GENERAL SUBJECT(S): Overview: Legislative Finance Division - State Revenue Stability Overview: Capital Projects - University of Alaska The following overview was taken in log note format. Tapes and handouts will be on file with the Senate Finance Committee through the 21st Legislative Session, contact 465-2618. After the 21st Legislative session they will be available through the Legislative Library at 465-3808. Time Meeting Convened: 9:01 AM Tape(s): SFC-99 # 22, Sides A & B PRESENT: Senator Parnell Senator Adams Senator Torgerson Senator P. Kelly Senator Donley Senator Green Senator Leman Senator Phillips was absent Senator Wilken ALSO PRESENT: Wendy Redmond, Vice President University Relations, University Of Alaska; David Teal, Director, Division of Legislative Finance; Ginger Blaisdell, Phil Okeson, Tammy Stromberg, Fiscal Analysts, Division of Legislative Finance Via Teleconference: Pat Pitney, Director of Budget Development and Institutional Planning, University of Alaska; Ann Ringstad, Director of Government Relations, University of Alaska. Tape: SFC - 99 #22, Side A Co-Chair Sean Parnell Introduction. I asked the Division of Legislative Finance to prepare and overview on state revenue stability. It's relatively short. We all know volatile oil revenues are but this will give us a better historic picture. David Teal Director, Division of Legislative Finance We're in the fourth of a five-year plan designed to reduce or eliminate expenditures of state revenue. Most efforts have been to reduce the expenditures. Real progress has been made. Today you asked us to address the revenue side. Since you left last May, oil prices changes and we came back to a $1.1 billion fiscal gap. That's roughly 50 percent of the budget. If Rip van Legislature from 20 years ago woke up and compared our situation to that in 1979 he would have said we were lucky. Because 20 years ago there was a feeling that permanent fund earnings would replace oil revenues as the primary and stable source of state funding. Not because of price declines but because of production declines. Production has held up better than anticipated. Price is still an issue The present fiscal gap is so big that nobody really expects to close the entire gap through the expenditure side. Although we've seen changes in expenditures the gap still widens because of the low oil prices. Now there is more attention on the revenue side of the gap. Several Division of Legislative Finance staff have spend hours working on compiling the following information. Ginger Blaisdell Fiscal Analyst, Division of Legislative Finance Handout: 25-Year General Fund History. Graph: Oil Revenues as Part of Alaska's Overall Revenue. The graph starts in 1973, about two years before oil production really got started. The graph ends with projected figures for FY00. The bottom line shows our standard general fund revenues, everything that is not oil- related. The upper line shows the oil revenue. It includes taxes: property, severance, rent and royalties - everything that has to oil. 1981-82 shows $34.92 per barrel at 2 million barrels per day production. It didn't last long but was a reflection of a positive market. The next peak was seen during the Gulf War. 1997 was an unexpectedly high priced oil year. More important to see is that even in high price years at higher productions, we have a basic trend of oil not being the most stable economic revenue for the state. It tends to continue to decline. It is very volatile. You can see a simple drop in price or production causes large swings Co-Chair Sean Parnell The one thing really demonstrated here is the stability or certainty of other revenues vs. the certainty of oil revenues. Ginger Blaisdell The small spikes shown on the graph are due to settlements. The largest is due to the oil settlement. But it is due to activity that happened in previous years and we finally saw the payment here. Department of Revenue felt that because it's a settlement it's considered a one-time event. Those one-time events do impact our general fund. Co-Chair Sean Parnell On that spike in the blue FY85 or FY86, is that settlement pre-Constitutional Budget Reserve? Ginger Blaisdell Yes. Anything other settlements collected on oil and mineral royalties are going into the CBR instead of the General Fund as before. That's pre-1990 and post-1990. Next graph: Forecasted and Actual West Coast Prices. What this shows is a pink line is the Department of Revenue's price per barrel projections. The dark blue line is where the price per barrel actually was. What this shows is that the Department of Revenue typically projects very close to what the actual prices are. We get a lot of questions on what system we should use to base our prediction on. We based our last few budgets on Department of Revenue's projections. It's been pretty close. Over the last 20 years they've averaged 82 cents per barrel less that what we've actually earned. The have a fairly conservative projection. The last three lines are for the years 2000-2003. They are projecting an increase but we don't have actuals for that yet. Senator John Torgerson They're adjusted annually (inaudible) Ginger Blaisdell These are the Spring forecast projections. Senator John Torgerson Out on March 15 Ginger Blaisdell Explain the numbers on the graph are from last springs forecast plus this is the projection Department of Revenue came out with this past January. Graph: Projected General Fund Revenues At Various