Legislature(2013 - 2014)SENATE FINANCE 532

01/23/2014 09:00 AM FINANCE


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09:11:14 AM Start
09:12:37 AM SB119 || SB120 || SB121
09:15:43 AM Fy15 Revenue Forecast: Department of Revenue
10:50:04 AM Fy15 Budget Overview: Office of Management and Budget
11:35:36 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 120 APPROP: OPERATING BUDGET/LOANS/FUNDS TELECONFERENCED
Heard & Held
*+ SB 119 BUDGET: CAPITAL TELECONFERENCED
Heard & Held
*+ SB 121 APPROP: MENTAL HEALTH BUDGET TELECONFERENCED
Heard & Held
FY15 Revenue Forecast - Angela Rodell,
Commissioner, Department of Revenue
FY15 Budget - Karen Rehfeld, Director, Office of
Management and Budget
                                                                                                                                
SENATE BILL NO. 119                                                                                                           
                                                                                                                                
     "An  Act   making  appropriations,   including  capital                                                                    
     appropriations   and   other   appropriations;   making                                                                    
     appropriations to capitalize funds."                                                                                       
                                                                                                                                
SENATE BILL NO. 120                                                                                                           
                                                                                                                                
     "An  Act making  appropriations for  the operating  and                                                                    
     loan  program  expenses  of state  government  and  for                                                                    
     certain  programs,   capitalizing  funds,   and  making                                                                    
     reappropriations; making appropriations  under art. IX,                                                                    
     sec. 17(c),  Constitution of the State  of Alaska, from                                                                    
     the constitutional budget reserve fund."                                                                                   
                                                                                                                                
SENATE BILL NO. 121                                                                                                           
                                                                                                                                
     "An  Act making  appropriations for  the operating  and                                                                    
     capital    expenses   of    the   state's    integrated                                                                    
     comprehensive mental health program."                                                                                      
                                                                                                                                
9:12:37 AM                                                                                                                    
                                                                                                                                
^FY15 REVENUE FORECAST: DEPARTMENT OF REVENUE                                                                                 
                                                                                                                                
ANGELA  RODELL, COMMISSIONER,  DEPARTMENT OF  REVENUE, (DOR)                                                                    
displayed  the PowerPoint  presentation, "Fall  2013 Revenue                                                                    
Forecast" (copy on file).                                                                                                       
                                                                                                                                
Commissioner  Rodell   looked  at  slide   3,  "Unrestricted                                                                    
Revenue Forecast  2012-2022." She  explained that  the slide                                                                    
was intended to give a sense of  FY 12 and FY 13 compared to                                                                    
the  forecast.  She  noted  that   oil  prices  had  trended                                                                    
downward  over  the  two  most   recent  fiscal  years.  She                                                                    
remarked  that  oil  production had  declined  from  579,000                                                                    
barrels in  FY 12 to 531,000  in FY 13. She  stated that the                                                                    
forecast production was  508,000 for FY 14.  She shared that                                                                    
lease  expenditures in  FY 12  and  FY13 were  approximately                                                                    
$4.4  billion  and  $4.9  billion, so  there  was  a  slight                                                                    
increase from FY 12 to FY  13. She stressed that there was a                                                                    
significant increase in lease expenditures  for FY 14 and FY                                                                    
15.  She  remarked  that  unrestricted  general  fund  (UGF)                                                                    
revenues  had declined.  She explained  that FY  12 had  UGF                                                                    
revenues of $9.4 billion, and  dropped to $6.9 billion in FY                                                                    
13. She explained  that FY 14 UGF revenue  was forecasted at                                                                    
$4.9  billion, and  was forecasted  to  remain $4.9  billion                                                                    
over  ten years.  She  stated  that in  FY  12  there was  a                                                                    
production  tax  value  of  $79.33, declined  in  FY  13  to                                                                    
$67.76, and declined even further in FY 14 to $54.57.                                                                           
                                                                                                                                
9:15:43 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman recalled  a meeting  in  the previous  year                                                                    
when  DOR  had  remarked  that their  predictions  were  too                                                                    
optimistic. He  liked that the department  had overestimated                                                                    
their  numbers, because  the  predictions were  historically                                                                    
over-inflated. He  felt that the current  predictions beyond                                                                    
2022  were too  optimistic,  because the  U.S. was  becoming                                                                    
energy independent.  He wondered  if the  optimistic numbers                                                                    
were achievable.  Commissioner Rodell  replied that  she had                                                                    
the  most confidence  in the  predictions through  2017. She                                                                    
was focused on those numbers,  because there were global and                                                                    
internal  analyses  that  looked   at  the  near-term  price                                                                    
forecast. She  remarked that inflation was  a consideration,                                                                    
and the chart  reflected the up-trend due  to inflation. She                                                                    
understood that  the estimate may be  overly optimistic, but                                                                    
felt that the near-term numbers were the most accurate.                                                                         
                                                                                                                                
Senator  Hoffman   understood  that  it  was   difficult  to                                                                    
determine  the  forecast,  because the  oil  companies  were                                                                    
making  the investment.  He  wondered  when that  production                                                                    
would   stabilize.   Commissioner  Rodell   responded   that                                                                    
stabilization  could occur  in 2017  or 2018,  because there                                                                    
was  a "ramp  up" in  activity.  She remarked  that DOR  had                                                                    
changed  its methodology  for  production forecast,  because                                                                    
the  recent   forecast  had  been  overly   optimistic.  She                                                                    
explained that  DOR made significant effort  to decrease the                                                                    
error rate of  the forecasts. She stressed  that the current                                                                    
estimates  were  more conservative  than  in  the past.  She                                                                    
stated that  she had  some slides  in the  presentation that                                                                    
reflected that change.                                                                                                          
                                                                                                                                
Co-Chair Kelly  asked Commissioner  Rodell to  present those                                                                    
on-topic slides.                                                                                                                
                                                                                                                                
9:20:04 AM                                                                                                                    
                                                                                                                                
Commissioner Rodell  moved to slide 12,  "Production History                                                                    
and  Forecast." She  explained  that, historically,  Prudhoe                                                                    
Bay was always  the center of oil production  for the state.                                                                    
She  looked  at  2001;  new fields  came  online  and  began                                                                    
producing oil. During that time  there was a leveling out of                                                                    
production  that came  in on  a daily  basis. She  felt that                                                                    
same effect  would occur  in the  future. She  remarked that                                                                    
there was additional  production currently occurring outside                                                                    
of  Prudhoe   Bay.  She  stated  that   the  slide  included                                                                    
forecasts  for non-Prudhoe  Bay field  production. She  felt                                                                    
that  projecting  activity outside  of  Prudhoe  Bay was  of                                                                    
great value to Alaska.                                                                                                          
                                                                                                                                
Commissioner Rodell looked at  slide 13, "ANS Oil Production                                                                    
Forecast." She noted  that 2005 showed a  FY13 projection of                                                                    
more  than  800,000 barrels  per  day.  This projection  was                                                                    
overly  optimistic,  because   the  current  production  was                                                                    
approximately  500,000 barrels  per day.  She felt  that the                                                                    
forecast  did not  provide  the  most accurate  information,                                                                    
even as  recently as fall  2011. She remarked that  the fall                                                                    
2011 forecast  was significantly  overstating the  amount of                                                                    
production versus what was actually true in FY13.                                                                               
                                                                                                                                
Commissioner Rodell discussed slide  14, "ANS Oil Production                                                                    
Forecast."                                                                                                                      
                                                                                                                                
     Currently Producing:                                                                                                       
                                                                                                                                
          -Oil from wells that are in production and                                                                            
          following     typical    reservoir     engineering                                                                    
          optimization without major investment.                                                                                
                                                                                                                                
