MINUTES SENATE FINANCE COMMITTEE January 17, 1996 9:05 a.m. TAPES SFC-96, #2, Side 1 and 2 SFC-96, #3, Side 1 (000-301) CALL TO ORDER Senator Steve Frank, Co-chairman, convened the meeting at approximately 9:05 a.m. PRESENT All members (Co-chairmen Frank and Halford and Senators Donley, Phillips, Rieger, Sharp, and Zharoff) were present. ALSO ATTENDING: Senate President Drue Pearce; Annalee McConnell, Director, Office of Management and Budget; Mike Greany, Director, Legislative Finance Division; Dave Tonkovich, fiscal analyst, Legislative Finance Division; and aides to committee members and other members of the legislature. SUMMARY INFORMATION SENATE BILL NO. 213 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. 17(c), Constitution of the State of Alaska, from the constitutional budget reserve fund; and providing for an effective date. HOUSE BILL NO. 412 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. 17(c), Constitution of the State of Alaska, from the constitutional budget reserve fund; and providing for an effective date. FY 97 Statewide Operating Budget Overview was presented by Annalee McConnell, Director Office of Management and Budget Upon convening the meeting, Co-chairman Frank invited the director of the Office of Management and Budget to join members at the committee table and present an overview of the FY 97 state operating budget. ANNALEE McCONNELL came before committee. She explained that the administration prepared the FY 97 budget in the concept of a multi-year plan as outlined in the Governor's state of the budget address. It is part of "the safe landing" toward a balanced budget within six years. Highlights involve: 1. Control of areas that have experienced rapid growth. (Welfare reform and Medicaid were given as examples.) 2. Streamlining efforts such as job training and economic development services which often cross departmental lines. 3. Technological improvements such as automation within the Office of Management and Budget. 4. Utilization of a "mix of tools," many of which were recommended by the fiscal planning commission. Focusing on budget cuts, Ms. McConnell acknowledged concern regarding whether significant fee increases or taxes should be levied before budget cutting is accomplished. She stressed that the Legislature and the previous Governor enacted significant cost cutting efforts that were not always visible to the public. She noted specifically that the public does not often think of absorption of inflation as cost control. Tax proposals recommended by the administration to offset need for constitutional budget reserve funds are included in the budget at 3/4-year funding to provide time for implementation. That is reflected in the difference between the fiscal planning commission proposal of $107 million and the administration's $80 million. Ms. McConnell stressed that the six-cent fuel tax has not been increased since it was established in 1961. Alaska's fuel tax is the lowest in the United States. The national median is twenty-two cents. Ms. McConnell next directed attention to a handout (Attachment A) evidencing a breakdown of the $2,356.0 operating budget and noted that "less than half of it is really going for directly provided state services." The other half is dispersed through local assistance (municipalities and school districts), grants to individuals (welfare payments and longevity bonus payments), or services provided through nonprofits. The second page of the handout relates to factors contributing to the budget gap between FY 96 and FY 97. Factors increasing the gap consist of: 1. Reduced oil revenues. 2. A reduction in moneys realized in FY 96 (the $72 million from Executive Life was mentioned) that will not be forthcoming in FY 97. 3. The dividend arrangement with AHFC calls for $70 million the first year and $50 million the second. There is thus a $20 million difference here. 4. Small, individual adjustments that total approximately $10 million. Factors decreasing the gap: 1. Greater TAPS fund revenues. 2. Shift of general fund support to user fees. Speaking to the process utilized in developing the FY 97 budget, Ms. McConnell explained that the administration did not start with caps for individual departments since the intent was to address the budget "from a policy standpoint" and explore options. The departments were asked to provide information on changes that could be made both in the coming year and over a three-year period. Changes in state operations often do not make it through the budget process because they may require more than a year for implementation. Ms. McConnell next spoke to need to capture proposed changes and attested to minicabinet efforts associated with changes that cut across departmental lines. Need for an additional prosecutor at Bethel as well as subsequent demand on the public defender and office of public advocacy were given as examples of action that would impact the entire criminal justice system. Recommendations of the Long-Range Financial Planning Commission were also considered in the budgeting process, although not all of them were adopted. Ms. McConnell specifically noted that the recommended cap on the permanent fund dividend was not utilized by the administration while recommended taxes and fees were pursued. The budget also reflects review of services provided by local governments versus the state. The impact of cuts was viewed from both a regional