HOUSE BILL NO. 69 "An Act making appropriations for the operating and loan program expenses of state government and for certain programs; capitalizing funds; amending appropriations; making reappropriations; making supplemental appropriations; making appropriations under art. IX, sec. 17(c), Constitution of the State of Alaska, from the constitutional budget reserve fund; and providing for an effective date." HOUSE BILL NO. 71 "An Act making appropriations for the operating and capital expenses of the state's integrated comprehensive mental health program; making supplemental appropriations; and providing for an effective date." 1:34:09 PM ^PRESENTATION: REVERSE SWEEP - OFFICE OF BUDGET AND MANAGEMENT 1:34:13 PM Co-Chair Foster hoped the presentation would help to answer some common questions about the reverse sweep and how it functioned. He advised the presenter to keep the presentation brief, as there were two bills that would also be addressed in the meeting. NEIL STEININGER, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR, introduced the PowerPoint presentation: "Constitutional Budget Reserve Sweep and Reverse Sweep" (copy on file). Turning to slide 2 He indicated that the Alaska Constitution addressed three distinct funds: The Alaska Permanent Fund (PF), (Article 9, Section 15); the Constitutional Budget Reserve (CBR), (Article 9, Section 17); and the general fund (GF). Each of the funds had different restrictions. Specific revenues were deposited into the PF and only the income of the fund could be appropriated. The Constitutional Budget Reserve Fund included money received from the termination of administrative and judicial proceedings involving mineral revenues. He reported that the concept of the sweep came from the CBR. The general fund contained money received from taxes, fees, and other sources not constitutionally directed to the CBR or the PF including the various designated general fund accounts used in the state budget system. Co-Chair Foster announced Representative Edgmon and Representative Wool had joined the meeting. Mr. Steininger turned to slide 3 which was a reproduction of Article 9, Section 17 regarding the Constitutional Budget Reserve Fund (CBR). It was added to the constitution in 1990 via an amendment. Subsection (d) pertained to the sweep and the reverse sweep and outlined the repayment requirement. He read the subsection: Repayment requirement "If an appropriation is made from the budget reserve fund, until the amount appropriated is repaid, the amount of money in the general fund available for appropriation at the end of each succeeding fiscal year shall be deposited in the budget reserve fund. The legislature shall implement this subsection by law." Mr. Steininger reported that over the previous decade, the state had drawn a considerable amount from the CBR in order to meet state needs and fill a structural deficit. As a result, the state owed a considerable amount to the CBR which triggered the repayment requirement on an annual basis. 1:37:23 PM Mr. Steininger continued to slide 4 to review the repayment requirement commonly known as the "sweep." Between FY 95 and FY 10 the requirement was also triggered. It peaked at a debt of $5.2 billion in FY 05 which was fully repaid by FY 10. The state's current debt began in FY 15. Presently, the state owned more than $11 billion to the CBR. Mr. Steininger reviewed the mechanics of the sweep's execution. The Sweep was effective at midnight on June 30th of each year. Any balance in an account on the night of June 30th would be swept to the CBR. It was reversed through the reverse sweep pending a three-quarter vote of the legislature and a signature of the governor in an appropriation bill. The reversal occurred at 12:01 a.m. on the following day. He explained that because the state's accounting systems did not close exactly at midnight, the state had 2 months to do clean-up. It ensured that all accounting transactions were in the right place and were made to the correct funds before closing out the fiscal year on August 31st on an annual basis. Mr. Steininger continued that There being NO OBJECTION, it was so ordered. state accounted for all payroll and bills that were pending and being received. The sweep transaction would not be executed until the administration was finished closing out the year and following the completion of an audit and a review by the Legislative Finance Division. As they prepared the annual comprehensive financial report, they looked at the balances of the account and determined the amounts that were actually in the accounts and subject to the sweep at midnight on June 30th. The mechanics of the sweep actually happened much later than June 30th. Mr. Steininger reviewed how the state determined which funds were subject to the sweep. The state did not have much guidance on how to interpret the constitutional provision. He suggested that a test had to be applied to different funds to determine whether the sweep should be applied to them and whether their amounts would appear in the annual financial report. Funds that were subject to the sweep were funds the legislature could appropriate and required further legislative appropriation. Funds that listed purposes for which the money could be used but still required legislative appropriation were also subject to the sweep. The rule came down to the availability of appropriation by the legislature. Mr. Steininger reviewed items that were not subject to the sweep including money and funds that were already validly appropriated - obligated funds. For example, the sweep would not defund an existing capital project. Also, federal funds were not subject to the sweep. Other trust funds with an obligation behind them such as the public employee's retirement fund or other funds that could only be used for a specific stated purpose under law or held in trust were not subject to the sweep. Additionally, donations were not subject to the sweep, because they usually came with strings attached by the person making the donation. Accounts that were subject to expenditure without appropriation, capitalized funds, were not subject to the sweep as well. Receipts subject to refund were not subject to the sweep including the Alaska Marine Highway System (AMHS) receipts and the University of Alaska (UA) tuition receipts. 