All in the Senate's Finance Committee, the order today is January the 28th.
We're in state capital, Senate Finance, room, a few minutes after 9 a.m.
We have full contingent of finance members.
Senator Stedman, Senator Olsen, senator Keel,
Senator Merrick,
Senator Kauffman and Senator Crock.
Today's agenda.
We have an overview of the Governor's FY27 budget from a legislative finance division.
So we're going to be hearing the presentation from Alexi Painter Esquire from the director from Peace Come Forward and proceed with your presentation.
So before we go into FY27 as the title says we're going to start with a recap of FY26 and
A little bit of fy25 even get into the fall revenue forecast then the fY27 governor's budget and just briefly touch on the long-term view
So to recap last session
Obviously everybody around this table is here last year, but be helpful for the public
When the legislature adjourned last year, we had a projected deficit in FY 25,
the supplemental year that year estimated to be 192.8 million.
And then in FY26,
we have a protected surplus of 56.6 million based on the spring revenue forecast of $68 oil.
The vote to fill the FY25 deficit from the CBR failed, that left the deficit.
coming in the legislature's budget first up to 100 million dollars from ADA's
reserves funds, the Alaska Industrial Development Export Authority, and then the
remaining amount would come from the Higher Education Investment Fund. And the
legislature did not set a source if there was an FY26 deficit if oil prices
went down, which has been common in recent years.
The legislature working through the budget, recognizing the constrained revenue environment
last year, the legislature accepted about half of the governor's recommended requested increments,
43 million out of 80 million. The legislator added $44.5 million of increases that were
not proposed by the Governor and then made $34 million in reductions to the adjusted base.
the budget was a little bit below the governor's request,
which is contrary to recent trends
where the legislature is added.
In this case, because of the constrained revenue,
the Legislature had actually reduced the
budget below his request.
The legislature's budget fully funded the K-12 formula including the fiscal note to the legislation that increased the formula and then most
statewide items were also funded at their statutory levels the exception to that was school debt reimbursement the legislature funded about 75%
And then the community assistance fund capitalization was an amount that
Was enough to pay a $20 million distribution to communities
that program at the full amount would be 30 million dollars to the communities.
At the 20 million dollar level it can essentially pay the base payments to communities but not
the per capita payments that go out above that.
The legislature funded both the fire suppression fund and the disaster relief fund at their
five-year average of expenditures. So there's no statutory formula for either of those,
but the legislature tried to find a formula that would try to meet anticipated costs.
Senator Steadman. Mr. Chairman, can we have ledge finance come back with us with the 10-year average yesterday?
The 10 year average is brought up by the administration
It's what they like to use as a target to see the Delta between the five year and the ten year, and maybe a
You know roll forward for next year so we can contemplate that in our discussions. Yes, mr. Painter. Yeah
Happy to do that
I did check the disaster relief fund number and it was about a hundred thousand dollars difference between the five and ten year average because
You get the high of the Anchorage earthquake, but there were a few very low disaster years and there when you extend the windows
So it ends up being very close, But I can check on the fire suppression amount as well
This is a comment so then apparently
The minute the governor's veto last year didn't use a ten-year average
Which they were talking about using
yesterday
Through the chair center said yes for the disaster relief fund last year the governor vetoed
Below that number but this year in his budget he put in an amount equaling the 10-year average
So not nobody did an FY26, but it's his 27 proposal. Thank you, sir. He's continued
so after the legislature adjourned the Governor vetoed portions of the budget as he
has done each year.
So in FY 25, he vetoed $5 million for ASME
and then $62.2 million of reappropriations to DOT for match.
I know that this committee covered the vetoes
quite extensively in hearing yesterday,
so I'm not going to go into this too much,
because I think the committee's been through it
in pretty good depth.
Another thing the governor vetoed
is the deficit-filled language for FY25 from ADA.
That meant that the entire FY-25 deficit
came out of the higher education investment fund instead.
In FY26, the vetoes totaled just over $100 million
from the operating budget and then another $14 million
from capital budget from UGF.
The largest veto is the K-12 foundation formula.
That veto was overridden so that large impact did not occur.
Other vetoes included about 27 million from the fire suppression fund, 10 million
from disaster relief, and then $25 million
from a major maintenance grant fund.
And I'll talk a little bit more about that item in a subsequent slide.
That was showed up as designated general funds.
So in the fiscal summary, but the true impact to that was likely a UGF veto.
So after the override, the enacted FY26 budget had a projected $130 million surplus
However, during session, both the legislature and governor expressed some skepticism about
that $68 oil price.
Prices declined shortly after the spring forecast was released.
And the Legislature tried to reach a lower balancing price, the Senate's target I think
was $64 and the conference committee ended up at $66 or something like that.
And when the governor signed the budget and made his vetoes,
he had an unofficial revenue forecast that reduced that price down to $62, I believe.
But he, even with the veto's, with that unofficial forecast,
the Budget wouldn't balance in FY26 based on the VITOs.
So, you know, it definitely was an unofficial forecast.
If it were official, would've been problematic.
But there was definitely a skepticism about the $68 price.
and indeed the fall forecast that was released in December reduced that projected oil price
down to $65.48 and that's incorporating some higher prices at the beginning of the fiscal year
and then lower price projection for the rest of year. That reduced projected revenue by
just over $180 million. There were other factors in that we wouldn't expect normally that
deductible expenses, reduce production in the forecast, and reduce corporate income tax revenue.
All in all that leaves us with a $130 million surplus is now a projected $51 million deficit before any supplemental appropriations in FY26.
Mr. Chairman, Senator Stateman.
amendments come in here next week or so with a forward projection on oil we can
see where we actually are and then what it would take going forward from February
through June to get an idea of the sensitivity, the delta sensitivity on
that deficit. Yes that would be great.
Happy to do that, Mr. Chairman. I actually had a slide about projections of oil and then Department of Revenue
presented an identical slide basically last week, so I pulled it out, but we can update it with newer futures as well.
So kind of more of the recap from last year, there was some discussion last
year about vacancy rates, and there is a positive trend in hiring where you can see that vacancy rate was declining.
This graph goes from the beginning of FY 25.
through December of last year.
So throughout FY 25 vacancy rates were going down.
This is a permanent full-time PCNs
in the executive branch, excluding any positions
that are not in this state accounting system.
So it's not the entire universe,
it doesn't have the Marine Highway
or some of the state corporations,
doesn' not have to legislature or governor or university.
But this is kind of a bulk of state government
is included in these data.
And you can see a positive trend of hiring going from about 14% vacancy to under 12% by April.
That started to reverse around when the governor announced a hiring freeze in May.
So we see starting in may that vacancy rate creep back upward, getting to 13.5% or so in the fall.
December went down slightly, perhaps we're seeing a reversal of that trend.
You know, you'd expect when there's a hiring freeze
that vacancy rates would go up and that's exactly what we've seen.
One of the things that was discussed last year
was while with all these vacancies
we should be seeing quite a bit of lapsing funds, the general fund,
or to reduce the deficit pull from the higher education fund.
And that was not quite the case as much as perhaps we projected.
And there's a few reasons for that which I'll go into in the next slides.
But one of them is that generally departments are able to use the funds for other purposes,
either within the same appropriation or in case of the departments of family and community services
They can transfer across appropriation lines, so essentially if you have vacancy, you
have money you save in one place, they can transport that in those two departments anywhere
and in other departments within the same appropriation to meet other shortfalls.
And we did see extensive use of that, in both departments, to family community services,
faced a shortfall in the amount that they needed
for pioneer home payment assistance,
which is a formulaia program that's hard to project
because they don't know the makeup of their population.
It's constantly changing.
And they found they need more money
and so they were pulling money from elsewhere
in their agencies.
So you may look and say, well, there's all these vacancies
in office, children's services and other places,
but that didn't lead to lapse.
That led to money being transferred
to fill the holes elsewhere.
And so, the other thing, you know, even beyond that there is some laps, but it ended up going rather than into reducing the deficit into kind of our laps waterfall, which we'll go into this next slide.
So, normally in the budget there's a bit of a waterfall I suppose for what happens to lapsing funds, and historically this has been pretty routine, we don't pull large amounts each year.
This year there were kind of two differences in FY 25.
One was the legislature inserted a different bucket
into that waterfall, the normal,
that one in the middle,
the school major maintenance grant fund.
The legislature anticipating the lapsing funds
hope to capture some of these.
lapsing funds and use them for school major maintenance.
There was backstop language in the capital budget that if
laps were insufficient, then those additional projects would be
made up with unrestricted general funds.
The governor vetoed most of those appropriations.
So I think we had funded the top eight projects.
He vetoed that down to the Top three and vetoed
that UGF back stop above that level because based on how much
laps there was and where it ended up going in
there would not have been enough laps for that total amount.