Oil Prices. This is the depressing one. What this shows is the impact of production on our oil revenues. The three lines are for $20 per barrel, $15 per barrel and $10 per barrel. If we were getting $10 per barrel we would be getting $1.1 billion. As production continues to decline, by the year 2020 the same $10 barrel of oil will only generate about $500 million. As production continues to decline, the amount of fluctuations between each dollar per barrel affects our earnings. A five-dollar change at a low production rate doesn't have nearly the same impact as it would with a higher production. This is also based on the current fields that we have with their attrition rates. If we get a new oil field maybe our production will go up again. This other part of the graph shows the oil severance taxes, corporate income taxes, and property tax. There are other funds that are coming in with the oil revenues. If we ever were to drop below $9 per barrel it will drop at a much faster rate of decline. As they drop lower the oil fields are going to produce less and some of the taxes actually go away. If you go above $23 dollars you would make more. Senator Gary Wilken Could you call out on that graphs the production levels of those years? Ginger Blaisdell This one gets us down to around 445,000 barrels a day as opposed to a million. That's how far out this graph shows. Senator Gary Wilken Please include in graph for future reference. Ginger Blaisdell Yes. Co-Chair Sean Parnell I had focused on the instability of price and its impact. But what this graph showed me is that declining production is the 20 million-pound gorilla around our necks in terms of declining revenue. Price is stability but production is also key here. Baring any new huge production, we are going to be at a level of revenues somewhere in the 500-700 million dollar range for the state budget. Production declines will be significant to us Senator Gary Wilken I agree. Everyone is focused on the price but production is also important. Ginger Blaisdell To make our current $1.257 billion goal in the year 2020, we would need a price of about $45 per barrel this year in today's dollars. Adjusting for inflation, that amount would actually have to be $91 per barrel. Senator Pete Kelly The $45 was where? Ginger Blaisdell That is with today's price being $11.58. Graph: General Fund Reserves Vs. Expenditures. Showing the revenues compared to the expenditures. There have been a couple of dips in here. This big spike right here of $1.8 billions was appropriated to the Permanent Fund. The money was actually dispersed over a four-year period. Depends how you look at it, you could level this out slightly. 1986 the oil prices dropped but 1987 the impact really took place. You'll see the spending dropped the next year but suddenly we got more money and spending was back up. You can see spending was relatively stable. It's come down some in the last several years. Our spending has been relatively stable. Revenue is where we will find our instability. In the areas where there is a large gap, the white spaces showing our fiscal gap. Each of the gaps has been filled in with other state savings accounts. On the handout I've bulleted the years of particular spikes up or down. Graph only shows general fund revenues not other program receipts. Co-Chair Sean Parnell Recess 9:20 am - 9:26 am Co-Chair John Torgerson Chairing remainder of the meeting. Wendy Redmond Vice-president of University Relations, University of Alaska Over 50-percent of our capital budget is in deferred maintenance, deferral, and replacement and renewal items, which are issues that both the House and Senate finance committees, have dealt with in incredible detail over the last several years. I don't know how much detail you want me to go into on the deferred maintenance except to give you a brief overview. We have included the total amount of deferred maintenance projects, which is $139.6. It continues to be our top funding priority in the capital budget. We have had great support over the last several years to deal with this problem. University of Alaska has made efforts to educate the public and us of the importance of degreed maintenance. The task force set up by the Legislature a couple of years ago have been very helpful in bringing the issue to the forefront of both the Legislature and the public. We need to continue the progress we had been making. We went a couple of years with very small appropriations. Last year we got $42 million. We need another 3-4 years of funding at that same level to be able to get a handle on the problem. If don't make annual adjustments of about $30 million we tend to take one step forward and two steps back. It's the kind of problem we have to get in front of. Board of Regents, when this problem first became critical about six years ago, began a process internally to reallocate money into our maintenance budgets to ensure that as we were taking care of deferred maintenance with the help of the Legislature that it wouldn't occur again. We have increased our maintenance budgets by 84 percent since 1994. We've reallocated almost $8 million from operating to expenses and programmatic expenses to the maintenance budget. On an annual basis we are fully funding maintenance at the level set out by the national formula. Not able to fully fund internally for the renewal and replacement portion. That is something we will continue to need annual appropriations for the actual