HOUSE FINANCE COMMITTEE January 12, 1996 1:36 P.M. TAPE HFC 96-2, Side 1, #000 - end. TAPE HFC 96-2, Side 2, #000 - end. TAPE HFC 96-3, Side 1, #000 - end. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:36 p.m. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Mulder Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Kohring Representatives Mulder and Therriault were absent from the meeting. ALSO PRESENT Nancy Slagle, Director, Division of Budget Review, Office of the Management and Budget, Office of the Governor; Mark Boyer, Commissioner, Department of Administration; Tamar diFranco, Special Assistant, Department of Revenue. SUMMARY GOVERNOR'S BUDGET OVERVIEW: ANNALEE MCCONNEL, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR ANNALEE MCCONNEL, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR noted that Governor Knowles presented the Legislature with the first year of a multi-year plan, designed to close the budget gap in 6 years. She asserted that some issues cannot not be resolved in one year. She identified the fastest growing areas of the budget: AFDC, Welfare, Medicaid and the Department of Corrections's budget. She emphasized that the Administration is using an interdepartmental approach to bring the growth of these programs under control. She noted that the Administration is developing a long range plan for the Department of Corrections. 1 Ms. McConnell pointed out that the Administration is working to streamline programs in order to reduce the effort and cost of administration and increase the level of direct services. Ms. McConnell observed that technological improvements often cannot be implemented in a single year. Ms. McConnell addressed the issue of budget reductions versus increased taxes. She pointed out that approximately $40.0 million dollars in agency cuts were combined with the $56.0 million dollar capitalization of the Mental Health Trust in the FY 96 budget. She maintained that there were no major fee increases or tax proposals included in the FY 96 budget. She maintained that inflation has been absorbed into the budget in previous years. She noted that the fuel tax has not been raised since 1961. The last alcohol tax increase was in 1983. She asserted that the Administration is not starting with user fees and taxes without looking at the necessity to focus on cuts. She acknowledged efforts of past legislatures and governors to control the growth of state spending. Ms. McConnell provided members with a chart detailing expenditures of state funding (Attachment 1). She noted that the total $2.3 million dollar state operating budget can be broken down as follows: * State Services & Operations - $1,077 million dollars; * Grants/Formula Programs for Individuals - $349 million dollars; * Grants/Formula Programs to Non-Profits - $128 million dollars; and * Local Assistance: Schools & Local Governments - $802 million dollars. Ms. McConnell stressed that the Administration looked at proposals and ideas for reducing costs of services across the State and the impacts of each action. She noted that many proposals will take more than one year to implement. She emphasized the need to look at multi-year proposals. Ms. McConnell restated that the Administration emphasized interdepartmental solutions to problems. She pointed to the success of the interdepartmental approach taken in regards to criminal justice issues. Ms. McConnell referred to recommendations of the Long Range Financial Planning Commission (LRFPC). She noted that the Governor outlined his recommendations in regards to the Long Range Financial Planning Commission's plan in his State of 2 the State address on January 11, 1996. Ms. McConnell assured members that no one area is focused for or protected from the impact of reductions. Ms. McConnell noted that there are services that citizens are willing to pay for in the form of program of receipts. She noted that services delivered and paid for through state government do not result in a reduction in total state spending. She noted that program receipts that are tied on a one to one basis to the service delivered have been identified in the budget plan as designated program receipts. She observed that funding for occupational licensing is based on money collected from the licensing process. She noted that some program receipts are a blend of state support and user fees such as the state park and recreation system. She suggested that users can appropriately pay for services provided by state programs. Ms. McConnell provided members with a handout: Comparison of the Budget Gap between FY 96 and FY 97 (Attachment 2). She reviewed Attachment 2. She noted that total oil revenues are projected to decline by $43.7 million dollars in FY 97. She noted that the State received an Executive Life settlement of $72.5 million dollars in FY 96 which will not be received in FY 97. She noted that there will also be a $20 million dollar reduction in dividends from AHFC. She noted that there will be $51.8 million dollars in increases over FY 96 from expenditure reductions, and a shift from state support to user support. She observed that the Administration's budget includes an increase of $80.0 million dollars in increased fuel, tobacco and alcohol taxes. Co-Chair Hanley noted that the Department of Revenue underestimated FY 95 corporate income tax revenues by approximately $194 million dollars. TAMAR DIFRANCO, SPECIAL ASSISTANT, DEPARTMENT OF REVENUE testified that the FY 96 forecast reflects increases in corporate income taxes as compared to the spring 95 