Legislature(2009 - 2010)Anch LIO Rm 220

11/05/2009 09:00 AM House FINANCE


Download Mp3. <- Right click and save file as

Audio Topic
09:02:14 AM Start
09:02:28 AM Workshops: Legislative Finance Division; Alaska Geographic Differential Study; Department of Law
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
9:00 - 12:00:
+ -Workshop with Legislative Finance, TELECONFERENCED
Fiscal Summary Format: Guidelines for
Repeals and Reappropriations, Transfers,
Fund Code Classification
-University of Alaska Senate Finance
Committee Fairbanks Meeting Take-Away
-Alaska Permanent Fund Corporation
Realized Loss Accounting
-Fiscal Note System/Capital Budget System
-Subcommittee Management Worksheet
1:00 - 2:30:
Alaska Geographic Differential Study-2008
Dept. of Administration & Alaska Court
System
2:30 - 4:30:
Briefing on State Legal Issues, by the
Dept. of Law, including:
Carlson Case, Mercer Lawsuit,
APFC/ACPD Realized Losses, Head Tax
(May be Executive Session as necessary)
-- Testimony <Invitation Only> --
                  HOUSE FINANCE COMMITTEE                                                                                       
                      November 5, 2009                                                                                          
                         9:02 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:02:14 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Hawker  called the  House Finance Committee  meeting                                                                   
to order at 9:02 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Hawker, Co-Chair                                                                                            
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas, Jr., Vice-Chair                                                                                     
Representative Allan Austerman                                                                                                  
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Woodie Salmon                                                                                                    
Representative Harry Crawford                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Anna Fairclough                                                                                                  
Representative Les Gara                                                                                                         
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Mike  Doogan; Representative  Nancy Dahlstrom;                                                                   
Representative  Paul Seaton;  Representative Scott  Kawasaki;                                                                   
Senator  Joe   Thomas;  David  Teal,  Director,   Legislative                                                                   
Finance;  James Armstrong,  Staff,  Co-Chair Stoltze;  Amanda                                                                   
Ryder,  Fiscal  Analyst,  Legislative   Affairs,  Legislative                                                                   
Finance;  Annette   Kreitzer,  Commissioner,   Department  of                                                                   
Administration; Jim Calvin, McDowell  Group, Juneau; Attorney                                                                   
General,  Dan  Sullivan,  Department of  Law;  Kevin  Brooks,                                                                   
Deputy Commissioner, Department of Administration.                                                                              
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Representative David Guttenberg                                                                                                 
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^Workshops: Legislative  Finance Division;  Alaska Geographic                                                                 
Differential Study; Department of Law                                                                                         
                                                                                                                                
9:02:28 AM                                                                                                                    
                                                                                                                                
Co-Chair Hawker observed that  due to the impact of the world                                                                   
oil market the state's finances  have evolved from $1 billion                                                                   
annual deficits to multi-billion  dollar surpluses, which has                                                                   
impacted the way the Legislative  Finance Division summarizes                                                                   
and reports to the legislature.                                                                                                 
                                                                                                                                
9:06:15 AM                                                                                                                    
                                                                                                                                
DAVID TEAL,  DIRECTOR, LEGISLATIVE FINANCE,  provided members                                                                   
with  a  handout  entitled,  House   Finance  Committee  Work                                                                   
Session -  November 5,  2009 (copy on  file). Mr.  Teal began                                                                   
with  a brief  update  of the  current  fiscal situation.  He                                                                   
summarized page  1 of the handout,  the FY 2010  General Fund                                                                   
Revenue - Fiscal  Sensitivity. He noted that  the information                                                                   
is on  the Legislative Finance  Division's website,  which is                                                                   
updated with each  official forecast change.  The slide shows                                                                   
the spring forecast.                                                                                                            
                                                                                                                                
Mr. Teal  stated that the final  figures for FY 2009  are not                                                                   
yet known. The certified annual  financial report will not be                                                                   
out  for  another four  weeks.  At  the  end of  session  the                                                                   
Statutory  Budget Reserve  (SBR) draw  was anticipated  to be                                                                   
approximately  $950 million.  No  funds were  taken from  the                                                                   
Constitutional  Budget Reserve (CBR)  because of the  way the                                                                   
appropriation bill  was structured.  The total of  $1 million                                                                   
in the SBR must  be used before the CBR comes  into play. The                                                                   
current estimate  is for a draw  of something less  than $500                                                                   
million.                                                                                                                        
                                                                                                                                
Co-Chair Hawker  pointed out that the discussion  referred to                                                                   
FY 2009, not FY 2010.                                                                                                           
                                                                                                                                
Co-Chair  Stoltze recalled  when oil  price charts were  less                                                                   
than  $36 per  barrel.  Mr. Teal  stated  that  there was  no                                                                   
reason  to show  higher prices  back  then. Co-Chair  Stoltze                                                                   
related that even at $36 dollars  there was a bigger surplus,                                                                   
which heightens the issue of production today.                                                                                  
                                                                                                                                
Mr. Teal explained the lines on  the sensitivity chart. The Y                                                                   
axis is money  in billions; oil  price is on the X  axis. The                                                                   
horizontal line just above $3  billion is the FY 2010 budget.                                                                   
The line that sweeps upward from  left to right is revenue at                                                                   
various oil prices.  That line crosses at the  $3.05 billion.                                                                   
The  break  even oil  price  required  is $57.  The  official                                                                   
forecast  is for  $58.29,  which yields  a  small surplus  of                                                                   
about $150 million.                                                                                                             
                                                                                                                                
Co-Chair Hawker  noted that the  chart refers to FY  2010. He                                                                   
thought  the average for  FY 2010  so far  was over  $70. Mr.                                                                   
Teal agreed that  the amount was about $70  with volume about                                                                   
4 percent,  which  is not  unusual due  to winter  production                                                                   
increases.  Volume does  not  appear to  be  a major  factor;                                                                   
however, price is.  The projected price is about  $58.29, and                                                                   
the actual price is about $70  year to date; at this rate the                                                                   
surplus  for  FY 2010  would  be  $1.4  billion; at  $75  the                                                                   
surplus would be $2 billion.                                                                                                    
                                                                                                                                
9:12:35 AM                                                                                                                    
                                                                                                                                
Mr.  Teal turned  to  issues that  would  have  an impact  on                                                                   
future  budgets.  He noted  that  education  was not  forward                                                                   
funded last  year. The  amount to  forward fund education  is                                                                   
$1.1  billion,  which would  cut  into the  surplus.  Another                                                                   
factor  is that  Alaska  has had  two  years  of low  capital                                                                   
budgets due  to vetoes  and veto  threats, which may  require                                                                   
the capital budget  to be "beefed up" through  a supplemental                                                                   
appropriation.  He concluded that  it would not  be difficult                                                                   
to spend the 1.4 billion surplus.                                                                                               
                                                                                                                                
Vice-Chair  Thomas reported  that the  Executive Director  of                                                                   
the Alaska Association of School  Boards pointed out the lack                                                                   
of forward funding for education.                                                                                               
                                                                                                                                
Mr. Teal  explained that the  budget includes a  reference to                                                                   
Article 9, Section 17(b) of the constitution:                                                                                   
                                                                                                                                
     (b)  If the  amount available  for  appropriation for  a                                                                   
     fiscal  year is less  than the  amount appropriated  for                                                                   
     the previous  fiscal year, an appropriation  may be made                                                                   
     from  the  budget  reserve  fund.  However,  the  amount                                                                   
     appropriated  from the  fund under  this subsection  may                                                                   
     not  exceed the amount  necessary,  when added  to other                                                                   
     funds available for appropriation,  to provide for total                                                                   
     appropriations  equal to  the  amount of  appropriations                                                                   
     made  in the  previous calendar  year  for the  previous                                                                   
     fiscal year.                                                                                                               
                                                                                                                                
Mr. Teal related that the FY 2011  forecast is generally held                                                                   
until the  Governor's budget is  released on December  15 and                                                                   
that  no information  has been  received from  the Office  of                                                                   
Budget and Management (OMB) in  regards to the FY 2011 budget                                                                   
approach,  but that  a  continuing conservative  approach  is                                                                   
expected.                                                                                                                       
                                                                                                                                
9:15:28 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker  mentioned  that the  Governor  invited  the                                                                   
House  leadership   to  a  meeting;  they   received  similar                                                                   
information  of   a  limited  formula  growth   picture.  Not                                                                   
counting  on Federal  Medical  Assistance Percentages  (FMAP)                                                                   
reverting  back  to the  pre-stimulus  rate,  the  Governor's                                                                   
office  is  looking  at  a  40   million  growth  in  formula                                                                   
programs,  which  is inconsistent  with  the  trend that  was                                                                   
established  in  past  years.  Ongoing  actuarial  valuations                                                                   
include an increase  in the retirement  system contributions.                                                                   
Co-Chair Hawker expected a continuation  of the same level of                                                                   
operations from the Governor's office.                                                                                          
                                                                                                                                
Mr. Teal  observed that FMAP was  $75 million in  2010, which                                                                   
was paid  with federal stimulus  money by reducing  the match                                                                   
rate. When and  if the state reverts to the  regular match in                                                                   
2011 it  will cost $75 million  in general funds  (GF). There                                                                   
is  also a  $100  increase  in  the base  student  allocation                                                                   
education rate,  as well as some differentials  and intensive                                                                   
needs items scheduled  to go into effect, which  would amount                                                                   
to  another $50  million increase.  Mr.  Teal concluded  that                                                                   
there would  be a minimum increase  in the FY 2011  budget of                                                                   
$125 million.                                                                                                                   
                                                                                                                                
9:17:51 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker agreed  with the Governor  that the  federal                                                                   
government would  continue the  beneficial FMAP rates  due to                                                                   
the  overwhelming  demand placed  on  the federal  system  by                                                                   
several states;  however, if that  does not happen a  plan is                                                                   
in place to make an adjustment.                                                                                                 
                                                                                                                                
Representative Austerman asked  for the FY 2011 dollar amount                                                                   
expected for FMAP. Mr. Teal replied  that FMAP would cost $75                                                                   
million  and  K-12  education  would be  a  little  over  $50                                                                   
million. Co-Chair  Hawker thought the Governor  said it would                                                                   
be  $69  million.   Mr.  Teal  suggested  that  Medicaid  may                                                                   
increase by  $40 million.  He concluded that  there may  be a                                                                   
total increase  by as  much as $200  million. He  agreed that                                                                   
FMAP was very "iffy". Alaska,  unlike other states, is not in                                                                   
dire straits because it does not  rely on income tax or sales                                                                   
tax. He anticipated that Congress  will feel extreme pressure                                                                   
from other  states. He thought  there might also be  a second                                                                   
round of stimulus money because of huge state deficits.                                                                         
                                                                                                                                
