Legislature(2017 - 2018)HOUSE FINANCE 519

02/15/2017 01:30 PM FINANCE

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Audio Topic
01:32:50 PM Start
01:35:04 PM HB115
01:35:06 PM Presentation: Modeling by David Teal, Director, Legislative Finance Division
02:36:32 PM Presentation: Expenditure Reduction Overview by Randall Hoffbeck, Commissioner, Dept. of Revenue
03:27:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME TELECONFERENCED
Heard & Held
+ Presentation: Modeling by David Teal, Director, TELECONFERENCED
Legislative Finance Div.
+ Presentation: Expenditure Reduction Overview by TELECONFERENCED
Randall Hoffbeck, Commissioner, Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 115                                                                                                            
                                                                                                                                
     "An  Act  relating  to  the  permanent  fund  dividend;                                                                    
     relating  to the  appropriation of  certain amounts  of                                                                    
     the earnings reserve account;  relating to the taxation                                                                    
     of  income  of  individuals;   relating  to  a  payment                                                                    
     against the  individual income  tax from  the permanent                                                                    
     fund  dividend  disbursement;   repealing  tax  credits                                                                    
     applied  against  the  tax  on  individuals  under  the                                                                    
     Alaska  Net  Income  Tax  Act;  and  providing  for  an                                                                    
     effective date."                                                                                                           
                                                                                                                                
1:35:04 PM                                                                                                                    
                                                                                                                                
^PRESENTATION:   MODELING    BY   DAVID    TEAL,   DIRECTOR,                                                                  
LEGISLATIVE FINANCE DIVISION                                                                                                  
                                                                                                                                
1:35:06 PM                                                                                                                    
                                                                                                                                
DAVID  TEAL,  DIRECTOR,  LEGISLATIVE FINANCE  DIVISION,  was                                                                    
asked to  begin with a  review of  the status quo  [Mr. Teal                                                                    
used a model on the projector  but did not provide a handout                                                                    
to accompany  his presentation]. He turned  the presentation                                                                    
over to Mr. Painter.                                                                                                            
                                                                                                                                
ALEXEI   PAINTER,   FISCAL  ANALYST,   LEGISLATIVE   FINANCE                                                                    
DIVISION, explained that the graph  in the upper left showed                                                                    
revenue  and  the  budget. The  blue  bars  represented  the                                                                    
typical revenue.  The green bars represented  Permanent Fund                                                                    
(PF)  revenue  not  in  place yet.  He  explained  that  the                                                                    
orange/brown  bars  showed  draws  from  the  Constitutional                                                                    
Budget Reserve  (CBR) or Statutory Budget  Reserve (SBR) and                                                                    
the red bars were unplanned  draws from the Earnings Reserve                                                                    
Account (ERA).                                                                                                                  
                                                                                                                                
Co-Chair  Foster   asked  if  members  had   copies  of  the                                                                    
presentation.  He  confirmed  that   members  did  not  have                                                                    
copies.                                                                                                                         
                                                                                                                                
Mr.  Painter  continued that  the  lower  left graph  showed                                                                    
budget  reserves. The  orange bars  represented the  CBR and                                                                    
the green  bars showed the  ERA. The top right  graph showed                                                                    
the  dividend check.  The lines  were the  same showing  the                                                                    
current scenario,  the status quo. Below  the dividend check                                                                    
graph was a  graph of the Permanent Fund  total balance. The                                                                    
bottom  right  graph showed  the  payout  for dividends  and                                                                    
general  fund  from Permanent  Fund  plans.  The status  quo                                                                    
scenario did not include a plan.                                                                                                
                                                                                                                                
Co-Chair  Seaton asked  Mr. Painter  to distinguish  between                                                                    
the dotted line and the black  line in the upper left chart.                                                                    
Mr. Painter  explained that the  black line  represented the                                                                    
budget including  paid Permanent  Fund Dividends  (PFD). The                                                                    
dotted  line showed  the budget  excluding  dividends -  the                                                                    
traditional way of showing the  budget. He relayed that when                                                                    
he  turned PF  plans on  in the  model, the  dividend became                                                                    
undesignated  general  fund  (UGF).  Expenditures  would  be                                                                    
reflected on the  black bar. He noted  that the expenditures                                                                    
without dividends were constant on the dotted line.                                                                             
                                                                                                                                
1:38:03 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara could  not see  the charts  well. He  asked                                                                    
what the  first year  was listed on  the chart.  Mr. Painter                                                                    
responded that  the first year was  FY 16 and the  last year                                                                    
was FY 26.                                                                                                                      
                                                                                                                                
Vice-Chair Gara asked  for the projected balance  of the CBR                                                                    
by the end  of FY 18. Mr. Painter relayed  that without a PF                                                                    
plan in  place there  would be  approximately $2  billion by                                                                    
the end of FY 18.                                                                                                               
                                                                                                                                
Vice-Chair  Gara suggested  that at  the  end of  FY 18  the                                                                    
state would have  to start spending from the  ERA to balance                                                                    
the budget  unless $1  billion was cut  from the  budget. He                                                                    
wondered  if   he  was   accurate.  Mr.   Painter  responded                                                                    
affirmatively. He pointed to the  red bar in the budget line                                                                    
for  FY 19,  which  showed  that in  order  to  pay for  the                                                                    
budget, the state would have  to have an unplanned draw from                                                                    
the ERA.                                                                                                                        
                                                                                                                                
Vice-Chair Gara was looking at  the bottom left-hand corner.                                                                    
He noted that  by FY 19 or  FY 20 the state  would be solely                                                                    
spending down  the PF ERA.  He asked if it  was by FY  19 or                                                                    
FY 20. Mr. Painter responded that it would begin in FY 20.                                                                      
                                                                                                                                
Representative Wilson  asked whether the  legislature needed                                                                    
a statute change  in order to implement a  Percent of Market                                                                    
Value  (POMV) using  the  earnings reserve,  or whether  the                                                                    
legislature could just  use a budget mechanism,  a bill. She                                                                    
wondered if a  separate bill was needed.  Mr. Teal responded                                                                    
that  a  bill  was  not  required  for  the  legislature  to                                                                    
appropriate money from  the ERA. The bill  would provide the                                                                    
legislature guidelines or a structure  to issue a payout. It                                                                    
would be a  computation based on a 5-year  moving average of                                                                    
the market  value and a  percentage payout.  The legislature                                                                    
could  determine what  the number  was and  place it  in the                                                                    
appropriation bill without the current bill.                                                                                    
                                                                                                                                
Representative Wilson asked what  the budget amount would be                                                                    
once FY  17 hit. She  wondered if  it was $4.2  billion. Mr.                                                                    
Teal  responded that  it would  be roughly  $4.2 billion  or                                                                    
$4.3  billion  depending on  what  happened  in the  current                                                                    
year. The  assumptions at the  top [Mr. Teal pointed  to the                                                                    
Fall forecast  in the  middle of  the screen].  He commented                                                                    
that  no growth  was reflected  in the  budget. The  numbers                                                                    
could be changed,  but the chart was  started without growth                                                                    
because there  were some legislators who  suggested that the                                                                    
budget  had  to  be  raised  every  year  to  keep  up  with                                                                    
inflation.  Whereas, other  legislators  suggested that  the                                                                    
state would  be making cuts  every year. The model  could be                                                                    
changed to  see the  impact of  an increasing  or decreasing                                                                    
budget.                                                                                                                         
                                                                                                                                
Representative  Wilson understood  that the  model reflected                                                                    
the status quo. She suggested  that status quo would reflect                                                                    
the legislature  making reductions in the  budget each year,                                                                    
which she thought the chart  should reflect. She asked about                                                                    
the payout  for dividends and  the general fund and  why the                                                                    
amount was at  zero on the chart in the  bottom right graph.                                                                    
Mr.  Teal responded  that  the bottom  right  graph was  the                                                                    
payout from  the ERA to  the GF.  There was no  payout under                                                                    
the status  quo scenario.  Dividends came directly  from the                                                                    
ERA  to the  dividend fund  which was  not reflected  in the                                                                    
chart. He explained that as  soon as the legislature changed                                                                    
to a POMV plan, lines would show on the bottom right graph.                                                                     
                                                                                                                                
Representative  Wilson  thought  that   Mr.  Teal  was  only                                                                    
talking about  the dividend. She  clarified by asking  if he                                                                    
was talking  about the  dividend going into  the GF  or some                                                                    
part  of the  earnings  reserve  going into  the  GF in  the                                                                    
bottom right  graph. Mr.  Teal explained  that it  would not                                                                    
matter whether  it went  through the  GF on  the way  to the                                                                    
dividend fund or went straight  from the ERA to the dividend                                                                    
fund. Mechanically,  they were  the same;  Politically, they                                                                    
were  different.  Currently,  there   was  no  payout  going                                                                    
through the GF, hence, the line was at zero.                                                                                    
                                                                                                                                
1:43:28 PM                                                                                                                    
                                                                                                                                
Representative Wilson suggested referring  to the top right-                                                                    
hand  chart  to  see  effects on  the  dividend  check.  She                                                                    
thought that  anything that went  beyond the  top right-hand                                                                    
chart would appear in the  bottom right-hand chart as far as                                                                    
doing  more  than just  paying  a  dividend check.  She  was                                                                    
trying to figure  out what she would see  that she presently                                                                    
could not  see on the  chart. Mr. Teal directed  Mr. Painter                                                                    
to change  the model to  a POMV plan. Mr.  Painter indicated                                                                    
that the  model currently reflected the  governor's plan. He                                                                    
pointed to the  green line on the bottom  right chart, which                                                                    
was the payout to the GF.  The payout was the planned payout                                                                    
of the  POMV draw.  The red  line showed  the payout  to the                                                                    
dividend  fund.  Both  would  go through  the  GF  but  were                                                                    
separated out to show the size of each.                                                                                         
                                                                                                                                
Representative   Wilson  indicated   that  the   explanation                                                                    
clarified things for her.                                                                                                       
                                                                                                                                
Co-Chair   Foster  Representative   Grenn  had   joined  the                                                                    
meeting.                                                                                                                        
                                                                                                                                