perspective and a balance between what state agencies, programs, local governments, and individuals are expected to do. Ms. McConnell next acknowledged questions surrounding the proposed $5 million shift from general funds to user fees. She cited Alaska pioneer homes as an example. Most residents and their families were not aware of the "huge disparity" between the cost of providing care and payment for care. While the average payment is $700, the average cost is $4,000. The cost of beds providing extra assistance is $6,400 a month. Instead of reducing the number of beds or cutting back on services, the administration worked with families to bring payments closer to the cost of care. A seven-year plan is proposed to equalize costs and payments. In instances where a family cannot afford the full cost of care, a sliding fee scale will be provided. Pointing to subsequent pages in the handout, Ms. McConnell noted that they provide a fund-source comparison of FY 96 and 97 budgets as well as a historical breakdown of formula programs. She noted that authorized figures used throughout the budget are up to date, including Legislative Budget and Audit Committee action, with the exception of that taken since presentation of the budget. Ms. McConnell next addressed process changes discussed throughout the summer and fall and highlighted new information set forth in the "Executive Budget Summary for Fiscal Year 1997" (Attachment B). Attention was next directed to a list (Attachment C) of items transferred from the capital budget to the operating budget. Although the items have long been funded in the capital budget, they are operating expenses and do not meet the statutory capital expenditure requirement and carryover date. Mr. McConnell asked that members review the list and advise if there is objection to the transfer. She stressed specific need to "get a much better fix on maintenance" in order to "get away from the deferred maintenance problem" and adequately maintain state facilities. A further area where agreement is needed between the Legislature and the administration is "how we treat the numbers in our budget." Mr. McConnell voiced need to avoid situations where the administration attempts to explain to the press or the public "adjustments between how you show your numbers in the Legislative branch and how we show them in the executive branch." Changes in the front section of the budget include aggregation of all items relating to AHFC. Department budgets are in alphabetical order in the appropriation bill. Separate mental health appropriation legislation (SB 214/HB 413) was also introduced for the first time. A summary chart highlights differences between mental health trust board recommendations and the Governor's proposed budget. The "Executive Budget Summary" demonstrates how the administration is using funding, why it is being used, and goals and objectives. Performance measures have been of concern to legislators for some time. Every department is beginning to deal with that. The administration will check with them at mid points during the year to evaluate progress in meeting performance measures. Next year's summary will report on that effort. The next summary will also contain more information outlining budgetary differences from one year to the next. Ms. McConnell next flagged the following generic issues that she indicated might arise: 1. Adjustments in risk management rates. In the past, everyday claims were taken from catastrophic reserves and the fund was not reserved for major catastrophic occurrences. Departments did not then see the result of lack of efforts in worker safety, etc. More effective management will make each department responsible for risk management rates and require departments to work hard to bring rates down. 2. Health benefits. The administration will be proposing changes here. AETNA reserves are approximately "$2 million more than they need to be." The monthly benefit rate will thus be brought down in the '97 budget, and cost control efforts will continue. The debt service schedule includes current projections from school districts regarding debt that will be sold. Information does not assume sale of new bonds at this time. It merely reflects what has already been authorized. Ms. McConnell concluded her overview at this time and welcomed questions and comments from members. Senator Rieger referenced funding source information and questioned the $16 or $17 million draw from the constitutional budget reserve fund. Ms. McConnell noted that amounts shown reflect Court System and Dept. of Law expenditures "charged directly to the CBR" rather than the amount needed to close the budget gap. In response to further questions from Senator Rieger regarding longevity bonus payments and whether the program is drawing people to Alaska, Ms. McConnell explained that while she could not say whether the program has acted as a draw, the Dept. of Administration reconstructed its model for calculating longevity bonus projections. Past calculations included "wild swings" over "very short periods of time." Reconstruction will attempt to produce more accurate forecasting of future demand. The projection for next year is $350.0 more than FY 96. Alaska and Hawaii have the fastest growing rate of citizens over 65 years of age. Further discussion regarding operation of the longevity bonus program followed between Senator Rieger, Senator Sharp, and