     Under Development (UD):                                                                                                    
                                                                                                                                
          -Oil from projects that will add incremental oil                                                                      
          to existing fields or will bring new fields into                                                                      
          production.                                                                                                           
                                                                                                                                
          -Project must have senior management approval and                                                                     
          be allocated funds in the company's budget.                                                                           
                                                                                                                                
     Under Evaluation (UE):                                                                                                     
                                                                                                                                
          -Oil  from projects  that are  likely to  occur in                                                                    
          the future,  but have not met  the requirements of                                                                    
          the previous category.                                                                                                
                                                                                                                                
          -Requires   that  oil   reserves  are   known  and                                                                    
          recovery  is  technically  possible  with  current                                                                    
          technology.                                                                                                           
                                                                                                                                
     Under Development + Under Evaluation = "New Oil"                                                                           
                                                                                                                                
Commissioner   Rodell  highlighted   slide   15,  "ANS   Oil                                                                    
Production Forecast."                                                                                                           
                                                                                                                                
     "Currently Producing" oil was not risked                                                                                   
                                                                                                                                
          -Engineering    assessment    based   on    actual                                                                    
          production data                                                                                                       
                                                                                                                                
     The "New Oil" portion of the Forecast was adjusted for                                                                     
     risks                                                                                                                      
                                                                                                                                
          -Accounts    for    uncertainty   in    subsurface                                                                    
          conditions and risk of delay                                                                                          
                                                                                                                                
     The "Under Evaluation" portion of the Forecast was                                                                         
     risked at a greater rate than "Under Development"                                                                          
                                                                                                                                
          -Accounts  for greater  uncertainty in  subsurface                                                                    
          conditions and higher risk of delay                                                                                   
                                                                                                                                
Commissioner Rodell looked at  slide 16, "ANS Oil Production                                                                    
-  Actuals  and Forecast."  She  remarked  that the  barrels                                                                    
would be added into the  production forecast, once there was                                                                    
greater confidence that they would actually be produced.                                                                        
                                                                                                                                
Commissioner Rodell discussed slide  17, "ANS Oil Production                                                                    
-  Actuals and  Forecast."  In order  to  establish the  new                                                                    
methodology,  DOR examined  its  own  recent practices.  She                                                                    
explained that  the slide reflected  the decline  rates that                                                                    
occurred  annually starting  in  2006. She  stated that  the                                                                    
department looked  over the past seven  years, and continued                                                                    
the  pattern  reflected  in  the   black  dotted  line.  She                                                                    
explained that the black dotted  line was used as a starting                                                                    
point  for determining  the forecast.  She pointed  out that                                                                    
the bottom  grey dotted line  was a projection if  there was                                                                    
no  new  oil.   The  top  dotted  line  was   based  on  old                                                                    
methodology. She  explained that using the  new methodology,                                                                    
with risk factoring, was reflected in the solid black line.                                                                     
                                                                                                                                
9:25:00 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell  highlighted  slide  18,  "North  Slope                                                                    
Production Forecast."  The slide  showed what  was currently                                                                    
producing, and how it would  decline. It showed what new oil                                                                    
was from  the legacy fields,  and would not be  eligible for                                                                    
the Alaska Production  Act tax credits. She  remarked that a                                                                    
significant portion of  new oil would continue  to come from                                                                    
the  legacy fields.  She  pointed out  that  the brown  area                                                                    
represented what DOR  forecasted to be eligible  for the tax                                                                    
credit. The green area was  upside potential, which was seen                                                                    
as  production  that  would  occur  if  everything  happened                                                                    
exactly as forecasted.                                                                                                          
                                                                                                                                
Senator  Hoffman remarked  that  there was  still a  gradual                                                                    
decline, and wondered why there  was no stabilization in the                                                                    
forecast. He  specifically wondered  when there would  be an                                                                    
increase in  revenue. Commissioner  Rodell replied  that DOR                                                                    
did not look  10 years into the future, so  she did not know                                                                    
if  or  when  there  would  be  an  increase  in  production                                                                    
revenue.                                                                                                                        
                                                                                                                                
Senator  Hoffman wondered  if that  increase in  revenue and                                                                    
production  would ever  occur.  Commissioner Rodell  replied                                                                    
that she did not know.                                                                                                          
                                                                                                                                
9:28:16 AM                                                                                                                    
RECESS                                                                                                                          
                                                                                                                                
9:41:10 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
9:42:18 AM                                                                                                                    
                                                                                                                                
Commissioner   Rodell  highlighted   slide  5,   "Fall  2013                                                                    
Highlights."                                                                                                                    
                                                                                                                                
     Oil price and production levels have been reduced                                                                          
     relative to the 2013 Spring Forecast.                                                                                      
                                                                                                                                
     Correspondingly, unrestricted revenues have been                                                                           
     revised down from the Spring 2013 Forecast.                                                                                
                                                                                                                                
     Revenue impacts largely due to changes in oil price,                                                                       
     production, lease expenditures, and tariffs.                                                                               
                                                                                                                                
     Substantial (~$10 billion) increase in spending on the                                                                     
     North Slope over the next 10 years.                                                                                        
                                                                                                                                
     Oil companies project increased North Slope production                                                                     
     following the increased activity.                                                                                          
                                                                                                                                
          -DOR   continues   to  prudently   assess   future                                                                    
          production and  the forecast is not  intended as a                                                                    
          comprehensive  assessment  of  all  the  potential                                                                    
          activity or projects under evaluation.                                                                                
                                                                                                                                
     State investment earnings are strong.                                                                                      
                                                                                                                                
Commissioner  Rodell  looked  at   slide  6,  "General  Fund                                                                    
Unrestricted Oil  Revenues." She  explained that  there were                                                                    
four  components of  petroleum revenue  that DOR  forecasts.                                                                    
She noted  that royalty, corporate income  tax, and property                                                                    
tax   were  all   relatively  stable.   She  stressed   that                                                                    
production  tax  had  the   most  significant  decline.  She                                                                    
explained  that the  lease  expenditures  would continue  to                                                                    
have  an  effect in  the  near-term  on the  production  tax                                                                    
forecast, because of the net tax system.                                                                                        
                                                                                                                                
Commissioner  Rodell   discussed  slide  7,   "General  Fund                                                                    
Unrestricted  Other  Revenues."  She explained  there  other                                                                    
revenue tax types that were  important to the Alaska General                                                                    
Fund (GF). She stressed that  the revenues on the slide were                                                                    
not as  important as the petroleum  revenue, but contributed                                                                    
significant amounts  of revenue  to the state.  She remarked                                                                    
that the forecast  of $86 million was roughly  up 15 percent                                                                    
for FY  14. She reported  that the estimate would  be closer                                                                    
to  $100 million  with three  months of  additional earnings                                                                    
from when the forecast was set in October.                                                                                      
                                                                                                                                
9:45:33 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell  highlighted  slide 8,  "Total  Revenue                                                                    
Forecast - FY  13, 14, and 15." She remarked  that the total                                                                    
state  revenue from  FY 13  actuals was  $15.8 billion.  The                                                                    
forecasted  revenue for  FY 14  was $12.8  billion, and  the                                                                    
forecasted revenue for FY 15 was $12.3 billion.                                                                                 
                                                                                                                                
Commissioner  Rodell   discussed  slide  9,   "General  Fund                                                                    
Unrestricted  Revenue Price  Sensitivity FY  2014-2016." She                                                                    
understood that  the price sensitivity  of the  forecast was                                                                    
always of interest to the  committee. She explained that the                                                                    
slide  showed  much  less  volatility  in  revenues  due  to                                                                    
changes in price. She expressed  that she would like to work                                                                    
with  the committee  to examine  how  changes in  production                                                                    
affect the  Unrestricted General  Fund (UGF). She  felt that                                                                    
DOR had  stabilized the forecast:  at $100 per  barrel there                                                                    
would be $4 billion in  UGF revenue. Alaska would receive an                                                                    
additional approximately  $1 billion of the  cost per barrel                                                                    
increased by  $10. Alaska would  still continue  to generate                                                                    
significant revenue, even if the  cost per barrel decreased.                                                                    
This was because there was  not much effect on volatility as                                                                    
the price declines.                                                                                                             
                                                                                                                                
