MINUTES SENATE FINANCE COMMITTEE January 17, 1997 9:05 A.M. TAPES SFC-97, # 2, Sides 1 & 2 SFC-97, # 3, Side 1 (065) CALL TO ORDER Senator Drue Pearce, Co-chair, convened the meeting at approximately 9:05 A.M. PRESENT In addition to Co-chair Pearce, Senators Torgerson, Phillips, Parnell and Adams were present when the meeting was convened. Co-chair Sharp was excused until plane time and arrived as the meeting was in progress. Senator Donley was excused. Also Attending: Senator Wilken; Senator Ward; Annalee McConnell, Director, Office of Management and Budget; Mike Greany, Director, Legislative Finance Division; fiscal analysts and aides to committee members. SUMMARY INFORMATION FY 98 Statewide Operating Budget Overviews were presented by Annalee McConnell, Director Office of Management and Budget and Mike Greany, Director Legislative Finance Division Upon convening the meeting, Co-chair Pearce invited ANNALEE MCCONNELL, Director, Office of Management and Budget to the table to begin her presentation. Ms. McConnell introduced new staff members at OMB. She referred to issues for this year such as the deferred maintenance elements to the long- range plan and the education endowment concept raised in the governor's state of the budget speech. Two specific items she addressed were the $12 million incentive to provide quality education, part of the state Board of Education's proposal to rewrite the foundation formula, which is not in the budget. The administration is committed to reduce overall spending by $100 million over the next three years, even with the decision to invest additional money in education. Ms. McConnell spoke of the context for the FY98 budget. Each of the last two years' budgets have been smaller than the previous year. Significant progress was made on absorbing inflation by the legislature putting brakes on state spending. Per capita funding of general fund dollars is $340 less than 1979. The FY98 budget is a continuation of the plan to close the fiscal gap. The two major tools are continuing to cut the budget and the tobacco tax. It is the only tax proposed for the fiscal year. She believed the governor's long range financial plan released last March which proposed a $100 million reduction was an appropriate number. It was arrived at after considerable deliberation by the Long Range Financial Planning Commission. The state is now in a better financial position than expected because of the price of oil and recent announcements by Arco and BP regarding production. The proposed budget absorbs more than $40 million of increases, including $12.4 million in school enrollment, fully funding pupil transportation and single site schools at $2.6 million. Most formula programs besides education are in the Department of Health and Social Services and there was a net of $15.3 million to deal with. Health insurance premiums for state government have gone up $2.3 million. University of Alaska overall personnel increases are $2.8 million and general government are $6.4 million, including contracts negotiated last year and equivalent increases for employees not represented. In addition to general increases in costs of supplies absorbed by the departments, it brought the figure well over $40 million. There was a need to reprioritize in areas of interest to the legislature, those being education and crime prevention and intervention. Money was added for domestic violence, including a half-million dollars of new federal funds, implementation of recommendations of the Youth and Justice Task Force, addition of VPSO's in ten villages and a capital item for the Johnson Youth Center. The repriorties add up to about $7 million in the budget to get additional services to deal with crime. Additional investments were made in the economic development, job creation area to help keep job replacement and development to ensure the economy stays strong with both large and small business development. In response to a written request by Co-chair Pearce, Ms. McConnell addressed what is affecting the fiscal gap. The level of the budget itself makes a big difference, but the biggest variable is on the revenue side because of oil price volatility. Positive changes in oil production include increased technology, expansion of fields and discovery of new fields. Ms. McConnell handed out Attachment #1 (Revenue Update) and explained that last June, when the budget passed it was expected that the budget gap would be about $411 million based on the April forecast. The document shows the difference between then and where it is believed to be at this point. A $100 million surplus is expected based on higher oil prices over a longer time period. The budget is based on the fall forecast, released November 1. It was expected the 1998 oil price average would be $17.71 per barrel, resulting in a budget gap of $377 million. It is now believed that the 1997 surplus of $100 will reduce the fiscal gap to approximately $270 million. Ms. McConnell referred to an improvement that was made based on conversations with Mike Greany by issuing budget plans based on official fall and spring forecasts. The other revenue item affecting the fiscal gap is the tobacco tax. It is shown just under $40 million for FY98 if the tax goes through. The other area that has affected the revenue gap is dramatic change in formula programs. A major budget discipline target this year has been to bring control to formula spending that has affected the budget, such as Medicaid and welfare reform. The target was to bring the rate of increase down in formula programs. The budget plan requires that $81 million from the general fund be used for debt service. They expect a balance in various debt service funds of $5.9 million to be applied toward next year's need. Ms. McConnell referred to the Department of Revenue's upcoming report on public debt update, which will detail each category. Next, Ms. McConnell walked the committee through items on side 2 of Attachment #1. The categories included restricted revenues, constitutional budget reserve, formula programs, agency operations, supplemental estimates, debt service, clean water fund, capital appropriations, permanent fund and removal of duplicated expenditures. She summarized that an increase in total funds was in part due to an increase in federal funds, and the overall plan, while modest, was well within reach of the $100 million pledge for three-year budget cuts. In response to a written request from Co-chair Pearce, Ms. McConnell addressed several issues, the first being that of supplemental funding requests. There has been considerable reform in the last couple years and the departments are living within their budgets. Specific legislative intent for