Ms. McConnell. Ms. McConnell stressed that although payments to new people joining the system are less, the number of people obtaining bonus payments has exceeded the degree of phase out. However, under current projections, phase out should begin to evidence reductions in FY 98. Senator Rieger next asked if the TAPS settlement included a fixed tariff for capital costs, regardless of throughput, with adjustments for operating costs. Ms. McConnell advised that she would obtain and return an answer to the Senator. Senator Rieger next inquired concerning efforts by the administration regarding tier III. [The following is a transcript of that discussion.] Senator Rieger - I'm aware that there has been some continuing discussion on Tier III and the administration's plan to do something. Where is the administration on Tier III, and what are you . . . . [Overlapping voices, Senators Rieger and Phillips] Senator Phillips - That was one of my questions. Annalee McConnell - Count that as a two for one question. Right. The administration has been working on some adjustments to the proposed plan, and I think we'll be prepared to come forward with those relatively soon. I can ask Mark Boyer if he will be prepared to address that in the overview. He may not be quite there yet. They're doing a number of things right now. They're running actuarials on different proposals, different adjustments that have been discussed, to see what the exact impact would be before we come forward with any proposal, so that we're not doing things by the seat of the pants, but actually have some good hard information behind it. So, if it's not ready now, or say, within the next week or so . . . I mean, it certainly has been our intention to try to get that pulled together early in the session. Senator Phillips - Is that going to be in the form of legislation or is that going to be internal? Annalee McConnell - In the form of the proposal? I'm not sure, logistically, how we'll suggest doing it. Ultimately, of course, it would end up as a legislative proposal. But whether or not . . . . Just which vehicle, I can't say at this point. [End of transcript.] Senator Rieger referenced Mental Health Trust/General Funds shown in funding source information and asked if the trust had generated income. Ms. McConnell responded affirmatively and advised that the trust authority is proposing utilization of some of the income to augment services this year. Funding will be used for "creative things" in terms of transition for patients at Harborview. Ms. McConnell referenced a chart presented December 15, and noted that it summarized funding from the mental health trust income versus what would flow from mental health general funds. The chart also provides a track between recommendations of the trust authority and the administration's proposal. In response to a further question from Senator Rieger, Ms. McConnell said that the initial proposal was to use a portion, approximately $500.0. Some areas of service for beneficiaries are now in limbo because of proposed federal changes. It was the intention to have a subsequent meeting to make a final determination, in light of federal changes. Senator Rieger voiced his understanding that the mental health trust was to produce income, and it was anticipated that the state might supplement that with general funds. He then referenced the $108 million in the Governor's budget, acknowledged that not all of the total flowed from the trust, and inquired regarding the general fund supplement. Ms. McConnell explained that the Governor's budget flags all general funds for beneficiaries. The first step of the mental health trust budget process was review to determine whether the trust agreed with the administration's determination of what was money for beneficiaries. Some areas, such as corrections and education, evidenced need for adjustments. General fund/mental health is shown in the budget as a category of spending in the separate mental health bill (SB 214/HB 413). For information now before committee, general funds and mental health moneys were rolled together to produce totals so that the full picture could be seen. Senator Rieger voiced his understanding that approximately $500.0 of the $108 million would flow from the trust. Ms. McConnell concurred. She added that trust income for the first year is expected to be approximately $1 million. That amount will grow but will be limited in early years because of start-up expenses. The annual report provides an outline of trust income and what is estimated to be available in the future. Senator Randy Phillips voiced his understanding that the Governor proposes a $40 million reduction. Ms. McConnell acknowledged a $40 million reduction in total general fund support ($35 million in expenditure cuts and $5 million in user fees). Senator Phillips noted that approximately $15 million relates to debt reduction. He then asked what portion of the remaining $20 million is dependent upon passage of legislation. Ms. McConnell replied that the administration identified $13 million requiring legislation. A portion of that relates to the RIP program, approximately $6 million is longevity bonus, and the remainder is comprised of a "group of other things." Ms. McConnell acknowledged that questions had been raised regarding a budget that is dependent upon legislation. She then voiced her opinion that "If we look to do budgets, in the