9:21:28 AM                                                                                                                    
                                                                                                                                
Mr. Teal turned to the fiscal  summary format. Changes in the                                                                   
state's fiscal  situation have  driven the alteration  to the                                                                   
summary.  Drivers include  changes in  the fiscal  situation,                                                                   
how money  is used, and attitudes  about how and  what should                                                                   
be shown. He  observed the simplicity of the  FY 2005 Summary                                                                   
of Appropriations.  He noted that a little  over $400 million                                                                   
was put into  the Public Education  Fund in FY 2005  due to a                                                                   
spike in oil prices. By FY 2007,  general funds had jumped to                                                                   
$3.5 billion. The division discovered  complications with how                                                                   
to  deal with  large  supplemental and  other  appropriations                                                                   
that cross  fiscal years  as well as  with the definition  of                                                                   
savings. For instance,  does putting money aside  in one year                                                                   
and spending it the next amount to "savings".                                                                                   
                                                                                                                                
Co-Chair Hawker  pointed out  that savings  still need  to be                                                                   
"appropriated"  in  order  to   be  transferred  to  savings.                                                                   
Appropriations  do  not  therefore  equate  to  spending.  He                                                                   
maintained  that "moving  money from one  savings account  to                                                                   
another  is  not  spending,  even though  we  still  have  to                                                                   
appropriate it."                                                                                                                
                                                                                                                                
Mr. Teal  observed  that by FY  2008 a  savings category  was                                                                   
added  to  the fiscal  summary  as  a result  of  legislative                                                                   
action that  deposited funds into  the Public  Education Fund                                                                   
and the Alaska Housing Finance  Corporation (AHFC) subsidiary                                                                   
account,  created  the  Capital Income  Fund,  and  deposited                                                                   
funds  into the  Constitutional  Budget  Reserve Fund  (CBR),                                                                   
which  resulted   in  billions  of  dollars   that  had  been                                                                   
appropriated but not spent. He  concluded that $4 billion was                                                                   
set aside  in addition to  funds that  went into the  CBR. He                                                                   
recalled  concerns that  the fiscal summary  did not  reflect                                                                   
what it should.                                                                                                                 
                                                                                                                                
9:25:56 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker noted  that  the fiscal  summary  is not  an                                                                   
accounting  document and is  not part  of the state's  formal                                                                   
reporting system;  it is a  working tool for the  legislature                                                                   
that attempts to  summarize the budget on one  page. Mr. Teal                                                                   
pointed out the  difficulty of summarizing the  budget on one                                                                   
page. The Legislative  Finance Division (LFD)  recognized the                                                                   
deficiencies  and  revamped  the fiscal  summary,  which  was                                                                   
presented to  the Governor  in FY 2009.  As a result  changes                                                                   
made to  the fiscal  summary by LFD  their summary  no longer                                                                   
tracked with that of the governor's  Office of Management and                                                                   
Budget (OMB). He  explained that the new format  by LFD added                                                                   
agency operations, which he felt  most people identified with                                                                   
when  thinking   of  the  "budget".  He  added   that  better                                                                   
accounting for supplemental appropriations  were included due                                                                   
to  large  surpluses.  Savings   were  separated  out.  These                                                                   
changes allowed a  better vision of cash flow.  He pointed to                                                                   
line 45 of page 3, which showed  that there was a pre-savings                                                                   
deficit of $950 million in FY  2009. Post savings there was a                                                                   
surplus  of $104 million  since $1,052.6  million was  pulled                                                                   
from the Public Education Fund.                                                                                                 
                                                                                                                                
9:29:57 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MIKE DOOGAN asked  if it takes  an additional                                                                   
appropriation  to spend  money  moved to  a separate  savings                                                                   
account.  Mr.  Teal   replied  that  it  does   not  take  an                                                                   
additional appropriation in all  cases. He explained that the                                                                   
Public Education Fund allows money  to be withdrawn according                                                                   
to  the   K-12  formula   without  appropriation.   Money  is                                                                   
appropriated  to the  fund, but  the funds  flow out  without                                                                   
appropriation.  The rest of the  savings accounts  require an                                                                   
appropriation for any withdrawals.  In response to a question                                                                   
by Representative Doogan, Mr.  Teal explained that the fiscal                                                                   
summary shows the funding transfer  to K-12 Education on line                                                                   
11.                                                                                                                             
                                                                                                                                
9:32:30 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker put  forth that  it would  be misleading  to                                                                   
leave out the education funds  coming from savings since they                                                                   
amount to more  than a billion dollars in  agency operations.                                                                   
He pointed  out that  money comes  out of  savings and  flows                                                                   
into agency  operations in line  11. He explained  that there                                                                   
would have  been a  positive number going  into the  fund had                                                                   
the legislature  taken funds  from the  CBR to replenish  the                                                                   
Public Education  Fund, which  would have  resulted in  a net                                                                   
zero  and a  negative number  in the  CBR. Both  transactions                                                                   
would  have occurred  under  the  savings line.  Any  surplus                                                                   
would have flowed back into the CBR.                                                                                            
                                                                                                                                
9:34:03 AM                                                                                                                    
                                                                                                                                
Mr.  Teal summarized  that the  most important  factors in  a                                                                   
fiscal or appropriation summary are:                                                                                            
                                                                                                                                
   · amount,                                                                                                                    
  · flavor (federal funds, general funds or other funds),                                                                       
   · location (agency operations, fund caps, debt service,                                                                      
     or the capital budget),                                                                                                    
   · timing (fiscal year in which an appropriation becomes                                                                      
     effective), and                                                                                                            
   · purpose.                                                                                                                   
                                                                                                                                
Mr. Teal observed that the amount  is generally known. Flavor                                                                   
refers  to  the category  or  group  such as  federal  funds,                                                                   
general  funds  or  other  funds.  The  flavor  of  funds  is                                                                   
complicated  by  transfers  between  funds and  the  need  to                                                                   
account for  duplicated funding  sources because once  a fund                                                                   
is capitalized  (funds are  put into a  fund) the  same funds                                                                   
cannot  be counted  on the  way out  or they  will be  double                                                                   
counted. Duplicated  funds are hard  to track and  are always                                                                   
categorized  as "other  funds". The  focus of  the House  and                                                                   
Senate Finance Committee co-chairs  has been to reduce "other                                                                   
funds"  or  at  least explain  and  identify  when  they  are                                                                   
"general funds". The  funds are counted on the  way in, which                                                                   
make them hard to count on the  way out where they are really                                                                   
spent.                                                                                                                          
                                                                                                                                
Mr. Teal continued to explain  that location refers to agency                                                                   
operations, fund  caps, debt service, or the  capital budget.                                                                   
Funds  are created  and  then  spent, creating  a  accounting                                                                   
problem on the  way out. Timing refers to the  fiscal year in                                                                   
which  an  appropriation  becomes  effective  and  is  not  a                                                                   
problem.  The purpose  does not  cause  problems. Flavor  and                                                                   
location create  the greatest problems; the biggest  areas of                                                                   
concern  are  reappropriations,   fund  transfers,  and  fund                                                                   
categorization.                                                                                                                 
                                                                                                                                
9:38:18 AM                                                                                                                    
                                                                                                                                
Mr.   Teal  reviewed   the   history  and   difficulties   of                                                                   
reappropriations.  He noted  that  reappropriations have  not                                                                   
always   been  accounted   for  since   they  are  net   zero                                                                   
transactions.   In  2000,   the   division  began   recording                                                                   
appropriations from operating  to operating reappropriations,                                                                   
and operating  to capital appropriations. Capital  to capital                                                                   
appropriations  remained a problem  since there is  no record                                                                   
of old capital projects that have  been reappropriated or the                                                                   
substitute  project. This year  (2009), the  reappropriations                                                                   
will  be  entered   in  the  capital  tracking   system  (TPS                                                                   
reports). The  new project side  of reappropriations  will be                                                                   
recorded, which will allow digital  searches. Non-legislative                                                                   
reappropriations   will   be  eliminated,   but   legislative                                                                   
reappropriations  will remain  with  a slight  change in  the                                                                   
process. Legislative reappropriations  allow funds to stay in                                                                   
the  district in  which  they were  originally  appropriated.                                                                   
Guidelines for legislative reappropriations  and repeals were                                                                   
outlined on pages  4(a-c); LFD began implementation  of these                                                                   
guidelines  for legislative repeals  and reappropriations  in                                                                   
2009.                                                                                                                           
                                                                                                                                
Mr. Teal highlighted  his three main recommendations:  moving                                                                   
money  in  a  current  fiscal  year should  be  done  in  the                                                                   
supplemental   bill,   operating  carry-forward   and   other                                                                   
operating  reappropriation  should  appear in  the  operating                                                                   
bill  (so  that  operating subcommittees  can  see  the  full                                                                   
story),  and  the  governor's   capital  projects  should  be                                                                   
terminated  without tying  the money  to a  new project.  The                                                                   
legislature  would  review  all  new  projects  on  an  equal                                                                   
footing, so that they compete  equally with all other capital                                                                   
projects.  Reappropriations might  not need  to be  examined,                                                                   
which would be a major change.                                                                                                  
                                                                                                                                
9:42:41 AM                                                                                                                    
                                                                                                                                
Co-Chair   Hawker   recalled  last   year's   reappropriation                                                                   
process, which  he found  excruciating and enlightening.  The                                                                   
process demonstrated  that the division was  not tracking the                                                                   
oil and  gas appropriations and  reappropriations as  well as                                                                   
they should. He  observed that there was not  sufficient time                                                                   
to make the change in guidelines during the past session.                                                                       
                                                                                                                                
9:44:44 AM                                                                                                                    
                                                                                                                                
Mr. Teal  observed that OMB has  the guidelines but  have not                                                                   
yet committed  to following  them. The  new guidelines  would                                                                   
require OMB to  turn in a list of "dead projects"  instead of                                                                   
a  list  of  money  they  would  like  to  reappropriate.  He                                                                   
explained  that if  OMB turns  in a  list of  $50 million  in                                                                   
projects that  are going  to be administratively  terminated,                                                                   
$50 million  would be recorded  in the fiscal summary  as new                                                                   
revenue  and  the  capital projects  to  replace  them  would                                                                   
compete  with all  other capital  projects as  new money.  He                                                                   
concluded that  there would be a  net zero if the  entire $50                                                                   
million is spent.                                                                                                               
                                                                                                                                
