HOUSE BILL NO. 325 "An Act making appropriations for the operating and loan program expenses of state government, for certain programs, and to capitalize funds, making appropriations under art. IX, sec. 17c, Constitution of the State of Alaska, from the constitutional budget reserve fund; and providing for an effective date." Ms. McConnell provided members with a 4 page handout from the Office of Budget and Management, Attachment 1 (copy on file). She compared the FY 79 general fund, capital and operating budgets with the FY 99 proposed plan. She observed that the State spent $1470 thousand dollars more per Alaskan in FY 79 than in FY 99. She emphasized that there are services today that did not exist in 1979, such as the longevity bonus. The FY 95 budget was adjusted for population and inflation. The FY 99 budget would be $2.9 billion dollars if it were adjusted for population and inflation. Representative Martin pointed out that approximately $700 million dollars have been put into "other funds." Ms. McConnell clarified that her charts did not include other funds. Ms. McConnell stressed that growth in Medicare and welfare programs has been arrested. She emphasized the need to control the growth of correction programs. She maintained that the State must "turn off the facet" of people coming into the correction system. She stated that Smart Start and Quality Education programs are the best ways to get at some of the areas of the budget that continue to grow. She maintained that an investment in these programs could reduce state costs in the future. Ms. McConnell noted that the Administration is not proposing a cut to municipal assistance or revenue sharing. Ms. McConnell stated that the Governor's decision to allow growth in education was based on the status of the State's reserve accounts and debt retirement. She referred to Attachment 1. She observed that the draw down on the Constitutional Budget Reserve Fund between FY 95 and FY 99 was less than anticipated by the Legislature. The four-year total draw down was $449 million dollars. The Legislature anticipated that the draw down would be $1606 million dollars. The Legislature estimated that $409 million dollars would be needed to make up the FY 97 deficit. Due to increased oil prices, there was actually a $70 million dollar surplus in FY 97. She observed that the Legislature did not spend the FY 97 surplus. She added that the Constitutional Budget Reserve Fund will earn approximately $250 million dollars in interest for FY 99. Ms. McConnell maintained that the state of Alaska can weather a year of lower oil prices. She noted that oil production has not dropped as predicted. She stressed that state revenues are more diverse. Oil revenues account for 78 percent of the State's strictly general funds. Oil revenues represent 33 percent of total funds. Investment earnings represent 32 percent of total funds. Ms. McConnell reviewed the spreadsheet titled, Projection with Governor Knowles' FY 99 Initiatives and January Oil Price Forecast for FY 99, contained in Attachment 1. She clarified that line 14, which shows the draw on the Constitutional Budget Reserve Fund, uses the January 98 projection. The spreadsheet includes the Governor's proposed investments for FY 99. She explained that increases for K - 12 education are shown on line six. She added that increased enrollment; a one- percent foundation formula increase and funding for the Governor's proposal for Quality Education are included. Ms. McConnell noted that formula programs were given a modest increase of half of one percent. She added that Longevity Bonus will be phased out. She observed that the prison package was not included in the spreadsheet. Ms. McConnell observed that the spreadsheet shows that the Constitutional Budget Reserve Fund will be $3,001.4 billion dollars by the year 2002. She emphasized that by the year 2002 other options will be available and other choices will have to be made. Ms. McConnell emphasized the need for the Administration and Legislature to coordinate financial reporting. Ms. McConnell referred to deferred maintenance. She stated that the Governor recognizes the need to resolve the deferred maintenance backlog. Ms. McConnell discussed Results Based Budgeting. She noted that the Executive Budget Summary includes departmental and interdepartmental goals. Each department identifies key performance measures and evaluates their growth. She observed that the automative budget system has been designed to incorporate performance measures. Ms. McConnell explained that cost of living adjustments (COLA) and retirement (PERS) adjustments were handled in the front section of the bill. Ms. McConnell observed that the general fund contribution for debt service is down from $72.3 million in FY 98 to $64.1 million dollars in FY 99. She noted that the Legislature made a $5 million dollar deposit from the Investment Loss and Trust Fund (ILTF). The tobacco tax collected in FY 98 was deposited into the School Construction Fund. This has reduced school debt reimbursement by $16 million dollars. The total pay-out is an increase from FY 98 to FY 99. However, the general fund amount needed has been reduced. Ms. McConnell acknowledged that the legislation needs some technical adjustments. She stated that these will be submitted as part of the Governor's budget amendment package. Co-Chair Hanley referred to the fiscal notes for the correction plan. He observed that debt service, under the correction plan, would be approximately $8 million dollars starting in the year 2000. He asked if the Governor has a plan for construction of a juvenile facility. Ms. McConnell stated that the issue is being discussed. In response to a question by Co-Chair Hanley, Ms. McConnell acknowledged that the spreadsheet could be considered as an update to the Administration's five-year plan. Co-Chair Hanley noted that there is still a fiscal gap. Ms. McConnell acknowledged that there is still a fiscal gap. She maintained that there will be choices