forecast. She stated that corporate receipts are expected to be $185 million dollars in FY 96 and $179 million dollars in FY 97. Ms. McConnell provided members with a cut sheet summarizing the Governor's FY 96/97 budget plan from the Executive Budget Book (Attachment 3). She noted that the plan shows total funds as well as general funds. She reviewed attachment 3. She noted that the spreadsheet also depicts total general funds without designated program receipts. Representative Martin maintained that the public needs to see the "true cost of government, no matter where the 3 resource is coming from." He referred to shared taxes passed directly to municipalities. Ms. McConnell noted that information regarding shared taxes are located in footnotes to the spreadsheet. She observed that shared taxes are indicated for accounting purposes. She emphasized that shared taxes are passed on to municipalities and do not effect the state's spending level. Representative Martin referred to University of Alaska's corporate receipts of $29 million dollars. He questioned how these will be accounted for in the budget. Ms. McConnell responded that the total spectrum of spending sources will be demonstrated and compared to FY 96. Co-Chair Hanley asked if the FY 97 budget for the Alaska Court System is shown at the FY 96 level. Ms. McConnell replied that the Administration included an increased FY 97 budget request for the Alaska Court System in the form that it was received. The spreadsheet assumes that the Legislature will not approve additional funding. Co-Chair Hanley pointed out that there is an inconsistency between the legislation and the Executive Budget Book. He noted that the legislation contains an increase of $2.3 million dollars above the spending plan. Representative Brown asked the percentage of federal contribution in the $3.0 billion dollars listed as other funds. Co-Chair Hanley observed that the Legislative Finance Division is working to identify the source of other funds. He noted that there is an increase in total other funds for FY 97. Ms. McConnell noted that the Governor's Budget Summary for Fiscal Year 1997 contains information on page 13 regarding other funds. Ms. McConnell assured members that the Administration will continue to attempt to better identify other funds. In response to a question by Representative Martin, Ms. McConnell explained that increased personnel costs, due to negotiated raises, were incorporated into the personal services line in each department. She explained that the Administration wished to understand the increased cost for personnel in order to accurately decide what cuts are needed in program services and streamlining to achieve their budget goals. Ms. McConnell noted that the proposed increase for non- represented employees is structure in the same manner as for the negotiated contracts. She stated that contracts were negotiated at half of the cost-of-living increase with a limit of 1.5 percent. (Tape Change, HFC 96-2, Side 2) 4 In response to a question by Representative Martin, Ms. McConnell explained that the University of Alaska received an increase for labor contracts. She further explained that after personnel increases were factored the entire University of Alaska budget was subjected to revised funding levels based on policy decisions. Co-Chair Hanley observed that personnel increases due to contracts were included in all agencies. Personnel increases were not added into the Legislature or Court System budgets. Ms. McConnell noted that contracts were funded with the exception of the Public Safety Employees Association and Correspondence Schools. Ms. McConnell stressed that there will not be separate legislation for personnel increases for contacts that were submitted prior to the October deadline. Legislation may be submitted for contracts received by Office of Management and Budget after that date. Co-Chair Hanley asked if the Administration had analyzed the cost of merit increases in FY 97. Ms. McConnell stated that they did not perform a FY 97 analysis of merit increases. She emphasized that Position Authorization and Control System (PAC) runs adjust for the person who is actually in the job. Ms. McConnell clarified that non-union personnel increases are estimated at $700.0 thousand general fund dollars. Ms. McConnell provided members with a handout detailing items transferred from the Capital Budget to the Operating Budget (Attachment 4). She emphasized that the Administration's review of capital appropriations attempts to determine if appropriations should be considered annual items which belong in the operating budget. Co-Chair Hanley assured Ms. McConnell that the Legislature would work with the Administration to identify items that should be transferred to the operating budget. Representative Parnell asked if all the maintenance items have been brought into the operating budget. Ms. McConnell replied that regular maintenance items were transferred to the operating budget. Co-Chair Hanley suggested that a comparison of capital appropriations over several years would be beneficial. Ms. McConnell noted that there has not been a separate expenditure for gravel in the Department of Transportation and Public Facilities. Co-Chair Hanley suggested that perhaps there should be a one time capital expenditure for this year to fund requirements from past years and an on going expenditure for future years. 