In response to a question by Representative  Doogan, Mr. Teal                                                                   
explained that  the funds would  show as revenue in  the year                                                                   
the project is  terminated. Funds terminated on  July 1, 2010                                                                   
would be available for FY 2011;  funds terminated on June 30,                                                                   
2010 could be spent in the supplemental  bill. Tracking would                                                                   
not be  difficult. The  effective date  of the  appropriation                                                                   
does not  pose a problem.  He reiterated that  the terminated                                                                   
projects would be recorded as "new" capital funds.                                                                              
                                                                                                                                
9:49:18 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker  explained  that  the intent  is  to  handle                                                                   
projects that have  been sitting on the books for  as much as                                                                   
20 years.                                                                                                                       
                                                                                                                                
Mr. Teal  addressed page 9,  line 4, which showed  terminated                                                                   
capital projects.                                                                                                               
                                                                                                                                
9:51:12 AM                                                                                                                    
                                                                                                                                
JAMES  ARMSTRONG,  STAFF,  CO-CHAIR  STOLTZE,  discussed  the                                                                   
reappropriation  guidelines on  page 4  (b) and  asked if  it                                                                   
would be a separate entity on  the district summary. Mr. Teal                                                                   
offered to  discuss the issue  later in the presentation  and                                                                   
indicated that the division needed legislative directive.                                                                       
                                                                                                                                
Mr. Teal  emphasized that it would  be less confusing  if the                                                                   
governor submitted  his reappropriation items in  the way the                                                                   
legislature  wants  to  see  them   in  the  legislation  but                                                                   
acknowledged  that the division  could correctly  account for                                                                   
them  if  they  were received  before  the  budget  closeouts                                                                   
occur. Co-Chair  Hawker noted the open  communication between                                                                   
the   Legislative  Finance   Division  and   the  Office   of                                                                   
Management and Budget.                                                                                                          
                                                                                                                                
Mr. Teal  observed that  the greatest effect  will be  in the                                                                   
supplemental  and operating  legislation.  He suggested  that                                                                   
the four  finance co-chairmen  request  OMB to implement  the                                                                   
guidelines as soon as they are comfortable with them.                                                                           
                                                                                                                                
9:56:28 AM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  expressed support for  the work done  by the                                                                   
Legislative Finance Division and  stressed that the intent is                                                                   
to achieve  consistency  and an  understandable product.  Mr.                                                                   
Teal added  that it  is a matter  of simplicity and  allowing                                                                   
reappropriation projects to compete with new projects.                                                                          
                                                                                                                                
9:57:38 AM     AT EASE                                                                                                        
10:06:35 AM    RECONVENED                                                                                                     
                                                                                                                                
Mr.  Teal spoke  to structure,  which  is an  agency with  an                                                                   
appropriation  and  allocation.  Fund  capitalizations  (fund                                                                   
caps) are  treated as a pseudo  agency. Savings are  put in a                                                                   
separate category because they  are not expenditures; this is                                                                   
true of many  of the fund caps.  He pointed to page  3, which                                                                   
showed  the   pre-savings  cash-flow  or  deficit   at  -$950                                                                   
million; this changed  to a surplus post savings.  The intent                                                                   
is  to   eliminate  confusion   by  renaming  fund   caps  as                                                                   
transfers. Each  fund capitalization results  in duplications                                                                   
as funds are  counted on the way  in and on the way  out. The                                                                   
way  out is  where the  money is  really spent  and where  it                                                                   
needs to be accounted.                                                                                                          
                                                                                                                                
10:09:56 AM                                                                                                                   
                                                                                                                                
Mr.  Teal provided  an example  of a  fund capitalization.  A                                                                   
$300  million capital  budget  that includes  $30 million  in                                                                   
spending to  the Capital Income  Fund would show  a reduction                                                                   
of $30  million plus a  $30 million of  other expense  in the                                                                   
capital budget. In  the new system the funds would  show as a                                                                   
transfer and be counted on the  way out (where they are being                                                                   
spent). The capital budget would  show $30 million in general                                                                   
funds (rather than "other" funds).  Under the current system,                                                                   
the funds  going into  the Capital  Income Fund were  general                                                                   
funds, but they  were categorized as "other  funds" when they                                                                   
were spent since general funds cannot be duplicated.                                                                            
                                                                                                                                
10:13:56 AM                                                                                                                   
                                                                                                                                
Co-Chair  Hawker   stressed  the  need  for   simplification,                                                                   
understandability,  and truth  in budgeting.  Mr. Teal  added                                                                   
that it is simply a different  way of presenting the material                                                                   
in an improved format.                                                                                                          
                                                                                                                                
10:16:05 AM                                                                                                                   
                                                                                                                                
In response to a question by Representative  Salmon, Mr. Teal                                                                   
explained   that   the   new   legislative   guidelines   for                                                                   
reappropriations   affect  the  administration.   Legislative                                                                   
reappropriations for each representative remain the same.                                                                       
                                                                                                                                
10:18:09 AM                                                                                                                   
                                                                                                                                
Mr. Teal gave a further example  of a fund capitalization. He                                                                   
observed that  $20 million in  general funds is  appropriated                                                                   
to the Debt Retirement Fund for  2003 series B bonds; another                                                                   
appropriation is  made from the Debt Retirement  Fund for the                                                                   
State Bond  Committee to pay  the debt service.  He suggested                                                                   
that a  single appropriation could  be made from  the general                                                                   
fund to the  State Bond Committee. There would  be one direct                                                                   
appropriation without fund capitalization or duplication.                                                                       
                                                                                                                                
Co-Chair Hawker pointed  out that there could  be some issues                                                                   
with  accounting  problems surrounding  debt  compliance  but                                                                   
felt that technical problems can  be solved. Mr. Teal agreed.                                                                   
                                                                                                                                
Mr. Teal  spoke to the pseudo  agency "transfers",  which are                                                                   
not added  in to  any reports.  He reviewed  page 5b.  Agency                                                                   
budgets for  statewide transfers do not  change. Non-additive                                                                   
fund   transfers   are  excluded   from   the   sum  of   the                                                                   
appropriations so  that the transfers can be  accounted where                                                                   
the expenditure occurs rather  than as a fund capitalization.                                                                   
This will allow the elimination  of duplicated codes, as seen                                                                   
on page 6a and 6b. Page 6c demonstrates  the duplicated codes                                                                   
that  would remain.  There would  be a  major improvement  in                                                                   
simplicity,  categorization  of  funds (general,  federal  or                                                                   
other), and location of reporting  where the money was spent.                                                                   
                                                                                                                                
10:22:05 AM                                                                                                                   
                                                                                                                                
Mr. Teal  emphasized that general  funds that are  spent will                                                                   
show  as  general  funds.  He   maintained  that  nothing  is                                                                   
changing in the  terms of what is being spent.  The system is                                                                   
set up and the division is ready for implementation.                                                                            
                                                                                                                                
Co-Chair  Hawker recalled  the complication  of past  budgets                                                                   
that tried to  explain the connection between  various funds.                                                                   
Mr.  Teal interjected  that  the  current fiscal  summary  is                                                                   
confusing  and  can  be  made  far  more  useful  with  these                                                                   
changes. He noted  that OMB's initial reaction  was positive.                                                                   
He  expressed  the hope  that  OMB  would implement  the  new                                                                   
system.                                                                                                                         
                                                                                                                                
10:25:44 AM                                                                                                                   
                                                                                                                                
Co-Chair  Hawker  acknowledged   that  there  could  be  some                                                                   
transition issues  but expressed the desire to  work with OMB                                                                   
for clarification.                                                                                                              
                                                                                                                                
Mr.  Teal  referred to  page  7a,  which shows  current  fund                                                                   
capitalization  and  noted  that   page  7b  shows  that  the                                                                   
Disaster  Relief  Fund  would  be  the  sole  remaining  fund                                                                   
capitalization.  He  noted  that   money  flows  out  of  the                                                                   
Disaster Relief  Fund without further appropriation  so there                                                                   
would be no duplication.                                                                                                        
                                                                                                                                
Mr.  Teal reviewed  page 8,  savings.  There are  designated,                                                                   
undesignated savings and transfers.                                                                                             
                                                                                                                                
10:28:32 AM                                                                                                                   
                                                                                                                                
Mr.  Teal discussed  fund categories  and  stressed that  the                                                                   
intent  is   to  provide  better  budget   information.  Fund                                                                   
categories  are general,  federal, or  other. In 2005,  there                                                                   
was $1 billion in other funds  in a $2.3 general fund budget.                                                                   
Other funds  are currently  $1.25 billion;  the general  fund                                                                   
budget up to $2.4 billion.                                                                                                      
                                                                                                                                
10:31:33 AM                                                                                                                   
                                                                                                                                
Mr.  Teal explained  that other  funds  do not  get the  same                                                                   
scrutiny that  general funds receive. He asserted  that other                                                                   
funds  are often really  are general  funds,  as seen in  the                                                                   
transfers.  The Permanent Fund  is the  only fund created  by                                                                   
the  Alaska State  Constitution  that  is separate  from  the                                                                   
General  Fund.  Many have  argued  that  there are  only  two                                                                   
categories of  funds: federal and general. The  Department of                                                                   
Law and  the Division  of Legislative  Audit agree  with this                                                                   
interpretation.   However,   the    finance   chairmen   have                                                                   
instructed finance sub-committees to look at other funds.                                                                       
                                                                                                                                
Mr. Teal  maintained that other  funds do count. The  lack of                                                                   
scrutiny  of other funds  is one  of the  big drivers  in the                                                                   
funding categorization  process  initiated by the  co-chairs.                                                                   
All four co-chairs have expressed  a desire to straighten out                                                                   
the issue  of other funds and  to categorize where  the money                                                                   
really belongs. The level of discretion  that the legislature                                                                   
has in spending  money creates the basis  for categorization.                                                                   
General funds are discretionary.                                                                                                
                                                                                                                                
10:36:00 AM                                                                                                                   
                                                                                                                                
Mr.  Teal  continued  that  the   categorization  is  not  an                                                                   
arbitrary decision  on the  part of LFD.  Rules apply  to the                                                                   
categorization of funds. The official  name for general funds                                                                   
is  "unrestricted   general  funds".  When   the  legislature                                                                   
designates  a  use for  an  appropriation  the funds  are  no                                                                   
longer unrestricted. He concluded  that everything that has a                                                                   
designation  does not  have to  be categorized  as other;  it                                                                   
could be  categorized as  restricted (or designated)  general                                                                   
funds.  The division  chose to  call  these funds  designated                                                                   
general funds  since "restricted" has a different  meaning in                                                                   
accounting terminology.                                                                                                         
                                                                                                                                