to make in the future. She noted that there has been discussion regarding a ten-year plan. Co-Chair Hanley noted that the Governor has deviated from his commitment to close the fiscal gap. He observed that the Governor's plan contains increased spending and an increased fiscal gap. He stressed that the Governor has been committed to closing the fiscal gap over the past three years. He noted that the Governor has stated that it is not appropriate to spend our children's inheritance and that we need to put "Alaska on a strict but healthy financial diet." Co-Chair Hanley questioned why the Governor's commitment to close the fiscal gap has changed. Ms. McConnell emphasized that the spreadsheet represents a projection of the current fiscal situation. She reiterated that there are a whole host of choices that can still be made. She noted that one choice is to not draw any money from the Constitutional Budget Reserve Fund. She added that another choice is to continue to draw from the Constitutional Budget Reserve Fund, in lieu of other choices such as taxes. She asserted that there have been adjustments by the Administration and the Majority to what "we are laying out on the table right now, from what there was a couple of years ago." She stressed that the overall philosophy of providing stable services and a stable fiscal environment has not changed. She asserted that the choices vary from year to year depending on what is realistic, or what appears to be warranted given the situation. She maintained that when taxes were proposed no one thought that the Constitutional Budget Reserve Fund would be in as good a position as it is now. Co-Chair Therriault questioned if the Governor's change in policy is the result of the health of the Constitutional Budget Reserve Fund. He noted that the Governor stated as recently as January 16, 1997 that, "First, we must close the budget gap and balance our budget." Ms. McConnell compared the Governor's position to someone who is told that they will loose their job in three months. She stressed that a person who is informed that they will loose their job in three months might make some tough choices. If that person later finds out that they have another job they may make different choices. Ms. McConnell emphasized that revenue options such as motor fuel tax increases or an Alaska credit income tax still exist. She stressed that implications must reflect the effect of decisions in terms of services. Co-Chair Therriault referred to a letter by the Department of Revenue dated October 21, 1997, regarding the Fall 1997 Revenue Forecast. He observed that the "mill is closing and the mill is not coming back." He noted that according to Commissioner Condon, new oil production will not pay the state treasury at the same rate as Prudhoe Bay oil. He noted that under the Governor's projection the principle of the Constitutional Budget Reserve Fund would be reduced beginning in the year 2001. He stressed that the Majority's plan would use the intervening time to fill the fiscal gap. He expressed concern that the Constitutional Budget Reserve Fund would drop rapidly after the year 2001. He emphasized that oil production will also decline. Ms. McConnell reiterated that reforms in welfare and Medicaid have reduced state spending. She maintained that state spending can be reduced through increased education levels. The average Alaskan inmate has a seventh grade education. Statistics show that abusers are often abused as children. She maintained that "it is a cycle we've got to break." She stated that it makes sense to spend $11 million dollars for prevention programs. She asserted that these programs will control significant costs in the out years. Co-Chair Therriault expressed concern that "no decline in '99" would be used to lull citizens into a false sense of security. He noted that the deficit is real and it is projected to grow. Ms. McConnell explained that that "no decline in '99" does not mean that "perpetually" there will be no decline. She maintained that the one-time use of the Medicaid savings would not break the budget. She asserted that it is a wise investment. She stated that the State's circumstances have changed and the window of opportunity is farther out than we used to think it was. She maintained that we are not at the point of falling off a cliff. She acknowledged that the level of Prudhoe Bay oil will not remain the same. Representative Mulder asked if the Governor is committed to closing the fiscal gap. Ms. McConnell replied that the Governor is committed to closing the fiscal gap. She stated that the question is how and when. She observed that the Administration disagrees with the Legislative Majority on the level of budget cuts. Representative Mulder observed that the Governor's plan would draw from the Constitutional Budget Reserve Fund. He asked how "can we be saying that we're closing the gap, when this gap remains huge." Ms. McConnell alleged that the Majority's and the Administration's plans both use the Constitutional Budget Reserve Fund. Representative Mulder maintained that the difference is that the Majority focuses on the interest income of the Constitutional Budget Reserve Fund. The Majority's plan would only utilize interest earnings to balance the budget. Ms. McConnell maintained that the Majority's plan would need to be adjusted for revenues. (Tape Change, HFC 98 - 18, Side 1) Representative Mulder stressed that the Majority would like to spend more money on Alaska's needs, but he stressed that you cannot spend money that is not there. He emphasized that the fiscal gap cannot be increased for the future, just because the Constitutional Budget Reserve Fund balance is better than anticipated. Representative Davies pointed out that the Constitutional Budget Reserve Fund will continue to grow until the year 2001. He acknowledged that the principle will be drawn on during that time. He stressed that there are other tools that need to be addressed. He questioned how deferred maintenance