1:42:31 PM Mr. Steininger discussed the sweep reversal on slide 6. He explained that the sweep reversal was an action taken annually in the state's operating budget or capital budget depending on where it fell in the legislative process. In the current year, the reverse sweep proposal was in Section 28(a) in the FY 22 governor's proposed operating budget. The language on the slide replicated the language in the budget implementing the sweep. The language stated that any monies swept from a fund or sub fund of the general fund or an account within the general fund were appropriated back to the funds from the CBR. Technically, it was a draw from the CBR and required a three-quarter vote of the legislature. The intent of the appropriation was to prevent programmatic problems that could be caused by the emptying of the various funds, sub funds, and accounts within the general fund. Mr. Steininger advanced to slide 7 to discuss the impacts of the sweep. If the sweep reversal was not enacted there were 3 categories of impacts. There were high impact funds, funds that did not have projected revenues for FY 22 including the scholarships coming from the Higher Education Fund and any appropriation made from the Power Cost Equalization (PCE) Fund. Both funds did not receive revenues on a fiscal year basis. Rather, they were savings accounts set aside in prior years by the legislature that produced income that provided for the cost of certain state programs including the PCE Program and the scholarship program. Mr. Steininger explained that medium impact funds were funds that would receive revenue in the following fiscal year. There would be money to back some of the appropriations. However, the revenue was less than the amount being appropriated in FY 22. Some of the programs included the Alcohol Safety Program, Chronic Disease Prevention within the Department of Health and Social Services (DHSS), substance abuse grants, the Domestic and Sexual Assault Prevention Program, AMHS operations, and the Spill Prevention and Response (SPAR) Program within the Department of Environmental Conservation (DEC). All of the programs he mentioned had revenues coming in the following fiscal year. However, the revenue was not sufficient to cover all of the appropriations. 1:45:30 PM Representative Josephson brought up the SPAR account. He thought the response portion of the funding was already fully appropriated, as it had to be available for use at a moment's notice. He was uncertain the item should be on Mr. Steininger's list. Mr. Steininger thanked Representative Josephson for his question. He responded that there was a strange technicality to the way the SPAR fund was filled. The Spill Prevention and Response accounts were filled with surcharges on fuel. However, during the fiscal year, the surcharges were held within an account in the general fund and in the following fiscal year the legislature appropriated the amount collected in the prior year. The appropriation into the account occurred on July 1st. The sweep occurred on June 30th and was subject to a holding account where revenues were placed. He continued that because of the way the money was appropriated into the SPAR account, the response account was not subject to the sweep. It was the revenue collections from the year that were about to be deposited into the fund that were subject to the sweep. The account itself was not subject to the sweep, as it was fully obligated. However, revenues going into the account were impacted by the sweep. There were areas where there might be unforeseen circumstances in which a fund would be impacted by the sweep indirectly. Co-Chair Foster asked members to hold their questions until the presentation was finished. Mr. Steininger indicated there were funds that experienced no real immediate impacts such as funds without FY 22 appropriations reliant on existing balances. There were holding accounts for revenues used for specific purposes but did not have ongoing reliance on a specific program. Mr. Steininger looked at a non-comprehensive yet high-level summary of some of the impacts if the sweep occurred but was not reversed in FY 22. The table reflected dollar value shortfalls of several funds where there would be significant impacts to the FY 22 budget. He had already reviewed the impacts to the PCE fund and the Higher Education Fund. There were use taxes such as tobacco use education and cessation that were directed towards prevention and public health, or things that addressed domestic violence or substance abuse. There were also industry impacts such as the Commercial Fisheries Entry Commission Fund where there would be a shortfall in the FY 22 budget without a reverse sweep. He noted that the impacts would be mitigated with the enactment of Section 28(a) of the governor's proposed operating budget. He concluded his presentation. Co-Chair Foster had wanted a refresher on the topic. He thanked Mr. Steininger for his presentation. He was glad to see the governor had included the sweep language in his budget. 