10:38:36 AM                                                                                                                   
                                                                                                                                
Mr. Teal analyzed  the fiscal summary on page  9. The summary                                                                   
shows little  change in the  unrestricted general  fund line;                                                                   
the change occurs between other  funds and designated general                                                                   
funds.  There was  a $700 million  move from  other funds  to                                                                   
designated general fund.                                                                                                        
                                                                                                                                
Co-Chair Hawker  elaborated that the $700 million  coming out                                                                   
of other funds  is state money  that can be spent in  any way                                                                   
with legislative  approval  and support  of the governor.  He                                                                   
spoke of the practice of taking funds "off budget".                                                                             
                                                                                                                                
Co-Chair Hawker  observed that  the Senate Finance  Committee                                                                   
has taken an  different approach and expressed  the desire to                                                                   
come to an agreement for clarity.                                                                                               
                                                                                                                                
10:42:34 AM                                                                                                                   
                                                                                                                                
Mr.  Teal  observed  that  the  Senate  utilizes  a  category                                                                   
designated as  "flex funds", which  are any funds  that spend                                                                   
like general funds.                                                                                                             
                                                                                                                                
10:45:11 AM                                                                                                                   
                                                                                                                                
Mr.  Teal  stated  that all  four  co-chairs  understand  the                                                                   
impact and have expressed support for the new process.                                                                          
                                                                                                                                
Representative  Austerman  asked  what  percentage  of  other                                                                   
funds can  be redirected  to the  new designations.  Mr. Teal                                                                   
noted that  $750 million is  being redirected.  The remaining                                                                   
other  funds would  be approximately  $500  million, and  are                                                                   
trust funds and bond funds that do not have discretion.                                                                         
                                                                                                                                
Mr.  Teal explained  that the  same thing  happened with  the                                                                   
capital  appropriations. The  general fund  portion would  go                                                                   
from $173  million to  $266 million.  He emphasized  that the                                                                   
capital portion is still being  worked on and that there will                                                                   
not be as large a jump as the summary on page 9 shows.                                                                          
                                                                                                                                
10:47:15 AM                                                                                                                   
                                                                                                                                
Mr. Teal  observed that  the general fund  budget in  FY 2011                                                                   
appears to  increase by  $750 million,  but pointed  out that                                                                   
this would disappear once the  FY 2010 budget is presented in                                                                   
the same manner.                                                                                                                
                                                                                                                                
Co-Chair Hawker  emphasized the  importance of acceptance  by                                                                   
both  sides   of  the   political  aisle.  Governor   Parnell                                                                   
expressed  strong receptivity,  and  is  concerned about  bad                                                                   
politics and poor presentation of the governor's budget.                                                                        
                                                                                                                                
Representative  Kelly advised  that  the changes  be made  to                                                                   
previous budgets for better comparison.                                                                                         
                                                                                                                                
10:51:10 AM                                                                                                                   
                                                                                                                                
Mr. Teal spoke  to participation by OMB and  acknowledged the                                                                   
difficulty of  converting during  preparation of  the budget.                                                                   
He stated that LFD can make the  conversion and stressed that                                                                   
it is important  that the budget be converted  before it goes                                                                   
into finance operating subcommittees.                                                                                           
                                                                                                                                
Mr. Teal  elaborated that conversions  of past  budgets would                                                                   
be time  consuming  and that LFD  would work  on the  process                                                                   
next interim.  He thought  budget comparisons  older  than 10                                                                   
years would be irrelevant.                                                                                                      
                                                                                                                                
10:54:49 AM                                                                                                                   
                                                                                                                                
Mr. Teal  continued  to discuss  the fund code  book and  the                                                                   
necessary of rewriting the codes.                                                                                               
                                                                                                                                
Representative  Austerman  commented  that a  list  regarding                                                                   
certain acronyms would be helpful  to understand the proposed                                                                   
classification.                                                                                                                 
                                                                                                                                
Mr. Teal  concluded that the transfers  are at the  bottom of                                                                   
the  fiscal summary  and are  excluded from  the totals.  The                                                                   
Permanent  Fund remains  a separate category.  He noted  that                                                                   
page 10 shows the impact agency by agency.                                                                                      
                                                                                                                                
10:58:19 AM    AT EASE                                                                                                        
11:09:19 AM    RECONVENED                                                                                                     
                                                                                                                                
Co-Chair Hawker referred to page  11a, and noted that OMB was                                                                   
involved  in  discussions  regarding  fund  codes.  Mr.  Teal                                                                   
interjected that  the intent is to improve  reporting through                                                                   
reclassifying fund  codes. He discussed page  11a. The column                                                                   
"Current  Group" refers  to  the current  classification.  He                                                                   
clarified  that RLF is  used for  Revolving Loan Fund.  There                                                                   
are federal revolving  loan funds and general  fund revolving                                                                   
loan funds.  The intent is to  have subgroups that  can cross                                                                   
the main group  to report on all revolving  loan funds. Notes                                                                   
are  used  to  explain  why  a   particular  fund  group  was                                                                   
categorized. There is also a column  called "eliminate". Most                                                                   
of  the items  identified for  elimination were  slid to  the                                                                   
back of  the spreadsheet. The  statute column  references the                                                                   
need for statutory change for  the reclassification to occur.                                                                   
Column P is structure and subcommittee.  An "x" usually means                                                                   
that the item  has been moved to transfers.  An "s" indicates                                                                   
that  the  subcommittee  needs   to  address  the  item.  The                                                                   
methodology  used  was to  list  codes in  a  group and  then                                                                   
identify anything that moved to the group.                                                                                      
                                                                                                                                
11:13:45 AM                                                                                                                   
                                                                                                                                
In response  to a  question by  Representative Crawford,  Mr.                                                                   
Teal  explained that  a code  has  not been  created for  the                                                                   
Statutory  Budget  Reserve (SBR),  since  it  has never  been                                                                   
used. He estimated  that $500 million would have  to be drawn                                                                   
from  the SBR  and that  a code  would  be created.  Co-Chair                                                                   
Hawker added  that funds from  the SBR require  a legislative                                                                   
majority   and   signature   by  the   governor.   Mr.   Teal                                                                   
acknowledged that other codes would have to be added.                                                                           
                                                                                                                                
11:15:58 AM                                                                                                                   
                                                                                                                                
Mr. Teal discussed codes for federal  receipts. Funds must be                                                                   
federal to receive  a federal designation. Lines  18 to 29 of                                                                   
page  11a are  existing federal  codes without  modification.                                                                   
New federal codes were created  for the Election, Clean Water                                                                   
and Drinking Water funds.                                                                                                       
                                                                                                                                
11:18:58 AM                                                                                                                   
                                                                                                                                
Mr. Teal  illustrated  how the Alaska  Clean Water  Revolving                                                                   
Loan  Fund was  reclassified from  "other"  to "federal".  He                                                                   
stressed  the  difficulty  of categorizing  the  fund,  which                                                                   
appears to be  composed of state and federal  funds. The fund                                                                   
was capitalized  with federal funds ($10 million).  The state                                                                   
fulfills  its  required federal  match  through  the sale  of                                                                   
bonds ($2  million). A portion  of the money leaves  the fund                                                                   
as an  appropriation for  administrative costs ($1  million),                                                                   
and   a   portion   is   used   for   loans   (also   without                                                                   
appropriation). A trace of the  funds shows that the money in                                                                   
the  fund  can be  used  for three  purposes:  making  loans,                                                                   
administrative  costs,  and to  pay  debt service.  Money  is                                                                   
taken from  the fund to  pay off the  bonds that  were issued                                                                   
($2 million).  He concluded that  the state funds  cancel and                                                                   
the  federal funds  remain  ($9 million  after  a $1  million                                                                   
reduction in administrative costs)  and therefore the fund is                                                                   
capitalized  with  federal funds  and  can be  designated  as                                                                   
federal. He  concluded that  there were  no great changes  in                                                                   
federal receipts.                                                                                                               
                                                                                                                                
11:23:14 AM                                                                                                                   
                                                                                                                                
Mr.  Teal turned  to unrestricted  general fund  as shown  on                                                                   
page  11a,  which  are  state   revenues  with  no  statutory                                                                   
destination.  Three  codes  remained as  general  funds.  The                                                                   
Constitutional  Budget Reserve Fund  (CBR) was moved  to this                                                                   
category.  Appropriations   from  the  CBR   are  open-ended.                                                                   
General  funds  are  appropriated   and  if  the  revenue  is                                                                   
insufficient  then   the  CBR  is  used  to   "backfill".  He                                                                   
explained that the CBR is not  appropriated by a fund code or                                                                   
amount; it is used to backfill  a general fund appropriation.                                                                   
Under the new system  any funds spent from the  CBR will show                                                                   
as general  funds. Management fees  are taken out of  the CBR                                                                   
by a three-quarter  vote, which creates a liability  from the                                                                   
CBR and must be  swept back from the general  fund to restore                                                                   
the CBR. He  suggested that a logical conclusion  may be that                                                                   
management  fees should  be  appropriated  directly from  the                                                                   
general fund.  This item  was flagged with  an "s"  since the                                                                   
subcommittee may want to consider the issue.                                                                                    
                                                                                                                                
11:26:37 AM                                                                                                                   
                                                                                                                                
Mr. Teal  informed that  the Investment  Loss Trust  Fund was                                                                   
also designated  for subcommittee review, since  it is simply                                                                   
revenue.  There was  never any  fund  source available  other                                                                   
than  strictly, unrestricted  general fund  cash, similar  to                                                                   
Alaska Housing  Finance Corporation  (AHFC) dividends  or the                                                                   
Alaska  Municipal   Bond  Bank   or  the  Alaska   Industrial                                                                   
Development and  Export Authority dividends. Codes  and where                                                                   
dividends are spent  can be tracked, but the  "bottom line is                                                                   
those  dividends  can be  spent  for  anything you  want  and                                                                   
should be classified as unrestricted general funds".                                                                            
                                                                                                                                
11:27:47 AM                                                                                                                   
                                                                                                                                
Mr. Teal  turned to miscellaneous  earnings, which  will need                                                                   
to be  split between general funds  and other bonds  that are                                                                   
not general obligation bonds.                                                                                                   
                                                                                                                                
