotiating that could result
in future adjustments. He noted that the legislature had to
authorize the funding each year. There was a total of $44.5
million in UGF salary adjustments, and $97 million in all
funds. The majority of the number was from past due salary
adjustments. The number would go up and could come in after
the govnerors amended budget was submitted. He noted that
the last time the legislature increased salaries for exempt
employees, there was a provision that said future increases
to the supervisory union would be extended to the exempt
employees. The provision needed an additional statutory
change to happen through a bill rather than just through
the budget. He noted that the supervisory unit was
currently in negotiation.
Co-Chair Stedman recalled a presentation from the OMB
director the previous day that showed vacancies across
agencies. He had asked for more information on the fiscal
impact linked to a more standardized rate of vacancies to
understand the impact on the budget. He noted that there
was a difference between authorized positions and funded
positions. He thought Mr. Painter could work with OMB to
provide the committee with information. He pondered going
up to a 5 percent vacancy or 8 percent vacancy and thought
the change would make a significant change in overall
budget numbers.
Mr. Painter agreed to work with OMB on the matter. He noted
that the following day he would provide a few more slides
that addressed the topic.
10:03:46 AM
Mr. Painter addressed slide 20, "Governor's FY25 Budget,"
which showed a table depicting the UGF comparison of the
governors budget from FY 24 to FY 25. He pointed out that
the revenue forecast overall was a reduction of $177
million due to a lower [oil] price. For agency operations,
the governors budget was $100 million below FY 24. There
were $165 million in one-time items, so a lot of the
reduction was that one-time items were not being repeated.
Statewide items were up by $18.2 million, and the capital
budget was down $54.6 million. The largest increase in the
governor's budget was going from the 25 percent POMV
dividend the previous year to the statutory dividend
estimated to be $3 billion. The energy relief payment was
not repeated and was a reduction. Overall, the governor's
budget, before considering supplementals, was up $1.175
billion or 19.2 percent, largely due to the proposed
increase in the PFD level.
Mr. Painter identified that in FY 24, before transfers,
there would be a $416.6 million surplus, and after
transfers there would be $292.7 million surplus in FY 24
available for appropriation. So far, the governor had spent
$17 million of the amount, leaving $275.7 million in
surplus. In FY 25, the post-transfer deficit was $982.3
million based on the governors budget. The governor
proposed to meet the nearly $1 billion budget by using the
CBR and SBR. He noted that there were a few numbers that
were different than OMBs fiscal summary, partly because
OMB was not incorporating estimates for items such as the
energy relief payment and the CBR yet, since the numbers
were fluid. He noted that LFD included the numbers in order
to demonstrate how much funding was available for
appropriation. Additionally, LFD assumed that any surplus
would go to the CBR, which was reflected in a higher CBR
balance in the scenarios.
Mr. Painter advanced to slide 21, "Governor's FY25 Budget
(Cont.)":
• The Governor's FY25 budget request has a pretransfer
(fiscal) deficit of $977.0 million, which would be
drawn from the SBR balance and the CBR.
• The largest increase is the statutory PFD payment of
$2.3 billion compared to FY24's payment of $881.5
million.
• Non-PFD UGF appropriations are up $53.9 million
(0.4%) from the Adjusted Base. However, there are
several areas where we expect the budget to increase
before the end of the legislative session.
10:07:46 AM
Mr. Painter looked at slide 22, "Governor's FY25 Budget
(Cont.)," which showed a swoop graph comparing the FY 24
management plan with the FY 25 governors proposals
including the PFD and capital budget. The slide had been
requested by Co-Chair Stedman and was sorted by the largest
expenditures to the smallest in FY 25. He identified that
the largest item in the budget was the PFD followed by the
Department of Education and Early Development (DEED), then
the Department of Health (DOH). The previous year, the PFD
was the third largest item after DEED and DOH. There were
significant increases in a few agencies including DOC, the
Department of Family and Community Services (DFCS), and
Department of Public Safety (DPS); while there were
significant decreases to DEED, DOH, and the capital budget.
