If you’re watching the gubernatorial debates, you’ve probably noticed that the budget is one of the hot topics. Some candidates say the budget is still too large, others say they’ve done as much as they can to cut it. I hear numbers get thrown around, so my economist ears perk up.

Here we are, about a month from the election, and I’m not sure who is right. Heck, I’m not sure that the different numbers are even referring to the same thing.

Learning about the Budget

I’ve spent most of my time as an economist focused on the revenue side of the equation. Sure, I’ve been a part of the budget process. So, I’m not completely in the dark. But, this is an important issue and I want to understand it better.

If you’re also interested in learning about the budget, join me over the next few weeks as I share what I learn.

This week I’ll try to build some foundational knowledge around how we talk about State budgets. Next, I’ll dig into the FY19 budget to see what we spend our money on (with some really cool visualizations too).

In part 3, I’ll try to track down where the budget increases came from during the high revenue years. After that, I’ll explore the budget cuts that occurred since revenues fell a few years ago.

Finally, in part 5, I’ll try to use this information to understand what we can expect going forward.

If you’re interested in the State budget, I hope you enjoy the next month. If not, I’ll see you on the other side.

The Budget Process

The Office of Management and Budget (OMB) is the State agency in charge of the putting together a budget proposal. But the Legislature is the branch that ultimately holds the purse strings.

While the Governor provides a draft budget to the Legislature each December, it is the Legislature that decides how much money to spend.

Sure, the Governor can veto line items after the Legislature passes the budget. But the Governor cannot add money once the Legislature finishes working on it. And, the Legislature can override a Governor’s veto if it wants.

So, the power of appropriation is firmly in the hands of the Legislature.

The Legislature works on the budget by assigning members to a Finance Committee in both the House of Representatives and the Senate. Since the budget bill is over 100 pages long, and the budget itself is thousands of pages of documentation, they assign sub-committees to take a closer look at the individual pieces.

The Finance Committees have staff to help sort things out. And the Legislature has its own team know as “legislative finance” to liaison with OMB and act as an impartial source of information for the legislators.

Finding the Data

The OMB website provides a plethora of information. More information than most people care to know really.

The Legislative Finance website is another good resource for researchers interested in the State Budget.

There is also an interactive tool on the Open Data Portal that is helpful.

Additionally, the Institute of Social and Economic Research has put out several reports that are useful. And the “Alaskans for a Sustainable Budget” website has some information that you may find interesting.

Finally, the budget process itself generates a ton of presentations and testimony. You can locate those on the Legislature’s website.

Honestly, it’s unlikely that anything I say in the next 4 weeks will be new. I’m sure it’s all been said before on one of these resources. But the process of digging through data is how I learn best. So that’s what I’m going to do.

Types of State Budgets

Each year, the Legislature passes two State budgets. One for operating costs and another one for capital projects (there’s technically a third for mental health).

For the most part, the operating budget pays for the recurring bills of the State. The capital budget pays for construction projects and large equipment. There can be some overlap, but that’s the general distinction.

The budgets also evolves over the legislative process. So you may see the preliminary proposal called the “management plan,” the first version of the bill called the “governor’s budget,” the second version of the bill called the “governor’s amended,” the version of the bill changed by the legislature called the “conference committee version” or “authorized” bill. And the final version, after vetoes, is called the “enacted” bill.

Additionally, there are typically expenditures that crop up after the spending bill passes. Those additional expenses are authorized under a separate “supplemental” budget.

When people talk about the supplemental budget, they sometimes attach it to the year it is supplementing, and sometimes attach it to the legislative session that authorized it. So you can get discrepancies if one person is talking about the fiscal year total and someone else is talking about the session totals. Just something to watch out for.

Once all is said and done, there are some authorized expenses that don’t get made. For example, maybe the legislature gave permission to hire a new employee, but the department couldn’t find a good candidate. This results in a difference between what was “budgeted” and what was actually spent.

Legislative Finance provides a report called “Actuals” to track this down. The money that is not spend is said to “lapse” back to the appropriate fund.

Terminology

Before we get too far, it’s good to nail down some terminology. It is easy to bog down a conversation about the budget by misunderstanding the terms.

We generally think about the budget in two dimensions – what we are paying for, and how it gets paid.

What We Are Paying For

The budget is made up of hundreds of items. Each budget item is assigned to an “agency” so that we can group them together and track how it changes over time.

Agencies

In total, there are 24 agencies. These include the 14 Departments; categories for the University system, court system, legislature, and governor’s office; and 6 separate categories for things like “debt service”, “fund transfers”, and others.