Mr. Teal observed that most of  the changes occurred as other                                                                   
funds were reclassified to designated  general funds as shown                                                                   
on page 11b.  Sub-groups were used. The first  list refers to                                                                   
revolving  loan   funds.  He  pointed  out   that  the  loans                                                                   
themselves  are  not appropriated.  Only  the  administrative                                                                   
costs  are appropriated.  The administrative  costs could  be                                                                   
paid  as a  dividend  from the  revolving  loan  fund to  the                                                                   
general  fund. However,  most  revolving  loan fund  statutes                                                                   
allow  for  payment  of  statutory   costs.  Co-Chair  Hawker                                                                   
reiterated  that  it  is  a choice  of  the  legislature  and                                                                   
governor how funds are spent.                                                                                                   
                                                                                                                                
11:29:11 AM                                                                                                                   
                                                                                                                                
Mr. Teal  referred to the  Commercial Fishing  Revolving Loan                                                                   
Fund on  line 58,  which has an  "x" and  "s" under  the note                                                                   
column. He explained  that the legislature  appropriated $1.3                                                                   
million from  the fund for  costs other than  administration,                                                                   
since the  fund has sufficient  capitalization to  pull money                                                                   
from  it.  These  funds  have  been  used  to  pay  for  non-                                                                   
administrative costs  in the Department of Fish  and Game. He                                                                   
observed that  the change to  general fund designation  would                                                                   
eliminate  this  need,  since   funds  were  taken  from  the                                                                   
revolving loan  fund to protect  general funds.  He suggested                                                                   
the subcommittee  may want to look  at this item since  it is                                                                   
being used outside of its current  statutory designation. The                                                                   
Bulk  Fuel  Bridge  Loan Fund  was  flagged  for  legislative                                                                   
review  because  it  has a  zero  interest  rate;  therefore,                                                                   
paying  for administrative  costs from  the loan reduces  the                                                                   
funds available.                                                                                                                
                                                                                                                                
11:31:36 AM                                                                                                                   
                                                                                                                                
In response  to a  question by  Representative Crawford,  Mr.                                                                   
Teal explained  that the  School Fund,  Fishermen's  Fund and                                                                   
Public Trust  Fund are dedicated  funds that were  previously                                                                   
designated as  other. There  are several ways  a fund  can be                                                                   
dedicated: though  the Alaska State Constitution,  in federal                                                                   
law,  or  grandfathered  in  because   they  pre-existed  the                                                                   
constitution.  These   three  funds  were   grandfathered  in                                                                   
because they pre-existed; however,  a grandfathered fund does                                                                   
not have  to be  a dedicated  fund. The  legislature has  the                                                                   
ability  to change the  use of  the fund  at anytime  for any                                                                   
purpose.   Representative   Hawker   emphasized   legislative                                                                   
discretion over the spending of the fund source.                                                                                
                                                                                                                                
11:34:07 AM                                                                                                                   
                                                                                                                                
Mr. Teal  observed that the  Special Vehicle Rental  Receipts                                                                   
need  to  be   split  to  differentiate  between   boats  and                                                                   
snowmobiles  in response  to federal  regulations (boats  are                                                                   
dedicated, snowmobiles are not).                                                                                                
                                                                                                                                
Co-Chair  Stoltze  expressed   the  concern  proper  tracking                                                                   
occurs  so  that  the  rights  of  snowmobile  users  can  be                                                                   
protected.  Co-Chair Hawker  and  Mr. Teal  assured him  that                                                                   
proper tracking can and would be done.                                                                                          
                                                                                                                                
11:37:29 AM                                                                                                                   
                                                                                                                                
Mr. Teal expressed that the intent  is not to get rid of fund                                                                   
codes but to correctly categorize the existing codes.                                                                           
                                                                                                                                
In  response   to  a  previous  question   by  Representative                                                                   
Crawford,  Mr. Teal explained  that the  Public School  Trust                                                                   
Fund gets a  certain percentage of the revenues  derived from                                                                   
the  payment  of  cigarette  taxes,  fees  and  penalties  in                                                                   
licensing.  The   restriction  on  use  is   constitutionally                                                                   
dedicated    to   rehabilitation,    construction,    repair,                                                                   
insurance, and  cost of school facilities.  Approximately $25                                                                   
million a  year goes into the  fund. The Public  School Trust                                                                   
Fund is  the balance of the  Public School Permanent  Fund on                                                                   
July 1978  plus one-half of  one percent of receipts  derived                                                                   
from the  management of  state land. These  funds may  not be                                                                   
appropriated for  purpose other than the state  public school                                                                   
program. Mr.  Teal noted that  there are also  three statutes                                                                   
setting up school construction funds that are duplicates.                                                                       
                                                                                                                                
11:40:14 AM                                                                                                                   
                                                                                                                                
Co-Chair Stoltze  asked whether  there was  still a  code for                                                                   
the  school tax.  Mr. Teal  explained  that once  the use  or                                                                   
source  of  a  dedicated  fund is  broken,  funds  cannot  be                                                                   
returned as dedicated.                                                                                                          
                                                                                                                                
Mr.  Teal compared  the University  of Alaska  to the  Alaska                                                                   
Marine  Highway System,  which sells tickets  and provides  a                                                                   
service. An argument can also  be made that the university is                                                                   
more like AHFC and other state  corporations, which were left                                                                   
in the  other category.  He observed that  it did  not really                                                                   
matter which  category was used,  since a designated  general                                                                   
fund code cannot be used outside  the program that designates                                                                   
the  income.  Mr.  Teal  continued   that  one  way  to  view                                                                   
designated general  funds is that  while the legislature  can                                                                   
they should not break the designation.                                                                                          
                                                                                                                                
11:43:23 AM                                                                                                                   
                                                                                                                                
Mr. Teal  observed problems  with the uninsurance  employment                                                                   
tax related,  which flows to  the federal government  without                                                                   
appropriation.  Co-Chair   Hawker  agreed  that   there  were                                                                   
hundreds of  millions unaccounted  for in the  appropriations                                                                   
in terms of the uninsurance employment tax.                                                                                     
                                                                                                                                
Mr.  Teal spoke  to receipts  support  services and  asserted                                                                   
that  the code  needs to  be split  into  three pieces:  non-                                                                   
regulated fees that are unrelated  to the cost of running the                                                                   
program, regulated  fees that  are unrelated  to the  cost of                                                                   
running the  program, and regulatory  fees equal to  the cost                                                                   
of running  the program. Co-Chair  Hawker commented  that LFD                                                                   
would lead the subcommittee through the discussion.                                                                             
                                                                                                                                
11:45:29 AM                                                                                                                   
                                                                                                                                
Mr.  Armstrong asked  what happens  if the  House and  Senate                                                                   
give  an  appropriation  different   designations.  Mr.  Teal                                                                   
observed  that   items  could  be  rectified   in  conference                                                                   
committee,  but hoped  that the  classification system  would                                                                   
not be political.  Co-Chair Hawker suggested  that hours have                                                                   
been spent on the discussion.                                                                                                   
                                                                                                                                
Representative  Kelly thought  fund code  changes made  sense                                                                   
but cautioned  that agencies  need to  be assisted.  Co-Chair                                                                   
Hawker agreed.                                                                                                                  
                                                                                                                                
11:48:58 AM                                                                                                                   
                                                                                                                                
Mr. Teal addressed the Permanent  Fund - page 12 (a-e), which                                                                   
is a  reclassification  of a billion  and a  half dollars  to                                                                   
general fund since the Earnings  Reserve Account is available                                                                   
for  legislative  appropriation.  The  $1.5  billion  in  the                                                                   
Earnings  Reserve Account  are  dividends that  now count  as                                                                   
general fund  expenditures, and inflation proofing,  which is                                                                   
also a general fund expenditure.  He added that $7 million of                                                                   
the permanent  fund corporate  receipts  are used for  agency                                                                   
operations in  the departments  of law, revenue,  and natural                                                                   
resources.  These expenditures  will now  show up as  general                                                                   
funds,  which  means there  is  no  real  reason to  use  the                                                                   
Earnings  Reserve  Account  instead   of  general  funds.  He                                                                   
observed  that permanent  fund corporate  receipts are  being                                                                   
used  to  support  an  agency   that  did  not  generate  the                                                                   
receipts. Alaska Statutes 37.05.145  prohibits this practice.                                                                   
                                                                                                                                
11:52:48 AM                                                                                                                   
                                                                                                                                
Mr.  Teal reviewed  the subgroups  that remain  in the  other                                                                   
category on  11d: dedicated funds  (federal or forced  by the                                                                   
US  Constitution),  trust  funds   (retirement),  bond  funds                                                                   
(AHFC), and corporate receipts.                                                                                                 
                                                                                                                                
11:54:50 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Thomas   clarified  comments  regarding   halibut                                                                   
IFQ's. He noted that fishers have  lost over 54 to 55 percent                                                                   
of their halibut  IFQ's, which equates to $20  million a year                                                                   
in Southeast  Alaska's economy.  Ninety percent of  the IFQ's                                                                   
are owned by residents of SE Alaska, most of them rural.                                                                        
                                                                                                                                
11:57:38 AM    AT EASE                                                                                                        
1:09:58 PM     RECONVENED                                                                                                     
                                                                                                                                
Co-Chair  Hawker observed  that  there was  confusion in  the                                                                   
previous budget  cycle regarding  university funding  because                                                                   
the budget  submitted by  the governor was  not in  line with                                                                   
the proposals  of  the Board of  Regents. The  intent of  the                                                                   
Board of Regents  is to work with the Office  of the Governor                                                                   
to bring  forth a  budget to  the legislature.  The Board  of                                                                   
Regents will establish a three-member  liaison team to enable                                                                   
better communication with the legislature.                                                                                      
                                                                                                                                