replacement. We think it's about $15 million per year. About 44% of facilities belong to the University of Alaska and over 55 percent of those older than 20 years. So we are a big player in the state's facilities. I think it's significant that we've attempted to take care of problems internally. Legislature has been very helpful. If we can continue receiving appropriations on the deferred maintenance side and the R&R side, that will take care of the internal. Want to insure that our facilities are protected into the future We put together each year an inventory that lists all the projects, which campus they are located as well as a historical outlook. That will be available in the next couple of weeks Co-Chair John Torgerson (Confirmed that the book will be available in the next couple weeks for the committee to see the proposed projects.) Senator Dave Donley I have a technical question. Where will they appear in the capital budget? Wendy Redmond Deferred maintenance will be listed as our Senator Dave Donley I don't see any listed in the in governor's budget. Co-Chair John Torgerson You submitted them all to the Governor and he only included one in his budget proposal? That one was for the Hutchinson Center? Wendy Redmond Correct. All but the Hutchinson Center of the requests is not included. Co-Chair John Torgerson I know there's another piece of legislation on the Anchorage consortium library. Is there other legislation that covers any other of your capital needs? Wendy Redmond Not yet. Senator Pete Kelly You had said that we've given $30 million per year. Do you advance on the problem at $30 million? Wendy Redmond I was prepared to go through the University of Alaska capital requests. Would you like me to just address the Governor's capital request? Co-Chair John Torgerson My understanding that what we have before us is what you submitted to the Governor. Through their ranking process only one project made it into his actual budget. Senator Pete Kelly You said also that you reallocated some money from the operating budget. You gave a number. Wendy Redmond $7.6 million over the last four years. Senator Loren Leman $21 million for the UAF School of Fisheries. Is that number consistent with the very recently announced reduced ore delayed funding plans by the federal government for the (Lena Point NOAA) facility. Is that consistent with the program that is now envisioned? Wendy Redmond Yesterday they announced that the federal portions for that facility had been somewhat reduced. I think what happened is they reached a compromise with Sen. Stevens and Sen. Gordon from Washington state. They plan to make a research facility in Juneau and maintain the administration portion in Seattle. They've scaled back from $80 to $50 million. The news report I heard said they would appropriate $36 million over the next 3 years for the federal portion. It doesn't change anything for our $20 million. Our facility was always a research facility. At this point it's my understanding that our piece will remain the same. Senator Loren Leman And is your portion of $21 million proposed to be state general funds. Wendy Redmond Yes. You'll see that we put $5 million in to the FY00 request. We knew it would be $21 million total we just didn't know when the out year would be. We put in this request so we could proceed with the planning and design of the facility. As we get more information, we'll make an adjustment in the budget. Senator Gary Wilken Confirm that this is the Lena Point facility? Wendy Redmond Yes. Co-Chair John Torgerson So the federal appropriation is not contingent on a match? The $21 million is for a completely separate facility? Wendy Redmond It is not contingent on a match. However Sen. Stevens and Sen. Murkowski have indicated to us that NOAA's willingness and eagerness to relocate from WA to AK is enhanced by state's willingness to make an appropriation to the facility to the facility. Co-Chair John Torgerson The $22 million would relocate about 500 jobs from WA to AK? Wendy Redmond Not familiar with exact figures. It is significant. Co-Chair John Torgerson The intent is that the Alaska Fisheries Research Center that is located in Seattle would be in Alaska? Wendy Redmond Yes. I do want to say that the Governor's office has been helpful over the last four years in trying to work with us on the maintenance and renewal and replacement items. Even though there is not an appropriation for these that is included this year, I feel they will still try to help find some other option as session moves along. The 2nd priority in our budget this year is under the Instructional Equipment and Telecommunication. We've requested $7.5 million. It's been over a decade since we've had a major appropriation of any kind for equipment. The equipment includes about $900,000 total for library books. We scramble every year in Anchorage. Trying to get the base budget for library books up has been very difficult. We found that capital appropriation for one-time purchases best way we can do it. Our student labs and instructional equipment are getting seriously behind the times. An employer group in Anchorage told me that the students at the Anchorage campus were not being trained on equipment that was up to date. That is criminal. The electronics program is a very high paying and excellent career field. Community colleges across the state are in the same situation. We simply need to get an infusion of instructional and laboratory equipment, particularly in some of our vocational and scientific areas. In looking at new construction, a question we are often asked is, "With the huge deferred maintenance problem how can we consider building anything new?" The answer is that we can't stop progress while we're fixing the facilities. There are new things that also need to be done at the same time. So we're trying to cautiously go forward with new construction where we think it's really essential. We've prioritized new construction projects based on 5 criteria. 1) How the project meets a particular strategic initiative 2) a demonstrated need 3) partnership potential that it creates 4) the degree to which the project will be self-supporting either with instructional tuition or by research revenues 5) the degree to which there is a developed plan for the project. So within that criteria the number one priority is for the Hutchinson Center at the Tanana Valley campus in Fairbanks. That's a joint partnership with the school districts where they share a facility. The community of Fairbanks will be going forward with a $ 10 million bond this fall. Our share will be $5 million. People are very excited about it. It's a wonderful partnership that allows a lot of opportunities for students at the school district as well as the community college to share programs. Co-Chair John Torgerson Is it safe to assume that if bond issue fails that your part fails also? Wendy Redmond Right, I would be surprised if the bond issue fails. Co-Chair John Torgerson Didn't we run other schools up there for three or four years and have...? I don't want to get into that. Wendy Redmond Yes they have failed, but I think one of the things that people were concerned about in the failed bond issues was that they were not for vocational training. That's what people wanted to see. It's very popular. Co-Chair John Torgerson This brings me to timing. I know it's your number one request. It looks like maybe your smallest one too. The question wouldn't be on the ballot until October so the appropriation or the building probably isn't going.. I'm concerned about timing and if it's correct to match up with the bonding money. Maybe that should be considered as a FY01 capital project. Wendy Redmond I'm not sure when their bond issue is going on the ballot. The second new facility priority (and this has been on the list for several years) is the library classroom facility at the Anchorage campus. Last year $9 million were appropriated by the Legislature for planning, design and some parking construction. There is additional legislation that is in on this facility as well. Senator Dave Donley How much money has been expended so far and how much more do you anticipate expending in the next fiscal year on this? Wendy Redmond Refer to Pat Pitney to testify how much of the $9 million had already been expended. Pat Pitney Director of Budget Development and Institutional Planning, University of Alaska. Linked to the meeting via teleconference from Fairbanks. I don't know off the top of my head, but I can find out. Only a small amount has been spent if any. Co-Chair John Torgerson (Request information be sent to committee) Wendy Redmond The next priority is the School of Fisheries/NOAA facility here in Juneau, which is a UAF and UAS joint facility. Senator Al Adams Did you say the Alaskan congressional delegation wants us to put up match? Wendy Redmond They know we have the $5 million in our request this year. I assume that's a sufficient amount. We didn't feel we were ready to put in the full amount yet since the federal piece did not fully come together. The next priority is the UAF residential dining facilities. It's a major renovation request. It goes well beyond what we would have needed for regular renewal and replacement. It needs to be redesigned. The kitchen the very old and is not adequate at this point to be able to provide good service to the students. Senator Pete Kelly On that, I think it was interesting in the decline of students in the last year at UAF. The exit interviews showed that it wasn't because they weren't getting a good education or that they didn't have the adequate level of funding. It was that the food services were not up to standards. This kitchen is a serious problem and I think it needs to be addressed. Wendy Redmond The next priority is for classroom additions costing $7 million at the Juneau campus, our fastest growing campus. There are [PAPER SHUFFLING - INAUDIBLE] small buildings. This will add sixteen new classrooms to this campus. Bristol Bay Campus, $900,000. This has been on our budget request for many years. I can tell you from my prospective, this is probably one of the biggest needs we have. The campus is currently housed in what is essentially a 3-bedroom house. They have facility and students who are four people crammed into a 10x12 ex-bedroom. The need is tremendous. They are working closely with other members of the Bristol Bay community to try to do a partnership project where they will work with the library to try to maximize their facility needs. The next project is construction of a biology and chemistry lab on the Sitka campus. This is another renovation. As some of you know, we have taken the old W.W.II hangers and renovated those and turned them into campuses. This has been a very cost-effective project for us. We have one of the hangers that has been completely redone. This is now adding on a second floor to add in a science lab that would be used jointly with the University of Alaska, Sheldon Jackson College and the Mt Edgecumbe High School. Currently our students have to go to the local high school because we have no lab space at all. The next priority is the small business development program. Senator Dave Donley is probably the most familiar with this one. This has been historically funded in the capital budget. It came over as a grant. It continues to be funded in the capital budget. This is the same amount of money they have been receiving for the last decade. Senator Dave Donley But it's not in the Governor's capital budget this year? Wendy Redmond Right. And this is an extremely highly leveraged account. They bring in about $3 or $4 million a year. Co-Chair John Torgerson How many years has that been funded? Wendy Redmond I think it's been with the university now for about five years. It came over to us from the Department of Commerce and Economic Development. Frankly, I think it's their preference that it continue to be funded like this, probably because if it's in the operating budget it would have been slashed by now within the university. I'm sure the people at the Small Business Development Center feel that this is a better option for them. No matter how difficult this process may be for them, it's still better than trying to deal with the university internally. That is my assessment of why they do it this way. Wendy Redmond I won't go into all projects unless you want me to. We've included in our budget the projects into the out years FY01 through FY04. This is because they are important projects and we want to keep them as a high priority and we want to keep them in front of the Legislature so you are aware of the kinds of issues and projects that we're looking at over the course of the next couple of years. I can discuss them if you'd like me to. Senator Gary Wilken I want to make sure I clearly understand that the Hutchinson Career Center is about a $20 million project total. That $5.5 is about half of what's needed on behalf of general funds to get it started. The bond issue will be voted on and you will be back again next year for another $5.5 million to complete the project. Pat Pitney The school district is going to contribute $14.5 million. That plus $5.5 million general funds and the $1.6 million in planning money that we got last year equal the $21 million total. Also included in the $14.5 million bond is some additional renovation items. Senator Gary Wilken So $5.5 million general fund allocation does take care of complete state obligation? Pat Pitney That's my understanding. Wendy Redmond Last priority is $800,000 in program receipt authority for a student recreation center on the Juneau campus. That was not included in the Governor's budget, but I think it may have been an accident since it is non-general fund authority. The Juneau campus is investigating several different options of how we may put in a recreation facility. Juneau doesn't have anything like this. There's no ice rink. We have more and more students who are residential students at the Juneau campus and there is a need to have some sort of a facility available. This would be a simple facility with an ice rink, a running track and a couple of basketball courts. We are looking at partnering with private sector. We're looking at selling the Bill Ray Center where we may have some proceeds that we can put toward this. None of these options use general funds. We'll be putting in an amended budget request to make sure that we get this program receipt authority included in our budget for this facility. Co-Chair John Torgerson The $4 million we approved last year was basically revenue from the sale of the Bill Ray Center. Wendy Redmond I don't remember that actually being included in last year's budget. Pat Pitney Yes it was. The $4 million was the estimated cost of the project two years ago. They've come back with a reassessment and the project increased to $4.8 million. So they're aggressively looking for funding options. Since the project cost has increased, that is what the extra $800,000 is for. Co-Chair John Torgerson I understand that but didn't want you to count the sale of the Bill Ray Center twice. Tape: SFC - 99 #22, Side B Co-Chair John Torgerson I would just ask you to make sure your program receipts are better identified than the use of something from the year before. Pat Pitney It's not what we used last year. Right now it is an unidentified source. But they are actively pursuing other options. Co-Chair John Torgerson How big is your Y2K request? Senator Gary Wilken $5.8 million. Co-Chair John Torgerson Would anyone care to go into the out-years on the capital budget? I think we can look that over and get back to you with any questions. Co-Chair John Torgerson Announce Monday schedule Office of Management and Budget cash-flow overview and we will hear some bills SJR4 and SB 35. No Tuesday meeting due to the Economic Summit. Senator Gary Wilken I'll be late Monday morning due to plane arrival. Senator Al Adams Will we have a spending plan for the operating and capital budgets? The reason I ask is University of Alaska has more than the one request listed in the Governor's budget. I would suggest the committee look at a bond package for higher education plus K-12 education. Senator Dave Donley I'm open to that idea by a vote of the people. Co-Chair John Torgerson Adjourn at 9:59 am. SENATE FINANCE COMMITTEE LOG NOTES 2/5/99 Page 1