future, without legislation, we're just talking about the status quo." Senator Phillips next asked if the administration supports a $100 million cut in the next three years. He further inquired regarding the administration's philosophy and stand on the long-range financial planning commission plan. Ms. McConnell referenced comments in the state of the budget address and stressed the importance of closing the fiscal gap. The Governor has some disagreements with recommendations presented by the commission in terms of how the tools are used, which tools are used, and the sequence. He is comfortable with the concept of a $100 million cut. Ms. McConnell cautioned that it is difficult to determine, in isolation, what is good or bad. She stressed need for future planning and acknowledged that $40 million is not the only number possible for this year's budget cut. The Governor has expressed concern and is opposed to the proposal to cap dividends. The commission recommends a reduction of $50 million in the total for dividends. The Governor believes that institution of an income tax should be explored prior to placing a cap on the dividend. In response to a question from Co-chairman Frank, Ms. McConnell acknowledged that the administration has not discussed introduction of an income tax this year. The administration would prefer to work with the legislature and attempt to develop consensus on how the budget gap can be closed. She acknowledged that neither the executive nor legislative branch could do so alone and stressed need for better understanding and support from the public. Co-chairman Frank observed that something else would have to replace the $50 million if the dividend is not capped or income tax legislation is not introduced. Ms. McConnell agreed. She remarked that the commission report also assumes a ballot issue this fall to take the endowment issue to the public. Great public concern has been raised regarding the endowment. Most people understand that permanent fund earnings will have to play some role at some time. It is unlikely that all will come together in time for an election this year and flow of endowment earnings next year. END: SFC-96, #2, Side 1 BEGIN: SFC-96, #2, Side 2 Co-chairman Frank asked if the Governor has a plan that would close the gap. Ms. McConnell suggested that the commission plan is a starting point. The administration seeks to work with the legislature to reach consensus. Ms. McConnell pointed to problems encountered by the commission in that when one part of a plan is jettisoned, one must figure out how to fill the hole. Senator Randy Phillips asked if the administration supports placing the commission recommendation for conversion of permanent fund savings to an endowment before the voters. Ms. McConnell responded, "Not at this point in FY 96." The Senator next inquired concerning the administration's stand on additional transfers from the constitutional budget reserve and earnings reserve account into the principal of the permanent fund. Ms. McConnell responded, "As we have outlined in the budget, we're proposing that there be a transfer in February . . . in the context of a plan." It does not make sense to foreclose options until a plan has been developed. In response to subsequent questions from Senator Phillips concerning the transfer, Ms. McConnell clarified that the effective date of the transfer from the earnings reserve (set forth in the front section of the budget) to the permanent fund corpus was to be February, unless there was "some other constitutional amendment that suggested doing it otherwise." The date was set to allow for the election and subsequent ratification. Co-chairman Frank inquired regarding the "Dave Rose plan," asking if a formal paper had been prepared. Ms. McConnell responded affirmatively, saying that Mr. Rose submitted his proposal after the commission finished its work. Senator Phillips next asked if the administration supports the recommended increase in motor vehicle fees. Ms. McConnell replied, "We have not made a determination yet." That recommendation was for the second year. The administration has concentrated on recommendations for the first year. Senator Phillips voiced his understanding that the administration supports $5 million in fees rather than the recommended $3 million. Ms. McConnell clarified that the budget calls for a total of $8 million in fees. The commission identified $40 million in cuts and $3 million in user fees. The administration repackaged the combination. The effect on the fiscal gap is the same $43 million, "between those two tools." Senator Phillips asked if the administration supports the concept of user fees. Ms. McConnell said that the administration wished to consider fees on a case-by-case basis. Fees are appropriate in some instances while they are not in others. Senator Donley voiced his understanding that commission recommendations call for $40 million in cuts. Those cuts, however, were not identified. Senator Phillips inquired concerning support for the $20 million in alcohol tax increases. Ms. McConnell acknowledged that it was included in the state of the budget speech. In response to a further question regarding $30 million in fishing, timber, and mining taxes, Ms. McConnell remarked, "That's an outyear proposal. We've not yet taken a position on that." Co-chairman Frank asked if the Governor had introduced an alcohol tax. Ms. McConnell responded