Mr. Painter spoke to slide 23, "Governor's FY25 Budget
(Cont.)":
• Agency Operations total $4.3 billion UGF, $94.9
million UGF (2.3%) above the Adjusted Base:
($20.8) million UGF reduction due to sunset of
Senior Benefits program (will require legislation to
extend)
$31.8 million UGF increase to Department of
Corrections ($12.5 million in fund changes and the
remainder in increments)
$17.3 million UGF for multiple Department of
Education items requested by the Governor in FY24 as
permanent items for which the legislature gave one-
time funding (such as the Alyeska Reading Academy)
($6.2) million UGF reduction in DOH to stop
funding for the tuberculosis and congenital syphilis
elimination plans
$19.2 million UGF for various increases in the
DOT's Highways and Aviation (such as expiration of
federal COVID funds, reduced federal support for the
Whittier Tunnel, and an increment for statewide
contracted snow removal)
10:11:38 AM
Mr. Painter referenced slide 24, "Governor's FY25 Budget
(Cont.)":
• Statewide Items total $365.0 million UGF, $13.6
million (3.9%) above the Adjusted Base:
School Debt Reimbursement, REAA Fund Capitalization,
State Assistance to Retirement funded at statutory
levels (reflected in Adjusted Base).
Statutory appropriation for Community Assistance
($30.0 million total, $2.2 million UGF and $27.8
million PCE Fund).
• This funding was vetoed in FY24, so the distribution
to communities in FY25 would be $20.0 million without
a supplemental appropriation.
$11.4 million for other fund capitalizations:
• $5.0 million for Disaster Relief Fund
• $3.1 million for AKLNG project fund
• $3.4 million for Alaska Clean Water and Drinking
Water funds
Mr. Painter noted that because of the veto in FY 24, the
distribution to communities was one-third of the balance as
of the end of the fiscal year. In FY 25, with no
supplemental, $20 million would go out to communities. The
amount would be enough for the base payments but no per
capita payments, which would require a supplemental
appropriation to get back to $30 million. Putting in $30
million in the current year would still result in reduced
amounts going to communities in FY 26 and beyond unless
there was a catch-up appropriation. He noted that the
legislature put $50 million into the Disaster Relief Fund
in FY 22 as a supplemental appropriation, so it was not
funded in FY 23 or FY 24. There was still money left and
the governor wanted to keep building up the fund. He noted
that the $3.4 million had been put in the budget for the
Alaska Clean Water and Drinking Water funds was put in the
budget two years previously but was not spent because the
department was not ready to do the projects as it was
currently.
Mr. Painter turned to slide 25, "Governor's FY25 Budget
(Cont.)":
• Capital Budget totals $305.2 million UGF, $3.5
billion all funds:
o $1.0 billion federal for Broadband Equity
Access and Deployment Program
o $25.0 million for a new AHFC Down Payment
Assistance program
o $22.8 million UGF to DPS for seven projects,
including:
• $9.5 million to replace the patrol vessel
Enforcer
• $6.2 million to acquire a Pilatus aircraft
o $18.2 million UGF, $47.7 million all funds for
University of Alaska projects, including:
• $10.0 million UGF (and $10.0 million UA
Receipts) for UAF to Achieve Research Tier 1
Status, contingent on UAF awarding 70
doctoral degrees in the 2024-25 academic
year
• $5 million UGF (and $5.0 million UA
Receipts) for year 3 of the drone program
o $4.3 million UGF for School Major Maintenance
grants and $4.0 million for School Construction
grants
o $7.5 million to replace an ADF&G research
vessel for the Gulf and Bering Sea
Mr. Painter noted that about half of the UGF in the
governors capital budget was for matching federal funds.
The largest new item was $1 billion in federal funds for
the broadband program, which was the full five years of
funding all at once. He commented that several of the items
listed were more appropriate for the operating budget.
10:15:34 AM
Mr. Painter considered slide 26, "Governor's FY25 Budget
(Cont.)":
Also notable is what is not yet in the budget:
o Education no outside the formula funds or BSA
increase (there was $87.4 million outside the formula
in FY24). There is also a pending issue with the
federal disparity test that could cause State costs to
increase by $89.1 million.
o Medicaid the Governor's budget does not contain an
increase to Medicaid funding, but the Department of
Health stated that the projection will be trued up in
a future amendment. Preliminary projections indicate a
need for an additional $22.6 million UGF.
o Senior Benefits the Senior Benefits program will
sunset on June 30, 2024, without legislative action.
If it is extended, it would cost $20.8 million.
o Alaska Energy Authority Electrical Grid Grant the
Alaska Energy Authority (AEA) received a $206.5
million federal grant to upgrade the Alaska Railbelt
electrical grid that requires equal matching funds.