fits into the Majority's plan. Representative Mulder reiterated his concern that there will be a $500 thousand dollar fiscal gap by the year 2001. Ms. McConnell alleged that it would take a $300 million dollar budget cut to keep the Majority's plan at the same level. She maintained that it makes sense to make investments in quality education, juvenile crime and child abuse. She stressed that the Governor's plan would not put the state of Alaska in jeopardy "of falling off the financial cliff in the year 2002." She stressed that there are lots of choices still available to deal with the fiscal gap. Co-Chair Hanley expressed frustration with the level of the Governor's rhetoric regarding the need to close the fiscal gap. He emphasized that the Governor reiterated his commitment numerous times in previous years. He quoted a statement by Governor Knowles attached to the May 1996 Longevity Bonus check. "Legislators left Juneau without performing their most basic responsibility, passing a balanced budget. The result is a gapping $400 million dollar hole in the budget and cuts to vital programs including medical services for the elderly, such as eyeglasses, hearing aides and dental care. Alaskans deserve better. I am urging lawmakers to adopt my safe landing budget plan that balances the budget in three years and also protects your services." Co-Chair Hanley stressed that the definition of budget discipline, according to the Governor's statements, has been closing the fiscal gap. He reiterated that the Governor has changed his position. He stated that he was more impressed with the Governor's plan when he included an Alaska credit income tax to offset increased spending. He viewed the Governor's plan as an increase in spending; a change from his previous three year commitment to close the fiscal gap; and the elimination of revenue measures to offset increases. Ms. McConnell reiterated that the Governor's plan as presented by the spreadsheet is a projection of the current budget and the Governor's current legislative proposals. She stressed that the projection does not make choices regarding future revenues and expenditures or foreclose new choices. She maintained that the choice for an income tax does not need to be made at this time. Ms. McConnell stated that the implication of budget cuts on services should be addressed. In response to a question by Representative Kelly, Ms. McConnell explained that there is an increase in the total debt service for 1998. She observed that because of the $5 million dollar ILTC deposit and the collected tobacco tax the general fund amount has been reduced. Representative Grussendorf stressed that the extent of the "fiscal gap" is dependent on which revenue sources are considered. He maintained that the original purpose of the Permanent Fund was to fill the fiscal gap. He maintained that other revenue sources should be considered. He stated that the Constitutional Budget Reserve Fund was established to help with the fiscal gap. He noted that the State's revenue portfolio is broad. He maintained that problems will be compounded in the future if some of the State's revenue sources are not used. He maintained that investments in Smart Start and education would save money in the long run. He asserted that the revenue gap is self- imposed. Co-Chair Therriault asked if the spreadsheet's projection for longevity bonus factored in the Governor's plan to change the program to needs based. Ms. McConnell clarified that the projection is based on the current statute. Co-Chair Therriault noted that Governor stated in a letter to the House and Senate Finance Committees on April 4, 1997, that the "budget gap-closing plan still requires $100 million in cuts over three years." Ms. McConnell maintained that there have been more than a $100 million dollars in cuts over the last three years. She recalled that the Governor's commitment when he took office was to "hold the line, but for education." She observed that the Governor accepted the recommendation of the Long Range Planning Commission for $100 million dollars in cuts over three years. Co-Chair Therriault thought that the additional federal contribution for Medicaid should be used to fund K - 12 education increases. He observed that the Governor plans to spend this money on Smart Start. He noted that Smart Start is composed of new programs or additions to new programs. He observed that the Governor has used the K - 12 funding shortage as justification for more spending. He maintained that the highest priority for general fund spending is to meet the K - 12 obligation. He stated that the disagreement is over new or expanded programs for Smart Start. He asserted that the K - 12 obligation would be met. Ms. McConnell stressed that Congress did not give the state of Alaska a 60/40 split to pay for K - 12 education. She stated that Congress did not approved a change in the formula to meet state expenses for education. The formula was changed because the state of Alaska demonstrated that medical care is more expansive in Alaska than in other states. Congress reevaluates the spilt in three years. She noted that it would be difficult for Alaska's congressional leaders to argue to continue the increase if Alaska uses the funds as a way to cut the budget. She asserted that the state of Alaska would be in a better position to argue the higher share if it is used for things that directly relate to the wellbeing of children. She stressed that Alaska is a rich state with huge reserves. Representative Davies observed that the 1999 draw from the Constitutional Budget Reserve Fund is $268 million dollars. Representative Moses emphasized that the Legislature cannot continue to cut the budget without the addition of any taxes. He stressed that deferred maintenance should have been taken care of every year. He observed that the priority has been to cut the budget without taxes. HB 327 was HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 3:40 p.m. House Finance Committee 1 2/04/98