Agency Operations

The 18 agencies with personnel are often combined into group called “agency operations.”

This grouping refers to paying the salaries of the staff that execute the business of the State, buying office supplies and equipment for them to work, covering business travel expenses, paying people to manage and maintain our assets, and all the other routine costs of keeping the government running.

This is usually what we think of when we talk about “government spending.”

Statewide Operations

In addition to agency operations, there are some categories of spending that don’t fit nicely into one of the departments. Debt service payments, and fund capitalizations are the best example of these expenses.

Debt service is the annual payments on money we borrowed. Just like your monthly car payments is a “debt service” in your personal budget. These are almost always related to capital projects.

Fund capitalizations are transfers from the general fund, into a fund that is set up for a specified purpose. Money in these funds can be used when they are needed, without going back to the legislature for approval. The Disaster Relief Fund is an example of this.

What makes these complicated is that the appropriation happens when the money is transferred. But, the use of the funds may be in a different year. So, “Statewide Operations” can lead to some confusion between budget years.

Fund Transfers

“Fund Transfers” are tracked separately for good reason. This category is a little strange in the context of how we normally think about budgets.

The confusion comes when more revenues flow into the general fund than is needed to pay for the budget. Occasionally, we put that surplus into a separate savings account. If that account is not part of the General Fund, then the transfer registers as a withdraw from the General Fund.

We log a withdraw from the General Fund as a negative number, which is exactly how we log expenditures. So, you have to be very careful not to misinterpret a transfer into a savings account as a budget increase.

Likewise, drawing money out of savings shows up as a negative expenditure. So, you have to be careful not to misinterpret a draw from savings as a reduction in the budget.

There are several other complications that arise in the Fund Transfers category. It’s best to just be aware that the category exists, but most of the activity in that group isn’t really “spending.”

Objects of Expenditure

Every line item in the budget is separated into several “objects of expenditure” in order to understand what we are paying for. A line item will usually fall into more than one of these objects.

It’s sort of like when you go grocery shopping and get cash back at the register. Your checking account will show it as a single transaction. But, If you track your spending at home, you’ll want to split that line into multiple categories.

That’s basically what’s going on here. But, there are 7 objects of expenditure that a line item can be split into.

1. Personal Services (the salary and benefits of employees)
2. Travel (self-explanatory)
3. Contractual Services (to pay contractual obligations, like a lease payment or management fee)
4. Commodities (office supplies, etc.)
5. Equipment (computers, office furniture, and such; but generally not large equipment)
6. Grants (money given to local governments and other recipients)
7. Misc. (a catch-all category for everything else, including fund transfers)

For grounding on which objects are most used, here is how the fiscal year 2017 actuals break down:

Budget Request Units (aka: Results Delivery Units)

Each agency is broken down into a smaller grouping. Legislative Finance calls these “Budget Request Units” or BRUs. OMB calls these “Result Delivery Units” or RDUs. As best I can tell, they mean the same thing. 

These subgroups are often divisions within a department, but may be other classifications of expenses.

For example, the Department of Law is broken into Criminal and Civil divisions, each with a separate BRU. Another BRU is used for administrative support.

Line Items (aka: Components)

Each of those units is further broken into “components” or “line items” in order to get more clarity around exactly what we are paying for. This is the most granular grouping that the budget process uses.

For example, sticking with the Department of Law, there are separate line items for “environmental law”, “oil, gas, and mining issues”, “time keeping”, “appeals”, and several others.

In the FY19 operating budget, there are 530 line items ranging from $3,000 (fees on general obligation bonds) all the way up to $1,406,555,000 (Medicaid services).

How We Pay For It (Funding Sources)

Each line item in the budget is married to a way to pay for it. That is what is commonly called the “fund source.”

A line item may have several fund sources, but the total of the fund sources will always equal the total of the objects of expenditure.

There are 4 main sources of funds:

1. Federal Receipts (Money received by the Federal government to be used for a specific purpose)
2. Designated General Funds (Money that is put into the general fund, but is designated for a specific purpose)
3. Other Restricted (Money that is deposited into a special account that is restricted for a certain use, by law)
4. Unrestricted General Fund (Money that the State collects from the normal business of the State – taxes, royalties, fees, etc.)

Federal Receipts

The Federal government has several programs that it supports through the State budget. The largest are Medicaid and transportation. Altogether, the Federal government typically sends over $3 billion to Alaska through the State budgeting process.