negatively, saying that the commission drafted legislation to be introduced as a package through the Rules Committee. There is now a question as to whether or not that will happen. In the course of further discussion, Ms. McConnell said that the commission operated under the expectation that its recommendations would be introduced as a package since it was neither the responsibility of any individual legislator nor the administration to "present that package of taxes, fees, etc." Co-chairman Frank pointed to the constitutional requirements that the Governor submit a budget. That budget anticipates legislative changes to achieve the target. It thus seems appropriate for the Governor to introduce legislation needed to balance the budget. Ms. McConnell said it would be appropriate for the legislature to give the commission the courtesy of accepting the legislative package drafted by the commission. Discussion of introduction of legislation through the Rules Committee followed. Senator Randy Phillips next inquired concerning the $44 million increase (8 cents a gallon to 22 cents) in the motor fuel tax. Ms. McConnell said that the Governor supports the proposal. She further advised that the administration is working on proposals to address issues of transfer of responsibilities for roads from the state to local governments. Senator Phillips asked if the Governor would support dedication of funds for road maintenance. Ms. McConnell referenced comments in the state of the budget address to the effect that the Governor supports a constitutionally dedicated motor fuel tax. Senator Phillips inquired regarding support for the $43 million tobacco tax. Ms. McConnell acknowledged support and inclusion of the increase in the proposed budget. She cautioned that it is not included at $43 million, but at three-quarter-year funding. Responding to an inquiry concerning the $20 million tourism tax, Ms. McConnell noted that it represents an "outyear tax." There is no specific commission proposal at this time. As with resource taxes, the commission believes tourism taxes should be looked at, but it had no time to develop specifics. The administration has not taken a position on the issue. Co-chairman Halford asked when the supplemental request would be introduced. Ms. McConnell advised of intent to introduce a proposal "in a couple of weeks." She referenced the administration's intent to control supplementals and said she was not expecting "any big surprises." In response to a question from the Co-chairman concerning timing of the capital budget, Ms. McConnell advised of the administration's "hope to have that by the 31st of January." The number in the budget plan is approximately $110 million. Co-chairman Halford next inquired concerning a cutoff for budget amendments. Ms. McConnell referenced the legal deadline of 60 days. She said she did not anticipate a great number of amendments. As a caveat, however, she noted lack of federal resolution in a number of budget areas. Co-chairman Halford expressed concern regarding large numbers presented to the Legislative Budget and Audit Committee by the Exxon Valdez trust. He referenced a requirement that trustees present a budget as part of the state budget and noted that "We're not getting that." He then voiced his hope that the Office of Management and Budget would review AS 37.14.415 for compliance. Concern has been raised in budget and audit that those expenditures go "around decisions made by the full finance committees." He asked for a joint proposal from the trust authority and administration. Ms. McConnell acknowledged that Representative Martin had pinpointed that concern. She said she would address both that issue as well as concern "about out years." She acknowledged a number of statutory requirements that have not been observed in the past and said she had made considerable effort to comply, pointing to improvements in the recent budget submission. Co-chairman Halford stressed the importance of making information available. Staff must have ample time for budget review. Ms. McConnell agreed. She noted, however, the when the capital budget was submitted last year, it was quite some time before the legislature dealt with it. She then expressed her opinion that hearings giving it the level of attention it deserved were never held. She concurred in need for cooperating between the administration and the legislature, saying that both have a great deal of work to do in improving the capital budget process. Ms. McConnell further commented that she had been unable to make many of the changes she would like because many of the tools used by the state are antiquated. Ability to provide information in a form that is useful to the legislature and the public is "no where near what it needs to be." Further comments on timely submission of materials followed by both Co-chairman Halford and Ms. McConnell. Ms. McConnell noted that capital budget categories will be the same as last year. Co-chairman Halford voiced his understanding that the Governor's spending plan requires an increased draw from the constitutional budget reserve from this year compared to last year. That indicates that "We're not even meeting the changes . . . with the level of reductions in the budget. We're increasing the level of draw down of reserves." Ms. McConnell concurred and acknowledged a long way to go before the gap is closed. Consensus must be developed