HOUSE FINANCE COMMITTEE January 17, 1997 1:37 P.M. TAPE HFC 97-1, Side 1, #000 - end. TAPE HFC 97-1, Side 2, #000 - end. TAPE HFC 97-2, Side 1, #000 - 559. CALL TO ORDER Co-Chair Hanley called the House Finance Committee meeting to order at 1:37 p.m. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Davies Representative Martin Representative Davis Representative Foster Representative Mulder Representative Grussendorf Representatives Kohring and Moses were absent from the meeting. ALSO PRESENT Mike Greany, Director, Legislative Finance Division; Annalee McConnell, Director, Office of Management and Budget, Office of the Governor; Dan Spencer, Senior Analyst, Office of Management and Budget, Office of the Governor; Wilson Condon, Commissioner, Department of Revenue; Charles Logsdon, Chief Petroleum Economist, Oil and Gas Division, Department of Revenue; Bob Bartholomew, Deputy Director, Income and Excise Audit Division, Department of Revenue. SUMMARY OVERVIEW: Governor's Spending Plan and Fiscal Gap GOVERNOR'S SPENDING PLAN AND FISCAL GAP WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE provided members with a copy of the Department's Revenue Forecast (Attachment 1, copy in file). He noted that the first 3 pages of the attachment reflect FY 96 actual spending levels and projections for FY 97 - 99 from the Fall Revenue Forecast. CHARLES LOGSDON, CHIEF PETROLEUM ECONOMIST, OIL AND GAS 1 AUDIT DIVISION, DEPARTMENT OF REVENUE discussed Attachment 1. He explained that nominal dollars represent the amount that comes into the State's treasury. Real dollars are nominal dollars that have been adjusted for the rate of inflation. The real dollar trend has declined since 1985. He estimated that the real price of oil will stay the same over the next 15 years. He suggested that nominal dollars will drift up with inflation. He estimated that supply will grow with demand and the future will be characterized by an oil price of $16 real dollars a barrel. He observed that there was a "price bubble" over the past year. He noted that the price of oil rose when demand out ran supply last spring. Oil prices remained high during the summer. Inventories were lean going into the winter. Severe winter weather has kept demand high. He estimated that oil prices will return to $18 dollars a barrel by April as seasonal demand ends and production increases. Mr. Logsdon noted that the bubble increased FY 96 revenues by an additional $55 million dollars. He estimated that FY 97 oil revenues will increase by $540 million dollars. Revenue for FY 97 is currently $210 million dollars above the spring estimate. He noted that the Futures Market assumes that the price of oil will come down $5 dollars a barrel in the next year. Representative Martin observed that the Department stated in its back-up that 85 percent of the State's income comes from oil revenue. Mr. Logsdon explained that 85 percent of the State's general fund income comes from oil revenues. Co-Chair Therriault pointed out that increased investment is based on expectations that the price will stay high into the future. Mr. Logsdon noted that there are things that can be done in the short term that can increase production. He reiterated that oil prices over time will probably be close to $16 real dollars a barrel. Representative Kelly asked the significance of a $5 dollar a barrel correction. Mr. Logsdon agreed that $5 dollars is a significant correction. Representative Kelly asked if a $5 dollar correction could lead to a further "free fall" in prices. Mr. Logsdon acknowledged that it could be the result, but emphasized that an underlying core of solid economic growth in the global economy exists. He did not anticipate a "free fall" in oil prices. Representative Davies pointed out that there was almost a $5 dollar correction in October, 1996. He referred to the Cambridge Energy forecast. Mr. Logsdon noted that the Cambridge forecast is primarily focused on demand growth as the cause of higher oil prices. He noted that the 2 Department of Revenue forecast is approximately .50 cents a barrel lower for both FY 97 and FY 98 than the forecast by Cambridge. Commissioner Condon emphasized that the Department anticipates a real price of $16 dollars a barrel over time. He discussed volume. He noted that both British Petroleum Exploration (Alaska) Incorporated and ARCO, Alaska, Incorporated announced that they would make additional investments in their Alaskan operations. He explained that the Department's November revenue forecast did not include projections based on these announcements. He stated that an increase of 25,000 barrels a day in FY 99 would be expected if BP and ARCO succeed in their objectives. Production could increase to 300,000 barrels a day by the year 2005. State revenues would be approximately $1.9 billion dollars for the fiscal years 1999 -2005 if additional investments are made. Commissioner Condon discussed the economic effect of the tax exemption for gasohol on state revenues. Co-Chair Hanley gave a brief history of the gasohol tax exemption. He noted that there are a number of companies that sell gasohol all year. In response to a question by Co-Chair Hanley, Commissioner Condon noted that the state loses approximately $8 million dollars in revenues from the exemption. BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE stated that gasohol sales are primarily in Anchorage. He explained that there is a cost to producers for the additive. Producers receive a .13 cent tax break (.8 cents from state and .5 cents from federal tax). ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR provided members with copies of the Executive Budget Summary, July 1997 - June 1998 (Attachment 2, copy on file). She discussed educational funding. She stressed that the State is not able to maintain the same level of nominal dollars for school funding. She noted that increased enrollment costs have been incorporated into the budget. She acknowledged public and legislative concern regarding the distribution of funding and the quality of education. She noted that the Board of Education has proposed a rewrite of the foundation formula that incorporates the concept of tying additional future funding to a demonstration of forward progress in regards to quality standards in education. Standards for teachers, administrators and students would be applied. She stressed that the proposal is in the development stage. (Tape Change, HFC 97-1, Side 2) 3 Ms. McConnell emphasized that revamping how the quality of education is tied to its funding will require a great deal of discussion with the Legislature and the public. The Governor's proposed budget was based on the current foundation formula with the inclusion of enrollment increases and the acknowledgement that additional work will take place on a new foundation formula proposal. Ms. McConnell stressed that the Governor is committed to a three year reduction of $100 million dollars. She noted that if education is funded at the proposed level this year, there will be greater cuts in the following year. She acknowledged that a public vote will probably be necessary for the creation of an endowment. Ms. McConnell maintained that the past two budgets have shown reductions. She noted the difficulty of absorbing inflation. She stressed that per capita spending continues to drop from 1979. She emphasized that the budget rose from $821.6 million dollars to $2.256.5 billion dollars from 1979 - 1980. Ms. McConnell stated that the Governor's fiscal plan is based on absorbing inflation and some modest continued budget reductions in nominal dollars and increased revenues from a tobacco tax. She explained that a $1 dollar a pack tobacco tax would net just under $40 million dollars in the first year and $44 million dollars in subsequent years. She stressed that the revenue projections took into account a reduction in consumption. Ms. McConnell acknowledged that there is a difference in opinion between the Administration and the legislative majority, in regards to the level of reductions which are necessary for FY 98. She maintained that the Administration favors a more modest level of cuts. The Administration recommends reductions of $100 million dollars over the next three years. She stressed that the State's plan can include increases in revenue as well as reductions in expenditures. She stated that the Administration is sensitive to the impact on services and the State's economy. Ms. McConnell observed that the Governor's proposed budget absorbs $40 million dollars in increases that include $12.4 million dollars for additional education enrollment. There was also a $2.6 million dollar increase in pupil transportation and single site schools. Other areas of growth were in the Department of Health & Social Services. There was a net increase of $15.3 million dollars in non- education formula programs. She stressed that the Administration is attempting to apply cost control to these 4 fast growing areas. She added that inflation increases were also felt in health insurance premiums. There was a $2.8 million dollar increase in personnel costs for the University of Alaska and a $6.4 million dollar increase for the General Government Unit. She noted that inflationary costs for fuel and supplies were also absorbed within the agencies. Ms. McConnell discussed spending priorities in regards to crime. She noted that the Governor's proposed budget funds a number of program recommendations from the Youth and Justice Commission. Some are expansions of existing programs and some are new efforts that the Commission believes will assist high risk juveniles. Additional resources were also allocated for village public safety officers and domestic violence programs. Ms. McConnell referred to programs relating to economic development and job creation. She noted that the industries that would benefit are funding many of these programs. She stressed the need to identify increases that effect the fiscal gap and those that do not effect the fiscal gap. Ms. McConnell reiterated that revenues are $100 million dollars greater than estimated for the current fiscal year. This surplus will be automatically returned to the Constitutional Budget Reserve Fund. She observed that the estimated fiscal gap for FY 98 will be reduced from $370 to $270 million dollars if oil prices remain steady. Ms. McConnell noted