Co-Chair Seaton  referred to the upper  right dividend check                                                                    
graph. He wondered if it  reflected a statutory calculation.                                                                    
In the bottom left chart, it  appeared there was no money to                                                                    
pay the dividend. He asked  if he was interpreting the chart                                                                    
correctly.                                                                                                                      
                                                                                                                                
Mr. Painter  responded there  was a  very small  amount $100                                                                    
million  left  at  the  end  of FY  26.  There  would  be  a                                                                    
sufficient  balance to  pay the  full statutory  calculation                                                                    
that year  according to  the Legislative  Finance Division's                                                                    
(LFD)'s  model. The  margin of  error in  the model  was far                                                                    
greater than $100  million. He did not want to  give a false                                                                    
impression.                                                                                                                     
                                                                                                                                
Co-Chair Seaton suggested that the  bottom left chart showed                                                                    
that there was  no money remaining in the ERA.  In the upper                                                                    
right-hand corner  showing the  dividend checks.  He thought                                                                    
the  chart  showed  large dividend  checks  being  paid  out                                                                    
continuously because of a  statutory requirement even though                                                                    
there would be  no money to pay them.  Mr. Painter explained                                                                    
that  the  balances  were end-of-year  balances.  Therefore,                                                                    
there would  be money at  the beginning  of the year  to pay                                                                    
the dividend check. However, at the  end of the year the ERA                                                                    
would be zero.                                                                                                                  
                                                                                                                                
Mr.  Teal  thought  the co-chair  was  concerned  with  what                                                                    
happened in  2027. By  2026, the  state would  be at  a zero                                                                    
balance. It also  meant that in 2027 the state  would have a                                                                    
difficult  time   paying  dividends,   as  there   would  be                                                                    
insufficient money in the ERA  to make the dividend payment.                                                                    
He  noted that  every year  there were  earnings. The  state                                                                    
would  earn  money  in  FY 27.  However,  it  was  uncertain                                                                    
whether the  earnings in  that year  would be  sufficient to                                                                    
make payments.                                                                                                                  
                                                                                                                                
1:47:03 PM                                                                                                                    
                                                                                                                                
Representative Wilson  thought the ERA was  being discussed.                                                                    
She brought up  the fact that there would still  be money in                                                                    
the corpus  of the  fund. The 5-year  calculation had  to do                                                                    
with the corpus  rather than the ERA. She  suggested that as                                                                    
long  as the  corpus went  untouched, there  would still  be                                                                    
money going  into the ERA.  There might not be  enough money                                                                    
to pay the  calculated dividend, but to  conclude that there                                                                    
would be no  dividend when the corpus existed,  would not be                                                                    
accurate. She asked if she was correct.                                                                                         
                                                                                                                                
Mr. Teal  indicated that the chart  reflected the assumption                                                                    
that government  required money first.  For example,  if the                                                                    
earnings on the  corpus and the ERA equaled  $3 billion. The                                                                    
unplanned draw would equal $2.3  billion to fund government.                                                                    
It  would account  for everything  but $700  million of  the                                                                    
earnings. If  the state  earned 7  percent, the  state could                                                                    
continue paying dividends. However,  dividends would drop to                                                                    
$700 million  in that year. If  the state did not  earn what                                                                    
it hoped,  then the  state would be  short funded  and would                                                                    
have to either choose to  pay reduced dividends or to reduce                                                                    
the budget.                                                                                                                     
                                                                                                                                
Representative Wilson suggested that  there was a difference                                                                    
between  state  government  taking  all the  money  and  not                                                                    
paying  a  dividend. The  dividend  would  still exist.  The                                                                    
legislature could  either lessen the dividend  or reduce the                                                                    
budget.  Her point  was that  the corpus  would continue  to                                                                    
generate  earnings. The  calculation would  still remain  in                                                                    
place. If  the state  did not reduce  its budget,  the state                                                                    
could  take   all  the  money   and  not  pay   a  dividend.                                                                    
Alternatively,  the state  could pay  a dividend  and reduce                                                                    
the budget or generate other  revenue. She suggested that as                                                                    
long  as  the corpus  remained  untouched  the people  would                                                                    
receive a  dividend unless the state  had a bad year  in the                                                                    
stock market.                                                                                                                   
                                                                                                                                
Mr.  Painter  asked  if  the committee  wanted  to  see  the                                                                    
effects of  HB 115 in  the model. Co-Chair  Foster responded                                                                    
affirmatively.                                                                                                                  
                                                                                                                                
Vice-Chair  Gara asked  Mr. Painter  to go  to the  previous                                                                    
model. He suggested that members  had different views around                                                                    
the  table. He  supposed the  legislature could  continue to                                                                    
massively  cut state  services in  order to  be able  to pay                                                                    
dividends. He suggested that the  legislature could do both:                                                                    
the  legislature could  maintain  state services  and pay  a                                                                    
dividend  by adopting  a plan.  However,  the committee  had                                                                    
heard  that every  $100 million  in  reductions would  equal                                                                    
another  1000  to 1500  jobs  lost  resulting in  a  10-year                                                                    
recession. He did not want a 10-year recession.                                                                                 
                                                                                                                                
1:51:03 PM                                                                                                                    
                                                                                                                                
Representative Wilson  thought it  was critical  for members                                                                    
to be able  to ask questions to confirm that  the facts were                                                                    
being provided. She wanted to  make sure that as the members                                                                    
were given  the charts,  they understood that  choices would                                                                    
have to be  made regarding the dividend. She  wanted to make                                                                    
sure people  understood that as  long as long as  the corpus                                                                    
was protected  a dividend would be  generated. She suggested                                                                    
what happened after that, based  on what the legislature did                                                                    
with the budget and other  issues, was to be determined. She                                                                    
indicated that  every time  she asked  a question,  she felt                                                                    
that someone took advantage of it. She was tired of it.                                                                         
                                                                                                                                
Mr. Painter returned to the model  for HB 115. The last view                                                                    
of the  model assumed consistent investment  returns of 6.95                                                                    
percent  per  year. Presently,  the  model  was showing  the                                                                    
actual returns from  the previous 9 years. It  sort of broke                                                                    
LFD's model  because there was  not a sufficient  balance to                                                                    
pay the  amount. He noted  that with volatility  the picture                                                                    
looked quite  different than a stable  picture. He indicated                                                                    
members were  seeing the  reverse of  the previous  9 years.                                                                    
The great recession happened in  a different year. The model                                                                    
showed the  dividend continuing to  be paid and then  a hole                                                                    
in government  spending. The model assumed  the dividend was                                                                    
paid  first  then  there  would  be  a  hole  to  government                                                                    
spending. He  reemphasized that the model  showed the impact                                                                    
of volatility.                                                                                                                  
                                                                                                                                
Mr. Teal  thought it  was important to  assume that  in each                                                                    
model  or   bill,  unanticipated  things  could   occur.  He                                                                    
mentioned  examples   such  as  low  oil   prices  or  lower                                                                    
earnings.  The  division  applied the  notion  that  history                                                                    
repeated itself. He thought the  information provided a more                                                                    
realistic  scenario than  simply  assuming  a constant  6.95                                                                    
percent earnings.                                                                                                               
Mr.  Painter  asserted  that   the  model  demonstrated  the                                                                    
effects of  HB 115. It  illustrated the impacts of  the POMV                                                                    
approach and  an income tax.  He pointed to the  dividend in                                                                    
the upper right chart. The  dividend started out about $1100                                                                    
and  steadily increased  in the  model as  the value  of the                                                                    
payout  was  increasing  faster than  population.  Next,  he                                                                    
pointed to the bottom left which  showed the CBR and the ERA                                                                    
increasing. The  bottom right graph showed  the payouts with                                                                    
a two-thirds/one-third model. The  graph to the general fund                                                                    
was  twice  the  graph  to  the  dividend.  In  showing  the                                                                    
different  investment  returns  in  the past  LFD  used  the                                                                    
previous 9  years. It  did not look  very pretty,  but there                                                                    
was an  earnings reserve  balance at the  end of  each year.                                                                    
Also,  the  dividend  payment   was  relatively  steady,  an                                                                    
advantage of a POMV plan.                                                                                                       
                                                                                                                                
Co-Chair Foster clarified that Mr.  Painter was presenting a                                                                    
look-back  of actual  returns  over the  prior  9 years.  He                                                                    
asked if  he was correct.  He noted a  dip in the  middle of                                                                    
the graph. He asked about the returns in that dip period.                                                                       
                                                                                                                                
Mr.  Painter explained  that the  state  had losses  greater                                                                    
than 20 percent.                                                                                                                
                                                                                                                                
Mr.  Painter continued  that  the chart  he  was looking  at                                                                    
showed the prior 9 years reversed.  He noted that at the end                                                                    
of  a  year there  would  be  no  earnings  in the  ERA.  He                                                                    
emphasized that he  was looking at a 1 in  20-year event. He                                                                    
scrolled  back to  the more  stable  view of  the model.  He                                                                    
highlighted  that   the  plan  had  an   inflation  proofing                                                                    
provision that equaled  4 times the draw. One  of the places                                                                    
where  LFD's model  might disagree  with  the Department  of                                                                    
Revenue's  model  was  the   percentage  of  the  investment                                                                    
returns that were realized in  the ERA each year versus held                                                                    
and unrealized  gains. Under a  plan that  inflation proofed                                                                    
there was  no difference. In switching  between assumptions,                                                                    
the  additional   investment  returns  would   be  inflation                                                                    
proofed into  the principle.  In a  POMV plan  that included                                                                    
inflation  proofing,  the   assumption  was  not  sensitive.                                                                    
Whereas, it would be sensitive without a POMV plan.                                                                             
                                                                                                                                
1:57:21 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster  wondered, under  HB 115  with a  four times                                                                    
rule, if the  money went back into the principle  in each of                                                                    
the years, some of the years, or none of the years.                                                                             
                                                                                                                                
Mr.  Painter   explained  that  there  would   be  inflation                                                                    
proofing in some years, but not all.                                                                                            
                                                                                                                                