regarding the mix of tools used to achieve that. Co-chairman Halford remarked that the proposed budget includes pay increases based on contracts and comparative provisions. He then asked if pay increases for exempt employees were included. Ms. McConnell explained that funding for non-represented employees is equivalent to "what was being done in the labor contracts." It equates to 1/2 of the CPI with a cap of 1-1/2 percent. Co-chairman Halford referenced a proposal from last year for reducing salaries of exempt employees and inquired about the status. Ms. McConnell responded that some salaries are limited by statute. She cited commissioners as an example, and advised that she was not taking her pay increase. A comprehensive proposal is not being recommended by the administration at this time. Co-chairman Halford next inquired regarding recovery of COLA overpayments within the marine highway system. Ms. McConnell said she did not know the status. She said she would ask that the commissioner provide information during overview of the Dept. of Transportation and Public Facilities' budget. Discussion followed regarding budgetary recognition of RIP benefits. [The following is a transcript of that discussion.] Co-chairman Halford - Just one final question. With regard to the RIP benefits, how are the RIP benefits actually realized in the budget? Annalee McConnell - Because the exact effects of the RIP, or where they would take place, can't be determined right now, what we decided to do was show that as an aggregate amount as part of the $13 million that would require statutory change in order to happen. The way we expect to implement it . . . . We're still working out some of the technical aspects of it, but what we would be doing is working with each department. And, as you probably recall from last year's discussion, we set up some fairly stringent requirements for them to show savings out of the RIP program (and over a shorter period of time than the previous version that was three- years). We need to figure out a mechanics in our accounting system for how to handle that throughout the year so that we are sure that those savings, not only that they happen, but that they don't get used in other ways. But, the exact determination of who will be ripping can't be known up front. We obviously can't require employees to RIP, for instance. So, we have undertaken . . . . And the Governor has asked all of the departments to really begin being extremely aggressive in attrition management, so that when any vacancy happens, we don't have to wait for a RIP program (we have vacancies, obviously, throughout the year, anyway) that there be a very aggressive review of those positions to see if that does not open up some opportunities for doing things differently so that the person doesn't have to be replaced. So, we will need to allocate it out among the departments, once we have some idea of how RIP will be received. Co-chairman Halford - But unless there's some mechanism to take the money out of the budget, does it not stay in the budget and get spent? Annalee McConnell - Well, actually . . . . No that's why I referred to some of the mechanics. I'm trying to work out a system, for instance, where we could have a separate account code that we can sort of lock out, in a sense. Once there's a savings in that account code, it is not available to the departments to spend for other purposes. But that would require . . . . You know, we'll have to do a lot of management. Co-chairman Halford - In terms of the next 100 days of debate, and getting something done, should we, if we pass a RIP bill, include an allocated reduction in some way in every department to take back out the projected savings of the RIP? If we don't have some way that takes it out of the budget, it's not a savings. It doesn't count toward the $35 or $40 million that is being claimed as reached. There's got to be an implementation somewhere. Annalee McConnell - That's what I'm working on right now. I've begun conversations with the department of administration and finance, in particular, on setting up some mechanism for us to do exactly that. I don't want those savings to dribble away. The whole point of it is to capture it, grab it, and keep it as a savings, and not let it get spent for other purposes. [End of transcript.] Co-chairman Frank complimented Ms. McConnell on her efforts to make improvements in the budget process. Ms. McConnell advised that she was open to suggestions on "ways we can make this information clearer." Senator Sharp referenced news reports of the Governor's six- year plan and asked that copies be provided to committee. Ms. McConnell explained that Governor Knowles spoke to need to close the fiscal gap "in no more than six years." He did not indicate he had a plan. He said he would work with the legislature. The long-range financial planning commission set up a four-year plan to close the gap. It is clear that some elements of the plan (the cap on the dividend and the permanent fund endowment becoming effective next year were cited) will not happen right away. Governor Knowles acknowledges that if those proposals are not acceptable, the administration and legislature must develop acceptable options. Senator Sharp voiced reluctance by legislators to push tax reform legislation because of what happened last year to "a lot of hard-worked bills that went through the committee process with the administration attending every committee meeting" and having opportunity for input. The Governor should place specific proposals on the table. Senator Sharp next referenced the $12 million switch in funding source contained within the proposed $35 million reduction, saying that it does not reflect a reduction of expenditures per se. Ms. McConnell pointed to two problems faced by the state. The first is the fiscal gap. The second is alternative means of providing needed services and charging fees, if appropriate. Senator Sharp concurred but stressed that the $12 million should not be treated as a budget reduction. Referencing rate increases at pioneer homes, Senator Sharp acknowledged endorsement evidenced by the pioneer home advisory board letter but said he found no residents at the Fairbanks home who worked with the administration on the 49 to 75% monthly increase effective February 1. Ms. McConnell said that representatives of the advisory board met with families at every pioneer home statewide. She said she would provide a summary of meetings. Further, staff held follow-up meetings with families to answer questions about services, rates, lack of ability to pay, etc. Senator Sharp noted that most residents endorse some form of adjustment. He referenced last year's 10% increase and questioned the magnitude of increases projected for the next seven years and suggested that it would result in "a lot of people not paying you anything because you've reduced them to paupers more quickly than at the old rate." Since these residents will not be evicted, there will be a diminishing return situation in terms of savings. Ms. McConnell advise that the foregoing situation was taken into account in development of a sliding fee schedule for those who could not afford the cost of care. Senator Sharp next referenced proposed legislation to place an income cap on eligibility for the longevity bonus. Accompanying fiscal notes reflect reductions but no personnel or cost increases for examination of qualifications of the 28,000 bonus recipients to determine whether or not they fall under the cap. Ms. McConnell advised of inclusion of $325.0 in the budget for longevity bonus administration. A note to that effect was to have been included in the narrative section of the fiscal note. Co-chairman Halford stressed that fiscal note law requires that the financial impact from passage or lack of passage of legislation be shown. Submission within the budget does not meet that law. Discussion followed regarding position upgrades. [The following is a transcript of that discussion.] Senator Pearce - I have a question. In your comments about the proposed RIP bill, Annalee brought up a question that I've had that comes up from a situation that I've been told is at the international airport in Anchorage. And I haven't had an opportunity to check it clearly. But, what is the process the administration uses when a department wants to [increase] a grade? What process do you go through to make sure that any increase of a range and grade for an employee is proper? Annalee McConnell - I'm not sure what the formal process is. I haven't asked for anything to be upgraded, so I haven't gone through that. But I'd have to check it out. Senator Pearce - . . . are upgrading positions. And I wondered how . . . . You know, what sort of control do we keep over that? Ripping may or may not help, in the long term, if people, once the position is empty, upgrade it so that the new person comes in at a higher range, not a lower range. I assume there is a process. Annalee McConnell - I assume there is too. Like I say, I haven't . . . . Co-chairman Frank - Could you give us a report on the activity on upgrades so that we get a feel for that? Senator Rieger - Do you review upgrades at all? Or is it some departments and not others? I mean OMB. Annalee McConnell - I don't personally review . . . . I can't speak to that. I don't know. I haven't personally reviewed them so I don't know. I'll have to check out and see what the process . . . . Co-chairman Frank - Is that something that's handled by the division of personnel in the Dept. of Administration, or do you know? Annalee McConnell - Or it may be handled . . . . I'm not sure. I mean, I assume . . . . Co-chairman Frank - It seems like an important budgetary control thing that maybe we should change the law . . . and require that you get the opportunity to review that if you don't now have that opportunity. [End of transcript.] Senator Pearce referenced meetings between the Governor and members of the business community and a proposed media campaign to "try to force the legislature to do something." She suggested that proceeding in that manner is not a constructive way of achieving cooperation between the parties. The legislature plans to have a long-range strategy. The legislature has not ignored budget problems. END: SFC-96, #2, Side 2 BEGIN: SFC-96, #3, Side 1 Ms. McConnell said she did not participate in the meetings but advised of her understanding that legislators were invited to attend. She referenced recommendations of the financial planning commission and acknowledged that she did not personally support all proposals. Information derived by the commission indicated that the public sentiment was not "where we all thought." People may well accept some of the tax proposals more readily than anticipated. Proposals for alcohol and tobacco taxes have broader support than earlier realized. The same is true for the income tax. There is much to learn about where the public stands. More information could also be shared with the public. Ms. McConnell noted indication by the business community that the public does not understand that the legislature has already done a considerable amount to reduce the budget and per capita spending. Statistics evidence reductions of 25% over the past five years. Senator Zharoff referenced earlier estimates of a $525 million deficit and inquired concerning an updated projection. Ms. McConnell advised of an expected FY 96 fiscal gap of $429 million. Some FY 96 tax revenues were higher than anticipated. That is the largest adjustment. Senator Zharoff next asked how much of the Governor's budget is predicated on federal funding. He then inquired about the status of federal revenues. Ms. McConnell said that the budget assumes that problems with the Medicaid formula would be fixed. The congressional delegation was in the process of trying to work to modify current proposals so that Alaska would not be penalized. Information from the commissioner of the Dept. of Health and Social Services indicates there may not be final resolution of Medicaid questions "anytime in the next couple of months." Philosophical differences here remain broad compared to AFDC where all proposals are generally the same. Senator Zharoff voiced concern over variables within the budget over which the state has limited control. Co-chairman Frank acknowledged that legislation would be required for AFDC reform and said that the legislature would work with the administration and congressional delegation. Co-chairman Halford expressed frustration over numerous plans but no consensus or willingness to "put something on the table." It is the obligation of the Governor to propose a budget and a spending plan containing all the necessary elements. He questioned how a five-year plan could be developed if a plan for the first year has not been forthcoming. The Senator advised that he would start with a $200 million cut, a $200 million development, and only thereafter would "I go to the private sector to get the money." He then urged that the Governor present a plan "at least for the first year." Ms. McConnell responded, "You have the plan for the first year . . . the FY 97 budget." Co-chairman Halford said that it does not contain all the necessary elements and cited lack of a capital budget as an example. Ms. McConnell reiterated that it would total $110 million. Details will be available by January 31. She suggested that discussions centering on closing the fiscal cap were not being "held up" by "what amount is in the capital budget." She again referenced the state of the budget address and noted that the Governor spoke specifically to taxes and fees, the income tax, and dividend cap. Senator Donley concurred in the Governor's reluctance to introduce a plan he does not totally support. The plan recommended by the long range financial planning commission is not necessarily the same as that proposed by the administration. Referring to discussion of taxes, Senator Donley advised that his constituents are interested in additional reductions to state spending. He said he would not vote for taxes before reductions in spending can be shown to the public. Senator Donley complimented the administration on correspondence to departments seeking priorities in light of percentage reductions in the budget. He then voiced need to review those priorities in the course of budget preparations. Ms. McConnell reiterated that cuts have been made. The administration is not proposing taxes before effecting cuts. She cited direct expenditure reductions last year and in preceding years. At the same time, there were no tax increases or major shifts in funding to user support. Senator Donley asked what programs would be eliminated and what services would no longer be performed under the proposed budget. Ms. McConnell said that the list presented December 15 cites the types of reductions and streamlining efforts. Co-chairman Frank referenced the education foundation program and requested information on projected student counts versus actual numbers. Ms. McConnell acknowledged last year's discussion of the issue and the fact that past information was based not on state numbers but information submitted by school districts using the statutory October 15 deadline. She explained that Rick Cross, Deputy Commissioner, Dept. of Education, has taken responsibility for improving and analyzing count information. It is not yet known whether a statutory change will be needed. Co- chairman Frank concurred in possible need for change, advising that the statute is vague and could be interpreted in a number of ways. He stressed need for good numbers. Co-chairman Halford asked if the Legislative Finance Division could be provided agency responses relating to proposed percentage (10 to 20% were cited) reductions. Ms. McConnell said that OMB requested that departments provide that information verbally. She stressed that she did not wish departments to devote considerable effort to proposals that "aren't going to go anywhere." For some departments, the proposed 20% reduction over three years would be unacceptable. The effort was intended to determine "conceptually where are we headed on these ideas." ADJOURNMENT The meeting was adjourned at approximately 10:55 a.m.