1:17:39 PM                                                                                                                    
                                                                                                                                
Senator Joe Thomas  and Mr. Teal reviewed the  Senate Finance                                                                   
Committee's  workshop  with  the   university  (10/14/09  and                                                                   
10/15/09).  Senator   Thomas  felt   that  the  meeting   was                                                                   
beneficial. Mr. Teal  concurred and added that  the there was                                                                   
honest discussion.  The university  considers itself to be an                                                                   
important  priority and  maintains that  there is a  rigorous                                                                   
process  of evaluating  campus  needs. The  Board of  Regents                                                                   
indicated that  they felt the legislature should  approve its                                                                   
request  [without  change]. He  stressed  that  the Board  of                                                                   
Regents needs  to understand that the legislature  deals with                                                                   
the university's  budget as submitted by the  governor. It is                                                                   
not a reduction of the university's  budget if the governor's                                                                   
submission is  fully funded (instead of the  budget presented                                                                   
by  the  Board  of  Regents  in   their  Redbook.)  Mr.  Teal                                                                   
acknowledged  that   the  university  monitors   a  statewide                                                                   
program  but  disagreed  that  it  is  uniquely  special.  He                                                                   
observed  that   Senator  Johnny   Ellis  agreed   with  this                                                                   
assessment  and  pointed out  that  the legislature  has  the                                                                   
statewide prospective and must  balance the priorities of all                                                                   
agencies including the university.                                                                                              
                                                                                                                                
1:23:08 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  reported that  the  university  was not  going  to                                                                   
submit a  large capital budget as  they had in the  past. The                                                                   
university  intends   to  submit  a  request   including  one                                                                   
building and some  deferred maintenance needs.  He noted that                                                                   
Senator  Ellis  felt  that the  university's  capital  budget                                                                   
request was a  demand and that they would not  accept funding                                                                   
outside  of their  request. He  recalled  that Senator  Ellis                                                                   
suggested that  the university  should rethink their  capital                                                                   
budget strategy.                                                                                                                
                                                                                                                                
1:24:59 PM                                                                                                                    
                                                                                                                                
Mr. Teal observed  that there was also a brief  discussion of                                                                   
future  general  fund  requirements. He  noted  that  Senator                                                                   
Stedman  raised the  point that  in the past  five years  the                                                                   
university's unrestricted general  fund portion has increased                                                                   
from 42  to 46 percent.  The Board  of Regents reported  that                                                                   
the intent  was to  reduce this  amount and  that they  would                                                                   
turn this ratio around. However,  discussions with university                                                                   
budget staff  indicated that  they are  not likely  to reduce                                                                   
their general fund amount.                                                                                                      
                                                                                                                                
Mr.  Teal  continued  to  relate  the  conversations  at  the                                                                   
meeting involving fixed costs.  The desire of Senator Stedman                                                                   
was for the  Legislative Finance Division and  the University                                                                   
of Alaska  to agree  on the  presentation of  fixed costs  or                                                                   
base budget.  He assumed  that the  Redbook procedures  would                                                                   
continue as they have in the past.                                                                                              
                                                                                                                                
1:27:02 PM                                                                                                                    
                                                                                                                                
Mr. Teal noted  that the topic of a public building  fund was                                                                   
not  brought  up  during  the   workshop,  but  that  he  had                                                                   
discussions regarding  the creation of a fund  with Kit Duke,                                                                   
Associate Vice President of building  facilities. He observed                                                                   
that the Public Building Fund  has seven buildings and eighty                                                                   
million dollars  of deferred maintenance. The  university has                                                                   
400 buildings  and $800 million in deferred  maintenance. The                                                                   
university has a huge problem with deferred maintenance.                                                                        
                                                                                                                                
Co-Chair Hawker  added that  the governor  has made  it clear                                                                   
that he is  contemplating a mechanism to address  the backlog                                                                   
of deferred maintenance. He agreed  that the meeting with the                                                                   
university  was  honest  and blunt.  He  suggested  elevating                                                                   
university funding as a priority  of the entire House Finance                                                                   
Committee.                                                                                                                      
                                                                                                                                
1:31:26 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze recalled being  offended by the university's                                                                   
attitude   about  the   capital  budget.   He  stressed   the                                                                   
inappropriateness  of  politics   in  the  process.  Co-Chair                                                                   
Hawker suggested  that the proposed  liaison team  would help                                                                   
improve communication.                                                                                                          
                                                                                                                                
Representative  Joule  suggested  that  the  legislature  not                                                                   
ignore past work on deferred maintenance,  which identified a                                                                   
billion  dollars  of  deferred   maintenance  throughout  the                                                                   
state,  not  just in  the  university  system. He  wanted  to                                                                   
refocus  efforts  to  determine  the  deferred  cost  of  new                                                                   
buildings or laws.                                                                                                              
                                                                                                                                
1:37:41 PM                                                                                                                    
                                                                                                                                
Representative  Kelly commented  that he  came away  from the                                                                   
university  meetings  with  a   hopeful  attitude.  Mr.  Teal                                                                   
indicated  that  progress  was  made even  if  there  was  no                                                                   
agreement.  He recalled  disagreements in  the previous  year                                                                   
regarding maintenance  costs for the new science  building. A                                                                   
[university] public building fund  would solve such problems.                                                                   
Representative Kelly reiterated that he was hopeful.                                                                            
                                                                                                                                
1:41:25 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  defined  the  proposed  fiscal  note  system.  The                                                                   
administration   prepares   the   fiscal   note,   which   is                                                                   
electronically stored. The division  is working to streamline                                                                   
the  process.  Fiscal  notes  would be  reported  as  a  data                                                                   
transaction in the  budget system in order to  track versions                                                                   
of the legislation and the associated costs.                                                                                    
                                                                                                                                
Co-Chair  Hawker  observed  that   fiscal  notes  are  funded                                                                   
through  the adoption  by  the  conference committee  on  the                                                                   
operating   budget.  The  process   would  allow   electronic                                                                   
transfer of information.                                                                                                        
                                                                                                                                
1:44:48 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  gave  an update  on  capital  projects  procedure.                                                                   
Legislative  reappropriations   are  going  to  require  full                                                                   
backup. The list  of contacts will need to be  updated on any                                                                   
project  that  was  submitted  in the  previous  year.  Group                                                                   
emails  will  be  available.  The  exchange  of  data  should                                                                   
improve and be more streamlined.                                                                                                
                                                                                                                                
1:46:41 PM                                                                                                                    
                                                                                                                                
Mr. Armstrong  suggested that reappropriations  be segregated                                                                   
out  in the  reporting  process as  seen  on page  4b of  the                                                                   
handout,  so   that  the  funds   do  not  count   against  a                                                                   
legislator's  district  if they  are transferred  to  another                                                                   
district. He  gave a hypothetical  example. Mr.  Teal thought                                                                   
it would be easy to do. Co-Chair Hawker agreed.                                                                                 
                                                                                                                                
Vice-Chair Thomas  observed that previously  approved capital                                                                   
projects were  recently funded with economic  stimulus funds.                                                                   
He  expressed  concern that  these  projects  are not  double                                                                   
charged.   He  also  brought   up  frustrations   surrounding                                                                   
projects that  are delayed by  a failure to obtain  necessary                                                                   
permits. He suggested  project requests indicate  if a permit                                                                   
is  needed and  if  so if  it is  on  hand. Co-Chair  Stoltze                                                                   
agreed.                                                                                                                         
                                                                                                                                
1:50:23 PM                                                                                                                    
                                                                                                                                
Mr. Teal stressed  that the state's reporting  system is very                                                                   
powerful and maintained  that Alaska is very  open and honest                                                                   
in comparison to  other states. The state of  Alaska does not                                                                   
sweep capital funding under the rug.                                                                                            
                                                                                                                                
Representative  Joule  wondered   how  capital  projects  get                                                                   
"typed"  and  assigned  to  districts.  He  objected  to  the                                                                   
assignment of the  Dalton Highway to his district  and argued                                                                   
that it is a statewide expense.  Co-Chair Stoltze agreed that                                                                   
there is difficulty in the assignment of capital projects.                                                                      
                                                                                                                                
Mr. Teal related that the Legislative  Finance Division tries                                                                   
to improve the  process. The Legislative Finance  Division is                                                                   
unbiased,  but   must  know  the  legislature's   wishes  for                                                                   
groupings and reporting.                                                                                                        
                                                                                                                                
1:55:41 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Thomas   agreed  with   Representative   Joule's                                                                   
comments. He gave an example of  a statewide project that was                                                                   
charged to his district.                                                                                                        
                                                                                                                                
1:57:20 PM                                                                                                                    
                                                                                                                                
Co-Chair   Hawker    explained   that   subcommittees    work                                                                   
independently  but  require  a final  summary  document  that                                                                   
should be structurally  similar. There is a  proposal to have                                                                   
a  subcommittee  management  worksheet.  He asked  for  staff                                                                   
feedback.                                                                                                                       
                                                                                                                                
AMANDA   RYDER,   FISCAL   ANALYST,    LEGISLATIVE   AFFAIRS,                                                                   
LEGISLATIVE   FINANCE,  described   the   qualities  in   the                                                                   
worksheet on page 13a. She stated  that the transactions will                                                                   
be  able  to be  read  clearly  due to  new  formatting.  She                                                                   
expressed excitement  with the new spreadsheet  and discussed                                                                   
various  ways in which  it will  streamline information.  The                                                                   
new spreadsheet will allow staff  to run "what if" scenarios.                                                                   
The  base  spreadsheet  will contain  the  governor's  budget                                                                   
transactions as a starting point.  Any difference between the                                                                   
governor's budget and the subcommittee's  recommendation will                                                                   
be highlighted in green. Staff  will only input data into the                                                                   
blue cells.                                                                                                                     
                                                                                                                                
2:03:08 PM                                                                                                                    
                                                                                                                                
Ms. Ryder shared that the spreadsheet  changes are not set in                                                                   
stone  and  she  hoped  that the  committee  would  give  the                                                                   
department  its  feedback.  She   continued  to  explain  the                                                                   
various qualities of the new spreadsheet.                                                                                       
                                                                                                                                
2:04:50 PM                                                                                                                    
                                                                                                                                
Ms. Ryder  explained that the  governor amendments  will also                                                                   
be  highlighted in  green. She  explained  that the  division                                                                   
will enter the  information into the subcommittee  reports to                                                                   
make sure that the LFD reports  match; any item that does not                                                                   
match will show in red. Co-Chair  Hawker added that the color                                                                   
coding  has been  added  to make  the  spreadsheet easier  to                                                                   
read, audit and review.                                                                                                         
                                                                                                                                
Ms. Ryder stressed  that the color coding in  the spreadsheet                                                                   
provides  a   tool  to  quickly  notice   discrepancies.  The                                                                   
spreadsheet  also  allows subcommittee  members  to  annotate                                                                   
their decisions.                                                                                                                
                                                                                                                                
2:09:21 PM     RECESSED                                                                                                       
2:16:12 PM     RECONVENED                                                                                                     
                                                                                                                                