And one of the big reasons for
that is the amount that went into the Group Health and Life Benefits Fund.
$23 million was utilized in FY 25.
So that fund is essentially part of how Alaska care,
the state health insurance plan for state employees,
the employee portion was a separate pool from the retirees.
They have this lapsing appropriation to try to make up shortfalls in the fund balance.
The intent of that is essentially that you may have extraordinary claims one year.
You may when GLP1s first came on the market, for example, there was a really spike in cost
of pharmaceuticals because those were very expensive and a lot of people went on to those
medications.
And so that caused a spike and cost.
That wasn't anticipated when they set the rate, so they pull from this lapsing appropriation
that's the amount needed to hit their target reserve levels.
In the last few years, we've seen that the rates selected by the Department of Administration
have not met the full actuarial expected value, and they're actually relying on that
lapse.
And the legislature saw that last year and included intent language for the administration
and not rely on the lapse.
And I believe the staff has distributed the intent response
to that.
The department did not do that, they instead kept,
they raised the rate by 6.4% for employers,
that's the same increase that they'd done the previous year
and was not the full actuarial amount needed,
and instead increased the rates more on employees.
So employees of Alaska Care in between I think
11 to 16 percent more. I don't have the intent in front of me, but it's in there. The amount, additional
amount they're paying. It's okay. And pass the sentence now. But so employees are paying more,
but even still, we're relying more heavily on that lapse. So they are projecting that going forward
there are no significant policy changes,
we could be using $27 to $50 million a year
of that lapsing appropriation.
We did not have $20 million,
we did have 50 million of lapsed appropriations this year.
So, that's not sustainable.
Intent language didn't really have
its intended effect, I suppose,
because they didn' change the action.
And I'm bringing up now,
this is something that normally would be
kind of buried in the overview as a few paragraphs but I'm bringing it up more because we were
trying to rely on that lapse and we're getting to the point where it's potentially not sustainable.
The solution to it is to increase the Alaska care rate significantly which would increase
the budget and you know so to those of you who are setting the Budget if we did increase
the Alaskan care Rate to get rid of that 27 to 50 million that would mean the
The positive of that is that the fund sources
that Alaska Care Contcharges are a bunch of fund
sources, every fund source that's
used for personal services.
When we're using LAPS funds, essentially,
that would have gone into school major maintenance
or would've not come out of the higher education fund.
So there's definitely a difference in the flavor
of those funds between having it in
the Alaska care rate versus relying on LAPS.
And even with that 23.1 million, they still had an unmet need and carried forward some of that need 1.6 million into FY26 which will increase the amount of laps they'll need in FY 26.
Mr. Steadman.
So to make the budget as transparent as possible not only for the legislature but for public, because it's the public purse.
not rely on this lapse, but we should actually
appropriate
the funds needed
to deal with the with issue in hand and then
Take that that lapse money into the CBR's out. So that would flow
Through the chair, it's assuming. It's a deficit through the Chair Center said when yes
I mean if assuming an FY 26 the deficit's filled by the CBR then
That would reduce the CBR draw, essentially.
I think we need to give that a lot of thought at this table,
but $50 million is a large sum for the budget.
Good accent.
Just a segment.
I'm thinking this might be a tough pill to swallow.
But does it change our cash flow?
Is it a real increase in the overall budget?
Or is that 50 million just spread out in other areas?
So a mask, what's actually going on underneath the covers?
Through the Chair, Senator Sedman.
So if we did pull it,
if you did increase the Alaska care rate,
you'd see that spreadout across all agencies every most.
There's some unions that have health trust,
but a lot of bargain units use Alaska Care.
So you see it pretty much all over the budget.
When it comes out of lapse, it does get hidden because lapse is duplicated funding
because we've already appropriated the funding to the agencies.
We don't count it again.
So you see that estimate for the amount they're going to use is in the budget as, you know,
a duplicative fund source because, we donít count again,
so it definitely gets hidden in a way theyíre financing it now.
Is it interesting?
Well, if Iím interpreting that correctly,
itís in an overall budget stays level.
It's just
It just shows that the Alaska
Cares more expensive than the other items where the money would lapse it will decrease so our total number should
Be fairly level. It. Just we've got to see this
50 million dollar bump on the right hand where The Left Hand actually goes down 50 millions through the chair center sub
I that would be the hope. Yeah, I'm so the
The budget is submitted by the governor uses an estimate that does not match what the actual projection is
They have a ten million dollar estimate on it, but for FY26 the or the 27 that you were appropriating now
They're projecting between 18 and I think 25 million so, you know
Even this year where it's not quite as big as what they project by FY30
the estimate in the governor's budget is not the full actual estimate so like we'd recommend
increasing that estimate and the budget to the actual estimates but in theory yes you'd see it
moving from an estimate there to just increases in operating budget so can you explain to
the committee if the Governor gets the Budget we increase it and The Governor
gets a Budget and he vetoes that number down what's the impact of that?
So, Mr. Chairman, you can kind of see an impact with what happened in the University
of Alaska's health insurance system.
They do not have laps that goes in, but they also self-insure.
And last year in The Budget, they had an increase, a one-time increase to their health
insurance to make up past claim payments because they experienced the exact same thing as Alaska
care that, GLP ones and other things cause health
insurance costs to rise faster.
After the fact increased rates to make up that whole and so you know if we don't make it up through some other method
You would just see something like what happened in the university where it just comes into the current budget as as yet another increase
An even larger increase so they had a major increase their health insurance costs both to
You know go up to the true cost, but also to makeup that past hole
Questions senator keel. Thank you, mr. Chairman, so mister painter it
I'm struggling with the same thing Senator Steadman was it it sounds like it's not in fact
Just taking it out of one pocket and putting it in the other
Especially when you talk about the the variety of fun sources
If we spread it across the budget versus
Pretty much all UGF or general funds anyway if we do it at a lapse
We have some experience with this I think with the way we handled some retirement payments when we spread those
Is there the potential that there's some of those fund sources can actually draw down more?
From federal funding from grant funding. I know that some those are capped, right? And that you just have to reshuffle a
grant deck if an administrative cost goes up, but
Are some of those, is there the possibility to draw down additional dollars?
Through the Chair, Senator Keel, generally yes.
You do get to a point, as you said, there were some that were capped and
some they're relying on a fixed amount of program receipts, for example.
So it may show up as program recedes, but those program
receds would have otherwise lapsed.
the general fund is UGF revenue, so it really is not new money.
But in other cases, yeah, we can charge the federal government the true cost or if there's
something that's paid by a third party and we could increase the cost to the full cost,
or the billing to full costs.
PERS payments, as you referenced with SB 55 a number of years ago, that there was a net savings to the general fund.
I think it was about half of the funding roughly was able to be saved.
There were some short term adjustments to make sure that the fund sources could catch up, but
I don't think over time you do save about a half the cost by spreading it to other fund services.
Thank you.
Senator Keel, thank you, Senator Kiel.
The questions on this topic, please proceed.
So, as I mentioned before, you know, another issue with why we don't see as much laps
as expected is, in some cases, there's actually overspending of appropriations.
So Department of Family and Community Services, I've mentioned as one that had transferred
And even with all their transfer authority,
I think that's $7.5 million to transfer
authority in FY 25, that may be the current year.
I'm not sure if they're different.
But even that, they were not able to get enough general funds
in and they ended up overspending that appropriation
by seven-tenths of a million dollars.
The Department of Corrections has also over spent
its appropriations each of the last two years,
legislative audit identified.
FY24 is part of the single audit, $8 million of spending
beyond the appropriations, and FY25,
based on preliminary pre-audit numbers,
it appears that they overspend by 12.6 million.
A lot of this is being driven by over time from past years
that get paid out,
and with the department not responsible for payroll,
they've had trouble projecting that.
That happening two years in a row is a little more concerning
the issue had been identified before and persisted.
But that's been a significant issue in that department.
Those are not small amounts of money to overspend.
We're expecting that these amounts
will come to the legislature's ratification request,
potentially in the governor's supplemental bill next week
or potentially a little later
if it takes longer to get through the paperwork.
I would expect the 25 amounts to wait till the audit
to finalize the numbers.
Questions?
Senator Keel.
Mr. Chairman, a mistake can happen.
But multi-year overspending of an appropriation by millions
is not just an oops.
As I recall, couple of years ago,
a school district over spent an appropriations,
and the ramifications continue to echo today.
I know the governor vilified that school district in one of his press conference.
You're saying it's happened multiple times in the executive branch?
Through the chair, Senator Keel, yes.
That's deeply concerning.
If memory serves the municipality with that School District,
later had to put a municipal, an accountant from City Hall down in
the district budget office to make sure that nonsense didn't happen again.