Vice-Chair  Gara asked  Mr.  Painter  for clarification.  He                                                                    
understood that  the legislature  had not  inflation proofed                                                                    
in 2 years.                                                                                                                     
                                                                                                                                
Mr. Painter explained that  with the conservative assumption                                                                    
that only 57 percent of  gains were realized, there would be                                                                    
an inflation proofing transfer in  FY 18 because the balance                                                                    
was  sufficiently high.  There  would not  be an  additional                                                                    
transfer  for several  years. He  suggested that  with a  90                                                                    
percent   return  assumption,   there  would   be  inflation                                                                    
proofing  consistently  from FY  18  and  beyond. There  was                                                                    
sensitivity  in how  much  would be  realized  each year,  a                                                                    
significantly volatile number.                                                                                                  
                                                                                                                                
Mr.  Teal  furthered  that  inflation  proofing  would  also                                                                    
depend on  the payout  rate. As the  payout rate  fell, more                                                                    
money would  remain in  the fund making  it easier  to reach                                                                    
the 4 times trigger. There would  be more money in the fund,                                                                    
and the payout  would be smaller - 4 times  the payout would                                                                    
become a  smaller target.  He continued  that the  lower the                                                                    
payout  rate,  the  more  likely  inflation  proofing  would                                                                    
occur, and more  money would go into  inflation proofing. In                                                                    
fact,  it might  be  possible to  over  inflation proof  the                                                                    
fund.  There would  be no  trigger, unlike  currently, where                                                                    
inflation  proofing was  based on  the consumer  price index                                                                    
(CPI). A  calculation was applied  to try to keep  pace with                                                                    
inflation.  The  4 times  trigger  did  not keep  pace  with                                                                    
inflation, it just  deposited money into the  fund. It might                                                                    
or might  not cover inflation,  or it might be  greater than                                                                    
inflation.                                                                                                                      
                                                                                                                                
Vice-Chair  Gara  asked  about   the  4  times  trigger.  He                                                                    
wondered if  it meant  that once  there was  a balance  of 4                                                                    
times  the payout  in the  ERA,  then the  money above  that                                                                    
amount  would go  into  the  corpus of  the  fund. Mr.  Teal                                                                    
responded in the affirmative.                                                                                                   
                                                                                                                                
2:00:30 PM                                                                                                                    
                                                                                                                                
Mr. Painter  did not have  anything more prepared  except to                                                                    
show the impact of the bill and to answer any questions.                                                                        
                                                                                                                                
Representative  Pruitt thought  it would  be helpful  to use                                                                    
the model to view the impacts of other scenarios.                                                                               
                                                                                                                                
Co-Chair Foster  invited LFD to present  other scenarios, if                                                                    
possible.                                                                                                                       
                                                                                                                                
Mr. Painter reviewed the governor's  plan in HB 61. He noted                                                                    
that  the plan,  although similar  to the  other, stabilized                                                                    
reserves.  However,  it  did  not  balance  the  budget  for                                                                    
slightly  longer,  had  slightly  lower  dividends,  and  no                                                                    
income tax. The dividend would be  held at $1000 for 2 years                                                                    
and would rise with the  formula. It was slightly lower than                                                                    
the  other  plan. He  continued  that  the POMV  payout  was                                                                    
slightly higher and the dividend  formula was different. The                                                                    
plan  could   be  viewed  under  different   assumptions  of                                                                    
returns.  He  pointed  to the  lower  left-hand  chart  that                                                                    
reflected the previous 9 years.  It barely scrapped through.                                                                    
He  also shared  that with  the  reverse it  managed to  get                                                                    
through. The  dividend payout was relatively  stable because                                                                    
it  was  based  on  POMV  and  royalties,  which  were  less                                                                    
volatile than earnings.                                                                                                         
                                                                                                                                
Co-Chair Foster asked  him to re-summarize what  he had just                                                                    
stated.  He thought  Mr. Painter  had stated  that it  had a                                                                    
higher POMV  and smaller dividends.  He asked his  to review                                                                    
what was  better in terms  of what  saved the state  more or                                                                    
less. He  also wanted him to  speak on the pros  and cons of                                                                    
HB  115 versus  the  governor's bill  [HB  61]. Mr.  Painter                                                                    
deferred to Mr. Teal.                                                                                                           
                                                                                                                                
Mr.  Teal thought  the results  were  fairly similar.  There                                                                    
would not be an income tax,  which meant things did not look                                                                    
quite as  they would under  HB 115 because revenue  would be                                                                    
lower. On the other hand,  paying lower dividends would mean                                                                    
that there  would be more  money left for the  general fund.                                                                    
It  would be  a partial  offset. The  governor's bill  had a                                                                    
revenue  limit. However,  under  the  current forecast,  the                                                                    
revenue limit  would not  kick in. The  payout rate  of 5.25                                                                    
percent  provided more  money  to the  GF  and kept  reserve                                                                    
balances high. The  timeframe of the model was  too short to                                                                    
show  that  the  5.25  percent payout  eventually  began  to                                                                    
payout less  than the 4.75  percent payout under HB  115. He                                                                    
relayed that in  the first few years 5.25  percent would pay                                                                    
more to the GF.                                                                                                                 
                                                                                                                                
2:04:20 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara asked  if  it was  appropriate  to model  a                                                                    
scenario.  Co-Chair  Foster  encouraged Vice-Chair  Gara  to                                                                    
provide his scenario.                                                                                                           
                                                                                                                                
Vice-Chair  Gara asked  LFD  to model  5.25  payout for  the                                                                    
first 2 years,  then going down to 5 percent  payout with 65                                                                    
percent  going   to  services  and   35  percent   going  to                                                                    
dividends. Mr.  Painter asked Vice-Chair  Gara if  the model                                                                    
reflected  what he  had  in  mind. He  asked  if there  were                                                                    
specific dividend amounts to include.                                                                                           
                                                                                                                                
Vice-Chair Gara replied that if  there was a split of 65/35,                                                                    
with a payout of 5.25 for  2 years and 5 percent afterwards,                                                                    
he wondered  what the dividend  payout and the  general fund                                                                    
payout would  be from the  POMV. Mr. Painter  recapped Vice-                                                                    
Chair  Gara's   scenario.  The   dividend  would   begin  at                                                                    
approximately $1300 and would  climb. The difference between                                                                    
a payout of 5.25 percent and  5 percent was difficult to see                                                                    
from year to  year in the model. He indicated  that the draw                                                                    
to  the  GF in  FY  18  would be  $1.6  billion  and to  the                                                                    
dividend fund would be $884 million.                                                                                            
                                                                                                                                
Vice-Chair  Gara asked  if the  draw for  services began  at                                                                    
$1.6 million  and would go  up slightly. He wondered  if the                                                                    
amount  was similar  to the  other plans.  He noted  using a                                                                    
more  aggressive  payout.  He  wondered  if  the  government                                                                    
services payout would  be slightly higher or the  same as in                                                                    
the current  version of HB  115. Mr. Painter  responded that                                                                    
in the current version of HB  115 the payout to the GF would                                                                    
be  $1.692 billion.  In Vice-Chair  Gara's version  would be                                                                    
$1.642 billion. There would be a difference of $50 million.                                                                     
                                                                                                                                
2:07:30 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton asked  if the  deficit was  maintained over                                                                    
all  of  the  years  [in  Vice-Chair  Gara's  example].  Mr.                                                                    
Painter responded, "Yes it does."                                                                                               
                                                                                                                                
Co-Chair  Seaton asked  if  it  was the  case  in the  other                                                                    
scenario.  Mr.  Painter replied  that  in  HB 115  with  the                                                                    
income tax there would be  no deficit. He noted that without                                                                    
the  income tax  the  deficit would  remain. The  governor's                                                                    
bill closed the  deficit eventually but not  towards the end                                                                    
of the period.                                                                                                                  
                                                                                                                                
Representative  Wilson  asked  about  UGF  revenue.  In  the                                                                    
models  the  committees  had been  shown,  revenue  did  not                                                                    
appear  to  be  moving  much.  She  wondered  if  a  certain                                                                    
percentage  of growth  in  UGF  was assumed  in  all of  the                                                                    
plans.  Mr.  Painter  responded  that  the  current  revenue                                                                    
streams  represented in  blue bars  were according  to DOR's                                                                    
revenue forecast  which did not  change. There was  a slight                                                                    
difference   because  the   governor's   plan  reduced   the                                                                    
percentage   going  to   royalties  to   the  constitutional                                                                    
minimum, which increased UGF revenue  slightly. For the most                                                                    
part,  all of  the  plans did  not make  a  large change  to                                                                    
existing revenue.  A green  bar was  added that  reflected a                                                                    
payout from the ERA.                                                                                                            
                                                                                                                                
Representative Wilson  relayed that in the  status quo model                                                                    
the line went straight across  and was close to $4.2 billion                                                                    
or $4.3 billion. She wondered  if Mr. Painter was indicating                                                                    
that the growth  was based on one of the  bars. She wondered                                                                    
if  the formula  was  making the  line  change. Mr.  Painter                                                                    
responded that the dotted line  on the upper left-hand chart                                                                    
did not  change through any  of the plans. It  reflected the                                                                    
budget less  dividends. Instituting  any of the  plans being                                                                    
discussed could be seen on  the black bar that reflected the                                                                    
budget including  dividends. He  returned to the  status quo                                                                    
graphs  and  pointed  to  the  dotted  line  which  remained                                                                    
static.  He highlighted  that the  black line  that included                                                                    
the dividends increased due to dividends increasing.                                                                            
                                                                                                                                
Representative  Wilson asked  if the  numbers reflected  the                                                                    
assumption that oil prices would  remain the same. She asked                                                                    
if she was  accurate. Mr. Painter answered  that the revenue                                                                    
numbers that were used were  from DOR's revenue forecast for                                                                    
each year. The department built  in an increase in price and                                                                    
decrease  in  production  over time.  Representative  Wilson                                                                    
thought it was difficult to know what each line was doing.                                                                      
                                                                                                                                