ANNETTE     KREITZER,     COMMISSIONER,     DEPARTMENT     OF                                                                   
ADMINISTRATION,   discussed   the   challenges   facing   her                                                                   
department.  She  said  the  recruitment   and  retention  of                                                                   
employees has  been the biggest challenge. She  observed that                                                                   
the  geographical differential  study  came  out of  Governor                                                                   
Palin's appointed  of an executive  working group  to address                                                                   
recruitment and  retention. She noted that $400  thousand was                                                                   
appropriated in  2008 for a geographical  differential study,                                                                   
which would be in addition to  any merit increases or cost of                                                                   
living   allowance   (COLA)  adjustments.   She   noted   the                                                                   
difficulty of  implementing major  initiatives during  the 90                                                                   
day legislative session.                                                                                                        
                                                                                                                                
2:18:23 PM                                                                                                                    
                                                                                                                                
Vice-Chair Thomas inquired the  total cost of implementation.                                                                   
Commissioner  Kreitzer  acknowledged that  there  would be  a                                                                   
total  cost for  implementation  of  the legislature  if  the                                                                   
governor were to  accept the report as written;  however, the                                                                   
goal  of the  hearing  was only  to provide  background.  She                                                                   
noted  that  the  department   is  in  the  middle  of  union                                                                   
negotiations. Commissioner Kreitzer  observed that the report                                                                   
has been on the department's website.                                                                                           
                                                                                                                                
2:21:35 PM                                                                                                                    
                                                                                                                                
JIM  CALVIN,  MCDOWELL  GROUP,  JUNEAU,  provided  background                                                                   
information  on the study,  which is  the most  comprehensive                                                                   
overview of the cost of living  allowance in Alaska since the                                                                   
1985 geographic study  (also done by the McDowell  Group). He                                                                   
referred   to   a  handout   entitled,   "Alaska   Geographic                                                                   
Differential Study  - 2008" (copy  on file). He  related that                                                                   
McDowell worked  with EcoNorthwest (data management)  and GMA                                                                   
Research, Bellview,  which did the urban  telephone research.                                                                   
The McDowell  group did  the rural  surveying, which  is more                                                                   
complicated.  All of the  research was done  in fall  of 2008                                                                   
(October through December). The  final report was provided to                                                                   
the administration in April 2009.                                                                                               
                                                                                                                                
2:24:06 PM                                                                                                                    
                                                                                                                                
Mr. Calvin  described the  study's methodology. He  explained                                                                   
that  2,547  randomly  selected   households  in  74  Alaskan                                                                   
communities were surveyed. There  were fifty questions in the                                                                   
survey  regarding household  spending  patterns  in order  to                                                                   
understand  the  shape  of  household  budgets  in  different                                                                   
communities throughout Alaska.                                                                                                  
                                                                                                                                
Co-Chair  Hawker  asked  if  they   received  good  voluntary                                                                   
compliance.  Mr.   Calvin  replied  that  people   were  very                                                                   
receptive to talking about their household budgets.                                                                             
                                                                                                                                
Mr. Calvin noted that they surveyed  634 stores throughout 58                                                                   
communities collecting  data on a household  market basket of                                                                   
approximately 200 items.                                                                                                        
                                                                                                                                
2:27:05 PM                                                                                                                    
                                                                                                                                
Mr.  Calvin  explained  that  the  basic  modeling  used  the                                                                   
household survey and shape of  the market basket to determine                                                                   
the   importance    of   the   following    items:   housing,                                                                   
transportation,  and food.  The  price information  allows  a                                                                   
differential for specific items.                                                                                                
                                                                                                                                
2:28:04 PM                                                                                                                    
                                                                                                                                
Representative Paul  Seaton asked how rural  communities were                                                                   
surveyed. Mr.  Calvin reported  that people were  asked where                                                                   
they bought their groceries. Groceries  bought in neighboring                                                                   
large cities were accounted for in the cost analysis.                                                                           
                                                                                                                                
2:28:56 PM                                                                                                                    
                                                                                                                                
Representative  Nancy  Dahlstrom  asked  if  subsistence  was                                                                   
taken into account.  Mr. Calvin explained that  the focus was                                                                   
on  the  cash  economy  but  that  subsistence  actives  were                                                                   
captured   through  the   cost  of   tools  associated   with                                                                   
subsistence.                                                                                                                    
                                                                                                                                
2:30:35 PM                                                                                                                    
                                                                                                                                
Mr. Calvin continued to discuss  the methodology in measuring                                                                   
the differentials. Communities  were aggregated into eighteen                                                                   
geographic pools or sample blocks  that are generally similar                                                                   
in   terms    of   size    of   population,    transportation                                                                   
infrastructure  access, and  geographic  location within  the                                                                   
state. Anchorage was  used as the base community  and given a                                                                   
differential of one. All costs are relative to Anchorage.                                                                       
                                                                                                                                
Co-Chair Stoltze wondered how fuel costs were estimated.                                                                        
                                                                                                                                
2:32:21 PM                                                                                                                    
                                                                                                                                
Mr. Calvin clarified that the  household surveys captured how                                                                   
much  gas is  spent on  fuel. The  cost of  fuel compared  to                                                                   
Anchorage  is used  to  create a  differential.  How much  is                                                                   
bought is as important as the relative cost.                                                                                    
                                                                                                                                
Mr. Calvin referred  to the profile on page 17  of the study,                                                                   
which shows  the factors  that went  into determining  a cost                                                                   
differential  (copy  on  file).  Each  profile  contains  the                                                                   
population of  the community and  number of state  employees.                                                                   
Fairbanks' cost  differential came in  at 1.03. Housing  is a                                                                   
little   bit  less  expense   in  Fairbanks   but  food   and                                                                   
transportation is  a little higher. The  Parks/Elliott/Steese                                                                   
Highways community was significantly lower.                                                                                     
                                                                                                                                
Representative Crawford  observed that Anchorage,  Fairbanks,                                                                   
and MatSu were pooled together  and there is an eight percent                                                                   
difference between these communities.                                                                                           
                                                                                                                                
2:35:23 PM                                                                                                                    
                                                                                                                                
Mr. Calvin clarified that Anchorage  was calculated by itself                                                                   
and offered to provide more information  on the pooling later                                                                   
in the presentation.                                                                                                            
                                                                                                                                
Mr. Calvin observed that Glennallen,  Delta Junction, and Tok                                                                   
all have  highway access, which  is critically  important for                                                                   
the  cost  of living  calculation.  The  cost of  housing  is                                                                   
significantly   lower  than  Anchorage,   but  the   cost  of                                                                   
clothing,   food  and  transportation   is  higher.   Blended                                                                   
together the cost  of living is not dramatically  higher than                                                                   
Anchorage.                                                                                                                      
                                                                                                                                
Mr.  Calvin observed  that the  first significant  difference                                                                   
occurs in the  roadless interior pool of Fort  Yukon, Galena,                                                                   
and McGrath,  which have high  housing and food  costs across                                                                   
the board of  1.31. Juneau has higher housing  and food costs                                                                   
than Anchorage and has a differential of 1.11.                                                                                  
                                                                                                                                
2:37:14 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Thomas wondered  about the  difference in  income                                                                   
levels throughout the state. He  expressed concern for basing                                                                   
the differentials on the price  of housing. He shared several                                                                   
observations he  felt should be  considered when  the surveys                                                                   
were conducted such as income.                                                                                                  
                                                                                                                                
2:39:38 PM                                                                                                                    
                                                                                                                                
Mr.  Calvin acknowledged  the  difficulties  in conducting  a                                                                   
survey in Alaska. Household income  can be determined but the                                                                   
challenge  is in the  comparison since  households vary.  The                                                                   
market basket  focuses on what  is available in  rural areas.                                                                   
The key issue is housing.                                                                                                       
                                                                                                                                
2:41:41 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Thomas  maintained   that  there   would   be  a                                                                   
difference  between professional  communities  versus a  more                                                                   
working class community.                                                                                                        
                                                                                                                                
2:42:51 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze thought that  the discussion on geographical                                                                   
differentials was necessary in  order to truly understand the                                                                   
issues. He  expressed a desire  for a conclusion of  the cost                                                                   
differential issues.                                                                                                            
                                                                                                                                
2:44:00 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Thomas agreed  and noted  that cost  differential                                                                   
changes   take   years   to    implement.   Co-Chair   Hawker                                                                   
acknowledged  that  the cost  differential  issue  is one  of                                                                   
three top  issues in  the state  along with subsistence,  and                                                                   
abortion. Mr. Calvin emphasized  the complexity and challenge                                                                   
of cost of living research in the state of Alaska.                                                                              
                                                                                                                                
2:44:52 PM                                                                                                                    
                                                                                                                                
Mr. Calvin  continued  with his presentation  and noted  that                                                                   
higher  costs in  Juneau for  housing (15  percent), food  (3                                                                   
percent) and transportation (9 percent).                                                                                        
                                                                                                                                
Mr. Calvin observed  that Ketchikan and Sitka  were initially                                                                   
grouped  together  because  they  are  similar  in  terms  of                                                                   
population  and geography,  but  further analysis  discovered                                                                   
that  they are  quite different  and suggested  that they  be                                                                   
split apart.  There were  much lower  costs in the  southeast                                                                   
mid-size communities  of Craig, Haines, Klawock,  Metlakatla,                                                                   
Petersburg, and  Wrangell. Transportation costs  are somewhat                                                                   
higher but not  significant since these communities  have the                                                                   
benefit of ferry service. Their cost differential was 1.05.                                                                     
                                                                                                                                
Mr. Calvin reviewed the southeast  small communities of Elfin                                                                   
Cover, Gustavus,  Hoonah, Pelican, Skagway,  Tenakee Springs,                                                                   
and  Yakutat.  He  acknowledged  that  there is  a  size  and                                                                   
quality  issue  in  housing, but  the  housing  available  is                                                                   
significantly lower. He concluded  that the cost of living is                                                                   
about  equal   to  Anchorage   (1.02).  He  emphasized   that                                                                   
Anchorage  is not  a cheap  place  to live  primarily due  to                                                                   
housing costs.                                                                                                                  
                                                                                                                                
Mr. Calvin  observed that  the Matsu  Borough was split  into                                                                   
different  communities, but  it is  the lowest  cost area  in                                                                   
Alaska  (0.95).  Housing  is less  expensive  in  Matsu  than                                                                   
Anchorage.                                                                                                                      
                                                                                                                                