What safety steps do we have to make sure doesn't happen again?
Through the chair senator keel, I I can't answer that question
I'll note that you know the legislative audit list of this is one of their top audit issues of FY 24 and
You know I expect given that that persisted in FY 25. That's the out of there working on it
It'll be another top issue and they may have more specific suggestions because they're more familiar with the accounting side
when you have a department like
corrections
It's a must have and there are some management decisions that management makes that are increasing
these costs that at this time I think beyond the control of the committee but we may have
that we have is ratification and if we don't ratify it just becomes an odd exception in the audit.
So if there are ways to address this we should discuss it.
One concept that has been utilized in
ship the inmates out of state, at a substantially reduced rate, that is not preferable, but
that was one solution that utilized in the past.
I guess, Mr. Chairman, my concern isn't for, in this context, isn�t about which policy
choice we as a legislature choose to fund.
It�s about whether the executive branch or state government sticks within their funding
Over the appropriated amount it wasn't acceptable at a school district as the governor made crystal clear and it's not acceptable in any administration
Please proceed
I'll make one one comment on this slide before I move on is that the reason we're able to see the overspending an FY 25 as a
Result of a change in reporting by the office of management and budget to more clearly identify
current year over spending previously it is
didn't see the FY24 overspending in DOC until the audit.
Now we're able to see it based on preliminary actuals.
And I appreciate the change they did to add transparency
because it makes it a lot more visible to legislature
when we were working on the current year budget
rather than finding it out after the fact.
So I do appreciate that from OMB.
So moving on to the governor's supplemental budget,
he has not actually
Submitted his supplemental budget itself, but he included supplemental appropriations in both his operating and capital bills
Those amounts total
239.8 million dollars of unrestricted general funds the largest items are
Just short of 70 million for capital match to DOT and again the committee has already gone through that
So I'll go much more into that
$40 million of unrestricted general funds for the disaster relief fund.
I'm not sure if that's the right number or not, I will say.
Looking at the fund tracking of that particular fund,
we're at a negative balance now that would bring us to a positive balance,
but that may not be quite enough with projected costs from disasters that have not yet occurred.
currently pending payments, become actual payments.
Whether that'll actually be sufficient
to get through FY26 or not.
But I don't have more information about
what the true number might look like
or how much, it's kind of a policy choice
to decide how many room you want to leave
for future disasters, for example.
And I would just encourage you to look
at whether $40 million is the right number or no.
And then the governor also has nearly $130 million of a direct draw from the CBR
to the higher education fund to repay the estimated F.25 deficit draw.
So when we adjourned that number was estimated, or after the vetoes,
we, that deficit was estimate to be just shy of $190 million.
administration transferred 129.6 million. The reduction is due to revenue coming in a little
bit higher than the forecast for FY 25. As I said, no lapse went back to the higher education fund
to reduce that. So it really was just the high revenue.
The governor's supplemental requests don't actually include yet 55 million for fire suppression,
but that is included in the governor fiscal summary because there were two disasters
Through the constitutional budget reserve I would note that when we get the supplemental bill next week
There are additional supplemental items we would expect the largest of these that we expect there may be more but
That we know about is 36.4 million dollars for Medicaid
Medicaid projections the last few years with the timing of that is difficult
for the administration to build into their December budget
because as they're going through budget development,
they don't have many actual check rights as
they call it where they are actually making the payments
to make their projections based on the current year.
So they have been submitting their projected Medicaid costs
for current and upcoming fiscal year in mid-December,
but in this case, it was four days after
the governor's budget came out,
so they didn't actually have to incorporate that
in the budget.
And so in both FY26 and 27 were anticipating additional amounts
for Medicaid based on that December 15th projection
that was, I believe delivered to this whole committee,
maybe just the co-chairs, but was part of an intent response.
So I guess I went through there.
But they're anticipating 36.4 million of UGF for Medicare
as well as I believed about $400 million
of federal receipts.
So significant amount of additional federal recedes.
Part of that is based on FY26 has one more week
of check rights than most weeks.
And so when the projection was made last year,
they didn't account for that additional week.
That's mostly showing up in the federal amount.
And, so the Federal amount is higher
than the Fed will need for FY27 based
on mostly that addition week,
but the FEDERAL amount it's still going up as well.
It's not like Medicaid's going
up just because the general fund is going
up, both are going in tandem.
Questions
This is might be a little off the wall
So we've got an ratification issue that we talked about here
which would be
Basically blessing the previous fiscal years already spent monies that weren't appropriated
We also have a system in place
That has a waterfall for meeting expenditures if for cash flows under severe strain
They borrow from the CBR
They eventually go to the earnings reserve and
Meet their cash flow
So if we don't
Do a three-quarter vote to fill the FY26 budget or any given year this will be over a two-year cycle we?
Don't do that
We just leave
The money's already been spent
The cash flow needs have to be met if they can't go to the CBR they go the
Permanent fund earnings reserve
We come back in January and we're asked for a ratification
That the permanent funds just been looted
Doesn't sound like a good outcome to me, but I think we have the mechanisms in place to do just that
And that is of a concern
Through the chair center said when you know one one comment I'll make is that
there there is a
procedure in statute for
The governor to withhold expenditures and it's called impoundment
But that was found to be unconstitutional and there's not a newer procedure now, so
We'd be in interesting legal waters if the governor decides to go through that process
But the the process as it was in the 1980s when it
Was last kind of litigated I don't think it's been replaced by one that the courts have blessed
So if The governor does decide to meet a deficit by withholding expenditures, you know, the legality of that could be challenged
That would be where the ratification would come to
Right
The point I'm trying to make is
For him to do impound money. He has to it before the end of the fiscal year
You probably have to start you know sometime in March or April or you he's got to cut the budget by that amount of dollars
But if he doesn't and he just spends the money
We're constitutionally obligated to balance the Budget
Cash flows get payroll is going to be met come hell or high water money's coming from somewhere and there is a cascading of
mechanism in place to meet those cash needs I could see where we could be put
in a position where that money's just spent and if it doesn't come out of the
CBR comes out in the rings reserve and then they just then it comes down to
having the footnote on the financial statements that we breached our
constitutional duty and get around that you ratify it so I think we need to
Close that door, Mr. Chairman.
It's also a crime.
Mr Chairman, I was just quietly murmuring to the Senator next to me that
there used to be a publication called the Alaska Budget Report
and when our ratification request would come in they would angrily point out that there is a criminal statute.
It is crime to spend money without an appropriation.
I don't believe anybody's been prosecuted, but if we're not going to go to that extent, we'd better figure something else out.
Or else the scenario Senator Stedman suggests, could just as easily happen.
That's in the practice for decades, which is the problem,
but it's money is tight and these are different times, I believe so.
Further dialogue on this topic?
Okay to revenue. So the fall revenue forecast came out in December. It showed
Lower oil prices in both FY26 and 27 than the previous forecast it showed lower production in FY 26
But higher production FY27
lease expenditures, which are the costs of
Actually doing the work on the North Slope by the companies are deducted in the production tax calculation
but only down to the
4% gross minimum floor, and those lease expenditures are up significantly in both years, but not
all of that actually comes against our production tax this year because the combination of the
higher expenditures and the lower price means that as a whole, companies are paying the
floor amount.
Some are actually paying below the floor because there's an ability for the gross value reduction
It's called Pierce to the Floor, and so if you look at the Department of Revenue's forecast,
they have a production tax calculation that includes the minimum calculation,
and then the actual calculation and the actually calculations below the
minimum tax.
There's also a reduction in the petroleum corporate income tax, a pretty significant
one.
That's not necessarily tied to activity just in Alaska, that's tied
to worldwide profitability of those companies, essentially that went down more than we would
expect based on price alone, so the global oil market seeing these same factors of kind
of tightening margins for the companies.
And the overall result of all of this is that there's lower projected revenue in FY26 and 27 and that's more than what the price change alone would suggest.
Generally in this price range we expect something like $25 to $35 million of revenue difference per dollar change in the oil price.
We wouldn't expect that a $250 change would be $180 million in revenue forecast.
That's really due to other factors beyond just price alone.
So, moving on to another revenue topic, the National Petroleum Reserve, Alaska, um,
account, and I'll give some background before going into the current issue.
So federal royalties from leases in the national petroleum reserve of Alaska or NPRA have historically
been split 50-50 between the state and the federal government since they're on federal
land.
There's a federal law that requires that the state give priority to use by subdivisions to the State that are most directly or severely impacted by the
development of oil and gas leaks under this act. So essentially, the communities that
are near NPRA get priority on the use of the
state royalties. That was litigated in the 1980s because the
communities felt that they were not being prioritized. The result of that litigation was the NP-RA impact grant program under statute.
Appropriations to that program were made annually in the capital budget.