Vice-Chair Gara  commented that they were  discussing policy                                                                    
calls within  a range that  Mr. Teal testified to.  He asked                                                                    
about  the impact  on the  deficit and  the CBR  by using  a                                                                    
higher  percentage  payout.  Mr.  Teal  responded  that  the                                                                    
amount  of payout  changed by  about $125  million for  each                                                                    
quarter point increase in the  percentage. He suggested that                                                                    
going from  a 5.25 percent  payout to a 4.75  percent payout                                                                    
the payout  would drop by  about $250 million.  He continued                                                                    
that  over time  the 4.75  percent payout,  after 20  years,                                                                    
would  actually payout  more than  the  5.25 percent  payout                                                                    
because more  money would have  been left in the  corpus and                                                                    
in the ERA to generate a higher level of income.                                                                                
                                                                                                                                
2:12:29 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara commented that the  chart that was presented                                                                    
on a  previous day showed  that for  the first 20  years the                                                                    
higher payout provided a greater  payout, but afterwards the                                                                    
payout  was smaller.  He asked  if  he was  thinking of  the                                                                    
crossover chart from a prior  day. Mr. Teal replied, "That's                                                                    
correct."                                                                                                                       
                                                                                                                                
Vice-Chair Gara  ran another scenario.  He suggested  a 5.25                                                                    
percent payout for  2 years, a 5.0 percent  payout after the                                                                    
2  years, with  a split  of 67  percent to  services and  33                                                                    
percent  to  dividends.  He asked  how  the  scenario  would                                                                    
affect the  dividend and the  payout. Mr. Painter  noted the                                                                    
change, which was  not very large, but  reduced the dividend                                                                    
by about  $50. Vice-Chair Gara  asked what was added  to the                                                                    
payout  for state  services. Mr.  Painter  replied that  the                                                                    
payout of  33 percent  to the general  fund would  be $1.692                                                                    
million.  At  35  percent  the GF  payout  would  be  $1.642                                                                    
million. There was a difference of $50 million.                                                                                 
                                                                                                                                
Co-Chair Seaton asked  about the deficit amount  in the most                                                                    
recent scenario. Mr. Painter replied  that the deficit in FY                                                                    
26  would be  approximately  $300  million. Co-Chair  Seaton                                                                    
suggested that  the difference between the  current scenario                                                                    
and HB   115  was the  income tax. He  asked Mr.  Painter to                                                                    
reinsert  the  income  tax revenue.  It  appeared  that  the                                                                    
deficit would  be gone in  FY 22. Mr. Painter  confirmed the                                                                    
representative  was correct.  Co-Chair Seaton  asked if  the                                                                    
approximate payout would  be about $1250 going  up to $1500.                                                                    
Mr. Painter responded affirmatively.                                                                                            
                                                                                                                                
Co-Chair Seaton  asked for the comparison  of the volatility                                                                    
with  and  without  an  income  tax.  In  other  words,  the                                                                    
legislature was trying to smooth  out volatility with a POMV                                                                    
plan but  with two different  revenue sources. He  asked Mr.                                                                    
Painter  to  show  the committee  an  example.  Mr.  Painter                                                                    
indicated  that   the  chart  showed  the   previous  9-year                                                                    
investment returns with an income  tax. He then switched the                                                                    
model  to reflect  the  numbers without  an  income tax.  He                                                                    
noted that  the largest difference  was the CBR  balance. He                                                                    
relayed  that with  an  income  tax there  would  be a  much                                                                    
larger CBR  balance. Without an  income tax the  CBR balance                                                                    
would decline.                                                                                                                  
                                                                                                                                
Co-Chair Seaton  asked if  Mr. Painter  had shown  the model                                                                    
with the  reverse 9  years as well.  Mr. Painter  showed the                                                                    
reverse  with   the  income  tax   and  then   without.  The                                                                    
difference in  reserve levels at  the end of FY 26  was that                                                                    
without  the income  tax it  was  approximately $6  billion,                                                                    
with the  income tax it  was approximately $12.7  billion to                                                                    
$13 billion.                                                                                                                    
                                                                                                                                
2:16:35 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  pointed to the modeling  line and                                                                    
asked  about  any  significant changes  beyond  the  10-year                                                                    
period reflected in the model.  He wondered about any spikes                                                                    
or curves.  Mr. Painter  explained that LFD  did not  have a                                                                    
revenue  forecast for  the  years Representative  Guttenberg                                                                    
mentioned. It  would be difficult  to say if there  would be                                                                    
any  difference in  an overall  picture without  a forecast.                                                                    
Representative  Guttenberg  was  aware  that  Department  of                                                                    
Natural   Resources  had   certain  projections   and  field                                                                    
explorations and development plans into the future.                                                                             
                                                                                                                                
Co-Chair  Seaton asked  members if  they wanted  to see  any                                                                    
other scenarios modeled.                                                                                                        
                                                                                                                                
Representative  Wilson asked  Mr. Painter  to model  Senator                                                                    
Dunleavy's  scenario and  Senator  Steadman's scenario.  Mr.                                                                    
Painter  showed the  50/50  plan.  He had  not  seen a  bill                                                                    
presently for the  plan. The plan used the  same formula for                                                                    
payouts to  the GF as  was used for the  dividend currently.                                                                    
The  model  had  higher  dividends   and  was  sensitive  to                                                                    
realized income. It also  showed somewhat declining reserves                                                                    
depending  on  the   assumptions.  Senator  Dunleavy's  plan                                                                    
included  budget   cuts  of   increasing  amounts.   It  was                                                                    
difficult to  show that point  in the model. He  thought the                                                                    
cuts equaled $1 billion.                                                                                                        
                                                                                                                                
Representative  Wilson interjected  that  the Senate's  plan                                                                    
was to reduce the budget by  $750 million in the following 3                                                                    
years.  Mr.  Painter  indicated  that  the  model  currently                                                                    
showed $750 million in reductions,  although taken all in FY                                                                    
18. The  visible impacts  included stabilizing  reserves and                                                                    
increasing the ERA.                                                                                                             
                                                                                                                                
Representative  Wilson   asked  to  see   Senator  Stedman's                                                                    
version  applied to  the model.  Mr. Painter  modeled SB  21                                                                    
[Legislation offered in 2017 -  Short Title: PERMANENT FUND:                                                                    
INCOME; POMV;  DIVIDENDS]. It reflected  a 4.5  percent POMV                                                                    
with  a payout  split of  50  percent for  dividends and  50                                                                    
percent  for government  services. The  model included  $750                                                                    
million  of cuts.  Without the  $750 million  in cuts  there                                                                    
would be  unplanned draws. He  added that because  the plans                                                                    
both  had higher  dividends, there  would need  to be  other                                                                    
action taken to  avoid the unclaimed draws.  He relayed that                                                                    
$750 million in reductions would be an answer.                                                                                  
                                                                                                                                
Representative  Wilson asked  if  the gap  for both  Senator                                                                    
Dunleavey's  plan  and  Senator  Steadman's  plan  was  $300                                                                    
million. Mr.  Painter did not  say an amount.  However, with                                                                    
$750 million  of cuts the  deficit under SB 21  would shrink                                                                    
to $150 million  by FY 26. Under the 50/50  plan the deficit                                                                    
would  be  approximately $287  million.  He  added that  the                                                                    
50/50 plan used investment returns.  If applied to the prior                                                                    
9 years, the dividend moved  significantly and the payout to                                                                    
services also changed. It would  make it through the period,                                                                    
but it  would likely  have extreme  swings. The  reverse had                                                                    
similar  features. Senate  Bill 21  had more  stable payouts                                                                    
and dividends.  He showed the  model with $750  million cuts                                                                    
and then without.                                                                                                               
                                                                                                                                
2:22:01 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked about the  impact on jobs in the state                                                                    
and the  impact on  the length of  the current  recession by                                                                    
cutting  another  $750 million  from  the  budget. Mr.  Teal                                                                    
thought  Vice-Chair Gara's  question should  be directed  to                                                                    
someone  else. Others  had previously  addressed the  topic.                                                                    
The Legislative  Finance Division  focused on the  impact to                                                                    
the treasury.                                                                                                                   
                                                                                                                                
2:22:54 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  mentioned  that  the only  bill  that  had                                                                    
passed  was the  previous year's  Senate bill.  He asked  if                                                                    
last year's bill and the  governor's bill were the same. The                                                                    
dividend would  be about $1000. Mr.  Teal responded, "That's                                                                    
correct, they're very similar bills."                                                                                           
                                                                                                                                
Vice-Chair Gara  asked if Representative Millet's  bill from                                                                    
the prior year offered $1000.  He asked if the dividend fell                                                                    
after $1000. Mr. Painter did  not recall the modeling of the                                                                    
bill Vice-Chair  Gara was referring  to. He believed  it was                                                                    
the same as Senator McGuire's bill.                                                                                             
                                                                                                                                
2:23:50 PM                                                                                                                    
                                                                                                                                
Representative Grenn asked to for  Mr. Painter to use the HB                                                                    
115  model  and change  the  POMV  payout from  year-to-year                                                                    
starting at  5.75 percent and  decreasing by .25  percent to                                                                    
show 5.5  percent, 5.25 percent,  then 5 percent.  He wanted                                                                    
to  see  if  anything  changed  substantially.  Mr.  Painter                                                                    
showed the 3 POMV values.                                                                                                       
                                                                                                                                
Co-Chair  Seaton  observed that  in  the  model the  deficit                                                                    
would be  gone in 2024. He  asked to see the  volatility for                                                                    
the  previous  9  years.  Mr.  Painter  reported  the  model                                                                    
showing the last 9 years and then the reverse.                                                                                  
                                                                                                                                
Co-Chair   Seaton  appreciated   being  able   to  see   the                                                                    
volatility  based on  real returns  to  avoid getting  stuck                                                                    
thinking the state would have a constant return each year.                                                                      
                                                                                                                                
2:26:15 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  asked if the model  was available                                                                    
for  members to  use  independently.  Mr. Painter  indicated                                                                    
that there were  several people in the office  that would be                                                                    
available to run  the modeling. Mr. Teal  indicated that the                                                                    
program was not  designed to be used  for someone unfamiliar                                                                    
with the program.                                                                                                               
                                                                                                                                
Co-Chair  Seaton asked  if Mr.  Teal  would provide  printed                                                                    
copies of  the scenarios.  He wanted members  to be  able to                                                                    
request   a  particular   scenario.   Mr.  Teal   responded,                                                                    
"Absolutely."  He   suggested  that  members  come   to  the                                                                    
Legislative Finance  office where  there was a  large screen                                                                    
that made it much easier to  see the model. The only problem                                                                    
with  printing the  scenarios  was that  they  did not  come                                                                    
labeled automatically.  Based on  the changes  the committee                                                                    
had  been   discussing  in  the  current   meeting,  it  was                                                                    
difficult  to tell  exactly what  they were  looking at  any                                                                    
point  in time.  Labeling would  have to  be carefully  done                                                                    
manually.  He reiterated  that  legislators  and staff  were                                                                    
welcome to come to the  office to view various scenarios and                                                                    
to have any of them printed.                                                                                                    
                                                                                                                                
Co-Chair Seaton asked Mr. Teal  to explain the green area in                                                                    
the upper  left-hand corner. He was  specifically interested                                                                    
in the  green bars in FY  25 and FY 26.  Mr. Painter relayed                                                                    
that they were surpluses. The  model assumed that they would                                                                    
go first  to the Constitutional Budget  Reserve (CBR). There                                                                    
could be a plan in which they went elsewhere.                                                                                   
                                                                                                                                
Co-Chair Seaton asked  to return to the HB  115 scenario. He                                                                    
asked him to  include a budget growth rate of  1 percent. He                                                                    
wondered if the  deficit would be eliminated by FY  25 or FY                                                                    
26.  Mr. Painter  relayed  that  FY 26  was  the first  year                                                                    
without a deficit in the scenario.                                                                                              
                                                                                                                                
Co-Chair Seaton asked about the  value of the Permanent Fund                                                                    
itself at  the same  point in  time. He  also asked  to look                                                                    
closer at  the red and blue  bars on the chart.  Mr. Painter                                                                    
reported that  the value of the  total PF in FY  26 would be                                                                    
$72 billion.                                                                                                                    
                                                                                                                                
Co-Chair Seaton  asked what the  difference was  between the                                                                    
red bar  and the  blue bar. Mr.  Painter responded  that the                                                                    
red  bar  represented  the status  quo.  He  furthered  that                                                                    
because it had  the unplanned draws from the  ERA, the value                                                                    
would be $69.1 billion. There  was an approximate $3 billion                                                                    
difference.                                                                                                                     
                                                                                                                                
2:31:43 PM                                                                                                                    
                                                                                                                                
Mr. Teal pointed out that on  the graph below the PF balance                                                                    
there  was  a  percent  real  value. In  FY  18  it  equaled                                                                    
118 percent. By FY  26, it was 109 percent.  He concluded it                                                                    
was more than keeping up  with inflation. It was another way                                                                    
to look  at the  Permanent Fund  balance. He  suggested that                                                                    
legislators would  want to  maintain the  real value  of the                                                                    
Permanent Fund.                                                                                                                 
                                                                                                                                
Vice-Chair Gara  asked if  Mr. Teal  was comfortable  with a                                                                    
draw  amount of  between 4.5  percent and  5.25 percent.  He                                                                    
realized the  percentage was  a policy call  on the  part of                                                                    
the  legislature. He  wondered if  the range  would preserve                                                                    
the earnings reserve.  He asked if between  4.25 percent and                                                                    
5.25 percent  was a safe  range as  a policy call.  Mr. Teal                                                                    
replied in the affirmative.                                                                                                     
                                                                                                                                
Vice-Chair Gara  opined that there  was presently  a crisis.                                                                    
He asked about a scenario in  which for 2 years, 5.5 percent                                                                    
was  used. After  2 years  the percent  would go  down to  5                                                                    
percent. He asked if the idea would be a safe policy call.                                                                      
                                                                                                                                
Mr. Teal  believed the earnings reserve  balance was healthy                                                                    
enough  to support  a  higher  payout for  a  few years.  He                                                                    
discouraged a 5.5 percent payout.  He reiterated that a 5.25                                                                    
payout was  aggressive. Based on  the current  oil forecast,                                                                    
the  Department  of  Revenue  testified  that  5.25  percent                                                                    
payout was aggressive,  but doable. It would  not impede the                                                                    
state's ability to  pay out of the ERA. The  bottom line was                                                                    
that it would  not likely be too dangerous to  have a payout                                                                    
of 5.5  percent for a  few years. However, the  state really                                                                    
did not  need that  amount as  long as  there was  a reserve                                                                    
balance that was  not endangered. The point  was to preserve                                                                    
the CBR as  an emergency reserve fund. He  continued that as                                                                    
long as  the legislature  did not mind  a lower  payout from                                                                    
the ERA, the  state would be fine. He relayed  that a higher                                                                    
payout would take  more money from the  earnings reserve and                                                                    
less  money from  the CBR.  The state  would still  need the                                                                    
same amount of money given  a level of expenditures. A lower                                                                    
payout would  provide less money  from the ERA,  therefore a                                                                    
larger deficit and  a larger draw from the CBR.  In the long                                                                    
run it probably did not matter significantly.                                                                                   
                                                                                                                                
^PRESENTATION:  EXPENDITURE  REDUCTION OVERVIEW  BY  RANDALL                                                                  
HOFFBECK, COMMISSIONER, DEPT. OF REVENUE                                                                                      
                                                                                                                                
2:36:32 PM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  was asked to report  the department's                                                                    
progress in reducing government  expenditures over the prior                                                                    
few years. He mentioned having  talked with a professor from                                                                    
the University of Potsdam who  had traveled around the world                                                                    
talking with  people associated with sovereign  wealth funds                                                                    
like Alaska's  Permanent Fund. The people  the professor had                                                                    
spoken with  reported having the  same challenge  Alaska was                                                                    
faced with  - incorporating  sovereign wealth into  a fiscal                                                                    
fix  in a  changing commodity-based  economy. The  professor                                                                    
noted another  mutual difficulty  was getting  policy makers                                                                    
to decide in the present to  prevent an event in the future,                                                                    
especially when they would be  held accountable based on the                                                                    
draconian  nature  of  their decision.  The  professor  also                                                                    
emphasized  the  importance  of  having  the  best  possible                                                                    
information  available and  keeping the  public informed  in                                                                    
the  process. The  professor  also  suggested cutting  first                                                                    
prior to  making other  decisions. The  commissioner thought                                                                    
the state had already made appropriate reductions.                                                                              
                                                                                                                                
2:39:21 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  began  with  slide  2:  "Expenditure                                                                    
Reductions to  Date." He reviewed the  numbers, derived from                                                                    
LFD, showing  an expenditure reduction  of 44  percent since                                                                    
FY 13.  He detailed that  28 percent  had been cut  from the                                                                    
operating  budget  and 95  percent  had  been cut  from  the                                                                    
capital budget  with the weighted average  being 44 percent.                                                                    
The state  had reduced  spending from  $7.8 billion  down to                                                                    
$4.3 billion, an astonishing  reduction to expenditures over                                                                    
the period. He had spoken  with many people around the state                                                                    
who  indicated  that  in  order  to  talk  about  additional                                                                    
revenues, further cuts  had to be made  first. People needed                                                                    
to  feel  that  government  had   been  reduced  to  a  more                                                                    
efficient   level  before   talking   about  other   revenue                                                                    
solutions such as  using the ERA and  implementing taxes. He                                                                    
argued  that the  cuts had  been made,  and it  was time  to                                                                    
discuss other revenue options to close the fiscal gap.                                                                          
                                                                                                                                
2:40:31 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  advanced  to slide  3:  "Expenditure                                                                    
Reductions to Date."  He first pointed to  the reductions in                                                                    
capital budget. The budget had  been reduced by $1.8 billion                                                                    
with  $100 million  remaining in  the budget.  The operating                                                                    
budget, not including the K-12  formula, had been reduced by                                                                    
$1.6 billion  with $2.5  billion left.  He explained  why he                                                                    
removed  K-12  formula  funding  and  the  direct  community                                                                    
payments  out of  the reduction  calculations. He  broke out                                                                    
the items in order to see  what areas would be impacted with                                                                    
additional large-scale  cuts moving  forward. He  also noted                                                                    
that  removing  the  education funding  out  of  the  agency                                                                    
portion  of   the  operating  budget  showed   the  relative                                                                    
significance of the cuts that have been made.                                                                                   
                                                                                                                                
Commissioner  Hoffbeck  referred  to slide  4:  "Expenditure                                                                    
Reductions to  Date: Unrestricted General Fund  Reduction by                                                                    
Agency  -  FY15  Management  Plan   to  FY18  Governor."  He                                                                    
explained the  level of impact  to many of the  agencies. He                                                                    
highlighted that  the Department of Commerce,  Community and                                                                    
Economic  Development had  been reduced  54.3 percent  since                                                                    
FY 15 to  the FY 18  management plan. He continued  with the                                                                    
Department of  Labor and Workforce  Development which  had a                                                                    
reduction of  37 percent. He  indicated the  chart continued                                                                    
through all  of the departments.  The Department of  Law had                                                                    
been reduced by  20 percent. The administration  had left it                                                                    
up to  the Legislature and  to Judiciary to  determine their                                                                    
own reductions.  The legislature  had made  significant cuts                                                                    
of  16 percent.  He noted  that  cuts to  the Department  of                                                                    
Health and  Social Services, the Department  of Corrections,                                                                    
the Department  of Public Safety, the  University of Alaska,                                                                    
and the  Department of Education and  Early Development were                                                                    
under 16  percent per agency.  He highlighted  that although                                                                    
some of the percentages were  lower, the dollar amounts were                                                                    
some of the highest that had been made.                                                                                         
                                                                                                                                