The funds may be spread over several years, but
securing the grant will require a significant
investment of general funds. AEA is considering
multiple funding options, but the need this
legislative session is likely to be $30-35 million.
o Alaska Marine Highway the Governor's budget
request does not change funding levels or sources from
the Calendar Year (CY) 24 enacted budget, but it does
not include any backstop funding if federal funding is
insufficient. If a similar amount of federal grants
are awarded in CY25 as the State expects in CY24,
there will be a $38.0 million shortfall in the CY25
budget.
o Ongoing Employee Bargaining Negotiations three
unions (Alaska Correctional Officers Association,
Alaska Public Employees Association Supervisory Unity,
and Labor, Trades and Crafts) are currently
negotiating new contracts to begin in FY25.
Mr. Painter noted that there were amendments to the
governors budget coming on the 30th day, as well as
supplemental items coming the following week. He mentioned
ensuring the state did not end up with an unfunded deficit
due to the pending disparity test issue. He mentioned that
there was a high level of uncertainty on the number for the
Medicaid item as it went through the redetermination
process.
10:19:35 AM
Mr. Painter continued to address slide 26. He discussed
AMHS funding and noted that the budgeted level for FY 25
could be more than what was possible depending upon unknown
funding factors. He mentioned policy considerations such as
what schedule to fund to. He mentioned a childcare task
force and its recommendations, which were not currently
being funded. He summarized that the governor's budget,
with its deficit, was likely a low starting point for where
it would end up at the end of session.
10:23:34 AM
Co-Chair Stedman recalled the committee had spent some time
on AMHS funding the previous year to ensure that there was
sufficient resources to absorb unknown federal
appropriation amounts. He expressed concern and the desire
to do the legislatures portion of funding for AMHS. He
thought there would be ample support for funding the
system.
Co-Chair Stedman addressed education and the potential
deficit related to no funding outside the formula and the
potential disparity test issue. He asked if Mr. Painter
planned on coming forward with a more refined numeric after
the supplemental items were released.
Mr. Painter affirmed that some of the items would be
refined after the submission of the governor's amended
budget. He thought Medicaid and other items would be built
in, but there would be ongoing uncertainty with some items
such as the disparity test issue.
Co-Chair Stedman understood that if the state did not fund
Medicaid, people received services anyway and the state
received the bill.
Mr. Painter agreed that if the state did not fund the full
amount, the payments to providers would be delayed till the
following year.
Mr. Painter displayed slide 27, "Long-Term Outlook and
Governor's 10- Year Plan":
• LFD modeling baseline assumes the FY25 Adjusted Base
grows with inflation (including in FY25) and all
statewide items are funded to statutory levels
(including the PFD).
• With the baseline assumptions, deficits increase
from $1.1 billion in FY25 to a peak of $1.9 billion in
FY31.
• The Governor's 10-Year Plan makes several policy
changes relative to the baseline that reduce the
deficit, but still shows deficits each year that would
drain the CBR in FY27.
10:27:12 AM
Mr. Painter highlighted slide 28, "LFD Baseline Model, No
ERA Overdraws," which showed two bar graphs and a table,
which depicted LFD's budget baseline model with no
overdraws from the ERA. The first line on the slide showed
the surplus and deficit, with a surplus for FY 24, and a
deficit for FY 25 and FY 33. The left-hand side had a graph
depicting revenue and the budget, and he pointed out the
gap between the revenue and budget. The first couple years
the gap was made up by draws from savings, which ran out in
FY 27 under the scenario. He pointed out the gap of the un-
filled deficit. The right-hand graph showed budget
reserves, including the CBR and SBR, and the realized ERA
blance.
Mr. Painter pointed out that the realized ERA balance was
declining in the baseline model and was the baseline
assumption. The APFC modeling showed decline even without
withdrawals. The model assumed leaving $500 million in the
ERA for cash flow, which was an assumption for the past
several years. The effective POMV draw rate was shown at
the bottom. The version of the model showed the statutory 5
percent level. The scenario included the PFD per person,
with $1,312 the previous year, and the estimates for
statutory PFDs going forward at $3,600 the current year to
peak at about $4,350 in FY 33.