The Department of Commerce solicits from the community's project proposals,
and we put in an appropriation of the estimated total revenue, and then they fill that in with projects.
We used to put the actual projects in a bill,
and the grant timing has kind of changed as the revenue has gone up,
or now, generally, we don't know the projects until after we've already appropriated it.
HR1 or the One Big Beautiful Bill Act or OBBBA, I'm going to stick with HR 1 because it's
easier to say than the other ones.
The federal appropriations bill changed the royalty split to 70% for the state and 30%
for federal government for leases issued after July 2025 but didn't change that split until
2034.
FY34 with that though I think there's a little bit of ambiguity about with after
the split or after that split changes do those federal restrictions still apply I
asked leg legal to look at it and they said that they don't see anything in HR
one that changes the right the sharing requirement it leaves that statute it
doesn't restate the rest the the um sharing requirements but it
In their opinion, it appears that it's still in place for all the years with no changes.
And that was a, I requested that in November just anticipating this could become an issue.
And indeed it did.
And when we got this fall revenue forecast in December, the administration changed how they handle.
the NPRA revenues.
So previously they had shown up entirely as federal revenue because they're subject
to federal restrictions.
In the new revenue sources book, they are not classified that way.
Instead, the majority of them are counted as unrestricted general funds.
A portion, 25%, is counted, as permanent fund restricted revenue for the permanent
25% of royalties has to go to the permanent fund and then
an additional half a percent goes to public school trust fund because half of percent of Royalties goes the public schools trust funds and
so there those are counted as restricted revenues and the 9.6 million which represents the
portion that wouldn't go those funds
is unrestricted general funds.
The table on the bottom shows the impact of this year
by year in the forecast.
You can see it's pretty small right now,
but once the Willow field is up and running,
which is in NPRA, that amount goes up significantly.
So by FY33, the unrestricted General Fund amount is
under this would be 200 million
that's showing in The Governor's forecast as UGF,
but that historically it'd been counted as fed.
The governor's capital budget does not include an appropriation of the NPRA impact grant program in the operating budget
Typically, there's language that says any amount of NPR a revenue that's not spent on grants
Goes first to the permanent fund to meet the full 25% then to
Public school trust fund and meet to half a percent anything else goes to a PCE fund, and that is based on statute
We have not actually seen lapsing appropriations
this for a long time. I think I look back and it's been at least 20 years since
any of those grant funds have lapsed. So that language sits in the operating
budget, nothing's really happened with it. It's still in Governor's operating
budget today in his new FY27 budget. And so the result is there's with no
appropriation for the grant program we would project that the entire amount would
go into those three buckets. The governor's fiscal summary, maybe they've
Initially did not count that the 9.6 million was going into the PCE funds their calculated deficit was off by 9 point 6 million in our view
But our fiscal summary treats it differently based on the legislative legal memo
We are treating it all as federal restricted revenue. We're still showing where the governor's putting it, but
based upon the legal advice from our leads our
Legal we're counting it. All this federal revenue and so
When I have a slide in the future a few slides from now that shows like the long-term revenue projection
Our long term revenue
projection counts all of the NPRion revenue is federal based on advice from large legal
So we don't actually match the fall forecast numbers because of their treatment of those funds
Senator statement I think on this you know over the years we have listed them in capital budgets
Numerous times and numerous times they haven't been listed
But as I recall there's a deadline for applying for the grants, which we don't really pay much attention to frankly
Because the budget is well underway
Before we get a list of what the grant's applications were to put in the Budget
So there are some timing issues too
and the Grant funds have been
Varying over the years. Some years there's not much and some years, there is more
But it does get complicated as far as the timing issues, but I don't think we've ever held
Fast the time rules we put the money in the budget and the projects are there they sometimes they get listed and sometimes
They donít
Through the share center said and that's correct in last couple of years at when the revenue amount had gone up a bit
The Department of Commerce had requested a change to the structure of that a little bit
because they actually have two years to get the grants out and so they wanted to make sure
that so, they could get all the grant out that they would potentially have
two different grant applications and, so there were a
little hesitant about listing projects because we'd only maybe list ones from the first grant
round and not the second.
So, it's gotten a bit more complicated with how to put it in the budget the last couple
of years just because of the higher revenue amount but, yeah, we did used to list the projects
when it was a smaller amount.
Thank you. So we talk a lot about oil revenue, but our largest source of
unrestricted general fund revenue is our draw from the permanent fund, so we
should spend at least a little bit of time talking about that. It's more
stable so gets talked about less than small fluctuations in oil prices,
but again it is a large source revenue and investment performance there is
So, the FY26 POMV draw was based on the average fund balances from FY20 through 24.
The FY27 POV will be FY21 through 25.
FY 21 was an exceptional market year.
You can see the value of the permanent fund increased by $16.5 billion.
And so, in the last few years, we've seen that PomV Draw has been growing pretty quickly,
so it's almost $200 million higher in FY 27 than 26.
We can't expect that is going to continue that that was based on incorporating that extraordinary year into the average and
In subsequent years, we're gonna next year
We'll be dropping that eighty one and a half billion dollar year and adding one that's you know based
On where we are somewhere in the mid 80s
So still increase but not nearly as much and so when we
Building the FY 27 budget
I think it's important to recognize that this year we do have two hundred million dollars more revenue from that and
So the picture may not look as
as difficult or as bleak as it could otherwise.
Next year, it won't go up by as much,
and so things will get a lot tighter
if we're just relying on growth from oil instead,
because we won' t have that $200 million to work with.
So as we' re building the budget,
the first step,
We have kind of an iterative budget cycle in Alaska.
We start with last year's budget,
and then we build a clean starting point
called the adjusted base,
and from there you can see the policy changes
that are proposed by the governor.
Historically, that really only applied
to the numbers section.
Starting a couple of years ago,
we worked with the office management budget
to modify that so that we could apply
the adjust to base concept of the entire budget.
And specifically we're trying to look at formula changes because every year you'd see the student count change for the K12 formula
And that showed up as a change in the governor's budget from the previous year
But really it's not a policy change proposed by the Governor the Student Count just goes up or down
We shouldn't give him like credit or blame for student-count changing
You want to clearly see his policy changed
So if he had a proposal to change the amount that went out we'd seen that in gov
but the change and just the
what the existing formula would bring would be an adjusted base.
The idea of that is really just to more clearly distinguish policy changes from other changes
in the budget.
For formula items that we funded a partial amount, or not at all, we use the same formula
from the current year and pull that into the next year.
And the reason for that, is that there's a lot of statutes out there that haven't funded
We have the amount for, you know, the community,
the amounts that give it to communities
for the property tax exemptions
that haven't funded in 30 years.
I don't think the adjusted base would be a useful concept.
So we haven't funded that last year.
It's going to be still zero this year
that applies to the PFD
where last-year we funded the
amount necessary to pay a thousand dollars.
So this- year that would
be the adjust of base,
the-amount necessary
to-pay a-thousand dollars
it's a slightly different number.
because that calculation changes, but we used the same formula.
Another example would be the school debt reimbursement program.
Last to refunded at 75%, so the adjusted base is funding 75%
of the new projection.
And again, that's just so you can see those policy changes more clearly.
So the first thing we do is remove one-time items.
Some of that is actually carry forward of.
multi-year items so when you have a multi year item you bring some of that money into the current year and
That shows up as carried forward revenue in the fiscal summary and then a expenditure
in all this year we have
About 31 and a half million dollars of one-time items that are pulled out and adjusted base
And so before you do anything else if you were comparing year to year you've reduced the budget by 31.6 million
Dollars for those one time items or multi years that we're pulling out
Some of these include some supplementals last year,
the new SNAP projects, for example,
the investments related to the SNAP penalties we made,
some UA research projects.
These actually have been going on for several years,
I think maybe FY23 or so,
that we've been carrying that forward and so forth.
There's a few other smaller items.
And again, this is just our step
to get to our cleaner starting point the next year.
The next item we do is the formula adjustments.
So the largest UGF decrease is that K-12 foundation number.
So there's a projection that the brick and mortar
student count will go down by about 2%.
And then the correspondence students
will grow up by 861.
That partially offsets that, but corresponding students
are funded lower in the formulae than brick
and mortars students, so that doesn't fully offset it.
There's also a projection that local property tax values will increase, so that increases
the required local contribution and offsets the state costs.
The result of that is that to meet the same formula amount as last year, the UGF is projected
to go down by $25.4 million.
Similarly, pupil transportation is protected to down because that's tied to the brick and
mortar students, and as that goes down, school, people transportation number goes
down.
based on paying the same formula the amount goes down as the student count goes
down. School debt reimbursement is projected to go down that program had
been closed for a decade from 2015 through 2025 it reopened last summer but
only one district actually voted on new debt so far it seems like more districts
are looking at targeting this spring or this fall for new
debt projects so at this point we're not seeing a lot of new school debt coming
And so that amount's still going down just based on the projection from the old debt sort of slowly falling off.