But these funds are restricted for the purpose of the program. We can’t use those Federal dollars for anything else. And most of those Federal dollars come with a catch. The State has to match at least a portion of those funds.

Because the Federal revenues always balance expenses paid with Federal dollars, we don’t usually pay much attention to this part of the budget. And because matching funds mean that we can boost the economy with leveraged dollars, we typically try to maximize those matching opportunities.

Designated General Funds

When revenues are collected, some of those revenues are tagged for a specific purpose. For example, part of the tobacco taxes are set aside for the tobacco prevention program.

There are several revenues that have these tags. A total of $454 million was collected   by the Department of Revenue last year. Additional designated funds come from University receipts, Marine Highway system ticket sales, and other collections.

It is tempting to ignore these expenses, since they “pay for themselves.” However, there is no requirement that these funds be used this way. Any of these collections could be diverted for other general fund uses, if they are higher priority.

I personally don’t like the DGF tags. I would prefer we just talk about the total general fund.

Other Restricted

There are also programs, that are created by law, which have a holding account attached to them. Many of these programs require inconsistent funding, but need the funds available when called upon.

For example, the oil spill response fund needs to have cash available, but hopefully we don’t need to use it. When money is spent out of these funds, it is classified as being paid with “other” revenues.

It’s also important to note at some expenditures paid with “other” revenues, are things we would usually consider “general” spending. For example, the 69 State employees that administer the PFD program are paid with money from the Permanent Fund. So, when only looking at UGF, we miss them completely.

And, because of the way we budget, we end up with some expenses that hit he budget twice (for example, the fully burdened cost of an employee includes the cost of their office space, but then we also count the lease payment as a separate expense).

These “duplicate” expenditures are mostly paid out of the “other” category. So, we have to be careful what we include as the final budget number (LegFi and OMB do a great job tracking this down).

Unrestricted General Funds

The number we usually hear about is the “Unrestricted General Fund” or “UGF” number.

UGF revenues are generally those that the Department of Revenue collects in taxes; the remaining royalties that DNR collects after transferring the portion required to go to the Permanent Fund; and the money other agencies collect in fees (unless they are designated for a purpose).

The reason why this is the number we hear about is because it is perceived as the “controllable budget.” However, we need to be careful about this. If not, then switching fund sources can be misinterpreted as a budget cut/increase.

For example, money received from the “insurance premium tax” was tagged as “designated funds” starting in FY17. That money is used to pay for the State’s reinsurance program. By changing the same level of spending from UGF to DGF, it would appear to be a budget cut if you only look at UGF.

There are several other complications as well. So, for the most part, just looking at UGF is a really good starting place.

It’s also worth noting that we historically have not counted PFD payments as UGF expenditures. But, the Supreme Court decision has changed the interpretation of the law. 

We also haven’t historically counted investment revenues as UGF, simply because the earnings stay in the account that earned them. However, most of those revenues are not restricted for use by the fund that generated the return. So, there is a little bit of a debate going on around how these expenditures and revenues should be counted.

The Department of Revenue has changed the way it reports investment earnings in their annual publication. Legislative Finance now counts a transfer from the Permanent Fund to the General Fund as “UGF revenues.” There’s more work to do here. 

“The Budget”

When people talk about “the budget,” they usually mean the UGF portions of agency operations, statewide operations, and the capital budget. They exclude fund transfers and PFD payments. When I talk about “the budget,” I’ll adopt the same meaning.

However, I think it’s important not to lose sight of all the other spending that happens. So, I’ll also talk about the “total general fund budget,” and the “total budget” on occasion.

Wrap-up

The budget is a huge piece of work that takes hundreds of hours to fully understand. It would be impossible to fully appreciate just how complicated it is here.

But as a general matter, it’s easy to drown in a fully transparent pool of numbers. It’s also easy to pull numbers apart and misunderstand them.

This can happen by making incorrect comparisons between data, or making conclusions based on incomplete information. Or you can aggregate information into meaningless, but logical sounding, statistics.

The confusion that is easy to create is why I’m going to dig deeper. I want to see for myself what is going on, and maybe translate some of this information into English.

As an aside, I suggest we minimize reclassifying revenues and creating new funds. That just adds to the confusion and gives the appearance of trying to hide expenses

If you have the time, I encourage you to do your own research. If not, hopefully I can shine a little light on the subject for you.

I’ll start in the next article by looking at the FY19 budget. Maybe that will help us understand where all this money is going and if those are the things we are willing to pay for.

I hope you’ll join me.