5 Representative Parnell asked if vehicles were included in the estimates for Trooper replacement equipment in Attachment 4. Ms. McConnell stated that vehicles were not included. Ms. McConnell emphasized the need to "get a handle" on ongoing maintenance and regular renewal and replacement costs. She stressed that it is not going to do any good to add new projects if maintenance needs are not covered. She accentuated that a plan needs to exist to provide for regular renewal, replacement and routine maintenance in agency budgets. Representative Navarre observed that, in past years, items have sometimes been shifted to the capital budget to lower agency's operating budget. He spoke in support of the Administration's approach. Co-Chair Hanley agreed that necessary adjustments should be made in the FY 96 and FY 97 budgets so that they can be compared appropriately. Representative Grussendorf questioned why the Renter's Rebate Program was maintained while the Senior Citizen's Property Tax Exemption was discontinued. Ms. McConnell noted that local municipalities can maintain a senior citizen's property tax exemption. She emphasized that local government's would not offer a renter's rebate. Representative Martin noted the need to control the growth of formula programs. He asked if the Administration's FY 97 goal of $10 million dollars below FY 96, for formula programs, is realistic. Ms. McConnell provided members with spreadsheets detailing formula programs in total funds and general funds (Attachments 5 & 6). She stressed the shift away from an emphasis on processing welfare claims and an increased stress on job training and placement effort. She noted that the demand in education is estimated at a slight increase. Non-general fund support to the foundation formula will be increased through the Public School Fund. Ms. McConnell stressed that in order to make reductions there must be some statutory changes. She noted that $13.0 million dollars of new revenues identified by the Administration require statutory changes. In response to a question by Representative Brown, Ms. McConnell observed that Alaska has the highest population growth rate of residents over 65 years of age in the nation. She observed that the Longevity Bonus Program will grow by $350.0 thousand dollars if there are no statutory changes. She stated that the Administration's budget assumes that Medicaid costs will be held steady by an increase in job 6 training and federal changes to Alaska's growth rate allowance in Congress. Ms. McConnell observed that the Front Section was reorganized to aggregate programs. Departments were placed into alphabetical order. She observed that the Administration has recommended some changes in the appropriation structure. She maintained that the splitting of programs between Budget Request Units has hampered the Administration's ability to efficiently manage and streamline programs. She acknowledged that public policy decisions need to be made in regards to particular services. She maintained that efforts to aggressively downsize and control supplemental requests will be aided by greater flexibility in management. Ms. McConnell noted that performance measures were included for each department. Ms. McConnell provided members with a schedule of debt service (Attachment 7) and a spreadsheet of loan programs cash flow analysis (Attachment 8). Representative Parnell asked if the Governor has a fiscal plan to close the fiscal gap and balance the budget in six years. Ms. McConnell replied that the Administration is working on a modification of the Long Range Financial Planning Commission's (LRFPC) recommendations with some adjustments. She noted that an initial plan has been laid with concerns and approvals of different elements of the plan. She observed that the Governor felt it was appropriate and necessary to establish a time frame beyond the year 2000. Representative Parnell questioned the format the Governor's fiscal plan would take. Ms. McConnell noted that the Governor outlined the direction that he wants to take and the values he will use in evaluating changes to suggestions that have been made. Co-Chair Hanley asked if the Legislature would see a spreadsheet from the Governor outlining his six year plan. He noted that the Governor expressed a preference for an income tax over capping the dividend. He questioned if the Governor would wait to see what direction the Legislature takes. Ms. McConnell stressed that the Administration will be working to assure the numbers add up in order to balance the budget in no more than six years. She stressed that "we sort of have to work both ends toward the middle, we've got 7 a target of six years in our minds and some framework for how those steps might fit." She expressed the hope that the administration and the legislature will be able to work together to fashion something that will provide a reliable, secure and realistic approach to closing the budget gap. Representative Parnell stated that he presumed budget deliberations this year would be part of the six year plan. Ms. McConnell expressed the desire to set direction early in the session. She noted that Speaker Phillips has suggested holding hearings in the first couple weeks of the legislative session on the plan. (Tape Change, HFC 96-3, Side 1) Ms. McConnell spoke in support of an overall plan developed jointly by the Legislature and the Governor. Co-Chair Hanley suggested that the Legislature is going to have to propose the starting point for deliberations. He summarized that the Governor is not going to come out with a six year plan. He reiterated that the Governor wants to work jointly with the Legislature. Representative