1:50:54 PM Representative LeBon referred to slide 7 and the Alaska Housing Capital Corporation Account. He wondered if the fund was not subject to the sweep because it was considered a capitalized account. Mr. Steininger responded that the fund was subject to the sweep but without any material impact to the FY 22 budget. The capital corporation account was an account at Alaska Housing Finance Corporation (AHFC). However, they were not able to spend from it without further appropriation and did not meet the other categories that would take it out of the scope of the sweep as he viewed the guidelines. Representative LeBon clarified that it would be subject to the sweep. He asked for an example of a capitalized account not subject to the sweep. Mr. Steininger responded that a good example would be the vaccine assessment account - the account that funded the purchase of vaccines. The state received payments from entities and pooled them together to purchase vaccines. The state received payments as general fund revenue, then it capitalized the account and allowed DHSS to spend without an appropriation to make bulk purchases of vaccines to keep costs down. Vice-Chair Ortiz referred to slide 4 regarding funds subject to the sweep. He asked if the state had always swept funds that were subject to the sweep in 1995. Mr. Steininger responded affirmatively but only on paper. He elaborated that no actual money was moved from account to account. The funds were not physically moved across accounts. Vice-Chair Ortiz asked if there had been any broadening of the funds subject to the sweep. Mr. Steininger responded that the funds subject to the sweep had shifted with different understanding over time. In prior years (1995 to 2010) the sweep had been reversed in a timely manner. Several years ago, there was uncertainty as to whether the sweep would be reversed. In order to ensure the that the provision was implemented correctly, the state needed to review the issue with greater rigor. 1:56:16 PM Vice-Chair Ortiz asked if the review had been done by each administration. He specifically asked about whether the PCE Fund and the Higher Education Fund had always been swept. Mr. Steininger responded that they were more recently a part of the sweep. He noted they had not necessarily been considered or reviewed with rigor in the past. Representative Josephson relayed that in the case of Hickel vs. Cowper the implication was that the PCE Fund was not sweepable according to the Legislature's legal counsel. However, the administration disagreed. He believed that if the PCE Fund was swept permanently, litigation would result. He asked Mr. Steininger if he agreed with the idea of crafting a law defining the sweepable accounts. He noted the CBR provision stated, "As prescribed by law." Mr. Steininger commented that the most recent attorney general's opinion on the matter was his reference point as the OMB Director. The opinion determined that PCE was sweepable based on the analysis of the information available. In response to Representative Josephson's question about whether there should be a law, he thought it would be helpful in guiding interpretation. Currently, there was little criteria available to determine sweepability. He suggested that there were many different funds impacted by the sweep. The policy position of whether to reverse the sweep and its impacts on the state budget and state programs did not really change depending on the outcome of some of the arguments about the higher profile funds. The importance of the budget item being discussed did not change based on a determination. It was still an important budget item to enact for the health of state operations. He thought it was an important thing to note as the funds were being discussed. 2:00:52 PM Representative Carpenter referred to slide 8. He asked about the programs represented by the dollar figures. He wondered if the legislature had created a program funded by a specific account which would go unfunded without a reverse sweep. The legislature had the option to fund the program with different funds. He asked if he was correct. Mr. Steininger replied that if, for example, instead of using the Tobacco Use Education and Cessation Fund for $2.7 million an unrestricted general fund appropriation was made to the programs, the impact would go away. It would require an appropriation of $2.7 million UGF. Representative Carpenter suggested that if a program was important enough, it would make sense to fund the account with UGF into perpetuity. He wondered why the state did not just do it the way he was suggesting. Mr. Steininger thought it was a policy decision for the legislature to make. Representative Carpenter believed the legislature was unable to do so based on the Alaska Constitution. It would be a dedicated fund. They were designated funds because they had to be reappropriated every year. The legislature did not have the authority to make it a dedicated fund. Mr. Steininger clarified that the policy decision would be which fund to use to support the program: the Tobacco Education and Cessation Fund or the general fund. The policy for what fund to use for any given appropriation was up to the legislature. Representative Carpenter asked what percentage of funds that were swept were on the list. Mr. Steininger indicated there was a list in member's packets that listed the total amounts of funds that were swept at the end of FY 20 and totaled about $1.5 billion. 2:03:59 PM Representative Edgmon indicated that the reverse sweep vote on the floor, which required a three-quarter vote of 30 members in the House and 15 members in the Senate, could prevent the legislature from getting its job done in a timely manner. He indicated that the SBR was established in 1986, and the CBR (a place to park billions of oil settlement dollars) was established in 1990. The accounts were created in an era of insufficient revenues, several budget cuts, and the Permanent Fund Dividend had to be paid. At the time oil prices were about $8 or $9 per barrel. The Constitutional Budget Reserve was a vault where legislators could not get their hands on it without a super majority vote. He requested an opportunity to look at the history of the funds and why they came to be. He appreciated the presentation but noted that no one really understood the concept. Co-Chair Foster liked Representative Edgmon's suggestion concerning a historical lookback. HB 69 was HEARD and HELD in committee for further consideration. HB 71 was HEARD and HELD in committee for further consideration. 2:06:47 PM AT EASE 2:07:25 PM RECONVENNED Co-Chair Merrick called the meeting back to order and invited the bill sponsor to begin his presentation.