There's a significant increase in state contributions to retirement.
I'll probably talk a little bit more about this when we get to the governor's proposal,
but that went up due to a combination of the actuarial changes and the policy changes by the arm board.
Trails the school debt reimbursement so as that goes down, so does REA amount
Community assistance fund we're projecting that ugf amount would need to go up to meet the same formula which the formula
Last year was the amount needed to do a 20 million dollar
Distribution to communities that UGF amount needs to grow up because there's less money available from the PCE fund this year
The last year based on FY 24 market performance, which is how the
statute goes. Then other formula adjustments are pretty minor in UGF.
There's a more significant amount of all funds because of, as I mentioned, that
additional week of Medicaid in FY26 that causes the federal amount to go up. So
all in all, the formula adjustment would increase the budget by $22.3
million of UGF, but decrease them in
all fund because that Medicaid adjustment primarily.
Next item is adding salary and benefits adjustments.
This adds $55 million of UGF and $111 million, $1011.9 million
I should say, of all funds.
And relatively few unions are negotiating right now.
It's five unions across the Executive Branch
and University of Alaska.
These contracts will likely come in future amendments
from the governor.
There's a statutory deadline of day 60 for those to come
in, but it's frequently ignored.
The largest increases we see in the salary and benefits adjustments are increases to health
insurance. This is both the Alaska Care 6.4% I mentioned earlier as well as differences in union
trusts aswell. The increase to the PERS rate as the actual rate goes up, the state as an employer
Judiciary went down slightly, so those offset a little bit.
There's cost of living adjustments for built-in for several unions.
You can see that a lot of those are relatively modest percentages.
A lot them were based this year on inflation.
There were quite a few bargaining units that currently have language
that ties their increase to kind of tiers based on the inflation,
a lotta them hit that 2.5% tier based
on actual inflation last year.
All in all, that's 55 million, but there are those five unions standing, so we'd expect
that to go up a little bit in the future.
But this is all incorporated into the adjusted base, you won't see this in subcommittee.
And those future amounts will do, we'll put into an updated adjusted basis,
so you'll still won t see them in sub-committee.
Senator Stedman.
Thank you, Mr. Chairman.
salary and I think there's a lot of concern with the salary schedule and trying to get it
implemented to make the state more competitive salary wise. But there is also a proposal in
the building from the administration for 1% growth and expenditures. And what I'm kind of curious
about is the percentage of our salaries and benefits relative to overall state spending.
The administration negotiates contracts that far exceed 1 percent
And it doesn't seem to line up very well
So if you could get back mr. Chairman if we could have them get to the committee on what is the percentage of
salaries and benefits relative to our
Offering budget expenditures
So we have some benchmark when we look at a 1% growth rate. It would be very helpful
Adjustments that that come but we also have step issues every year with longevity of employees
so
But it appears that
The trend of just handling our staff across the state exceeds one percent a year
Thank you senator Sidman, mr. Patrick. Can you provide that to the committee? Yes, Mr. Chairman
Further questions seeing none, please proceed
Okay, so getting on to the fiscal summary of the governor's budget
Note noting that our fall revenue forecast makes an adjustment for the NPRA revenues
So I think the trend if you look at the Governor's FY 27 budget is pretty flat numbers and agency operations
statewide items in the capital budget very similar to last year's numbers
And then a large increase in The Perma Fund dividend as he goes to The statutory amount
the
calculation, the estimate by the permit fund corporation is actually a little bit higher
now than when the governor put that forward. So if we updated that, that would actually
go up a bit based on projection that it incorporates FY26 actuals, which have been pretty positive
so far.
So in FY 26, post-tran- the deficit right now we're looking at, I mentioned $51 million.
the $240 million roughly of supplemental so far plus we know about the fire suppression.
That leaves us with about $346 million deficit in FY26 that needs to come from somewhere.
And then we can add to that the Medicaid $34.6 million and then some unknown supplementals.
the legislature made a small error in commerce's budget by $45,000.
They're going to need that $40, $5, 000 to come back.
There's small things like that.
There may be larger items that come
back, but we'll see next year and get a bigger idea of what that actual FY26 deficit will be.
But right now we're projecting that 346 based on what we know now.
FY27, based on the governor's budget, we're projecting a deficit of just over 1.5 billion.
The governor poses to take that out of the CBR, combined these two items would draw just
over half of a CBRs balance.
It's at about 3.3 billion today.
And after projected revenue, in FY26, about $3.4 billion available by the end of year.
Thank you Mr. Chairman I'm just curious on the negative 346 345.9
Can you give us just a rough guess to men of what we might see next week so we don't have a coronary right at the table next
Through the sheriff's senator sediment the biggest item you're going to see is that that medicate item
Fire suppression the average spring cost is something like seven or eight million so, we may see that
We have another SNAP fine based on performance in the current the previous year last I heard I think that's about five million
That's another we could expect
Department of Corrections that said that the
Community residential centers we cut that in conference committee below the amount that they had requested and I
think they are
Running a bit short, but that I'd think about a million or a 1.5 or something based in their projection
So those are the issues we're aware of
There are other things that we're not aware of there always are so
We'll see exactly how big that would come out with I would I
Would guess that will end up somewhere around a $400 million deficit, but
We will know better and that 400 million. I should add does include that
129.6 million to repay the higher ed funds. So if we didn't want to do that
We could reduce that amount by 129 that's showing up as part of the transfers
That's one of the biggest supplementals I think we've seen in history you've been here a lot longer than anybody Mr. Chairman
So you might recall something bigger, but this is colossal numbers even without
Unfortunately
For the legislature it should be noted that these are
The governor's requests and hopefully the Legislature can comply with the governor requests
Please proceed. Okay going on to a couple of visual representations of the governor's budget
This is the what's often called the swoop graph this compares in the red the FY 26 management plan by agency
to the blue which is governor budget
You can see that for most items, they're pretty close, except for the PFD, where the governor
is increasing it to the amount.
We order them from the largest to smallest, so you can sort of see the relative size.
That's not to say in subcommittee you shouldn't care about the, uh, amount for Department
of Commerce and Community and Economic Development, just because it's hard to see in this graph.
But again, to give you a relative idea of if we have one and a half billion dollar deficit.
You know, you'd need to eliminate quite a few of these agencies starting from the right to balance it.
One other little comment on this is that we do have the Department of Agriculture on here.
You can't really see it on the graph because it's too small,
but we have it in there because that's in the Governor's budget.
And the amount in FY26 is the division of agriculture just for comparison,
so you can sort of see that on there.
If I recall right, we neglected to thank OMB for putting the PFD on their swoop chart this year.
I think that's finally, they added that, and we should have thanked the OMD director,
we need to remember to do that when she comes back.
But there's this other little department up there, not really department,
they're called capital, that is not the capital building.
I expect that to be the capitol budget.
and is there some statutory guidance on what size
or constitutional guidance, on which size
the capital budget should be relative
to the operating budget?
Through the Chair of Senator Seidman.
So in the, as you're aware,
the constitutional spending limit reserves one third
of the spending limits for the Capital Budget.
We spend about half of a limit right now,
so the Operating Budget is in no danger
of getting to two thirds of
the limit by itself, but that suggests
when that was established the legislature had in mind that we would spend a third of
our available revenue on capital. I think we're at about let's see 5% is that that may be higher
maybe lower than that actually. Not going to do math at the table.
I said that last year and I'm sick with it.
Mr. Chairman, it seems as though you're not following the Constitution.
Mr Chairman I'm doing my best but the operating budget gets fed first and we have to make
payroll and so it is a concern when we look at our deferred maintenance.
We've got to get that dealt with and then hopefully you get on the building infrastructure
how compressed the capital budget is but you know you've got to make payroll
first that's before dividends before the capitol budget before anything so I
think just wanted to point that out mr. Chairman that we need to we
need try to fix that eventually over the next few years since this governor likes
to follow the
letter of the law and the dividend
he should also be supporting
moving north on the capital budget and
Possibly consider not vetoing any of The capital Budget because it's not even close to
addressing the Constitution
Please proceed okay, so here's another visual the governor's budget
This one shows essentially where the money's coming from on the left.
There are buckets of UGF revenue and then on
the right where it goes.
So our largest source of revenue in FY27 is the POM V draw,
nearly $4 billion.
The next largest sources in the governor's budget is a deficit draw from the CBR of
$1.5 billion that's greater than the amount of petroleum revenue we project of $2.4
billion, I think this can be useful for those who aren't.