Parnell noted that the Governor, in his State of the State Address, took a significant portion of what the LRFPC adopted. He noted that the Governor disagreed with capping the permanent fund dividend and questioned if the Governor agreed with other points in the first three years of the plan. Ms. McConnell replied that the Governor has not addressed all the proposals in the second and third years of the plan. She noted that the Administration has not addressed the Commission's recommendation for doubling of the motor vehicle registration fees or the specific numbers that were recommended for various resource industry tax increases. She spoke in support of dialogue between the Administration and the Governor with the recommendations of the Long Range Financial Planning Commission. Co-Chair Hanley reiterated his desire to have the Governor take a position in regards to aspects of the Long Range Financial Plan. Ms. McConnell asserted that the Governor has specifically addressed all of the elements that were in the Commission's first year recommendations. She maintained that the items that he agrees with are in the budget. She stressed that levels for proposed taxes on alcohol, tobacco and motor fuels were addressed. She reiterated that the Governor has 8 stated that he does not agree with the recommendation to reduce the permanent fund dividend at this time. She added that the Governor thinks that other tools should be brought into place prior to a cap on dividends. She pointed out that if a particular tool is not implemented in the first year its equivalent dollar amount in savings must be found through a different tool. Representative Navarre stressed the need for leadership. He suggested a budget summit which would allow members of the administration, members of the Senate and the House to reach a consensus. He maintained that it is vitally important that something be done this year. Representative Martin summarized that the Administration's position is that a solution cannot be found in one year. He questioned if the Governor supports a ballot question concerning capping permanent fund dividends. He agreed that the State's fiscal solutions will not be found in one year. He asked that the Governor clarify his position in regards to the Permanent Fund. Representative Brown expressed support for the placement of a six year plan on the ballot in 1996. She emphasized the need to resolve issues regarding the Constitutional Budget Reserve. She anticipated that it will be difficult to reach agreement on the first year recommendations of the Commission. Representative Brown referred to the fiscal plan proposed by Dave Rose. She expressed support for the plan to insulate the principle of the Permanent Fund. She maintained that significant solutions are needed for a large problem. Representative Navarre observed that the Long Range Financial Planning Commission's recommendations were based on hard work by intelligent Alaskans who are committed to obtaining a solution. He noted that proposals regarding permanent fund dividends are politically difficult. He urged that debate go beyond the political spectrum and into a policy spectrum to reach consensus among the leadership of the State. He cautioned that a lack of action will accelerate the problem. He asserted that the State's current level of expenditure is far below that of 10 years ago when adjusted for inflation. He maintained that significant action has been taken to reduce the State's budget by past legislature's and Governors. Co-Chair Hanley asked when the supplemental request would be available. Ms. McConnell replied that they hoped to have it prepared prior to the 30 day deadline. Co-Chair Hanley asked when the capital budget request would be prepared. 9 Ms. McConnell could not provide a specific date. She stated that the Administration is working on the out year portion of the plan. Co-Chair Hanley asked for additional information regarding the foundation formula. He asked if there will be a carry forward as far as the estimates for last fall. He acknowledged that it is fairly flat for this year. Co-Chair Hanley asked Ms. McConnell to provide him with lapsed balances of the school debt program. Representative Martin referred to the Exxon Valdez Oil Spill Settlement (EVOSS). He observed that the allocation has been increased. He suggested that these funds should be considered in the total budget. He observed that these funds will end in six years. He questioned if the state will be expected to assume the cost of programs now funded from the EVOSS funds. Representative Kelly noted that Alaska Rural Development Assistance grants (ARDORs) have been moved into the budget of the Alaska Industrial Development and Export Authority (AIDEA). Ms. McConnell emphasized that ARDORs are an appropriate use of AIDEA resources. She noted that the Administration is working with AIDEA to develop a more aggressive and integrated effort in rural Alaska. In response to a question by Representative Kelly, Co-Chair Hanley observed that part of the education foundation formula is being funded by interest from the Public School Fund. Ms. McConnell pointed out that other funds have been included in the foundation formula. She emphasized that it is not a change in funding source. Co-Chair Hanley expressed concern that an increased one time appropriation will result in a larger general fund contribution in FY 98. Ms. McConnell stressed that the Administration is working to prevent that scenario. ADJOURNMENT The meeting adjourned at 3:31 p.m. 10