Commissioner  Rodell looked  at slide  10, "Fall  2013 Total                                                                    
Revenue Forecast."  She stated that the  graphic displayed a                                                                    
picture of what  had occurred over the ten  year history and                                                                    
the ten year forecast. She  noted that 2004 showed an actual                                                                    
production  of   roughly  974,000   barrels  per   day,  and                                                                    
production had decreased  to 531,000 barrels per  day in the                                                                    
current  day. The  forecast showed  that  the decline  would                                                                    
stabilize,   and   she   believed  that   there   would   be                                                                    
approximately $500,000 for the next two fiscal years.                                                                           
                                                                                                                                
Commissioner Rodell looked at  slide 20, "Alaska North Slope                                                                    
Crude West Coast  Price." She remarked that  there were many                                                                    
activities that affected the global  oil market. She pointed                                                                    
out of few of the activities  that affected the price of oil                                                                    
in FY 12 and FY 13:  supply disruptions in Yemen, Syria, and                                                                    
South Sudan; Syria used chemical  weapons; and the threat of                                                                    
regional warfare in  the Middle Ease in response  to the use                                                                    
of chemical weapons from Syria.                                                                                                 
                                                                                                                                
Commissioner  Rodell highlighted  slide 21,  "Key Oil  Price                                                                    
Drivers."                                                                                                                       
                                                                                                                                
     Supply and Demand                                                                                                          
                                                                                                                                
          There are two main factors to monitor.                                                                                
                                                                                                                                
               -Global spare  capacity, since  it is  both a                                                                    
               reflection  of supply  and  demand. In  other                                                                    
               words,   the    Organization   of   Petroleum                                                                    
               Exporting  Countries  (OPEC)  spare  capacity                                                                    
               (flipping a switch) is key.                                                                                      
                                                                                                                                
               -Cost of developing new oil supply.                                                                              
                                                                                                                                
          Department   is  developing   a  probability   and                                                                    
          statistical  model  incorporating  spare  capacity                                                                    
          and  cost   of  developing  new  supply   to  help                                                                    
          forecast ANS prices in the future.                                                                                    
                                                                                                                                
9:50:27 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman  wondered how  the  efforts  of the  United                                                                    
States to  become energy independent and  the transportation                                                                    
costs of  importing oil  affected ANS  pricing. Commissioner                                                                    
Rodell  responded   that  the   price  of  oil   would  stay                                                                    
relatively low compared to recent  years. She furthered that                                                                    
Oil Producing  and Exporting Countries (OPEC)  was hoping to                                                                    
keep the price of oil around $100 per barrel.                                                                                   
                                                                                                                                
Commissioner  Rodell  discussed  slide 22,  "Price  Forecast                                                                    
Methodology."                                                                                                                   
                                                                                                                                
     Price Forecasting Session                                                                                                  
                                                                                                                                
          Held a  day long oil price  forecasting session on                                                                    
          October 1, 2013.                                                                                                      
                                                                                                                                
          Speakers  provided   insight  into   oil  markets,                                                                    
          probability and analysis,  modeling, and financial                                                                    
          aspects of commodity markets.                                                                                         
                                                                                                                                
                                                                                                                                
          39  participants from  state government,  academia                                                                    
          and the private sector.                                                                                               
                                                                                                                                
               -DOR, DNR, DOL, OMB, University, Legislative                                                                     
               Finance and outside participants.                                                                                
                                                                                                                                
          Participants  were  asked  to  forecast  real  ANS                                                                    
          prices for the West Coast.                                                                                            
                                                                                                                                
               -Real prices were converted to nominal using                                                                     
               a 2.5 percent inflation assumption.                                                                              
                                                                                                                                
          Median  price  path  was   chosen  for  each  time                                                                    
          period.                                                                                                               
                                                                                                                                
Commissioner  Rodell highlighted  slide 23,  "Historical ANS                                                                    
West Coast FY  Oil Price Bands, Annual  Average and Official                                                                    
FY  2013  Forecast." The  slide  showed  the actual  average                                                                    
price that was used and  converted into revenue. She pointed                                                                    
out 2009,  when there  was global  unrest the  average price                                                                    
was $68.34 per barrel. She  remarked that over the course of                                                                    
the entire  year in  2009, the price  ranged from  under $40                                                                    
per barrel to as high as  $130 per barrel. She remarked that                                                                    
the  price   range  narrowed  as  the   global  economy  was                                                                    
steadying.  She looked  at 2013,  and noted  that there  was                                                                    
very little price volatility.                                                                                                   
                                                                                                                                
9:55:26 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell looked  at slide  26, "Contributors  of                                                                    
Changes  in FY  2014 Revenue  Forecast." She  explained that                                                                    
the average production  tax value per barrel  was reduced by                                                                    
$9.23.  She  furthered  the  slide  displayed  a  simplified                                                                    
calculation,  and  did  not  represent  any  actual  company                                                                    
value, and assumed a 12.5 percent royalty.                                                                                      
                                                                                                                                
Commissioner Rodell  highlighted slide 27,  "Contributors of                                                                    
Changes in  FY 2015  Revenue Forecast."  She noted  that the                                                                    
average production  tax value per  barrel in this  slide was                                                                    
reduced by  $14.90. She explained  that it was  a simplified                                                                    
calculation,  and  did  not  represent  any  actual  company                                                                    
value. It also assumed 12.5 percent royalty.                                                                                    
                                                                                                                                
Senator Dunleavy  queried the reasoning for  the increase in                                                                    
lease  expenditures.  Commissioner   Rodell  responded  with                                                                    
slide 28,  "North Slope  Lease Expenditure  Forecast Change,                                                                    
CAPEX." She  stated that there  was an expected  increase in                                                                    
activity and drilling in  capital expenditure forecasts. She                                                                    
remarked that  FY 14 had an  increase and FY 15  had an even                                                                    
greater  increase in  deductible  lease  expenditures of  $1                                                                    
billion.                                                                                                                        
                                                                                                                                
9:59:40 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly  surmised  that   the  increase  in  capital                                                                    
expenses   was  not   reflected  in   the  current   revenue                                                                    
forecasts. Commissioner  Rodell replied that some  of it was                                                                    
included, but not all of it.                                                                                                    
                                                                                                                                
Co-Chair Kelly  wondered if he could  receive forecasts with                                                                    
all of  the capital  expenses included.  Commissioner Rodell                                                                    
agreed to provide that information.                                                                                             
                                                                                                                                
Commissioner Rodell  looked at slide 29,  "North Slope Lease                                                                    
Expenditure  Forecast Change,  OPEX."  She  stated that  the                                                                    
slide showed  a significant  increase in  operating expenses                                                                    
versus the capital expenditures  in 2014. She explained that                                                                    
the companies  were building staff,  which is why  there was                                                                    
low capital expenditures in 2014  but there was increased in                                                                    
2015.                                                                                                                           
                                                                                                                                
Co-Chair Kelly  introduced the staff  of the  Senate Finance                                                                    
Committee.                                                                                                                      
                                                                                                                                
10:04:10 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  recalled the governor stating  that $105 per                                                                    
barrel was  the crossover  price between  ACES and  the More                                                                    
Production  Act. He  understood that  the price  of oil  was                                                                    
low, as more oil was produced.  He felt that Alaska was more                                                                    
attractive to investors as oil  prices continue to decrease.                                                                    
He remarked that the increase  in expenditures was accurate,                                                                    
because the  oil companies were announcing  new projects. He                                                                    
stressed  that  the  intent  of  the  passage  of  the  More                                                                    
Production  Act  was get  more  production.  He wondered  if                                                                    
Commissioner Rodell agreed that the  $105 per barrel was the                                                                    
crossover  point to  the More  Production Act.  Commissioner                                                                    
Rodell  replied that  she  believed that  it  was still  the                                                                    
crossover  point.  She  stated   that  she  had  no  further                                                                    
information, but shared that  DOR was continually evaluating                                                                    
the projection.                                                                                                                 
                                                                                                                                
Co-Chair  Meyer  felt  that   there  had  been  historically                                                                    
accurate  production  forecasts,  which  included  potential                                                                    
offshore  development. Commissioner  Rodell understood  that                                                                    
there were  many opportunities for  companies to  develop in                                                                    
Alaska,  which  DOR  did  not   include  in  the  production                                                                    
forecasts.                                                                                                                      
                                                                                                                                
Co-Chair   Meyer   remarked   that  companies   were   still                                                                    
experimenting with the potential  for heavy oil. He stressed                                                                    
that  there was  potential  for exploration  in Alaska,  but                                                                    
understood that DOR could not  include that potential in the                                                                    
forecasts.  Commissioner Rodell  agreed,  and stressed  that                                                                    
DOR  must provide  the  best estimate  of  revenue based  on                                                                    
current knowledge.  She stressed  that Alaska  was AAA-rated                                                                    
for investors,  because the revenue forecast  was taken very                                                                    
seriously. She did  not want to give  the misperception that                                                                    
Alaska  was misleading,  or creating  an environment  in the                                                                    
near-term  that  was  unrealistic.   She  stressed  that  90                                                                    
percent of  Alaska's revenue depended on  the oil production                                                                    
tax,  it was  important  to be  conservative and  forthright                                                                    
with the revenue forecast.                                                                                                      
                                                                                                                                
Co-Chair  Meyer   remarked  that  some  oil   companies  are                                                                    
reluctant to  explore for oil,  because they feel  that they                                                                    
may discover gas instead of oil.                                                                                                
                                                                                                                                
10:09:25 AM                                                                                                                   
                                                                                                                                
Commissioner  Rodell discussed  the presentation,  "State of                                                                    
Alaska, An Update on the  State's Savings Accounts" (copy on                                                                    
file).  She stated  that the  presentation  was intended  to                                                                    
provide a  sense of the  performance of the  state's savings                                                                    
accounts. She shared  that the equity markets  had been very                                                                    
good to everyone  who had investments in  the equity markets                                                                    
in  calendar  year  2013.  She stated  that  the  Dow  Jones                                                                    
Industrial  was up  over 25  percent over  the year,  so the                                                                    
state  realized  the  benefit of  that  through  its  equity                                                                    
investments.                                                                                                                    
                                                                                                                                
Commissioner  Rodell displayed  slide 3,  "General Fund  and                                                                    
other  non-segregated investments  (GeFONSI)." She  stressed                                                                    
that  she  hoped  to  work with  the  committee  to  examine                                                                    
information   from   the    Federal   Reserve   related   to                                                                    
quantitative easing.  She shared  that there were  DOR staff                                                                    
that were  examining the state's  asset allocations  and its                                                                    
exposure  to the  bond market.  As interest  rates increase,                                                                    
the bond  prices decrease,  to the mark  to market  value of                                                                    
the  investments  would  also decrease.  She  stressed  that                                                                    
there needed  to be an  examination of the time  horizons of                                                                    
the  reserve draws,  and what  can be  done to  mediate that                                                                    
issue. She  explained that  GeFONSI provided  the day-to-day                                                                    
cash for  the operations  of the state.  She stated  that it                                                                    
had a  moderate risk profile,  with a short  to intermediate                                                                    
investment  horizon, because  of the  liquidity requirements                                                                    
of the state. She explained  that on December 21, 2012 there                                                                    
was a  balance of  $11.8 billion, and  on December  21, 2013                                                                    
there was  a balance $5.76  billion. She explained  that the                                                                    
statutory budget reserve (SBR) was  removed from the GF, and                                                                    
created its own  asset allocation. The SBR  was now invested                                                                    
independently from the GF.                                                                                                      
                                                                                                                                
Senator  Hoffman queried  the  justification  of moving  the                                                                    
SBR. Commissioner  Rodell replied  that DOR felt  that given                                                                    
the size  of the balances  in the GF,  the SBR needed  to be                                                                    
allowed to invest in a slightly longer time horizon.                                                                            
                                                                                                                                
Senator Hoffman  remarked that SBR  was still  considered GF                                                                    
to be spent by the  legislature, and felt that excluding the                                                                    
SBR  did  not  give  a  true  picture  of  the  GF  balance.                                                                    
Commissioner Rodell remarked  that the SBR was  still at the                                                                    
discretion of the legislature, but had its own page.                                                                            
                                                                                                                                
10:14:21 AM                                                                                                                   
                                                                                                                                
Commissioner  Rodell  highlighted slide  4,  "Constitutional                                                                    
Budget  Reserve  Fund (main  and  sub)."  She explained  the                                                                    
slide  divided the  CBR between  the main  fund and  the sub                                                                    
fund. She stated that the sub  fund was determined to have a                                                                    
longer time  horizon, and  take a  higher risk  profile. She                                                                    
stressed that  the sub fund  would receive the  true benefit                                                                    
of the  equity investments that  the CBR sub fund  made. She                                                                    
remarked that the state increased  the value of the sub fund                                                                    
by almost $700  million. She furthered that  the majority of                                                                    
the main fund was in treasury bills and bonds.                                                                                  
                                                                                                                                
Commissioner  Rodell   looked  at   slide  5,   "Power  Cost                                                                    
Equalization Fund." She explained  that statute required the                                                                    
Power Cost Equalization  (FCE) to target a  7 percent return                                                                    
rate,  therefore  there  was an  80  percent  allocation  to                                                                    
equities.  She stressed  that the  allocation  was of  great                                                                    
benefit  over the  year prior,  because  the fund  increased                                                                    
from  $787.5  million  to  $937.3  million  at  the  end  of                                                                    
December 2013.                                                                                                                  
                                                                                                                                
Co-Chair  Meyer  looked  at  slide 4,  and  noted  that  the                                                                    
governor had  suggested withdrawing $3 billion  from the CBR                                                                    
for  a  cash  infusion   into  the  unfunded  liability.  He                                                                    
wondered if the $3 billion would  come from the main fund or                                                                    
sub  fund.  Commissioner  Rodell responded  that  the  trust                                                                    
funds had  an asset allocation  that was different  than the                                                                    
sub fund. She remarked that the  sub fund did not perform as                                                                    
well  as PERS  and  TRS by  comparison.  She explained  that                                                                    
there would  be an  examination of  the investments  in both                                                                    
the main  and sub  funds; examine  the asset  allocation for                                                                    
PERS  and TRS;  and move  it  from either  fund. This  would                                                                    
result in rebalance between the sub and main funds.                                                                             
                                                                                                                                
Co-Chair Meyer looked at the PCE  fund, and felt that it had                                                                    
done  substantially better  than  some of  the other  funds.                                                                    
Commissioner  Rodell  agreed,  and  explained  that  statute                                                                    
required the PCE to achieve 7 percent.                                                                                          
                                                                                                                                
10:19:58 AM                                                                                                                   
                                                                                                                                
Co-Chair  Meyer  wondered  if  the PCE  was  too  large.  He                                                                    
remarked  that  PCE  was working  as  intended  Commissioner                                                                    
Rodell responded  that it  was one of  the first  years that                                                                    
did not require a GF contribution to the PCE.                                                                                   
                                                                                                                                
Senator  Hoffman recalled  that the  previous year's  market                                                                    
was   considerably  different   than  current   markets.  He                                                                    
remarked  that the  previous  year's  presentation showed  a                                                                    
loss in the PCE fund,  because of the higher required return                                                                    
of 7  percent. He stressed  that the state was  fortunate to                                                                    
have a robust market in 2013.                                                                                                   
                                                                                                                                
Co-Chair Meyer quipped  that he was merely  looking for more                                                                    
money for the capital budget.                                                                                                   
                                                                                                                                
Vice-Chair   Fairclough  stressed   that   the  market   was                                                                    
constantly  readjusting, and  Alaska was  "riding on  top of                                                                    
the  budget" to  Alaska's benefit.  She stressed  that there                                                                    
should be  less risk to  the state.  She felt that  the fund                                                                    
should lower the  rate of return, so the  investors were not                                                                    
forced to invest in more risky proposals.                                                                                       
                                                                                                                                
Commissioner  Rodell  highlighted  slide 6,  "Public  School                                                                    
Trust  Fund (Principal  and  Income  accounts)." She  stated                                                                    
that the  Public School Trust  Fund had an allocation  of 58                                                                    
percent  to the  broad market,  27 percent  domestic equity,                                                                    
and 15 percent international  equity. She explained that the                                                                    
fund had a  lower allocation to the equity  markets, and the                                                                    
fund  increased  from  just under  $500  million  to  $536.7                                                                    
million by the end of December  2013. The fund had an actual                                                                    
rate in FY  13 of 8.19 percent. She felt  that the slide was                                                                    
a  good illustration  between  the PCE  with  an 80  percent                                                                    
allocation to  equity; versus the  Public School  Trust with                                                                    
an allocation of approximately 40 percent to equities.                                                                          
                                                                                                                                
Commissioner Rodell looked  at slide 7, "PERS  and TRS." She                                                                    
remarked  that PERS  and TERS  was  allowed to  have a  much                                                                    
broader asset allocation and touch  on more markets than the                                                                    
CBR. She remarked that domestic  equity was approximately 26                                                                    
percent and global equity was  approximately 25 percent. She                                                                    
added that  PERS and  TRS was  able to  put money  into real                                                                    
assets like timber land and farm land.                                                                                          
                                                                                                                                
10:26:19 AM                                                                                                                   
                                                                                                                                
Commissioner Rodell highlighted slide  8, "APFC." She stated                                                                    
that PERS and TRS did  slightly better than Alaska Permanent                                                                    
Fund Corporation  (APFC). She explained  that it was  due to                                                                    
different  long  term  investment  goals, and  the  need  to                                                                    
achieve different rates. The APFC's  goal was achieve a real                                                                    
rate of return of 5 percent, and it had exceeded that goal.                                                                     
                                                                                                                                
Commissioner Rodell discussed slide  10, "FY 2014 Investment                                                                    
Revenue Forecast." She remarked  that the forecast showed an                                                                    
increase in investment  income of over $100  million in UGF.                                                                    
She stated that  the restricted funds in GF  saw an increase                                                                    
of $7.7 million. She announced  that the CBR saw an increase                                                                    
of $823  million. With the  addition of the other  funds and                                                                    
APFC,  the total  restricted amount  was  $4.8 billion.  She                                                                    
stressed that  the market  had been very  good to  the state                                                                    
over the previous year.                                                                                                         
                                                                                                                                
Co-Chair Meyer  surmised that the  PERS and TRS  fund relied                                                                    
on an  8 percent return over  a 30 year period,  but noticed                                                                    
that  the PCE  fund had  an "unrealistic"  expectation of  8                                                                    
percent.  He  queried  the difference.  Commissioner  Rodell                                                                    
responded that PCE had a  statutory requirement to achieve 7                                                                    
percent without  regard to inflation.  She remarked  that it                                                                    
was a very  aggressive rate of return. She  stated that PERS                                                                    
and TRS had a different  time horizon. It assumed 8 percent,                                                                    
including an  inflation factor, so  a real return  should be                                                                    
slightly less  than 8 percent for  achievement. She stressed                                                                    
that the  actuary used  that outline to  value the  fund, to                                                                    
determine the available benefits over thirty years.                                                                             
                                                                                                                                
Co-Chair Meyer  wondered if the annual  $500 million request                                                                    
for the  unfunded liability would  increase, if the  re rate                                                                    
of  return on  the PERS  and TRS  was not  met. Commissioner                                                                    
Rodell responded in the affirmative,  and furthered that the                                                                    
goal of  the $500  million annual request  was to  keep that                                                                    
number the  same annually. She  stressed that  the liability                                                                    
would adjust based on investment  returns. She remarked that                                                                    
there  could  be  years where  the  liability  increases  or                                                                    
decreases.  She  felt  that intention  with  the  governor's                                                                    
proposal was to create some budget certainty.                                                                                   
                                                                                                                                
10:31:57 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:45:29 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
10:46:07 AM                                                                                                                   
                                                                                                                                
^FY15 BUDGET OVERVIEW: OFFICE OF MANAGEMENT and BUDGET                                                                        
                                                                                                                                
KAREN  REHFELD, DIRECTOR,  OFFICE OF  MANAGEMENT AND  BUDGET                                                                    
(OMB),  OFFICE OF  THE  GOVERNOR,  discussed the  PowerPoint                                                                    
presentation,  "FY  2015  Budget  Overview,  Senate  Finance                                                                    
Committee" (copy on file). She  stated that there were three                                                                    
budget bills  for the operating, capital,  and mental health                                                                    
budgets.                                                                                                                        
                                                                                                                                
Ms.  Rehfeld  highlighted  slide  2,  "Budget  Vision."  She                                                                    
stated  that  Governor  Parnell was  very  optimistic  about                                                                    
Alaska's  future. She  remarked  that  Alaska's economy  was                                                                    
growing, and  provided many opportunities for  Alaskans. She                                                                    
felt that  the effort of  the legislature had worked  to put                                                                    
Alaska's finances in  order. She felt that  Alaska had solid                                                                    
a  solid financial  footing, strong  bond ratings,  and felt                                                                    
that the  branches of Alaska's government  were working well                                                                    
together to sustain the financial energy.                                                                                       
                                                                                                                                
Ms. Rehfeld discussed slide 3, "Budget Principles."                                                                             
                                                                                                                                
     Four principles to guide FY2015 budget                                                                                     
                                                                                                                                
          -Live within our means                                                                                                
          -Focus on constitutional priorities                                                                                   
          -Fix what we have                                                                                                     
          -Finish what we started                                                                                               
                                                                                                                                
10:50:04 AM                                                                                                                   
                                                                                                                                
Ms. Rehfeld  looked at slide 4,  "FY2014/FY2015 Budgets: Big                                                                    
Picture."   She  remarked   that   the   governor  and   the                                                                    
legislature  had worked  very closely  the previous  year to                                                                    
set a  spending target.  She pointed  out that  the previous                                                                    
year's budget  was over  $1 billion  less than  the previous                                                                    
fiscal year. She stated that  the current budget request had                                                                    
reduced  the pressure  on the  GF  by over  $1 billion.  She                                                                    
stressed that  less revenue meant less  spending. She stated                                                                    
that  OMB had  asked the  departments to  carefully evaluate                                                                    
their core services,  and only request funds  that would not                                                                    
require additions to  the budget. She stressed  that OMB was                                                                    
looking  at different  ways to  decrease  overhead, be  more                                                                    
efficient,  and focus  on Alaska's  priorities. She  pointed                                                                    
out that  the savings account  would need to be  accessed in                                                                    
the current and following fiscal  years in order balance the                                                                    
need  to  provide  essential  services  and  the  short-term                                                                    
revenue  picture.  She  felt  that the  state  would  see  a                                                                    
turnaround in resource production in the near future.                                                                           
                                                                                                                                
Ms.   Rehfeld  highlighted   slide   5,  "Alaska's   Reserve                                                                    
Accounts."  The purpose  of the  slide was  to show  how the                                                                    
savings accounts  had grown over  a period of time,  from FY                                                                    
02 to FY  15. She pointed out that the  reserve accounts had                                                                    
grown  from approximately  $2 billion  to  $16 billion.  She                                                                    
remarked  that higher  oil prices  made it  possible to  put                                                                    
more  money  into  the  savings  accounts.  Maintaining  and                                                                    
managing the  reserves were  keys to  the long  range annual                                                                    
fiscal  plan.  She felt  that  the  reserves could  be  used                                                                    
wisely to address the short  term budget dilemmas. She added                                                                    
that the reserves  could also be used  to invest differently                                                                    
to cover the cost of the pension unfunded liability.                                                                            
                                                                                                                                
Senator  Hoffman  wondered  if   the  $11.3  billion  FY  15                                                                    
projection reflected the three  areas the governor discussed                                                                    
as  priorities.  He asked  specifically  if  the $3  billion                                                                    
unfunded liability  was taken from  the savings  account. He                                                                    
also  wondered  if  there  was  a  budget  for  the  state's                                                                    
spending on the  proposed gas line. He further  asked if the                                                                    
proposal   included   the   governor's   education   funding                                                                    
intentions.  If those  items were  not included,  he queried                                                                    
the  funding   number  that  would  include   all  of  those                                                                    
priorities.  Ms.  Rehfeld   responded  that  the  projection                                                                    
reflected the transfer  of $3 billion from the  CBR into the                                                                    
retirement trust  funds. She stated that  the governor spoke                                                                    
about two  separate pieces which  included the gas  line and                                                                    
the potential  for the education  funding package,  but were                                                                    
not incorporated in the December  numbers. She stressed that                                                                    
bills regarding  those issues had  not been  introduced with                                                                    
accompanying fiscal  notes. She  furthered that  there would                                                                    
be  adjustments to  the overall  budget, depending  on where                                                                    
the  spending  lined  up  at  the  end  of  the  legislative                                                                    
session. She explained that the  chart showed the governor's                                                                    
December  15  budget  as  proposed and  the  impact  on  the                                                                    
reserves. She felt  that $11.3 billion was  a strong reserve                                                                    
account for the end of FY 15.                                                                                                   
                                                                                                                                
Vice-Chair Fairclough  looked at  the issue  of transferring                                                                    
$3  billion  to the  Arm  Board,  and  its current  rate  of                                                                    
return, which  was better  than past  years. She  noted that                                                                    
the  8   percent  rate  of  return   required  a  historical                                                                    
examination  over  30  years,  to  determine  how  the  real                                                                    
numbers would be  affected. She felt that  moving $3 billion                                                                    
over to a management tool, based  on only one year's rate of                                                                    
return was  not historically  high. Ms. Rehfeld  stated that                                                                    
Vice-Chair Fairclough  made a good  point regarding  the Arm                                                                    
Board's historic rates of return.                                                                                               
                                                                                                                                
10:55:22 AM                                                                                                                   
                                                                                                                                
Ms.  Rehfeld  discussed  slide 6,  "FY2015  Budget  by  Fund                                                                    
Source." She stated  that the next few  slides were designed                                                                    
to  provide some  context  into the  total  budget with  all                                                                    
three budget  bills combined. She  announced that  the total                                                                    
request  for all  funds for  FY  15 was  $12.4 billion.  She                                                                    
reported that the chart showed  that the UGF budget of $5.64                                                                    
billion  was just  slightly  over 50  percent  of the  total                                                                    
budget.  She explained  that the  $3.11  billion of  federal                                                                    
funds was 23  percent of the budget. She  announced that the                                                                    
$2.15 billion in the permanent  fund component for dividends                                                                    
and  inflation  proofing  was  15  percent  of  the  budget.                                                                    
Designated GF of  $868.4 million was 7 percent  of the total                                                                    
budget.  She announced  that $600.6  million of  other state                                                                    
funds was approximately  4 percent of the  total budget. She                                                                    
pointed out  that other state  funds included a  transfer of                                                                    
$3 billion from the CBR to  the Retirement Trust Funds was a                                                                    
component of the  other state funds line  item. She stressed                                                                    
that the  item was outlining  the removal of money  from one                                                                    
fund and  moving it to  another fund. She stressed  that the                                                                    
fiscal summary included a net-out,  but restated that moving                                                                    
the funds was reflected in that particular component.                                                                           
                                                                                                                                
Ms. Rehfeld addressed slide 7,  "FY2015 Budget by Category."                                                                    
She  remarked  that  the  total  budget  request  was  $12.4                                                                    
billion,  and  the  chart outlined  the  categories  of  the                                                                    
proposed funding.  She looked at  the left-hand side  of the                                                                    
pie  chart. She  explained that  the red  and pink  portions                                                                    
were  the areas  of  the budget  that  were considered  non-                                                                    
discretionary. She stated that the  blue portions of the pie                                                                    
chart were  more discretionary funds,  so the  reductions in                                                                    
governor spending would be focused  on those blue areas. She                                                                    
looked at the dark red  portion, which was the K-12 Formula,                                                                    
which  included the  school funding  formula. She  explained                                                                    
that the  school funding  formula was  based on  the current                                                                    
statutory  student allocation  of  $5,680  per student.  She                                                                    
furthered  that  the  formula also  included  transportation                                                                    
expenditures. She stressed that  the budget fully funded the                                                                    
current statutory entitlement,  and forward funded education                                                                    
in the  budget. She remarked  that the budget  also included                                                                    
the  $25 million  that was  technically  outside the  school                                                                    
funding formula  for utility and  energy related  costs. She                                                                    
looked  at  the   darkest  pink  area  of   the  chart  that                                                                    
represented  other  formula  programs  with  $2.02  billion,                                                                    
which was  for Medicaid,  public assistance, and  power cost                                                                    
equalization.  She looked  at  the statewide  appropriations                                                                    
portion of the chart which  contained $3.88 billion that was                                                                    
direct  payment for  the unfunded  liability. She  furthered                                                                    
that  the statewide  appropriations also  included the  $450                                                                    
million  tax credit,  which included  debt service  payments                                                                    
and  community  revenue  sharing.   She  restated  that  the                                                                    
permanent fund  budget of  $2.15 billion  would be  used for                                                                    
inflation  proofing and  dividends.  She  remarked that  the                                                                    
state  agency  operations budget  related  to  the 14  state                                                                    
departments, UA,  the legislative  branch, and  the judicial                                                                    
branch.  She noted  that the  portions of  the chart  titled                                                                    
"Agency Nonformula  and other funds" and  "Agency Nonformula                                                                    
Unrestricted  GF" totaled  $4.3 billion.  She stressed  that                                                                    
$2.26  billion  in  Agency Nonformula  funds  was  UGF,  and                                                                    
remarked that much of the  legislative attention was on that                                                                    
portion of the budget.                                                                                                          
                                                                                                                                
11:00:03 AM                                                                                                                   
                                                                                                                                
Ms.  Rehfeld looked  at  slide 8,"  FY2015  UGF Spend:  $5.6                                                                    
Billion."   She  stressed   that   the   governor  and   the                                                                    
legislature had  worked together very well  on fiscal issues                                                                    
and fiscal  discipline. The chart  showed that  the previous                                                                    
year's spending  target reduced the  GF spending by  over $1                                                                    
billion.  She added  that  the FY  15  proposal included  an                                                                    
additional reduction  of $1.3  billion. She  recognized that                                                                    
there  would be  a  downward pressure  on  GF spending,  and                                                                    
reducing  the   state  operating   budget.  She   felt  very                                                                    
optimistic   about   the   potential   shift   in   resource                                                                    
production, because of recent  changes in the tax structure.                                                                    
She remarked  that there would  be some  difficult decisions                                                                    
in  the next  couple of  years,  but felt  that the  current                                                                    
budget was  very responsible  as it  related to  the current                                                                    
revenue picture. She remarked that  over the years there had                                                                    
been  very healthy  capital  budgets,  with remaining  funds                                                                    
from previous appropriated projects  that would be available                                                                    
to continue work on those efforts.                                                                                              
                                                                                                                                
Co-Chair  Kelly  wondered  if  there was  a  number  on  the                                                                    
capital  budget  dollars  that  had yet  to  be  spent.  Ms.                                                                    
Rehfeld  responded that  the current  numbers  needed to  be                                                                    
updated,  but she  stated that  the recent  prepared numbers                                                                    
reflected $6 billion  that had yet to be  spent with various                                                                    
projects  yet to  come  online. She  stated  that there  was                                                                    
anticipated federal authorization for some projects.                                                                            
                                                                                                                                
Co-Chair  Kelly  surmised  that $6  billion  was  previously                                                                    
appropriated  funds that  needed  to be  spent. Ms.  Rehfeld                                                                    
replied that $6  billion was the amount in  spring 2014, and                                                                    
stressed that the recent updates had not yet been released.                                                                     
                                                                                                                                
Co-Chair Meyer surmised that there  were some bonds that had                                                                    
not yet  been sold.  Ms. Rehfeld  responded that  there were                                                                    
some  bond-funded projects  that had  not moved  forward for                                                                    
various reasons.                                                                                                                
                                                                                                                                
Co-Chair  Meyer understood  that there  was a  5-year window                                                                    
for use of capital funds.                                                                                                       
                                                                                                                                
JOHN  BOUCHER, SENIOR  ECONOMIST, OFFICE  OF MANAGEMENT  AND                                                                    
BUDGET, OFFICE  OF THE GOVERNOR,  responded that he  was not                                                                    
certain about  the timeframe, but remarked  that there could                                                                    
be  tax consequences  because of  the earnings.  He stressed                                                                    
that  the department  was carefully  managing how  they were                                                                    
rolling out the  most recent bond issues based  upon some of                                                                    
the discussed issues.                                                                                                           
                                                                                                                                
Ms. Rehfeld furthered  that once the bonds  were sold, there                                                                    
were some time horizons that  required use of the funds. She                                                                    
announced that DOR would know more about that issue.                                                                            
                                                                                                                                
11:05:17 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman  noted  that  the  unfunded  liability  was                                                                    
included in the  draw-down of the reserve  accounts. He felt                                                                    
that  the spending  chart did  not  show the  $3 billion  as                                                                    
expenditure. He felt that the  UGF spending would be more in                                                                    
the  neighborhood   of  $8.6   billion  with   the  unfunded                                                                    
liability  inclusion. He  furthered  that  there were  large                                                                    
issues, including  education and the gas  line. He expressed                                                                    
concern  related to  the  use of  the  savings account,  and                                                                    
stressed that the  energy costs should be  addressed for all                                                                    
Alaskans. Ms.  Rehfeld clarified  that the proposal  for the                                                                    
unfunded  liability  was moving  $3  billion  from the  CBR.                                                                    
Slide 8 only referred to UGF,  so the transfer on the fiscal                                                                    
summary would  be considered "other funds."  She agreed that                                                                    
OMB was  concerned about  the use  of the  savings accounts,                                                                    
and OMB  was annually  preparing its ten-year  plan released                                                                    
on  December 12,  2013. She  noted scenarios  where OMB  had                                                                    
built  in some  potential midrange  production numbers,  and                                                                    
OMB had  also examined some different  price indicators. The                                                                    
legislature  needed  to  impose  fiscal  discipline  on  the                                                                    
annual  UGF spending  for maximizing  deliverance of  public                                                                    
service  and  minimizing  the  draw   on  reserves,  as  OMB                                                                    
prepared the state's projected use of the savings accounts.                                                                     
                                                                                                                                
Ms. Rehfeld  displayed slide 9, "FY2015  General Fund Budget                                                                    
by Category."  She remarked  that the  slide was  similar to                                                                    
slide 8,  but focused solely on  the GF budget. She  felt it                                                                    
was  important to  understand the  categories  of the  $5.64                                                                    
billion in  UGF funding. She  remarked that the  red colored                                                                    
areas  of the  pie related  to non-discretionary  funds; and                                                                    
the blue colored areas related to discretionary funds.                                                                          
                                                                                                                                
Co-Chair Kelly handed the gavel to Co-Chair Meyer.                                                                              
                                                                                                                                
11:10:30 AM                                                                                                                   
                                                                                                                                
Ms.   Rehfeld  highlighted   slide  10,   "State  Assistance                                                                    
payments."  She   stressed  that  the   retirement  unfunded                                                                    
liability was  a very serious  issue. She announced  that it                                                                    
was the single largest  cost-driver in the operating budget.                                                                    
She stressed that  if it was not addressed, it  would have a                                                                    
negative impact for future generations.  She shared that the                                                                    
legislature,  governor,  and  Arm   Board  had  worked  very                                                                    
diligently  on this  issue. Over  the previous  seven years,                                                                    
the state  had paid over  $3.3 billion in  direct assistance                                                                    
payments  to  help  address   the  unfunded  liability.  She                                                                    
stressed   that  the   payments   had  been   a  relief   to                                                                    
municipalities  and  school  districts.  She  stressed  that                                                                    
there  was an  almost  $12 billion  unfunded liability.  She                                                                    
explained  that  the black  bars  on  the chart  showed  the                                                                    
escalating  cost of  the assistance  payments, based  on the                                                                    
current methodology of  level percent of pay.  Over a period                                                                    
of time to  2032, the stated will have  spent $15.2 billion.                                                                    
The governor had proposal was  highlighted by the blue bars.                                                                    
She  noted that  there  was  a $3  billion  for the  current                                                                    
fiscal year, and then the  annual payment would be capped at                                                                    
$500  million. The  result would  be  extending three  years                                                                    
beyond the current methodology, but  would cost the state $2                                                                    
billion  less than  the current  level percent  of pay.  She                                                                    
stressed  that  the  goals  of  OMB were  the  same  as  the                                                                    
legislature: to  be able  to manage the  annual cost  of the                                                                    
program; meet the obligations to  the retirees; preserve the                                                                    
health of the trust funds; and  to not leave this problem to                                                                    
the next generation.                                                                                                            
                                                                                                                                
11:14:27 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer felt that the  $3 billion would be considered                                                                    
spending.  Ms.  Rehfeld  responded  that  the  transfer  was                                                                    
leverage the  use of the  existing savings, to  maximize the                                                                    
benefit  of  the funds  that  were  already in  the  savings                                                                    
account.  She  remarked  that  the  result  would  take  the                                                                    
pressure off the annual recurring revenue from the UGF.                                                                         
                                                                                                                                
Co-Chair  Meyer stressed  that if  CBR money  was considered                                                                    
UGF money,  and could be  used toward roads,  schools, etc.,                                                                    
it should be considered spending.  He wondered why the funds                                                                    
needed to be  deposited in the trust, rather  than set aside                                                                    
in a  reserve or  escrow account. He  agreed that  the issue                                                                    
should not be held off for  the next generation, but did not                                                                    
want to  spend too  much and  deny that  generation possible                                                                    
education  funding. Ms.  Rehfeld agreed,  and stated  that a                                                                    
three quarter  vote of  the legislature  allowed the  use of                                                                    
the  CBR for  any  item the  legislature  might choose.  She                                                                    
explained that the governor proposed  a single item, but did                                                                    
not request the funding for any other purpose.                                                                                  
                                                                                                                                