supplemental funding came to about $17 million for FY97 and estimates are being gathered for this year for areas such as fires, leases, OPA and Public Defender. Ms. McConnell next discussed OMB's process for reviewing department adjustments throughout the year, called Revised Programs. It allows departments to make adjustments within appropriations. A summer analysis showed that all 2,000 met legal criteria and appropriateness, resulting in a decision to limit the paperwork process to the more significant dollar items and key areas such as grants. OMB can always track where departments are making adjustments. The third issue was changes between the capital and operating budgets. There were about ten items that were proposed last year that the legislature addressed and no additional items were being proposed this year. Ms. McConnell stated the major goal of budget presentations is set forth what they intend to achieve with appropriated dollars. She referred to the "Executive Budget Summary, FY98" book which updates performance measures of the departments in the back of the book. Performance measures will be a major part of the automated budget system being developed. She expressed appreciation to the Legislative Finance Division for loaning their system during the interim while developing the more complete system for roll-up of the budgets. Another issue in the aforementioned letter related to current and projected reorganizations. She brought up two executive orders introduced by the Governor. One moves the Division of Motor Vehicles from the Department of Public Safety to the Department of Administration, a more appropriate department for dealing with information technology and paperwork. The other consolidates responsibilities relating to commercial vehicle weights, size and safety in the Department of Transportation and Public Facilities. It will improve coordination and insure federal requirements are met. Internal reorganizations in OMB have been made to produce cost savings and invest in development of the computer budget system. Department of Administration consolidated services relating to seniors. With regard to new legislation, Ms. McConnell noted the governor's proposal for quality education. There is a need to look both at the mechanism the Board of Education is proposing to use to distribute money to encourage quality education and also revenue sources and possibilities. In response to a question from Senator Adams, Ms. McConnell stated that two pieces of legislation were built into the budget plan. One was the Longevity Bonus proposal to cap eligibility at $60,000 for individuals and $80,000 for married couples. The other was an adjustment in the geographic pay differential for non-represented employees. The first splits $8 million between the Departments of Administration ($6 million) and Health and Social Services ($2 million) because of the hold harmless provision. The geographical differential anticipates a first-year savings of about $100,000 and more after that. Senator Adams asked about facility maintenance in the new capital budget. Ms. McConnell replied that a final listing for the capital budget will be released the beginning of February. She acknowledged that the list of schools needing attention was greater than what could be funded in one year. That was why the governor suggested the discussion about deferred maintenance be expanded to include some new facilities such as schools. The current level of $7 million per year will only make a small dent in what needs to be done. Co-chair Pearce referenced the governor's plan of cutting the budget by $100 million over three years and his claim that $88 million has already been accomplished, including the Miller's Reach fire and the $70 million cut by the legislature last year. His current budget proposal is approximately $2 million, excluding $12 million in education incentives, which leaves about $10 million. She inquired if the legislature could expect the FY99 budget to have a $10 million cut, since there was only $2.5 million this year. Ms. McConnell stated the governor has made it clear that there will be a $100 million reduction over three years and could not say what the budget would be for next year. With regard to the fire, she explained that each year there is usually a significant one-time item. Co-chair Pearce commented on using the Constitutional Budget Reserve Fund for catastrophic events. Senator Parnell asked if the FY98 budget eliminated any programs. Ms. McConnell responded that there were some recommendations for changes in how programs are delivered, such as the Department of Environmental Conservation's work relating to impaired water bodies. If the state relinquishes that activity, the EPA will provide the service, so the service will remain, but state dollars won't be used in the future. Begin SFC-97 #2, Side 2 Ms. McConnell summarized that there was no wholesale program elimination, but they are looking at dropping some small functions that wouldn't show up at an appropriation level, such as routine reporting that doesn't seem to do anything. Senator Parnell asked how many state employees have been terminated during FY97 because of budget cuts and how many new positions were added in the FY98 budget. Ms. McConnell didn't have a tally, but would be addressing the Retirement Incentive Program at her next presentation on January 20 and would also explain positions added and their funding source. Senator Parnell asked if the administration supported the minority's education endowment plan proposed last year. Ms. McConnell said he did not, but rather is suggesting this year a concept for a secure source of funding for education while acknowledging that it will have to grow and must be tied to a higher quality of education. The administration doesn't want to see more money going into education unless it can produce better results. There have been a half dozen proposals for how it could be done with different mechanisms. What seems most appropriate is to agree that the way in which education should be funded should be based on quality schools. She noted that education is a huge portion of the budget, over $700 million in the operating budget. In response to another question by Senator Parnell, Ms. McConnell recalled the governor's proposal last year of basing an endowment on the earnings of the permanent fund. She stated other ideas have been suggested, such as using the constitutional budget reserve or excess earnings of the permanent fund. The governor's proposal provided full inflation proofing and there would have been no effect on the dividends. In response to a query by Co-chair Pearce, Ms. McConnell stated she did not know if the governor would introduce a bill relating to education endowment. There was additional discussion to clarify the governor's position regarding permanent fund earnings to fund education. Ms. McConnell explained that the governor was seeking discussion and recommendations with the idea of having a public vote on the funding mechanism. She noted again that other sources besides the permanent fund could be considered. Co-chair Pearce asked if it was the governor's opinion that the legislature shirked it's duty to education and students. Ms. McConnell replied that it was not, but pointed out that there had not been a change for the last several years and that cannot continue into the future. There is a need to provide additional money to schools while being sure that it is tied to some requirement for quality education. Responding to a question by Senator Parnell, Ms. McConnell informed the committee the capital budget would be submitted in early February. Senator Parnell next asked about the plans for the Office of Public Advocacy, since it was short- funded. Ms. McConnell explained that both OPA and the Public Defender Office needed supplementals regularly in past years because they were caseload driven agencies and funds had fallen short. Last year they proposed getting out of the supplemental situation feeling it would be better to acknowledge up front that costs were going to be higher but the legislature preferred supplemental funding. Based on that preference, there will be a need for a FY 98 supplemental. She noted efforts were underway for a better system to determine eligibility for Public Defender services. There were no further questions from the committee on Ms. McConnell's FY98 budget presentation. Co-chair Pearce noted the presence of Co-chair Sharp. She invited Mr. Greany to the table for his presentation. MIKE GREANY, Director, Legislative Finance Division, greeted the committee. He noted he would be working from the division's "FY98 Budget: Legislative Fiscal Analyst Overview of the Governor's Request" that was before the committee (Attachment #2). He explained the history of why it was possible to have the document available so soon after the governor's budget speech. He referred to an amendment of Title 37 which required the submission of the budget by December 15. There were only minor changes to the budget bill introduced by the governor. Referring to page 1, Mr. Greany noted the comparison between the FY97 authorized budget and the FY98 proposal. The budget is spent in several areas: the operating, capital, debt service and other pieces. The operating budget breaks out between agency operations and formula programs and the governor's proposal would be an overall increase of $9.9 million. He noted a key element to the budget plan was a statutory change to the Longevity Bonus program resulting in an $8 million reduction to achieve an overall $2.6 million reduction from the current authorized budget. The debt service reduction is a function of 1) continuing decline in the need to appropriate general obligation debt following the Prudhoe curve in structuring debt to tail off to zero by the turn of the century, and 2) projected carry-forward amounts in the debt retirement fund which is used to make the debt service payments for the general obligation debt and the school debt. Mr. Greany noted there are differences in perspective relating to the budget. For example, the funding of a fiscal note that accompanied a bill vetoed by the governor and then overridden by the legislature would be included from his perspective, but is not included in the governor's FY97 authorized budget. It is the subject of a current court case. Mr. Greany's division looks at "authorized" as being what was enacted by appropriation law, specific fund sources. The governor has a different view of FY97 authorized in that he increased the amounts for designated program receipts. Mr. Greany said he would be bringing before the committee a constitutional perspective of how funds should be treated in the budget, relative to what is and is not a general fund item, and how they should be treated for budgetary purposes. Other issues concern underfunding of agencies such as OPA, the Public Defender, Leasing and supplementals. He emphasized that supplementals are only estimates when comparing budgets from one year to the next. Some expenditures are predictable and can be dealt with earlier, but others such as disaster relief and fire suppression are unknown. Mr. Greany noted differences between the actual appropriation bill request and the spending plan. For example, the governor includes the Court System in the budget for information purposes, but treats it differently in that the spending plan does not reflect the increments the Court System is requesting of over $3 million, however it does appear in the appropriation bill. The budget builds in salary increases for the second year of contracts, estimated at $19 million ($11 million GF) for just the executive branch. It doesn't include the Court System or Legislative Branch, which would require an additional $1 million. Mr. Greany concluded his presentation and asked for questions from the committee. Senator Adams asked what the majority's plan of cutting $60 million would do to public services. Mr. Greany replied that from his perspective it would be painful. Because there are only a handful of formula programs that could be cut, it inevitably brings the cuts back to the agency operations and would require substantial reductions. He pointed out that the five largest departments account for two-thirds of the budget: Health and Social Services, the University, Corrections, Transportation and Public Facilities and Public Safety. He felt there was a need for a more surgical approach to the budget and prioritizing, but there was no easy way to do it. Senator Adams asked if Mr. Greany's agency had ever prioritized what needed to be funded from the operating budget according to what the Constitution says the state should be doing. He mentioned the Alaska Railroad as an example of privatizing state agencies. Mr. Greany responded that attempts have been made in the past, and many of the recommendations have been addressed. He commended the legislature in holding down expenditures and cutting the budget, noting that Alaska is the only state that has actually reduced its budget. He felt that $60 million was an ambitious target and it would be more difficult than the $70 million cut last year. End SFC-97 # 2, Side 2 Begin SFC-97 # 3, Side 1 Co-chair Pearce thanked Mr. Greany for his comments. She then described for the committee next week's scheduled overviews and previews. ADJOURNMENT The meeting was adjourned at approximately 10:45 A.M.