Super familiar with the budget just to see the relative size of our revenue sources
You know there's a lot to talk about well, you're taxing marijuana so much shouldn't that solve the deficit?
Well that goes into you know a portion of this non petroleum revenue here. It's very small portion. Of that
You, know the vast majority or the largest chunk by far is POMB and then petroleum revenues still are next largest source of ongoing revenue
And where that goes in the governor's budget,
the largest place that it goes is agency operations.
That's the day-to-day cost of state government,
including the K-12 formula spent by school districts.
The statewide items are things that don't necessarily
fit into agency budgets like debt service,
but are still operating items.
We have a very small capital budget as we'll talk about,
and then the PFT is the second largest item
in a governor s budget after the agency operation.
So, turnings agency operations, the governor's agency
operations are slightly above the adjusted base,
less than, you know, a fraction of 1%.
The governor budget right now reduces Medicaid by $10 million
because there was an FY26 through 27 temporary increment
for behavioral health rates, and he's terminating that
a year early.
As we'll talk about on a subsequent slide,
we'd expect the Medicaid budget will grow in amendments.
In DOT, the governor added $6.5 million to replace one-time fund sources used in the
FY26 budget.
We're expecting a government that will grow a little bit because one of the uses of one
time fund source was inadvertently not reversed in a governor's budget, so when we get government,
we'll assume that'll probably go up to $7.9 million.
The next largest change is UGF to Replace for Sort of Justice funds.
deductions from the PFD for felons.
Felons are not eligible to get their PFT.
And instead it goes to state agencies.
And some agencies, it just offsets general funds.
So when the PFD goes down essentially with a one-year lag,
we have to replace those with unrestricted general
funds, we see that $5.2 million across agencies
and then another fairly significant item
is the IT class study, which we
see across all agencies that's a study that
initiated I think back in FY 20 in this complete or nearly complete there's
still just a draft out there that's not yet public. The administration is
including 1.9 million dollars of UGF and then just I have 8 million of all
funds for that.
The amounts in the governor's budget are based on the draft study they may be
updated when we get a final study. It also is only for classified employees. We
Employees who are not part of a bargaining unit will also need to see increases because for example
the IT staff and our legislative branch and the executive branch or in the governor's office and
the judiciary
They have the same job classes and same duties as these other positions and to be competitive will likely see
increases there also the state corporations are
Not included so the final cost that study will lightly go up once all of those are included
But that may not be until next year when the study is finalized
When state-wide items the amount the governor's budget is
14 and a half million dollars below adjusted base
It's above last year, but below adjust to base the biggest reason is below the adjusted basis that the Governor's not fully fund the arm boards
Recommended contribution to our retirement systems his amount is 37 0.7 million dollar below with the armboard recommended
if you
In the arm boards discussions this year, they had a few different policy options for how
to amortize the debt, and the governor selected the one that corresponds to what they
had done, I think, two years ago, not last year this
year.
And that results in a lower payment.
The governor's budget does fully fund for the state as an employer the actuarial amount
on behalf of other employers.
So he's picking different numbers
between the two areas.
And-
Senator Stademan.
I'm forgetting what that's like.
Yes.
So on the reduction to the, on
behalf, of which is all our communities
and some hospitals and
some nonprofits in there and whoever
else is in our system.
When we short fund that unfunded
liability, which extends its life.
That burden then is held or split between the state and the communities or the community
Gets it all or state gets it off
Through the chair center said when so in this particular case the arm board had
Wanted to use a payment plan for the post 2014
New liabilities due to actuarial under performance that would have paid them off within 15 years of when they began
Because they were really targeting that by FY 39
Which was the original 25-year target that we'd have everything paid off
So if we take everything sense FY 14 and say that needs to be paid out within
15 Years generally we're still targeting around FY39 or before to pay off all those existing liabilities the governor
went to a funding method that would stretch those out 25 years instead of 15 and so they
would strech out some of them past that FY39 period and that does mean that some
of those costs would be shifted onto municipalities because if we do pay off all those liabilities
by FY 39 for per's in particular the actuarial recommendation will fall below the 22% employer
And so they, if we push those payments out,
they will continue to pay more after that.
Otherwise, they would face,
they receive a big reduction in their purge payments
starting at FY 39, or starting in FY 40,
but by pushing them out it essentially
keeps them paying more longer.
It's interesting.
Roughly, and this is last year's numbers,
but roughly about 13% of that, 22%,
And that's 22% is the aggregate payroll at City Hall.
We'll just use City Halls representative for all members in the retirements system, not counting the state.
So 13% of the aggregate payroll goes to the unfunded liability.
That is significant financial impact on our communities.
So that that is a concern in and of itself because it falls back to
the property tax payer or sales tax.
The other thing, I think that Mr. Chairman, we should have a view at some point coming
up, is the escalation in the contribution rate going forward.
As I recall, the ex-escalation rate on behalf increases quite substantially over the next
decade.
And I've asked for, think the last numbers we had were 22 or 23, have asked an update
And I think we should take a look at that because that falls into upcoming budgets in
the cash flow.
But we're talking, could be, you know, 50 to 100 million increase, significant.
And but it ladders up slowly over time.
But it continually increases, and my concern is we won't meet those obligations because
of other budget constraints, capital budget, payroll, ongoing payroll.
lower them and then all that does is stretch out that payment some more and
continue the burden and it's not a there is no easy answer here but I think we
we need to have a clear view of what we're actually dealing with and this is
not out discussion of the retirement system replacement good or bad or or
whatever this just dealing what the debt that we have on the table that
And I think when the arm board comes before us and Kallen talk about returns and status,
we need to have that laid out.
What we're looking at between now and in 2040 is when I saw those escalated payments,
I don't know how we are going to meet them, other than stretch out the amortization into
Thank you for that wonderful
Please proceed
Mr. Chairman one thing I'll say is that the arm board has been
Trying to grapple with the exact same issues here and there was there's been quite a bit of discussion that
The armboard has had about the concern that we're not
Making we are not paying the liability off fast enough and part of that is
That when they did when we switched in 2014 to that new 25-year amortization
We also switched to level percent of payroll instead of level dollars.
So basically projecting out 25 years what state payrolls will be.
Well right after we did that, revenue crashed.
And so payroll's did not increase at the rate that the arm board had projected in 2014 when
oil prices were 100-something dollars a barrel.
And they've adjusted those payroll numbers downward, but it did mean that we were not
Making is big of payments because of project they were anticipating payroll would grow faster than it really did
And they've been doing a very good job in my opinion of looking at that
Critically and adjusting those numbers each year to try to match the actual trends
But that does mean that we're kind of playing catch-up a bit that
We've since 2014 we've put a lot of money into the fun, but it hasn't really reduced the liability
Because in part our payroll is just not growing as fast and so that
Level percent of payroll is not quite working. I think the way it was anticipated when
Oil was much higher than it has been
Also, I guess I was only one bullet down on the slide
So I'll keep going on this slide the governor's fully funding school debt reimbursement and the REA fund to their statutory amount
The governor has fourteen million dollars from PCE fund two community assistance and no UGF
because there's
right now a
I've reduced amount in the fund it would lead to an 18 million dollar payment to communities in FY 28
That's not enough to make the full base payments those base payment should be prorated under the governor's proposal
The governor has 47 and a half million dollars for fire suppression that matches the post veto pre supple
Excuse me supplemental total this year and then 24 million to the disaster relief fund
Which is above 11 million?
above the FY 26 total
And as the OMB director said is based on a 10 year average, so that one, you know
I think we're in lunch finance
I'm happy that they're using an average and trying to get towards a more kind of systematic approach to that
Fire suppression. They're still under the the average spend for that
Going on to the capital budget there's not much going on in there. It's a very small capital. Budget
In terms of UGF, $156.6 million, the vast majority of that is general fund match.
So about 81% of the UGF in the capital budget is being used to match federal funding.
The next largest item after that, is the Alaska Housing and Finance Corporation's own projects.
They had a very healthy dividend this year, it was their largest in, I think, a couple
of decades.
$22.9 million of that on HFC projects that's a bit under $6 million less than the HBC board
recommended. The governor has about $2 million in general fundamental health.
funding in the mental health capital budget that's compared to about six and a half million
dollars from the Mental Health Trust recommendation.
And the governor has just two UGF projects other than that, both in The Department of
Fish and Game, and both are continuations of projects that were begun in previous years.
There's no funding for school construction or major maintenance.
And for deferred maintenance of state facilities, there's just the statutorily designated amount
To give you a comparison of what $26 million gets you between the university and the rest
of the state of Alaska and FY24, it was estimated that we have $14.6 billion of facilities.
So if we wanted to spend 2% of that value on deferred maintenance, that would be $292
million.
We have about 10% that.
I would say that's not quite sufficient to keep up with the needs of state facilities.
This is the 12th straight year that the budget would include less than what's needed to hit
that 2% or even 1% target.
And on school construction major maintenance, there's a report that Department of Education
values of the school facilities it recommended last year and the new reports coming out I think in the next week or so but
based on the previous year
Based on about ten billion dollars of school
Facilities they recommended because we've underfunded that for a while three percent value of that
That's another three hundred million. There's zero dollars for that
There is the funding in this school debt reimbursement program and then REA fund that can go to that as well
But none in a capital budget
school districts can bond for some of it,
they can get up to some that amount
and then that would eventually get money into the REA fund.
But again, we're not funding those on a sustainable level.
I don't think anybody would argue that we are.
Yeah, I'll talk more about that
when it gets the long-term picture,
but it's a very slim capital budget,
I leave it that for now.
I think the Chairman of the Capital Budget
would totally agree.
Another thing that's notable is what's not yet in the budget if you look at the last
Five years six years, I guess the governor's amended budget on average is about a hundred million dollars higher than his December release
That varies year to year, but that includes those bargaining units. We haven't gotten for example this year that'll include Medicaid
So the Governor's budget doesn't have that projected amount because it came out a few days after his budget released for the need for FY 27 their projection
As of December 15th is that they'll need an additional $47.4 million of UGF.
That's just for the current rates that their charging and for
the currently projections.
The Department of Health did four rate rebalancing studies that have been released.
You can find them on their website.
They're fascinating reading if you want to read 100 pages of.
of, uh, thick with numbers, but they're actually very interesting for people like me, I suppose.
They, they recommend that essentially we rebuild our rates from the bottom up.
So a lot of these,
uh...
Medicaid rates, we have pretty blunt tools right now if we notice that one of the rates is not sufficient to me to service
We have to raise a whole class of rates
And so there's certain services that have rates that are just
Structurally too low an example they use in one the studies is autism services
Our rates are too. Low for providers and as a result those services are under provided in Alaska
But right. Now the only mechanism to increase those would be to
Increase all behavior of health rates. That's not necessarily desirable because some are sufficient for the services
So these they engage with the contractor who looked at the rates kind of just looking at each individual service and made
Recommendations for rebalancing those if you were to implement these
increases
They would recommend probably doing it over the course of several years, but
It would cost tens of millions more. Let's just say for the first year depending on how you do it in general funds
That's not in the governor's budget at all at this point
It's unclear if it'll come in amendments or not
But I think when the legislature's looking at the Medicaid budget you may want to look at whether it's worth it to
try to
Rebalance the rates because the policy benefit of funding these certain services better is worth the cost or naught
Again, it's not in the governor's budget now, but these studies are out there, and I'd encourage the legislature to look at that
more critically as an item to potentially include above the Governor's Budget.
As I mentioned, there's ongoing bargaining negotiations. There's a couple other items that are not on the government's
budget. Now the biggest one that is on this slide is the SNAP administrative cost match. So as part of HR-1,
there were a few changes to the
SNAP program.
One of them that is going to hit in the federal fiscal year 27 is increasing the state's administrative share
Cost share for that program right now. We pay 25% of the administrative costs of SNAP
That'll go up to 50% in federal fiscally or 27
There's nothing in The governor's budget to reflect that at this point in
The fall there was a white paper by the department that and that
Projected that would be 10.7 million in addition
It's hard to quantify this, but
the
There are additional requirements in HR one on the state we go from having to certify Medicaid
Eligibility once a year to twice a Year we have new work requirements a lot of which people in Alaska are going to be exempt from they still need to process those exemptions
We would anticipate that this would increase their workload,
but they don't have any additional requests for more positions or
Ways to fill those positions since we struggle to feel those physicians as well
I'm not sure if that's coming or not and I don't know if the ten point seven million dollars is coming in future governor's amendments
But I would highlight that for the committee. I also highlight another right in this not in the slide because it's fairly small is
in past years we've had unrestricted general funds for
The to meet the states maintenance of effort for TANF the temporary assistance needy
families, there's two Fs though, I'm not sure what the other F is for, program.
That was I think about three million dollars in the last year that it was included, that's
not brought back, it's a language item so it doesn't show up as a one-time item because
it is carried forward but they don't have additional amounts for that year.
I am concerned that they can't meet the federal maintenance of effort and that may have consequences
for the TANF program but that is not addressed in Governor's budget at this point and when
We're they've said we're not sure if that's coming or not
So again, there's there is additional items that may the legislature may need to address that are not there
another one that sounds on the slides at all because I guess no I have it on slide never run I'll wait for that slide so
Regarding the snap administrative cost match
for the general public and for The Committee how does the
administration
Of the SNAP program
be impacted if we do not increase the match from 25% to 50%.
Mr. Chairman, I suppose then there would just not be
enough general funds to pay for those employees.
We have to essentially cut staff because the appropriation
of general fund we have now is only enough
for the 25 percent share.
So-
And the impact would be if you cut the staff,
then that would impact.
the administration of the funds going up to SNAP.
Mr. Sherman, that's correct.
So in addition to these items that are a little more known,
there's some, you know, the known unknowns,
let's call them to use the Donald Rumsfeld typology.
So.
There's some additional items that I want to put on your radar, but it's not quite clear
exactly whether we'll have to address them or not.
But again, I think they should be on the legislature's radar.
One of those is the federal disparity test.
The governor's budget for both FY26 and 27 assumes that we passed the disparity tests.
However, for FY 26, we failed.
That's currently undergoing an appeal.
It's not the first time we've failed and we have appealed in past years we
have been successful in those appeals. It is unclear what the timing will be and
whether we will actually succeed but if we do fail in its appeal
Then the result isn't that we lose that funding, it's that
we can't deduct it.
So essentially the districts that get it would still get
their federal impact aid, but we'd have to then make up the
difference that
we cannot deduct in additional general funds.
The existing appropriation language for the K-12 formula is
the amount necessary, so that'll
be paid out regardless, but it would increase the deficit
in both 26 and 27 if we fail.
So there's no action needed,
but when we see that $345 million deficit for FY26,
that could go up by 78.9 million
if our unsuccessful in our appeal of the disparity test.
If you have CBR language that covers that,
great, no, action-needed,
but again, it should be on your radar.
unclear item all throughout there is the Alaska Marine Highway System. For the
last three years, I think we're on year four now, the state has relied on the
federal transit administration grant.
that typically the grant application comes out in the spring we know by the fall how much we get.
This year we have not yet seen that grant
application for what we're counting on in
the calendar year 26 budget. The calendar
year twenty six AMHS budget relies on nearly 78 million
dollars of federal funds after factoring in backstop.
That grant applications not you have been released
and so the current year that is they're already sailing
is funded right now.
They need the grant for the remaining 42%.
We don't know when that's gonna come out
or even if it will,
we've seen this federal administration delay grants
and not issue them,
and we're just not sure what's going to happen.
And again, it's unusually late at this point.
It was last year, I think it was April or May
that they released it,
and were in January and haven't seen it.
And then in FY27, or...
the governor is proposing to switch to a multi-year appropriation. It relies on 83.3 million
dollars of federal receipts for AMHS and there's no, again, we don't know if that grant application
is going to come out. Even if the grants are awarded for FY26 and 27, when we're looking at
next year's budget FY28, those funds are expiring. There's a new federal transportation bill that's
or at least taken out potentially in September of this year,
it's unclear if that program will be extended or terminated
or modified, so in FY28, we may have a budget hole.
The positive news here is that the capital budget
that was previously appropriated for FY26 was using money
that we'd already been awarded.
We used that principally for...
making up the amount needed for the testimony and replacement vessel, those funds are on
hand. We have those that went out to bid a few days ago, so that is funded. It's the
two years after that for capital budget that are not yet funded,
so potentially 400 million or so are still in limbo because those grant applications haven't
gone out. And then going back to SNAP, in addition to the administrative match, HR1 adds a match
Programmatic funding the timing and the amount of that will depend on our our error rate
So it could be that we do very well. We get
only a low match rate, that would be a $15.4 million cost.
If our rate remains the highest in the country, we'd be looking at $46.2 million estimated FY28.
There is a waiver process for that as well, so it's possible we could delay the implementation.
It's very unknown at this point what that impact will be and when.
But I do think it is worth putting on your radars if you're trying to build a long-term fiscal plan
that some costs will come. It is just unknown exactly where and how much.
So
So moving on to the longer-term view
This this graph goes back to FY 14 because this is sort of our current fiscal era
I would say since oil prices declined in the fall of 2014
through the present and the bars in front are the
the budget's each year, the area in the back is revenue.
The big change occurred in FY19
when the legislature adopted the POMV draw,
that purple, that significantly increased our revenue,
but I do wanna address some of the,
what did we do to deal with the deficits?
The first few years, we reduced the budgets substantially.
The operating budget, as you can see,
went down quite a bit through FY18.
And even still, agency operations are 16.6% below the inflation,
excuse me, inflation adjusted number from FY 15,
which is our peak operating budget year.
So even now, you know, 10 years later or 11 years
later, we are significantly below
the real amount and only 5.5% above the nominal,
which non-inflation adjusted budget from the FY15.
The other thing we've done is reduce the capital budget and the PFD.
We haven't followed that search for a PFD formula since FY16.
Since then, the last decade now they've been set through the appropriations process.
And the Capital Budget throughout this entire period really since FY14
has not fully funded kind of a sustainable amount for deferred maintenance.
You know, it's...
But the analogy that sometimes I've used is it's like if you're trying to tighten your
belt and your family's budget and you skip going to the doctor for a few years, you know,
you can skip the copays for little bit but eventually you might get sicker because you
haven't been taking care of yourself and that's sort of what's happening in the state facilities
in a lot of cases because we haven t been investing in deferred maintenance, the eventual costs
we face go up.
I think there's a temptation to always use this year's budget as your anchor, but I would encourage the legislature to take a more holistic view about what size budget would you need to meet the current size and scope of state government, and that's going to require more investment in capital facilities.
facility footprint we have. If not, a lot of the specialty facilities like pioneer homes
and prisons and things like that are going to need to be replaced eventually. You know,
we're talking briefly about the Department of Corrections. One of their cost drivers
is actually their deferred maintenance backlog that means that at any given time, quite a
few of those cells are unavailable because of deferred-maintenance issues. That means
they can't be as efficient in their use of space, they cannot respond to vacancy or not
to empty beds by closing whole modules necessarily because they need to keep areas open because
of deferred maintenance issues. And again, that's just a symptom of systematically
underfunding deferred payments for 12 years now. But you know, really since FY19, we could say
we've been in what I call the muddle through fiscal plan. We make it through each year.
We roughly balance the budget each here, although as we see in years like FY26,
go down or supplemental is coming high and tweak the prior year but you know the past
five years we've balanced the budget in the current year at least and or in
the year going forward without using savings it's just sometimes in
the supplemental we have to go back and you
know that's good in a way it means we're we are not draining our savings like we
were for a while and as we'll see on the next slide our
But again, we're not necessarily funding things out
in a sustainable way.
And it does lead to substantial uncertainty
from year to year, where oil prices go up.
You get a 50, 50 dividend and an energy relief check.
And then prices goes down.
You got the smallest dividend in inflation-adjusted terms
in the program's history.
That's the uncertainty that you see year
to you as a result of muddling through,
rather than having a comprehensive fiscal plan.
And so you can see that in the next slide in our savings balances, you know, when we were in those
Pre-PMV years we drained our saving balances quite a bit
We went from nearly 16 billion between the CBR and SBR to under 2 billion and FY 20 at the lowest level
We've started to rebuild that we're now up to 3.3 billion as I said, but
That's come at. The price of sort of just setting the budget year by year without a real ongoing plan
This next slide is an
Update of one that we presented last year a concern of the legislature the past few years has been the
Sufficiency of The Earnings Reserve Account to meet our our POM V draw our largest source of revenue
the graph on the bottom shows the on
the left the year and realize P on era balance, so that's the amount of
money sitting in the ERA that's available to spend, the blue shows the following year
POMV. So if you look at it, you could essentially say, on June 30th, how much money is sitting
in ERA, then on July 1st, How much do we need to pull out? And right now, it's actually
looking fairly healthy. We had a pretty good year in FY 25. There was, realized earnings
The forward projections by APFC assume less money coming in than is going out from the
ERA.
And as a result, those two bars are closing the gap there.
Our probabilistic model.
Shows a 33% chance of having an insufficient ERA balance assuming full inflation proofing each year if we suspend the
ERA the inflation-proofing if the ERA
Balance goes below the following year p.m. V draw that goes down to 24% those percentage right
percentages are actually quite a bit better than we showed last year. I think it was like 46% and 30 something percent last
year because of that strong performance 46%, 33% last
year that's stronger than last
year, because the strong
performance this year is still a concern going forward because
of the projection. It's not quite as dire as it
was a year ago because good performance and not
appropriating inflation proofing for a
but it's still a concern that is worth monitoring
year by year.
Going on to the long-term revenue outlook,
again, these are using the adjusted projections
I mentioned that uses the NPRA royalties
showing us federal and using
the Permanent Fund Corporation's
POMV calculations, they adjusted them after the revenue sources book came out, so these
are actually slightly higher than what the RSB showed for P.O.M.V.
Essentially, the way to read this would be there's this bar, there was this dotted line
that shows F427 revenue growth inflation, an actual revenue projection essentially grows
with that each year, despite increased production.
of nearly 25% or maybe just over 25%, as new fields come online.
But the petroleum revenue is not growing as fast as that.
And in fact, the production tax revenue was projected to draw between FY 27 and FY 35.
It's just the royalties grow and the corporate income tax is projected
to grow.
The permanent fund is protected to go at 7.3% per year.
Roughly means that the POMV draw should grow with inflation
beyond that one time bump we got in FY27.
The result of that, all that is that revenue would grow
with inflation. If you can't balance your budget this year,
you're not going to expect unless there's a gas line which is not in the forecast
perhaps, we shouldn't expect that what's in
the forecasts is going save us unless oil prices go up significantly.
There's just not much to see in forecast that would...
make us think that production is going to drive an increase in the revenue.
Going forward.
Senator Stidman.
Is there a barrel production forecasted to go out?
Through the Chair of Center 7, yes, the actual production's projected to
go up from, you know, right now it's just under $500,000 to $660,00 barrels per day by FY35.
That revenue is the new production is coming from new fields and it's offsetting production declines in existing fields that are more profitable.
We were not seeing the projected increase to revenue because of that production taxes are actually projected decrease.
So Mr. Stademan.
Thank you, Mr Chairman.
I think we've asked the Department of Revenue.
Come back to the committee and walk through the order of operations, which is how our tax works, and then to extrapolate out
The the issue here at hand at the gross value reduction for newer barrels
Splitting out the barrels and and splitting out
The different component parts so we have a clear view of of what's in front of us
Senator keel
Mr.. Thank you. Mr. Painter did you say the production increase is expected to be plus a hundred and sixty thousand barrels a day?
Senator Kiel for the chair yes compared to current production
So I won't ask you to do math at the table when I multiply that by the days in a year and
60 bucks a barrel
It's three and a half billion dollars of additional gross value a
year
I understand gross isn't net and all that but when I look at just the oil part of that chart
The split may be off
For the questions on this slide
Seeing none we're looking for this line. Okay. It's dirty. Yes 30th and final
so
You know as I said with the long-term view
You know some years we've done like models of the Governor's 10-year plan
We're not bothering with that because the governor's ten- year plan was replaced with his fiscal plan
That was released just a couple of days ago
Essentially you can look at this year and say well, we have a deficit now
That's kind of persist and that was what the governors 10 year Plan
Represented and as we talked about I think this if we look out at it just from
Flat budget growing with inflate or a budget growth inflation that probably
Understates the true deficit because we're not into we are not accounting for the capital budget needs that at some point
We are going to have to make up
The governor's proposed revenue measures were issued, you know, released just on Monday
So we haven't had time to analyze them in this presentation
But if the committee wants us to look at those in the future we could but again
We didn't really have time do that in advance of this particular presentation
We'll get back with you after
The committee discusses internally
Mr.. That is all I have for this presentation does
Members of the committee have any questions or comments
Senator Kaufman. Thank you
Through the chair, mr. Painter. I'm
In personal finance you often, you know see probabilistic modeling
Monte Carlo projections of likelihood of funding over a period of time
it is there
Is there a product out there right now like that?
That takes in the the likely assumptions of revenue the projected assumptions have cost at base line and projects it out in any sort of
You know very graphic
presentation of likelihood to succeed
Through the chair of Son of a conference, so we do have a probabilistic model that incorporates volatility and investment revenue and oil
production and price. And we're happy to present on that. You can see in that, you
know, it's hard when you model something that has a built-in deficit. It's very
unlikely that it is going to succeed, but it can be useful for evaluating a
fiscal plan more probabilistically. We'd be happy
to do that in the future with any fiscal plans.
Further questions or comments from committee members
Seeing none mr. Painter do you have any closing comments? I don't mister
With that that concludes today's agenda
We the next meeting will be
On Monday February the second there is no scheduled meeting for tomorrow or Friday
With, that we are adjourned
Okay.
All right.
Thank you.
Thank You.
Bye.
Bye bye.
Bye-bye.
Bye, bye-Bye.
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