Co-Chair Meyer handed the gavel to Co-Chair Kelly.                                                                              
                                                                                                                                
Co-Chair  Meyer  wondered if  the  fund  was unhealthy.  Ms.                                                                    
Rehfeld replied that the fund had and AAA rating.                                                                               
                                                                                                                                
Co-Chair Meyer remarked  that Alaska was one  of four states                                                                    
that  had accounted  for medical  unfunded liability,  so it                                                                    
looked much worse than other  states. Ms. Rehfeld agreed and                                                                    
furthered  that  it  was  how  the  unfunded  liability  was                                                                    
calculated.                                                                                                                     
                                                                                                                                
11:19:32 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Fairclough remarked  that  there  was already  a                                                                    
payment method  to pay  off the  unfunded liability,  and as                                                                    
long as  the payments  were met, Alaska  would be  viewed in                                                                    
good standing. She wondered if  a subaccount were to flatten                                                                    
the  payments to  draw interest,  the rating  agencies would                                                                    
still  apply a  remarkable  rating. Ms.  Rehfeld agreed  and                                                                    
furthered that  it was  one of  several approaches  that had                                                                    
been considered.                                                                                                                
                                                                                                                                
Co-Chair  Kelly  felt  that the  issue  was  important,  and                                                                    
pointed out  that it was  probably the largest  issue facing                                                                    
the legislature in the operating budget.                                                                                        
                                                                                                                                
Vice-Chair Fairclough  stressed that one of  the measurement                                                                    
tools that  she will be examining  was what was left  in the                                                                    
fund. She  remarked that the  Arm Board was  responsible for                                                                    
the health  of the people  that were promised  benefits. She                                                                    
stressed  that  her  votes  would   be  in  line  with  that                                                                    
responsibility.                                                                                                                 
                                                                                                                                
Senator  Hoffman   agreed  that  there  should   be  further                                                                    
examination  of the  unfunded liability  issue. He  remarked                                                                    
that  there  had been  various  proposals  about creating  a                                                                    
reserve account.  The Arm Board  had opposed  that proposal;                                                                    
because  it did  not reflect  what  they felt  was the  true                                                                    
liability.   He  remarked   that  the   proposal  would   be                                                                    
considered  a  loan,  so  the  state  would  get  the  funds                                                                    
returned.                                                                                                                       
                                                                                                                                
Vice-Chair Fairclough stressed that  she was concerned about                                                                    
what  would be  leftover  in  the fund  after  a $3  billion                                                                    
investment. She understood  that the Arm Board  needed to be                                                                    
sure that there was cash  flow to make their annual payments                                                                    
to beneficiaries' health needs. She  wanted to know what the                                                                    
cash flow would look like after the $3 billion infusion.                                                                        
                                                                                                                                
11:24:01 AM                                                                                                                   
                                                                                                                                
Co-Chair Kelly  stressed that  there had  been conversations                                                                    
regarding  the  unfunded  liability,   and  hoped  that  Ms.                                                                    
Rehfeld  would   communicate  to   the  governor   that  the                                                                    
legislature supported a healthy retirement system.                                                                              
                                                                                                                                
Senator Bishop stressed that lowering  the cost of energy in                                                                    
rural Alaska  was another important  issue in  maintaining a                                                                    
healthy cash fund.                                                                                                              
                                                                                                                                
Ms. Rehfeld discussed slide 11, "Spending Controls."                                                                            
                                                                                                                                
     Maximize efficiency/Rein, in operating spending                                                                            
                                                                                                                                
          Improve/Streamline Business Processes                                                                                 
          Regulations Review- AO 266                                                                                            
          Enhance technology                                                                                                    
          Lower cost of purchasing                                                                                              
          Reduce footprint/cost of office space                                                                                 
          Deleted 150 vacant positions                                                                                          
                                                                                                                                
Ms. Rehfeld looked at slide 12, "Budget Priorities."                                                                            
                                                                                                                                
     Focus   on    Administration's   strategic   investment                                                                    
     priorities                                                                                                                 
                                                                                                                                
          Education                                                                                                             
          Resources and Energy                                                                                                  
          Public Safety                                                                                                         
          Transportation/Infrastructure                                                                                         
          Military Support                                                                                                      
                                                                                                                                
Ms.  Rehfeld displayed  slide  13,  "FY2015 Budget-  Another                                                                    
Perspective." She remarked that  the chart reflected that 60                                                                    
percent  of  Alaska's   budget  benefitted  communities  and                                                                    
organizations through  grants, direct payments,  and capital                                                                    
project funding.                                                                                                                
                                                                                                                                
11:29:49 AM                                                                                                                   
                                                                                                                                
Co-Chair Kelly thanked  Ms. Rehfeld for her work  at OMB. He                                                                    
stated  that it  was  rare  for the  governor  to present  a                                                                    
budget that  contained a reduction.  He understood  that the                                                                    
reduction was  difficult, because there were  over a billion                                                                    
requests  that OMB  needed to  filter  in order  to draft  a                                                                    
budget.  He felt  that  Alaskans would  want  to reduce  the                                                                    
government  agencies  even  more  than  the  current  budget                                                                    
request.  Ms. Rehfeld  agreed that  OMB had  worked hard  to                                                                    
develop   the   proposed    budget.   She   remarked   that,                                                                    
historically, there were far  more state department requests                                                                    
that what was included in  the budget. She stated that there                                                                    
were  not  an  overwhelming  number of  requests  that  were                                                                    
considered for  the current  budget, because  OMB encouraged                                                                    
the departments  to limit the requests  to significant areas                                                                    
of  problem  or concern  in  their  individual budgets.  She                                                                    
pointed  out  that there  was  an  actual reduction  in  the                                                                    
agency  operations portion  of  the  budget. She  understood                                                                    
that the statewide  portion of the budget  that included the                                                                    
unfunded  liability payment  or  shifts in  the tax  credits                                                                    
were big  picture inclusions. She  restated that  the agency                                                                    
budget  was a  reduction.  She asserted  that the  following                                                                    
year's  budget  would  include   more  reductions  that  the                                                                    
current year.                                                                                                                   
                                                                                                                                
Co-Chair  Kelly commented  that the  previous year's  budget                                                                    
halted  a  default expansion  of  government.  He felt  that                                                                    
there  needed  to  be  a  reduction  of  funding  for  state                                                                    
agencies.                                                                                                                       
                                                                                                                                
Co-Chair Kelly handed the gavel to Vice-Chair Fairclough.                                                                       
                                                                                                                                
Senator Hoffman asked for a report on the revenue sharing                                                                       
program. Ms. Rehfeld indicated that she would provide that                                                                      
information.                                                                                                                    
                                                                                                                                
SB 119 was HEARD and HELD in committee for further                                                                              
consideration                                                                                                                   
                                                                                                                                
SB 120 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
SB 121 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
Fall 2013 Forecast Presentation Senate Finance Jan 23 2014 (2).pdf SFIN 1/23/2014 9:00:00 AM
SB 120
FY2015_2 page_Cost_Driver_Budget_Priorities_for _Finance_Committees_1-23-14.pdf SFIN 1/23/2014 9:00:00 AM
SB 120
KJR Budget Overview for SFC Final 01 22 2014.pdf SFIN 1/23/2014 9:00:00 AM
SB 120
State Savings Accounts Update Senate Finance Jan 23 2014.pdf SFIN 1/23/2014 9:00:00 AM
SB 120