2022 FLY-IN HIGHLIGHTS – Sunday Luncheon Keynote: Neil Steininger, OMB Director

Office of Management and Budget Director Neil Steininger provided his perspective on Governor Dunleavy’s FY 2023 budget and Alaska’s projected fiscal future during the Sunday luncheon. In addition to school board members, students attending AASB’s Youth Advocacy Institute were also present. 

Director Steininger began with an overview of the state’s current fiscal situation. He said in recent years Alaska has faced significant fiscal deficits as a result of constrained revenue.

When the Governor took office in 2019 the state was facing a half billion dollar deficit going into the next fiscal year. He said the administration has been trying to work toward cost constraint in the operation of government, while also investing in necessary expenditures to deliver government services.

Between FY19 and FY23, the state budget has been reduced by 5% and revenue has rebounded by 5%, resulting in closing the fiscal gap the state has faced. Based on the most recent state revenue forecast, the FY23 budget has a $27 million surplus. 

Budget changes over the past four years

• Reduced the overall UGF budget 5.1%
  • All state funds (UGF and DGF) down ~7%
• Reduced agency operating budgets 2.2%
• Approximately $100m UGF saved in retirement payments
• Held Medicaid flat – Down $5m UGF
• Reopened highway maintenance stations
• Transitioned Alaska Marine Highway to a calendar year budget to provide schedule certainty
• Made significant investments in public protection

Traditional sources of state revenue have rebounded, such as oil, taxes, corporate income taxes, and  investment revenue, Steininger said. The state has also increased its use of money from the Permanent Fund to pay for government operations and PFDs. 

The governor’s FY23 budget is roughly the same as FY22: flat. Savings from core obligations, such as payments into the state retirement system, were used to invest in things like public protection that hadn’t been able to be funded over the last several fiscal years. Now because of available revenue, we’re able to fully fund some of the state’s statutory obligations, he said.

Highlights of the Governor’s FY23 Budget

• 50/50 PFD without savings draws, deficit, or reductions to core programs
• Mitigates impacts of the CBR Sweep 
• Ensures the budget can be passed without a ¾ super-majority vote
• Use available federal funding to maximize benefit to Alaska
• Invest in economic development
• Preserve UGF for future state needs
• Run a full AMHS schedule
• Over $30m operating UGF added for public protection
• Fully fund school bond debt ($79.0m UGF) and REAA ($32.8 UGF)
• Fund construction of a Napakiak K-12 school replacement
  ($54.9m)
• Fund scholarships, education grants, and WWAMI from UGF
• $2.15 billion all funds capital budget
• $719.9 million investment in capital projects from state, GO bond, and discretionary funds prepares us for influx of federal infrastructure money.

Steininger said the Administration has structured an FY23 budget that retains the Alaska scholarship Program, Alaska education grants, and the WWAMI medical education program, to make sure those programs are funded and those scholarships paid, regardless of what happens in the wider political discussion about the PFD and use of state funds.

The amount of federal stimulus funding coming into the state has enabled support for a lot of programs and investment in economic development throughout the state. It also enabled an increase the amount of money spent on the Alaska Marine Highway System, allowing AMHS to run a larger schedule, make more port calls to more destinations, and maximize the use of the vessels they have. Steininger said the hope is the Federal money coming in for the AMHS will help to reshape the system to run better, be more reliable, and post schedules that are more useful to those in coastal communities. 

The FY23 budget also contains significant investments in public protection; increases in the number of troopers, prosecutors, and defense staff.

Steininger said the governor is proposing a $2.1 billion Capital budget this year. In past years when the state budget had to be cut, the first thing to go was investment in capital infrastructure around the state. In this year’s budget they’re trying to turn that around and make investments in rebuilding Alaska’s crumbling infrastructure thru the use of General Obligation (GO) bonds, state funds, and discretionary federal funds.

K-12 Foundation Funding

The FY23 proposes to fully fund the BSA. Going thru the formula results in a slightly lower amount of money than was projected for FY22, which is a result of a continued shift from brick and mortar schools to correspondence in the numbers reported to DEED based on projections from school districts. This shift has resulted in lower state share being paid into the foundation formula program. 

There’s also other funding that’s come in thru the last several years related to COVID pandemic relief that’s available to school districts. Over $500m in federal relief for districts has come in, and nearly $440m remains unspent. It has been allocated to districts and we’re working with districts to get it deployed. Steininger encouraged districts to identify eligible costs, and assign those eligible costs to federal funds to ensure that flexible dollars remain available. 