that there is a $12.1 million dollar reduction in the amount needed for debt service in FY 98. This is the result of some bonds being paid and an anticipation that there is $5.9 million dollars in balances in debt service funds that can be applied to FY 98 payments. This assumes that all the school bonds that are being proposed will occur. She noted that there are additional schools waiting for available debt service dollars. Ms. McConnell discussed the format of the FY 97 - FY 98 budget plan. She noted that total funds are indicated. Representative Martin noted the need to identify duplicated expenditures. Ms. McConnell agreed that there is some duplication between the front and back sections of the budget. She stressed that the automatized budget system which is under design by the Office of Management and Budget will simplify the process. She noted that key program areas are broken into total funds. Ms. McConnell stated that the current plan estimates $17 million dollars in supplementals. She emphasized that there 5 are certain items that the legislature indicated should be funded through supplementals. She noted that funding for disasters, fires, the Public Defender Agency, the Office of Public Advocacy and leases have been partially funded through supplementals in the past few years. She added that judgments and claims have also been included in supplementals. She stated that there are no major judgements or claims pending. Ms. McConnell noted that the plan incorporates a $100 million dollar capital budget component. This would be in addition to the Alaska Housing Finance Corporation's (AHFC) capital budget. Ms. McConnell explained that the Governor's plan does not include revised programs approved by the Legislative Budget and Audit Committee. She noted that the fiscal gap is not affected by program receipts. Co-Chair Therriault provided members with a memorandum from Mike Greany, Director, Legislative Finance Division to the Legislative Budget and Audit Committee, dated October 14, 1996 (Attachment 3 copy on file). He expressed concern that Ms. McConnell, elected to delegate authority to agency commissioners. He maintained that legislative access will be limited by the delegation of authority to commissioners in regards to the shifting of funds. Ms. McConnell argued that money cannot be moved within appropriations. She stressed that the intent is to increase efficiency. She stated that all transactions that are brought before the Legislative Budget and Audit Committee, RSA's over $100.0 thousand dollars and any change in the grants line will still be reviewed by the Office of Management and Budget. She maintained that the system has not been abused and that there is unnecessary paper work involved. She stressed that the authority is revokable. She added that a report will be generated quarterly in the AKSAS System. The report is available to the Legislative Finance Division. Representative Mulder reiterated concern that legislative access will be lessened. Representative Therriault questioned Ms. McConnell's authority to delegate this function. Ms. McConnell assured him that there is authority within statutes to delegate the function. She emphasized that she retains responsibility for any functions delegated. MIKE GREANY, DIRECTOR, LEGISLATIVE FINANCE DIVISION observed that the Division ran a report on allocation transfers approved by commissioners and found an agency had inappropriately transferred money between appropriation 6 lines. He expressed concern with the transfer of the review function from the Office of Management and Budget to the agencies. He stressed that the AKSAS system is difficult to access. He assured members that the Legislative Finance Division will continue to review these actions periodically. Ms. McConnell emphasized that the Office of Management and Budget is working toward a more user friendly reporting system. Ms. McConnell stressed that the Legislature indicated that some items should only be partially funded. Accordingly, disasters, fires, the Public Defender Agency, the Office of Public Advocacy and leases did not receive full funding in the proposed budget. She emphasized that the intent is that the remaining funding will be contained in a supplemental. Ms. McConnell recounted that the Administration proposed that some items be transferred from the capital budget to the operating budget in FY 97. She noted that the Administration has not proposed any new transfers to the operating budget from the capital budget in the FY 98 plan. Ms. McConnell reviewed performance measures as contained in Attachment 2. She stressed that FY 97 is only halfway over. She emphasized that the automatized budget system will enhance the Administration's ability to track the level of service to the level of appropriation. Representative Martin questioned the State's level of flexibility in relationship to federal block grants. Ms. McConnell stressed that there is a tremendous amount of change occurring in regards to federal requirements. She noted that the plan anticipates a savings in welfare assistance payments. She stressed that savings are tied to job training and child care. Co-Chair Hanley emphasized the need to make sure that all parties agree on spending levels for comparisons. (Tape Change, HFC 97-2, Side 1) Representative Davies noted differences between page 6 of the Legislative Finance Division's Budget Overview and page 12 of the Executive Budget Summary (copies on file). Co-Chair Hanley noted that reduction scenarios will be considered. Ms. McConnell stressed that reductions need to be reviewed in light of impacts. Co-Chair Hanley asked if the Governor is proposing education endowment legislation. Ms. McConnell stated that the State's education needs must be addressed and ideas reviewed 7 prior to the introduction of legislation. Co-Chair Hanley asked if the Board of Education has proposed a foundation formula rewrite. Ms. McConnell stated that the rewrite is still in discussion. Co-Chair Hanley pointed out that the Governor's spending plan takes credit for the reduction of $8 million dollars in Longevity Bonus payments. He questioned the decision not to include the $12 million dollar [education incentive] increase. Ms. McConnell explained that the Board of Education had not finished it's work on a foundation formula rewrite when the plan was finalized. She emphasized that a rewrite of the foundation formula will require a broad discussion. She maintained that this is a major change of how the State looks at the biggest part of its entire budget. She noted that there was little negative reaction from seniors in regards to the reduction in the Longevity Bonus program. In response to a question by Co-Chair Therriault, Ms. McConnell noted that the Retirement Incentive Program (RIP) has only been in effect since July 1, 1996. She explained that the estimated $5 million dollar reduction applied to the Governor's initial proposal. She noted that the Office of Management and Budget will discuss the issue in detail in the Senate Finance Committee on January 20, 1997. She stressed that the Administration has followed strict criteria for demonstrating savings. Representative Davies questioned the Administration's position regarding deferred maintenance. He acknowledged the Administration's intent to develop a six year capital plan. Ms. McConnell replied that the Governor has been in discussions with the Legislature regarding deferred maintenance. She reiterated the need to develop a six year plan. She noted that State's capital needs must be determined along with a capital appropriation plan. Co-Chair Hanley emphasized that the FY 96 appropriation level was increased by $15 million dollars due to the Miller's Reach fire. He stressed that this increase should not be part of the baseline spending level for FY 96. Ms. McConnell maintained that the numbers sometimes get in the way of determining if the State is moving toward a sustainable level of funding, over the long term. She emphasized that the focus should be on the impact to services. She questioned if the State is at the right level of services and can the State afford to pay for the services being offered. She maintained that Alaska is not a poor state. She acknowledged that the State has not matched its 8 income and long term expenditures. She alleged that what is happening in per capita spending in today's spending makes a better measure for the public. Co-Chair Hanley acknowledged that statistics are easy to manipulate. He noted that Alaska has the highest per capita spending of any state. He observed that it would be interesting to compare the current per capita spending to 1978. Ms. McConnell pointed out that there is no other state that provides as many services on a central basis as Alaska. She noted that functions performed by the Alaska Court System and Department of Public Safety are often administered on the county level in other states. She emphasized the difficulty to compare Alaska to other states. She noted the need to engage in conversation with the public regarding the level of essential services and which services can be user supported. In response to a question by Representative Davis, Ms. McConnell noted that the Department of Health & Social Services generated numbers regarding the reduction of consumption used in the fiscal note accompanying the tobacco tax legislation. Representative Davis questioned the effect of increased fees at the pioneer homes. Ms. McConnell did not have the statistics in question. She observed that pioneer homes are in the second year of a seven year plan. She emphasized that the plan still allows entry for those that cannot afford the fee. Representative Davies emphasized that the budget is a complex social plan that has lots of ramifications that must be summarized. He maintained that the budget should take into account the impact of inflation. He stressed that there should be recognition of where the budget is in relationship to the fiscal gap. He added that agreement must be reached in regards to program receipts. He suggested that the budget contain a separate category called "extra ordinary items" for expenditures such as the Miller Reach fire. Co-Chair Hanley noted that the Mental Health Trust Authority appropriation was identified as an extra ordinary item. ADJOURNMENT The meeting adjourned at 3:44 p.m. 9