Commissioner  Hoffbeck  continued   that  the  governor  had                                                                    
promised 16  percent cuts  when he  was running  for office.                                                                    
Some  people  suggested  he  had  not met  his  goal  -  the                                                                    
commissioner  disagreed.  He  believed  the  goal  had  been                                                                    
clearly  met. He  noted  that on  the  governor's website  a                                                                    
report could  be found titled,  "Examples of state  cuts and                                                                    
closures to date."  It showed all of the  various things the                                                                    
state  had  done in  an  effort  to accommodate  expenditure                                                                    
levels. It provided a significant amount of detail.                                                                             
                                                                                                                                
2:44:08 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  turned   to  slide  5:  "Expenditure                                                                    
Reductions  to Date."  He reported  that by  the end  of the                                                                    
current fiscal year 7 trooper  facilities, 600 public health                                                                    
centers,  3   maintenance  stations,  1   full  correctional                                                                    
facility,  2   youth  detention  facilities,   multiple  job                                                                    
centers, and 1 fire training  facility will close across the                                                                    
state. There  were about  2500 fewer  state employees  as of                                                                    
October of the  previous year (DOL numbers)  and another 500                                                                    
state  employees  would be  cut  by  the  end of  the  year.                                                                    
Additionally, state  employees would  not receive a  cost of                                                                    
living adjustment for the following  3 years. There would be                                                                    
mandatory  unpaid  furlough  days and  increased  healthcare                                                                    
costs.  He continued  that for  the exempt  employees, merit                                                                    
increases had been frozen.                                                                                                      
                                                                                                                                
2:45:47 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  continued  to slide  6:  "Additional                                                                    
Expenditure Reduction Impact Scenarios":                                                                                        
                                                                                                                                
   · Capital   Program    Spending   is   already    at   an                                                                    
     unsustainably low level and will likely need to be                                                                         
     increased in the very near future.                                                                                         
                                                                                                                                
   · Agency Operations Spending has already been reduced                                                                        
     28%.   Although  additional   reductions  are   planned                                                                    
     through   transitioning   to    shared   services   and                                                                    
     consolidating   program   delivery  there   is   little                                                                    
     additional  savings that  can be  achieved without  the                                                                    
     reduction or  elimination of the programs  and services                                                                    
     that these expenditures support.                                                                                           
                                                                                                                                
   · Indirect Expenditures are currently being reviewed for                                                                     
     modification or  elimination. The  largest of  which is                                                                    
     the oil  and gas  tax credit  program which  is already                                                                    
     constrained to the statutory  annual payout formula but                                                                    
     has significant accrued  liability that eventually will                                                                    
     need  to  be paid  through  direct  payment or  reduced                                                                    
     revenues.                                                                                                                  
                                                                                                                                
   · Direct Payments to Municipalities and to Program                                                                           
     Participants  represent over  46%  of  the total  state                                                                    
     budget.  Cash  out the  door  to  support programs  and                                                                    
     services statewide.                                                                                                        
                                                                                                                                
Commissioner Hoffbeck  indicated that  the slide  showed the                                                                    
areas where expenditures had occurred.  One of the questions                                                                    
was where  additional cuts could  be made. The Senate  had a                                                                    
plan to  reduce the  budget by  an additional  $750 million.                                                                    
Senator  Dunleavy's proposal  included budget  cuts of  $1.1                                                                    
billion. One  of the ideas was  to hold spending flat  for a                                                                    
decade  to keep  government from  growing without  affecting                                                                    
the public.  He thought  putting such a  message out  to the                                                                    
public would  be a disservice.  He pointed to  the scenarios                                                                    
where  the  state  could  cut  spending  going  forward.  He                                                                    
relayed  that  the  capital  program   spending  was  at  an                                                                    
unsustainably  low level  and would  likely be  increased in                                                                    
the following few years.                                                                                                        
                                                                                                                                
The  commissioner  continued  that  not  having  an  ongoing                                                                    
maintenance and  capital program has  had a large  impact on                                                                    
the  construction industry.  Agency operations  spending was                                                                    
down 28  percent. Although  the administration  continued to                                                                    
look for  reductions through  consolidation in  the delivery                                                                    
of services  and a shared services  model for administrative                                                                    
functions,  it   was  difficult  to  find   savings  without                                                                    
reducing or  eliminating programs.  There was  some movement                                                                    
in  making  changes  to indirect  expenditures  which  would                                                                    
affect  the  private sector.  He  continued  that the  state                                                                    
could  reduce  its  direct payments  to  municipalities  and                                                                    
program  participants which  represented 46  percent of  the                                                                    
total state  budget. He  reiterated that  46 percent  of the                                                                    
state's  total  budget was  cash  out  the door  to  support                                                                    
programs and services statewide.                                                                                                
                                                                                                                                
2:49:05 PM                                                                                                                    
                                                                                                                                
Commissioner   Hoffbeck  moved   to  slide   7:  "Additional                                                                    
Expenditure  Reduction Impact  Scenarios:  Current Level  of                                                                    
Direct Payment  to Municipalities." The slide  reflected the                                                                    
five  largest payout  communities including  Fairbanks, Mat-                                                                    
Su,  Anchorage,  Kenai, and  Juneau.  The  chart showed  the                                                                    
amounts  and  the  four  major   funding  programs  for  the                                                                    
communities.  The   programs  included  the   the  education                                                                    
formula, the School Debt  Assistance Program, the Retirement                                                                    
Assistance  Program and  the  Community Assistance  Program.                                                                    
Fairbanks received $159.8 million  per year; Mat-Su received                                                                    
$224.5  million;  Anchorage  $449.7  million;  Kenai  $103.7                                                                    
million;  and  Juneau   $58.6  million.  The  municipalities                                                                    
budgets were  very dependent  on the  revenues that  went to                                                                    
support  their  operations.  The statewide  total  was  $1.6                                                                    
billion.                                                                                                                        
                                                                                                                                
Representative  Wilson  asked  about the  retirement  system                                                                    
payout for  the Public  Employees' Retirement  System (PERS)                                                                    
and  the  Teachers'  Retirement System  (TRS).  Commissioner                                                                    
Hoffbeck responded in the affirmative.                                                                                          
                                                                                                                                
2:50:47 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  continued  to slide  8:  "Additional                                                                    
Expenditure Reduction Impact  Scenarios: Reduction in Direct                                                                    
Payment to  Municipalities." He spoke about  the scenario on                                                                    
the  slide that  seemed  extreme until  further review.  The                                                                    
scenario  included  cutting  education funding  10  percent.                                                                    
Education  funding would  be  cut by  10  percent and  would                                                                    
completely  eliminate  school  debt  assistance,  retirement                                                                    
assistance, and  community assistance to the  communities on                                                                    
the chart.  The scenario would  reduce the budget  by $464.4                                                                    
million. The  legislature would have  to find  an additional                                                                    
$300 million in  reductions on the low end. On  the high end                                                                    
the  legislature  would  have  to find  an  additional  $650                                                                    
million in  reductions. The  cuts in  the scenario  would be                                                                    
draconian  cuts  to  the  municipalities.  It  would  likely                                                                    
implode most of the  budgets of local communities. Questions                                                                    
about  the   impact  to  communities  and   how  they  would                                                                    
compensate had  to be answered.  He also wondered  what else                                                                    
would be  left to  cut in  a cut-only scenario  to get  to a                                                                    
budget solution.                                                                                                                
                                                                                                                                
2:51:51 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  advanced  to  slide  9:  "Additional                                                                    
Expenditure  Reduction Impact  Scenarios." He  wondered what                                                                    
it would take to offset the  scenario of cuts. In looking at                                                                    
the 5 large communities that had  a tax base and the ability                                                                    
to  raise  revenues  Fairbanks   would  have  to  raise  its                                                                    
property tax mill rate by  4.9 mills (36 percent); Mat-Su by                                                                    
5 mills (50  percent); Anchorage by 3.8  mills (26 percent);                                                                    
Kenai by  2.2 mills  (50 percent); and  Juneau by  5.3 mills                                                                    
(49 percent).  Mill rates would have  to be raised by  25 to                                                                    
50  percent to  offset the  reductions in  the state's  cash                                                                    
payments  to  municipalities.  He  wondered  if  communities                                                                    
would choose to  pay for all of the items,  or if they would                                                                    
eliminate some.                                                                                                                 
                                                                                                                                
Commissioner   Hoffbeck   suggested   that  there   was   no                                                                    
flexibility with  school debt reimbursement due  to it being                                                                    
a general obligation  debt. It was debt based  on bonds that                                                                    
were  sold  on  the  full  faith and  credit  of  the  local                                                                    
government.  The  bonds   had  to  be  paid   by  the  local                                                                    
jurisdictions whether  or not the state  participated in the                                                                    
school  debt reimbursement.  Regarding PERS  and TRS,  there                                                                    
were constitutional requirements  for the retirement system.                                                                    
Payments could be delayed for a  time, but they could not be                                                                    
avoided, and  municipalities would  eventually have  to pick                                                                    
up  the payments.  He explained  that community  assistance,                                                                    
money  that  was  not  necessarily   tied  to  any  specific                                                                    
programs,  would be  money that  would  have to  be made  up                                                                    
elsewhere. There  were many rural  communities that  did not                                                                    
have a  tax base or capacity  to fund these revenues  if the                                                                    
state no longer provided them.                                                                                                  
                                                                                                                                
Commissioner   Hoffbeck   wanted   to  clarify   one   other                                                                    
misrepresentation   about  the   legislative  body   or  the                                                                    
administration  trying to  defend maintaining  or growing  a                                                                    
bloated  government.  In  every  scenario  government  would                                                                    
shrink to  some extent. He  suggested that the  question was                                                                    
about  what  the state  valued  enough  to preserve  in  the                                                                    
process of addressing the fiscal gap.                                                                                           
                                                                                                                                
Commissioner  Hoffbeck continued  to  slide 10:  "Additional                                                                    
Expenditure  Reduction Impact  Scenarios: Direct  Payment to                                                                    
Recipient Programs":                                                                                                            
                                                                                                                                
Direct Payment to Recipient Programs:                                                                                           
                                                                                                                                
   · Housing Programs                                                                                                           
   · AK Temporary Assistance                                                                                                    
   · Child Care Benefits                                                                                                        
   · Community Developmental Disability Grants                                                                                  
   · Behavioral Health Prevention/ Intervention/ Treatment/                                                                     
     Recovery Grants                                                                                                            
   · Adult Public Assistance                                                                                                    
   · General Relief Assistance                                                                                                  
   · Food Stamps                                                                                                                
   · Pioneer Home                                                                                                               
   · Senior Benefits                                                                                                            
   · WIC                                                                                                                        
   · Foster Care                                                                                                                
   · Subsidized Adoptions                                                                                                       
   · LIHEAP (Heating Assistance)                                                                                                
                                                                                                                                
                                                                                                                                
Commissioner Hoffbeck  relayed that slide listed  the larger                                                                    
direct payment  to recipient programs.  He read the  list on                                                                    
the slide. He  suggested that programs listed  were the next                                                                    
programs that  to be cut  potentially. He thought  the state                                                                    
needed  to  consider all  aspects  when  looking at  cutting                                                                    
funding for various programs.                                                                                                   
                                                                                                                                
2:56:29 PM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck continued to slide 11: "Additional                                                                        
Expenditure Reduction Impact Scenarios":                                                                                        
                                                                                                                                
   · Just because the State stops funding a program or                                                                          
     service doesn't  mean that the  needs for  that service                                                                    
     go away. However, the Federal  funding match often does                                                                    
     go  away  causing  severe   collateral  damage  to  the                                                                    
     programs, services and the economy.                                                                                        
                                                                                                                                
   · Cuts flow downhill. If the State stops funding a                                                                           
     program or service the burden often falls to the local                                                                     
     governments and then to non-profits, the private                                                                           
     sector, or finally to the individual.                                                                                      
                                                                                                                                
   · State expenditure cuts that don't recognize on going                                                                       
     needs are a "pass through" solution. The expense                                                                           
     doesn't go away it just shifts to an even smaller pool                                                                     
     of resources.                                                                                                              
                                                                                                                                
   · A statewide solution, such as a broad-based sales or                                                                       
     income tax, broadens the funding for the delivery of                                                                       
     programs and services by capturing revenues from out                                                                       
     of state workers and visitors.                                                                                             
                                                                                                                                
Commissioner  Hoffbeck  offered  that   even  if  the  state                                                                    
stopped funding services, the need  for those services would                                                                    
not go  away. He thought it  was possible the need  would be                                                                    
greater.  Reductions in  state funding  might result  in the                                                                    
loss of matching federal dollars.  Cuts rolled down hill. He                                                                    
continued to review the slide bullet points.                                                                                    
                                                                                                                                
Commissioner Hoffbeck  reported having been asked  about the                                                                    
governor's  take on  the bills  that had  been offered.  The                                                                    
governor did  not comment  on bills  before they  made their                                                                    
way  through   the  legislative   process.  He   wanted  the                                                                    
legislative   process   to   work  to   its   fullest.   The                                                                    
commissioner provided a quote  from the governor's state-of-                                                                    
the-state  address. The  governor  had relayed  that it  was                                                                    
time  to  move  beyond  the visionless  exercise  of  budget                                                                    
cutting  to  achieve   predetermined  cost  savings  without                                                                    
considering  their   impacts  and  costs  on   society.  The                                                                    
governor  had emphasized  the need  to start  thinking about                                                                    
how to build  Alaska instead of pitting  groups against each                                                                    
other in futile efforts to hold onto and maintain an ever-                                                                      
shrinking  pie,  tearing  the state  apart  cut-by-cut.  The                                                                    
state needed  a better plan.  The governor had  reviewed the                                                                    
reality of  a $3.2 billion  cut the previous summer.  He had                                                                    
asked  DOR to  model  an "all  cut" budget  to  see what  it                                                                    
looked  like.  He  concluded  that the  impact  on  such  an                                                                    
extreme reduction  did not meet  his vision for  Alaska, not                                                                    
currently or for the future.                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  quoted   Governor  Bill  Walker,  "A                                                                    
strong economy,  vibrant communities, healthy  families, and                                                                    
a  healthy environment  are worth  fighting for.  It's worth                                                                    
sacrificing for,  and it  is our  obligations to  the future                                                                    
generations  of  the  State  of  Alaska."  The  commissioner                                                                    
concluded that the price had  been paid and the state needed                                                                    
to  start talking  about additional  revenues including  the                                                                    
use of the Permanent Fund  earnings and looking at other tax                                                                    
solutions  for closing  the fiscal  gap.  He believed  there                                                                    
would be  a balance in  a mix  of additional cuts  and other                                                                    
revenues. The  additional cuts  needed to  be based  on good                                                                    
business decisions.  More damage could be  done depending on                                                                    
the  cuts and  the timing  of  the cuts.  He continued  that                                                                    
achieving  a dollar  goal could  not be  the only  focus for                                                                    
additional reductions.  He reported that the  state had been                                                                    
making reductions since  FY 13. The options  were known, and                                                                    
decisions  needed to  be  made. Until  the  state made  some                                                                    
decisions  it  would  be  difficult  to  return  to  growing                                                                    
Alaska.                                                                                                                         
                                                                                                                                
3:01:12 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara thanked  the commissioner.  He agreed  that                                                                    
the  state could  not cut  much more  of the  budget without                                                                    
hurting  people.  He  had  heard that  there  was  a  direct                                                                    
correlation  between continued  cuts and  costing the  state                                                                    
jobs. He asked the commissioner to comment.                                                                                     
                                                                                                                                
Commissioner Hoffbeck suggested that  there had been several                                                                    
people that had testified in  committee that there was a job                                                                    
loss cost  to cuts. The  most recent  study he had  seen was                                                                    
that the  greatest impact on  the economy was  cutting state                                                                    
workers.  If the  state were  to reduce  everyone's revenues                                                                    
slightly people  adjusted. However, when people's  jobs were                                                                    
cut, they tended  to leave the state.  Impacts then filtered                                                                    
into  the housing  market and  various other  areas. It  was                                                                    
difficult to adjust  to a total loss as  opposed to marginal                                                                    
changes in  income. He referred  to a study by  Institute of                                                                    
Social and Economic Research (ISER)  that concurred that the                                                                    
largest impact was the loss of state jobs.                                                                                      
                                                                                                                                
Vice-Chair  Gara  was  also concerned  about  how  long  the                                                                    
recession  would last.  He  mentioned  Mr. King's  testimony                                                                    
from  the previous  day about  an additional  $1 billion  in                                                                    
cuts equaling an  additional 20,000 job losses.  He asked if                                                                    
the commissioner  though the recession would  be extended to                                                                    
10 years.                                                                                                                       
                                                                                                                                
Commissioner  Hoffbeck could  not  speak  directly to  Vice-                                                                    
Chair  Gara's question  but  commented  that every  decision                                                                    
regarding cuts and new taxes  would have an impact. The only                                                                    
positive impact  was using the Earnings  Reserve for funding                                                                    
government services.  The money  in the ERA  was not  in the                                                                    
economy  and  would  be  new   money  in  the  economy.  The                                                                    
governor's plan  pushed for  maximizing the  use of  the ERA                                                                    
and the 5.25 percent draw rather than a lower draw.                                                                             
                                                                                                                                
3:04:14 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara stated that the  dialogue had changed in the                                                                    
building. He suggested  that now people were  talking that a                                                                    
flat budget equated to the  same level of services. However,                                                                    
like in education,  a flat budget in  Anchorage would equate                                                                    
to the loss  of 99 teachers in the following  year. He asked                                                                    
if Commissioner Hoffbeck  agreed that a flat  budget did not                                                                    
mean the same level of services.                                                                                                
                                                                                                                                
Commissioner Hoffbeck  reasoned that inflation  would impact                                                                    
costs.  Therefore,  holding  a  budget  flat  would  require                                                                    
adjusting for  those costs elsewhere.  Larger issues  had to                                                                    
do with some  of the underlying formula  programs within the                                                                    
state.  The governor  took  some criticism  at  the time  he                                                                    
released  his budget  that he  only had  about $100  million                                                                    
cuts in the budget. People  felt that was not addressing the                                                                    
problem  to the  fullest extent.  He argued  that there  was                                                                    
about $260  million in increased formula  costs and one-time                                                                    
and prior-year  expenditures that  were loaded in  the prior                                                                    
year  budget that  had to  be  compensated for  in order  to                                                                    
reach a zero increase in  the budget. He relayed 2 examples.                                                                    
Public  Employees' Retirement  System  (PERS) and  Teachers'                                                                    
Retirement System  cost the  state $58  million more  in the                                                                    
current year versus the prior  year. Oil and gas tax credits                                                                    
cost the  state $44 million  in the current year  versus the                                                                    
prior year.  He anticipated  upward pressure  from different                                                                    
areas of the budget besides  the inflation factor. Holding a                                                                    
budget flat for a long time would be very difficult.                                                                            
                                                                                                                                
3:06:15 PM                                                                                                                    
                                                                                                                                
Representative Wilson reported that  North Pole paid a sales                                                                    
tax and a  property tax. The community was  giving. Now, the                                                                    
state  was considering  an income  tax or  a sales  tax. She                                                                    
wondered about the  areas that had chosen not  to become any                                                                    
type of  municipality. She understood the  intention was for                                                                    
the entire state to be  under some type of local government.                                                                    
Each local government would decide  on the level of services                                                                    
to  provide  rather  than  the  state  deciding.  She  asked                                                                    
whether  discussions on  this topic  had  ensued within  the                                                                    
administration.                                                                                                                 
                                                                                                                                
Commissioner  Hoffbeck responded  there  had been  mandatory                                                                    
borough bills in  past legislatures that had  not passed. He                                                                    
reported having  done and  interview with  one of  the radio                                                                    
stations in  Anchorage recently and that  same question came                                                                    
up.  He indicated  that boroughs  had typically  formed when                                                                    
there was  a tax base. He  cited examples such as  the North                                                                    
Slope  Borough   which  had  formed   around  oil   and  gas                                                                    
development,  and the  Northwest  Arctic  Brough had  formed                                                                    
around  the Red  Dog  Mine. The  Denali  Borough had  formed                                                                    
around  the   Usibelli  Coal  Mine.   There  had   not  been                                                                    
significant  momentum in  borough formation  in areas  where                                                                    
there was  no economic  base. He did  not believe  the issue                                                                    
could  be resolved  in the  current bill.  Borough formation                                                                    
had  been discussed  over the  years and  was a  topic worth                                                                    
discussing  again.  However,   the  administration  had  not                                                                    
proposed a solution to the issue.                                                                                               
                                                                                                                                
Representative  Wilson understood  that there  used to  be a                                                                    
school tax per  person. She asked if  the administration had                                                                    
considered  imposing one  in areas  that  did not  currently                                                                    
provide funding  for their school.  She thought  things were                                                                    
very   unfair   in  the   state   regarding   the  way   the                                                                    
municipalities  were handled.  Anchorage  paid  for its  own                                                                    
police  department, whereas,  Fairbanks  utilized the  state                                                                    
police. She  wondered if  something such as  a head  tax had                                                                    
been  considered for  those areas  that were  not part  of a                                                                    
borough.  She thought  it  was important  to  get closer  to                                                                    
being more equitable around the state.                                                                                          
                                                                                                                                
Commissioner  Hoffbeck mentioned  that a  head tax  had been                                                                    
discussed in  the prior year.  He noted that  Senator Bishop                                                                    
had introduced  a school  head tax bill  in the  Senate. The                                                                    
bill had not had any  hearings schedule to-date. He admitted                                                                    
that  the   $25  minimum  tax   in  the  current   bill  was                                                                    
essentially  a head  tax. He  thought several  of the  bills                                                                    
under consideration  were dealing  with something akin  to a                                                                    
head tax.                                                                                                                       
                                                                                                                                
3:10:38 PM                                                                                                                    
                                                                                                                                
Representative Wilson  did not  see the bill  as a  head tax                                                                    
bill.   She  asked   for  information   on  the   additional                                                                    
expenditures impact scenarios.  She asked for a  list of the                                                                    
entities which  paid and  those that did  not. She  wanted a                                                                    
full picture of expenditures for the state.                                                                                     
                                                                                                                                
Commissioner Hoffbeck  responded that  he would  provide the                                                                    
documents she requested. He  mentioned an additional handout                                                                    
in member  packets titled, "State  Revenue Impact  On Alaska                                                                    
Communities."  It had  more communities  listed  that the  5                                                                    
noted on  the slide  presentation. He  would try  to provide                                                                    
her with a comprehensive list.                                                                                                  
                                                                                                                                
3:11:40 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  asked   about  the  administration's                                                                    
thought process regarding education  and health care and the                                                                    
roll the state played in each.                                                                                                  
                                                                                                                                
Commissioner   Hoffbeck   responded  that   the   governor's                                                                    
position  was  clear  that he  thought  a  strong  education                                                                    
system  and  strong communities  were  at  the core  of  the                                                                    
state. He reported  that when the governor  looked at making                                                                    
major  cuts in  those  areas versus  a  broad-based tax,  he                                                                    
favored a tax.                                                                                                                  
                                                                                                                                
Representative Pruitt  posed a question about  a willingness                                                                    
to discuss different delivery methods.                                                                                          
                                                                                                                                
Commissioner  Hoffbeck  believed  that  the  discussion  was                                                                    
absolutely  necessary.  He  thought the  discussion  had  to                                                                    
occur within the agencies.                                                                                                      
                                                                                                                                
Representative   Pruitt   appreciated   the   commissioner's                                                                    
response.  He pointed  out that  the cost  of the  education                                                                    
formula as it  applied to the five  listed large communities                                                                    
totaled  two-thirds  of  the total  cost  of  the  education                                                                    
formula. He reported  that since he had  been a legislature,                                                                    
the  state had  increased  the education  budget every  year                                                                    
with the except for the  previous year due to the governor's                                                                    
veto. However, the state was  still struggling with the same                                                                    
issues  regarding delivery  since  he first  arrived at  the                                                                    
legislature.  He surmised  that unless  the legislature  was                                                                    
willing  to have  difficult  conversations about  education,                                                                    
health care,  and their deliveries, they  would increase. He                                                                    
agreed  with Vice-Chair  Gara that  there  was an  automatic                                                                    
increase  to budgets  due to  inflation. He  thought members                                                                    
needed to discuss how things  were being delivered, not just                                                                    
how they were funded.                                                                                                           
                                                                                                                                
Commissioner  Hoffbeck agreed.  He  noted  that his  comment                                                                    
about making  smart cuts applied.  The state needed  to make                                                                    
reductions  in  the  right  places.  If  there  was  a  more                                                                    
efficient way  of delivering education and  health care with                                                                    
services remaining  sound, the administration  could support                                                                    
it. Unless  the state was  absolutely convinced there  was a                                                                    
way  to  save enough  money  to  balance the  budget,  other                                                                    
revenue options would need to be discussed.                                                                                     
                                                                                                                                
3:15:47 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg   mentioned  that  some   of  the                                                                    
communities that  were not organized  had voted  against the                                                                    
idea including Delta  Junction and Nenana. If  either of the                                                                    
communities had  voted in favor of  becoming a municipality,                                                                    
they would have  become very wealthy. They  would have taken                                                                    
in  a  large  swath  of  the pipeline.  If  they  had  taxed                                                                    
themselves,  they  would  have  received the  value  of  the                                                                    
pipeline  and the  state  would have  taken  the rest.  Both                                                                    
communities opted not to become  a municipality. He wondered                                                                    
whether the communities could be  included. He mentioned the                                                                    
idea  of  integrating  the  Legislative  Finance  Division's                                                                    
interactive model  with the economist's  models encompassing                                                                    
job losses  and other effects  on the economy. He  asked how                                                                    
close  the legislature  could get  to receiving  an accurate                                                                    
picture  by  integrating  several   factors.  He  asked  the                                                                    
commissioner for his insight.                                                                                                   
                                                                                                                                
Commissioner  Hoffbeck did  not believe  a picture  could be                                                                    
painted with a clear level  of certainty. There were several                                                                    
moving parts and  unknown factors. Alaska had  a more stable                                                                    
population  that  what  it  had in  the  80s.  However,  the                                                                    
administration did  not know what  the trigger  points might                                                                    
be for people to leave  the state. He thought the department                                                                    
could  reasonable model  the cost  economic impact,  but not                                                                    
the decision. He  agreed with the House  and Senate bringing                                                                    
in  experts  to help  legislators  in  making decisions.  He                                                                    
confirmed, that  DOR could not  deliver an  integrated model                                                                    
that would tell members the right answer.                                                                                       
                                                                                                                                
3:20:49 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  was concerned that the  commissioner agreed                                                                    
with  the statement  that  the state  had  not improved  its                                                                    
education system.  Over the prior  5 years  graduation rates                                                                    
had  improved  significantly.  He   noted  that  the  Alaska                                                                    
Performance  Scholarship Program  had reached  middle school                                                                    
as  a merit-based  program and  kids were  enrolled in  more                                                                    
advanced  classes. He  mentioned  Operation  Grad and  early                                                                    
childhood education.  He also noted that  26,000 more people                                                                    
were  enrolled   in  healthcare   insurance  than   5  years                                                                    
previously.  He  asked  the  commissioner  for  his  thought                                                                    
regarding improved educational  outcomes and performance and                                                                    
delivery.  He   talked  about  a  newspaper   article  which                                                                    
reported people  were looking to Alaska  rather than Finland                                                                    
for advanced  high school education  programs. He  wanted to                                                                    
confirm  that the  commissioner  was not  agreeing that  the                                                                    
state  had not  improved  its education  system or  people's                                                                    
access to health insurance.                                                                                                     
                                                                                                                                
Commissioner Hoffbeck thought the  question had been whether                                                                    
there  was a  more efficient  way to  deliver healthcare  or                                                                    
education.  If it  was  possible to  get  good results  with                                                                    
alternative  delivery  systems,  he  thought  it  was  worth                                                                    
looking at.                                                                                                                     
                                                                                                                                
3:23:16 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  agreed  with  Representative  Pruitt  that                                                                    
healthcare costs were increasing  severely. He hoped to work                                                                    
with the administration on finding a solution.                                                                                  
                                                                                                                                
Commissioner  Hoffbeck  confirmed  that  the  administration                                                                    
wanted to work  with the legislature on  finding a solution.                                                                    
He agreed that it was a difficult problem.                                                                                      
                                                                                                                                
Co-Chair Foster invited Mr. Alper to the table.                                                                                 
                                                                                                                                
                                                                                                                                
3:25:11 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
had thought of  the previous day's meeting.  He relayed that                                                                    
the bill  was very large  and did  2 things: it  changed the                                                                    
Permanent  Fund and  added an  income  tax. He  had spent  a                                                                    
significant  amount  of  time  the  previous  day  answering                                                                    
questions on  relatively small issues  within a  large bill.                                                                    
He suggested that  DOR had regulatory discretion  to come up                                                                    
with  answers  if handed  a  bill.  However, the  department                                                                    
would strongly  prefer not to  use its discretion.  He urged                                                                    
members to  put smaller items  in the bill to  provide clear                                                                    
direction  to the  department to  ensure the  intent of  the                                                                    
legislature.                                                                                                                    
                                                                                                                                
Co-Chair Foster asked Mr. Alper  how much time he needed for                                                                    
his presentation scheduled for the following day.                                                                               
                                                                                                                                
Mr. Alper estimated 15 to 30 minutes.                                                                                           
                                                                                                                                
HB 115 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Foster reviewed the agenda for the following day.                                                                      
                                                                                                                                

Document Name Date/Time Subjects
HB 115 Opposition letters 2.14.17.pdf HFIN 2/15/2017 1:30:00 PM
HB 115
HB115 - Community Revenue Impacts Handout - 2.15.17.pdf HFIN 2/15/2017 1:30:00 PM
HB 115
HB115 - Expenditure Reduction Overview Presentation - 2.15.17.pdf HFIN 2/15/2017 1:30:00 PM
HB 115
HB 115 Supporting Doc Modeling 3 Static Examples.pdf HFIN 2/15/2017 1:30:00 PM
HB 115