As a result of having these federal funds, the state chose to remove the 10% cap on unreserved fund balances to allow school districts to carry forward more money in order to ensure that as the more restricted federal money is being spent, unrestricted money can be reserved for future needs. So far 26 districts have taken advantage of the removed cap, and $163 million in unreserved fund balances. Overall there is about $600 million available to districts thru various COVID relief programs. 

Looking Forward

One of the requirements OMB has, is to provide the legislature with a 10 year fiscal plan. We look at the K-12 formula and try to project it forward, based on the current BSA and other factors that would influence it. The Department of Labor is currently projecting a fairly flat population in the state of Alaska of school age children of about a 2% total increase over 20 years, which comes out to about 1/10 of one percent a year in student population change. 

However, looking at the way K-12 foundation funding has been trending the past few years with the shift to correspondence as a result of COVID, we didn’t think it was prudent to assume a flat funding level for the next ten years. Instead, we added an expenditure growth rate, because there will likely be some shift back from correspondence to brick and mortar schools driving up that cost again. We also know that there is a lot of discussion about how we fund education, and we think we need to build room in our future projections for some of those discussions to happen, so that’s why we’ve included a growth rate that is greater than the population growth, which would be the core input into the foundation formula program. 

State revenues are better than they have been in the past, but still remain constrained. Looking into the future based on the most current estimates of state revenue, Steininger said he sees a continued constrained environment. Our assumption is that in a constrained revenue environment policy makers, the legislature and executive branch, will have to make pragmatic decisions to live within those means. That’s why you see a lower than inflation cost growth rate, because our assumption is that hard decisions will have to be made in the future if revenue continues to be constrained, and those decisions will affect the growth of the state operating budget.

The Federal Infrastructure Bill is being discussed in the legislature right now in context of the budget. The bill was passed in November and provides a lot of funding to the State of Alaska for infrastructure projects and state programs both old and new. Much of the bill is not well understood at this stage, and there has been very little guidance from federal agencies. 

OMB and the governor’s office are looking at what opportunities there are around the state, and how Alaska can take advantage of those to help different regional constituencies. There aren’t many that directly impact school districts, but some support areas could help in the delivery of education, the biggest of which for coastal communities is support for the Alaska Marine Highway System. Providing a better schedule and the ability to visit more communities is a big advantage we see coming out of the infrastructure bill. 

Summary

Director Steininger concluded his presentation with an outlook of the state’s fiscal picture, based on current projections. Based on expenditure growth in the K-12 formula, Medicaid program, and state agency operations, plus the projected revenue Alaska has going forward, we’re looking at continued state deficits for a number of years, he said. However, by the end of this 10 year period that starts to close up. When OMB looks at projections of deficits, we look at what how much money the state savings accounts have to help us manage our way through this. During this 10 year time period we know that the state is projected to have, at minimum, about $1.8 billion dollars through the course of this 10 year outlook. That amount of money we think is enough to manage through upcoming deficit years and get through to a point where the state can fully support itself on its recurring annual revenues. 

Questions

A question and answer period followed Director Steininger’s presentation. For the benefit of students in the audience who were unfamiliar with some of the budget terminology he used during his presentation, Director Steininger was asked to explain the meanings of UGF, POMV and CBR.

• UGF & DGF There are several categories used to designate how money can be used that comes into the state to support government operations. UGF (Unrestricted General Fund has no restrictions and is discretionary money the state has to support operations. DGF (Designated General Fund), Other Funds, and Federal Funds all have stricter rules for how the money can be used. When we talk about the state’s deficit, income and spending, we tend to focus on UGF, because that’s where policy makers can make decisions to direct the money. 
• POMV The primary source of unrestricted general funds is the Percent Of Market Value (POMV) draw, a draw of savings from the Permanent Fund that goes to support government. Several years ago the legislature passed a law to allow 5% of the Permanent Fund to be used each year to support government operations. That 5% allows the fund to continue to grow because it’s earning interest of 6-7% a year on average. So when you draw the 5% out, it’s being replenished by interest earned. That was set up as a way to prudently use the Permanent Fund without drawing it down too much over time.  
• CBR The Constitutional Budget Reserve Fund (CBR) serves as the state’s main piggy bank to cover short-term deficits. This is the account into which all oil tax settlement revenues are deposited. Settlements occur when the state disputes how an oil company calculates its profits or production. Withdrawals from the fund require a 3/4 vote of the legislature and must later be repaid from the state’s general fund.  In FY 2010, the state finished paying the CBR back for loans made during the early 2000s, the last time there was a fiscal gap.

Other question topics included how Alaska will benefit from the Federal Infrastructure bill, issuance of a GO bond package, the impact of inflation on ADM growth and the cost of operations, 10 year outlook for the BSA, and how much of a draw the POMV 75/25 bill  would take from the Permanent fund. 

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