Mr.  Calvin addressed  other areas  in the  state. The  Kenai                                                                   
Peninsula was  similar to Anchorage  at 1.01.  Prince William                                                                   
Sound was 1.08,  but Valdez and Whittier are  quite different                                                                   
and he suggested that they be  split. Kodiak came in at 1.12.                                                                   
The Arctic  region of  Barrow, Kotzebue and  Nome had  a high                                                                   
cost of living  differential of 1.48 due to  high housing and                                                                   
utility  costs,  along  with  high  food  and  transportation                                                                   
costs.  Bethel  and Dillingham  were  at  1.49 but  might  be                                                                   
better split.                                                                                                                   
                                                                                                                                
2:47:33 PM                                                                                                                    
                                                                                                                                
Mr. Calvin continued discussing  other areas of the state. He                                                                   
observed  that the  Aleutian region  of Adak,  Cod Bay,  King                                                                   
Cove,  Sand Point,  Unalaska and  Dutch Harbor  were at  1.50                                                                   
with high housing  and transportation costs.  Southwest small                                                                   
communities are the smallest communities  of Alaska and had a                                                                   
differential of 1.44.  He noted in some cases  communities of                                                                   
sufficient size  were isolated.  Barrow was 1.50,  Bethel was                                                                   
1.53, and  Dillingham was  1.37 (even  though it was  grouped                                                                   
with Bethel  in the study). Cordova  was 1.13 and  Valdez was                                                                   
1.08.  Homer was  on  par with  the Kenai  Peninsula  Borough                                                                   
analysis.  Ketchikan and  Sitka  were grouped  together,  but                                                                   
they found  that they  are quite  different. Ketchikan  had a                                                                   
differential of 1.04  and Sitka was 1.07. Unalaska  and Dutch                                                                   
Harbor  were the  highest in  the  state at  1.58, which  was                                                                   
higher than  some of the  smaller surrounding  communities in                                                                   
the region.                                                                                                                     
                                                                                                                                
2:49:39 PM                                                                                                                    
                                                                                                                                
Mr.  Calvin shared  that it  was informative  to examine  the                                                                   
changes in  differentials from 1985.  In some areas,  such as                                                                   
Ketchikan  and Prince  of  Wales Island,  there  has been  no                                                                   
change over  the last 23  years. Wrangell and  Petersburg are                                                                   
up slightly  from .98 to 1.04.  Sitka is way up from  1.01 to                                                                   
1.17 due  to housing costs.  Juneau is  up from 1.03  to 1.11                                                                   
due to housing.  Valdez and Cordova are slightly  down. There                                                                   
was virtually  no change  in Icy  Straight, Palmer,  Wasilla,                                                                   
Kenai, Cook Inlet  and Fairbanks. Seward is  up slightly from                                                                   
1.0 to 1.03.  Kodiak is up  from 1.06 to 1.12.  Aleutians are                                                                   
up significantly.  Areas on the road system  did not increase                                                                   
much, while  off the road  system and remote  communities had                                                                   
significant  change. Bristol  Bay is  up from  1.29 to  1.37.                                                                   
Bethel is up from 1.39 to 1.53.  Yukon Kuskokwim shows a drop                                                                   
but he pointed  out that it was the result of  a small sample                                                                   
size. Barrow, Nome and Kotzebue were up slightly.                                                                               
                                                                                                                                
Mr. Calvin  discussed  factors that influence  the change  in                                                                   
the cost  of living differentials.  He observed  increases in                                                                   
Juneau  and Sitka.  Urban areas  have  seen a  growth in  the                                                                   
retail environment,  which has caused a downward  pressure on                                                                   
the cost of living over the last  23 years. Rural communities                                                                   
have  not benefited  in the  same way.  Increased fuel  costs                                                                   
have been a factor in rural areas.                                                                                              
                                                                                                                                
2:52:58 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  wondered about  the  labor  pool and  free                                                                   
marked  factor   as  far  as  the  employment   situation  in                                                                   
different communities.  Mr. Calvin explained  that employment                                                                   
situations  are  not  factored  in  except  to  pool  similar                                                                   
communities together.                                                                                                           
                                                                                                                                
Representative  Doogan questioned if  the affect of  taxes on                                                                   
the communities  in the  study were  taken into account.  Mr.                                                                   
Calvin noted that the tax burden was captured.                                                                                  
                                                                                                                                
Representative Kelly felt that  the survey was conducted at a                                                                   
poor  time economically.  Mr. Calvin  acknowledged that  fuel                                                                   
prices were exceptionally  high and trending  down while they                                                                   
were in the field. Steps were  taken to test how the price of                                                                   
oil  would  change  the  differentials   between  communities                                                                   
statewide.   The   price  of   fuel   did  not   change   the                                                                   
differentials  between Fairbanks  and  Anchorage, since  they                                                                   
are in the  "same boat" in  relation to cost. Fuel  costs did                                                                   
have  some  affect  in  rural   areas.  In  areas  with  high                                                                   
differentials  (1.45 -  1.50) a one-third  reduction  in fuel                                                                   
prices could lower the differential slightly (by .02).                                                                          
                                                                                                                                
2:57:43 PM                                                                                                                    
                                                                                                                                
Mr. Calvin discussed  the recommendations. He  concluded that                                                                   
it makes sense  to depart from a plan that  is based strictly                                                                   
on election district  boundaries and to group  communities in                                                                   
terms  of economics,  social characteristics,  location,  and                                                                   
infrastructure. The  program administrative costs  need to be                                                                   
considered. He  acknowledged that  there is some  uncertainty                                                                   
in the differentials. He emphasized  that it also makes sense                                                                   
to aggregate into geographical differential pools.                                                                              
                                                                                                                                
2:59:10 PM                                                                                                                    
                                                                                                                                
Co-Chair   Hawker   questioned   if  the   methodology   that                                                                   
incorporated the housing costs  in communities was consistent                                                                   
with   the  1985   study.   Mr.   Calvin  stated   that   the                                                                   
methodologies have  been consistent.  He observed that  it is                                                                   
not possible  to take the  average quality home  in Anchorage                                                                   
to Dillingham and price it.                                                                                                     
                                                                                                                                
In  response  to  a question  by  Representative  Kelly,  Mr.                                                                   
Calvin acknowledged  that the  1985 study  was the  target of                                                                   
consternation   among  many   groups  and   the  subject   of                                                                   
discussion concerning its methodology.  He concluded that the                                                                   
1985  study "stood  the test  of  time". The  first month  of                                                                   
their  2009 project  was  spent on  design  to address  these                                                                   
critically  important issues.  He felt  that the  methodology                                                                   
was strong.                                                                                                                     
                                                                                                                                
3:01:54 PM                                                                                                                    
                                                                                                                                
Mr.  Calvin   discussed   statistically  based   geographical                                                                   
differential  pools based on  communities that are  generally                                                                   
similar in terms  of their cost of living.  They were grouped                                                                   
together   for  an  administratively   functional   plan  for                                                                   
applying  differentials  to  wages as  one  methodology.  The                                                                   
state was split into five geographical pools (GDP).                                                                             
                                                                                                                                
   · Anchorage, Fairbanks, Delta/Tok, Glennallen, KPB, Mat-                                                                     
     Su, Parks/Elliott/Steese, Small & Mid-size SE - .95 to                                                                     
     1.05, weighted average of 1.0                                                                                              
   · Cordova, Juneau, Kodiak, Sitka, Valdez - 1.08 to 1.17,                                                                     
     weighted average of 1.11                                                                                                   
   · Dillingham, Nome, Roadless Interior - 1.31 to 1.39,                                                                        
     weighted average of 1.37                                                                                                   
   · Barrow, Bethel, SW Small commities - 1.44 to 1.53,                                                                         
     weighted average of 1.50                                                                                                   
   · Kotzebue, Unalaska/Dutch Harbor - 1.58 to 1.61,                                                                            
     weighted average of 1.60                                                                                                   
                                                                                                                                
Mr.  Calvin explained  that the  weighted average  represents                                                                   
the number of state employees.  He acknowledged the challenge                                                                   
of keeping  like communities together  but observed  that the                                                                   
program  would  be easier  to  administer  than one  with  30                                                                   
differentials. The  grouping also acknowledges  the ratio for                                                                   
error in  survey research. An  aggregate approach  provides a                                                                   
range  not a  single value,  without  a scientifically  based                                                                   
number  of districts.  He concluded that  there were  natural                                                                   
breaks that allowed Alaska to  be broken into five districts.                                                                   
                                                                                                                                
3:06:03 PM                                                                                                                    
                                                                                                                                
Representative  Dahlstrom  wondered  about  the  out-of-state                                                                   
firms that had  helped with the study. She  wondered if there                                                                   
had  been a  competitive bid  process.  Mr. Calvin  explained                                                                   
that   they   chose   firms   that   they   had   established                                                                   
relationships with  and they trusted  and were  familiar with                                                                   
the quality  of their work. The  McDowell Group did  not do a                                                                   
competitive bid process.                                                                                                        
                                                                                                                                
3:07:13 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Thomas  asked   if   state  employees   included                                                                   
teachers. Mr. Calvin replied no.  Vice-Chair Thomas expressed                                                                   
concern for out migration of workers in rural areas.                                                                            
                                                                                                                                
Annette  Kreitzer   stressed  that   the  governor   has  not                                                                   
recommended implementation of  the system. The purpose of the                                                                   
meeting was to provide information.                                                                                             
                                                                                                                                
3:09:41 PM                                                                                                                    
                                                                                                                                
KEVIN    BROOKS,   DEPUTY    COMMISSIONER,   DEPARTMENT    OF                                                                   
ADMINISTRATION, stated that the  department is satisfied with                                                                   
the work  done by  the McDowell Group.  He observed  that the                                                                   
focus  was on  the  executive branch  but  that the  research                                                                   
could be applied  to school districts. He referred  to page 5                                                                   
of the differential  study. He provided members  with a chart                                                                   
indicating the full and part time  employee count by location                                                                   
(copy on file).                                                                                                                 
                                                                                                                                
3:11:25 PM                                                                                                                    
                                                                                                                                
Mr.  Brooks clarified  that the  employee  count was  derived                                                                   
from  the employee's  employment  location. Co-Chair  Stoltze                                                                   
observed that  employee work place location  versus residence                                                                   
would  affect  the Matsu.  Ms.  Kreitzer clarified  that  the                                                                   
study is not based on the numbers in the employee count.                                                                        
                                                                                                                                
Mr. Brooks stated that the employee  numbers were pulled from                                                                   
OMB  budget data  for  2010.  The focus  was  on  the top  20                                                                   
communities in terms of employee  count. