GENERAL SUBJECT: Overview of Governor's Proposed FY'01 Budget By David Teal, Director, Division of Legislative Finance 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 465-4935. After the 21st Legislative session they will be available through the Legislative Library at 465-3808. Time Meeting Convened: 9:05 AM Tape(s): SFC-00 # 3 Side A PRESENT: Senator Adams Senator Parnell Senator P. Kelly Senator Torgerson Senator Green Senator Donley Senator Phillips Senator Leman Senator Wilken ALSO PRESENT: DAVID TEAL, DIRECTOR, DIVISION OF LEGISLATIVE FINANCE LOG SPEAKER DISCUSSION Tape SFC-00 #3 Side A 000 CO-CHAIR PARNELL Introduction 14 DAVID TEAL DIRECTOR, DIVISION OF LEGISLATIVE FINANCE Handout: The Fiscal Year 2001 Budget: legislative fiscal analyst overview of the governor's request I hope to tie together the information presented by the Department of Revenue and the Office of Management and Budget during the last two Committee meetings. Page 4: Fiscal Summary - FY00/FY01, Page 1, far right-hand column: FY00 to FY01 General Purpose [funds] "General purpose" is what we usually call general fund, Constitutional Budget Reserve (CBR) and Investment Loss Trust Fund (ILTF). Revenue is down $236 million mainly due to low oil prices, which are expected to fall from $20.11 per barrel in FY00 to $18.26 in FY01. That accounts for about $220 million of the decline. The remainder of the decline, $17.4 million, is from Alaska Housing Finance Corporation (AHFC) dividends. The governor moved those AHFC dividends from the "General Purpose" column over to the "Other" column and from there they went into the "Debt Retirement" column. If we treated those dividends the same we had last year the debt service would have been $34 million instead of $19 million. It would have affected the bottom line and there would have been an increase in the governor's budget of about $124 million instead of $109 million that is shown on the fiscal summary. 52 CO-CHAIR PARNELL Please clarify the third line down of the "General Purpose" column showing AHFC receipts under the "Revenues" heading. The column shows $17.4 million authorized in FY00. Could you help us tract that through the FY01 budget? 59 MR. TEAL There is more debt service involved because the "unspoken for" dividend this year from AHFC is only about $15 million instead of $17.4 million. The governor took that amount and called it "Other" funds and deposited them into the "Debt Retirement" fund. 68 SENATOR DONLEY Was last year the first time the legislature treated Alaska Industrial Development and Export Authority (AIDEA) receipts in the "Other" column? How did we treat those in FY99? MR. TEAL As general funds. 72 SENATOR DONLEY So we did the smoke and mirrors trick and put $18 million into the general fund from "other" funds. Now the governor is moving AHFC funds the same way. 76 MR. TEAL The impact on the fiscal gap is neutral because both the revenue and the expenditures show in the other columns. Debt service would decline and the apparent general fund budget would increase. It depends on whether you want to count the increase in the governor's request as either $109 million or $124 million. I don't think we've ever treated everything consistently from one year to the next. It is difficult to get a real "apples to apples" comparison from one budget year to the next. We now have dept service of $19.3 million and the statewide totals of dept service and fund transfers are an increase of $19 million. The capital budget has increased about $18 million. The operating budget is up about $72 million. The combination of declining revenue of $236 million and the $109 million increase in spending increases the fiscal gap approximately $350 million up to $837 million. 104 CO-CHAIR PARNELL So the $836.7 million at the bottom of the FY01 column is the amount that would have to be drawn from the CBR if the governor's budget were adopted? Is the $109.4 million figure shown at the bottom of the "FY00 to FY01 General Purpose" column the amount Division of Legislative Finance calculates as the increase in spending? Are you also saying that if AHFC funds were treated as "general purpose" to general funds dollars the total in the "FY00 to FY01 General Purpose" column would be $124 million? 117 MR. TEAL Correct. Office of Management and Budget presented their fiscal summary similar to this and used a figure of $98 million. The difference is partly based on the way some of the fund source codes are treated. Office of Management and Budget uses a term called "fee supported services", which they call "other funds" and we classify as "general purpose". There also could be some question on the treatment of "power cost equalization" and "Southeast Energy" funds, which we classify as "general purpose" as well. There are some minor differences in the classification of funds in FY00, which makes up about $100 - $110 million. 134 Page 5: Fiscal Summary - FY00/FY01, page 2 This shows information on permanent fund and CBR cash flows. This is a new chart and we hope to have this accompany each bill that passes out of the finance committees. This will allow us all to track spending that accompanies a bill. 141 CO-CHAIR PARNELL Because the viewing audience does not have the handout, please read the balances out loud. 146 MR. TEAL The balance at July 1, 1999 in the CBR was $2.6 million. There are settlements and earnings contained in that figure of approximately $150 million. The $490.7 million CBR draw is taken off the fiscal summary and shown on page 4. We are starting the year with a balance of about $2.29 billion. There is a net loss after, the settlement and interest earnings, of about $337 million. Settlement income this year may be $150 million or it may be nothing. It is highly variable and completely dependent upon how negotiations go between the Attorney General's office and the various parties. Interest earnings may be close to $100 million. Figuring in the $837 million withdraw carried over from the previous page, the ending balance on June 30, 2001 is estimated at about $1.7 billion. 147 CO-CHAIR PARNELL So if the governor's budget were enacted, the balance of the CBR would be $1.7 billion on June 30, 2001. 148 MR. TEAL Correct. These are very close to the projections presented by the Department of Revenue. If this continues, the CBR will be gone by 2004. 176 CO-CHAIR PARNELL Permanent fund balances? MR. TEAL The important thing to note in the permanent fund is that there are projections of negative earnings for the unrealized gains in both FY00 and FY01. The earnings reserve still goes up and that balance is projected to be about $3.6 billion at the end of FY01. The total permanent fund balance will be about $26.1 billion. In previous fiscal summaries both permanent fund dividends and inflation have appeared in one column. However, there has been about one billion dollars a year in earnings of the permanent fund that have not been appropriated for dividends or inflation proofing. That excess earnings has not appeared in the fiscal summary as revenue. If those earnings were placed in the general fund there would be no more fiscal gap. However, the vote on Sept. 14 showed that the public does not want to spend permanent fund earnings as general funds. Therefore, this fiscal summary separates these earnings to show as a cash flow analysis. At the bottom of this page we show the total authorization from the fiscal summary of $4,807.5 million. Add inflation proofing of $596 million and permanent fund dividends of $1.2 billion for a total budget of $6.62 billion. 207 Page 6: State Of Alaska Expenditures by Category - FY00 This pie chart is very similar to the one Office of Management and Budget showed. The only difference is that ours breaks down expenditures and theirs breaks down revenue. Page 7: Anticipated FY00 Supplemental Requests The projections of spending and of the fiscal gap don't include supplementals. We've identified approximately $50 million in supplementals, although some may be overstated because they are five-year averages. They do tend to increase during the session. Given the amount of that list, it is going to be tough to get to a net zero. 223 SENATOR ADAMS We expected this supplemental because we short-funded various programs. Isn't that correct? 225 CO-CHAIR PARNELL Mr. Teal cannot speak for what the legislature's intent was. 226 SENATOR ADAMS But he is giving this presentation and he went through the details with us. 229 MR. TEAL There are a number of things that we did not anticipate such as a Medicaid ratification from 1999. There is nothing on the supplemental request list that I knew we were short funding last year. 236 CO-CHAIR PARNELL I was going to make a similar comment however I look at this as overspending rather than under-funding. Regarding some of the items listed on your anticipated list of supplemental requests, such as the Department of Corrections, I understand they are living within their authorization. Are the supplemental requests amounts your estimates based on prior history or do you have data to back up the information? 248 MR. TEAL No. This is simply an average of the last five-years for the Department of Law and Department of Corrections. The total of those is about $12 million. We have no indication that either of those departments will actually request a supplemental. 252 SENATOR ADAMS Regarding the Department of Natural Resources fire fighting disasters estimation of a $19.2 million supplemental request. Is that to fight fires such as the one in the Mat-Su area, or throughout the state? 254 MR. TEAL I estimate that $3.9 million of that amount is from FY99 and covers the May 28 disaster. The remaining $9 million is to cover costs incurred in FY00. 257 SENATOR P. KELLY Please explain the $2.2 million Medicaid Services Ratification shortfall for the Department of Health and Social Services. 258 MR. TEAL It could be said that this item is a no- choice option. The money has already been spent. They can't spend the money without an appropriation, but on the other hand, they had no choice except to spend the money. 264 SENATOR PHILLIPS Are they required by law to spend the money or is it a moral obligation or something else? 267 MR. TEAL There are quirky situations such as with Medicaid. Checks are mailed every Tuesday and in FY99 there were 53 weeks and therefore 53 Tuesdays. The cost per week is tens of millions of dollars so that extra week is substantial. SENATOR PHILLIPS Was that the only major component? MR. TEAL No, fire fighting as well. There will probably also be some ratification from the Department of Law, which is normal. 278 SENATOR PHILLIPS Was the extra Tuesday the only problem with Medicaid? 281 MR. TEAL If you ask the chairman, he would say they overspent and if you ask the department, they would say they were under funded. 283 SENATOR DONLEY What ratification could we expect from the Department of Law? 285 MR. TEAL It usually involves settlements. I don't know if there really will be any this year. 286 SENATOR DONLEY Does the department pay the settlements without legislative authorization? I thought we still held that authority. 291 MR. TEAL Yes, but in every department there are extra costs that get missed in the budget process and are usually quite small, such as phone bills. SENATOR DONLEY So they are not major settlements? MR. TEAL No. I would expect that the total ratification from all the departments that aren't on this list will probably be less than a million dollars. Page 3: Special-funded Increments In the Governor's FY01 Operating Budget These supplemental numbers exclude some one-time items listed on page 3. When we say these are one-time items, we mean that the funding method was one-time. One example is the K-12 reappropriation contained in last year's capital budget for a number of operating purposes including the Division of Motor Vehicles. The departments can argue that their needs are continuing and that the expenses were not intended to be a one-time item. However, as we look at the situation, the source of funds is one-time and we can't expect the K-12 lapse to be there year after year. An increment would have to be added elsewhere in the bill. We just wanted to bring attention to those items so they can be handled in subcommittees. Some of the larger items such as the Department of Community and Economic Development are continuing operating expenses that were handled in the front section of the bill last year. It can't simply be said there are $17 million in savings. There will actually be between two and four million dollars of savings. 317 SENATOR ADAMS I don't consider all of the items listed on this page as one-time items, some are long term and some are not. 321 CO-CHAIR PARNELL Clarify that only the funding sources are one-time. The subcommittees will determine whether they should continue. 327 MR. TEAL There are two "hollow" authorizations: tobacco settlements and Power Cost Equalization (PCE). The tobacco settlement is part of the general fund. There is a shortage of about nine to ten million dollars in tobacco settlement funds. If all the money gets appropriated and we only receive a portion, the agencies can continue to spend the balance due out of the regular general fund. PCE receipts are considered "other" funds and does not have the same flexibility in that unless the money is received, it can't be spent. 343 CO-CHAIR PARNELL Is that why your analysis is showing actual spending of the FY01 proposed budget at $109 million over last year and the governor's analysis shows only a $98 million increase? 342 MR. TEAL No. We put PCE and Southeast Energy receipts in the general fund column and the governor calls those receipts "other" funds. It is the same issue but for a different reason. The problem is that this year the PCE program was funded through the federal "National Petroleum Reserve, Alaska" funds. There is about $40 million available from that source but the first call on that money is community grants and there were about $70 million in grant applications. There were more applications for grants than funds allocated. Therefore, PCE may have no money left from that source, which means PCE is out of money now and has no certain source for FY01. Senator Adams may have suggestions for this situation. 353 CO-CHAIR PARNELL 354 MR. TEAL It is a significant dollar amount for both FY00 and FY01. Page 8: Position Comparison These were not unexpected. The biggest increases were for the Department of Health and Social Services for youth detention facilities under construction. We are starting from a different point than the Office of Management and Budget. We are starting after reductions were made for some of the unallocated reductions last year and they are starting with the authorized budget, which had more positions. We would like to get a better handle on positions. Last year's focus on positions surprised us as well as the Office of Management and Budget. Until the legislature gives us more direction on positions when adopting amendments, it is difficult to determine the intent. We enter the reduction into the budget bill, but can enter no effect on the position count. If you want us to keep better track of positions, we need to address the intent during the closeout process. 374 CO-CHAIR PARNELL The budget subcommittees could specify the dollar amounts and position authorizations during their closeouts. 377 MR. TEAL We've never paid that much attention to them because the executive branch has the flexibility to add positions anyway. However, there is the public perception issue and I think we will all try to pay more attention. 380 SENATOR ADAMS What triggered the increase in the number of juvenile facilities positions? 384 MR. TEAL The information is in the back of the handout organized by department and also in the detail budget books. 386 CO-CHAIR PARNELL There were 54 new positions added for the Mat-Su, Ketchikan and one other youth detention facilities. 389 SENATOR ADAMS These are needed positions that we appropriated and that meet a service we provide. 392 MR. TEAL All in all there were no technical problems in getting the governor's budget proposal ready. The Division of Legislative Finance is ready for the budget subcommittees' work to begin. 395 SENATOR ADAMS Before we start criticizing the governor's budget, we should wait until we have gone through the process of establishing our own budget. We may have to add our own smoke and mirrors. 401 CO-CHAIR PARNELL 402 Adjourn 9:29 AM SENATE FINANCE COMMITTEE LOG NOTES 1/13/00 Page 10