Mr. Painter looked at slide 29, "LFD Baseline Model with
ERA Overdraws," which showed the same baseline model graphs
if the legislature filled the deficits from the ERA. He
noted that the budget could not have unfilled deficits, and
based on the baseline the savings were not enough to get
through FY 33. He made note of additional overdraws leading
to higher effective POMV draws in later years due to
overdrawing the ERA. He noted that the scenarios were based
on the assumption of the legislature doing nothing. He
noted that the legislature had not run the budget in the
manner of the model and had varied elements such as the PFD
and the capital budget to ensure the state was not running
big deficits. The scenario illustrated what would happen if
the budget followed current statutes.
10:30:39 AM
Mr. Painter addressed slide 30, "Long-Term Outlook and
Governor's 10-Year Plan (Cont.)":
• Policy changes in Governor's 10-Year Plan:
Agency operations and capital budget grow at 1.5%
Does not fund Community Assistance with UGF after
FY25
• Assumption Differences in LFD Model:
Governor assumes supplementals and lapse cancel out
after FY24, LFD includes $50.0 million placeholder
LFD includes a placeholder for new school debt after
the moratorium ends in 2025, Governor does not
DOR's Fall Revenue Sources Book used preliminary
POMV/PFD estimates from APFC; LFD uses the figures
from APFC's November History and Projections report
Mr. Painter explained that the $50 million placeholder for
the supplemental was based on a pre-Covid average. He
discussed LFDs assumption of $7.8 million of new state
obligations each year based on school debt before the
moratorium. He thought it was possible that the number
could be higher or that some school districts might be less
interested in the debt reimbursement program. He noted that
the result of LFD using different POMV and PFD estimates
was higher POMV numbers by about $100 million per year.
Co-Chair Stedman noted that the committee members had seen
the budget base model for many years. The models would be
considered again after the governors budget amendments and
adjustments.
Mr. Painter advanced to slide 31, "Long-Term Outlook and
Governor's 10-Year Plan (Cont.)," which compared the
governor's 10-year plan to the LFD baseline. He noted that
the biggest difference was the rate of budget growth, with
rates of 2.5 percent versus 1.5 percent. He mentioned the
powerful force of compound interest. He noted that the
difference grew over time, with a nearly $700 million
difference by FY 33.
Co-Chair Stedman reminded that the committee would be
focusing much narrower than ten years forward because of
the substantial deficit and would be reining in some of the
analyses to look forward two to three years.
10:35:30 AM
Mr. Painter reviewed slide 32, "Governor's 10-Year Plan in
LFD Model, No ERA Overdraws," which showed two bar graphs
and a table. He explained that LFDs model showed similar
numbers to the governors because the assumption
differences balanced out. There was a deficit of about $1
million in FY 25, shrinking slightly then growing to a peak
of $1.5 billion. The governor's plan was submitted and
showed the CBR being drawn to negative $10 billion by FY
33. The statutory requirement in the ten-year plan was to
balance the sources of revenues and expenditures and fund
balances. He continued that the governor's 10-year plan did
not provide a full fiscal solution, and just funded the CBR
negatively. He noted that LFDs model did not run the CBR
negative but showed an unfilled deficit. He noted that the
deficits were smaller than in the baseline model because of
the governors proposed policy changes.
Mr. Painter spoke to slide 33, "Governor's 10-Year Plan in
LFD Model with ERA Overdraws," which showed if the
legislature chose to fill the deficits out of the ERA
rather than leaving them unfilled, it would draw the ERA
down for a combined ERA/CBR balance of about $2.5 billion
by FY 33. He thought it was unlikely that the legislature
would do so, but the slide showed what the ten-year plan
would result in.
Co-Chair Stedman suggested that the data include the
Permanent Fund Market value.
Mr. Painter showed slide 34, "Questions?":
Contact Information
Alexei Painter
Legislative Fiscal Analyst
(907) 465-5413
[email protected]
Subscribe to email notifications from LFD:
https://www.legfin.akleg.gov/EmailNotifications/subscr
ibe.php
Co-Chair Stedman explained that the slides had shown
preliminary data and future presentations would reflect
updated numerics from the governor over the next several
weeks.
Co-Chair Stedman discussed the agenda for the afternoon
meeting.
ADJOURNMENT
10:38:44 AM
The meeting was adjourned at 10:38 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012424 LFD FY25 SFIN Overview.pdf |
SFIN 1/24/2024 9:00:00 AM |
LFD FY25 Budget Overview |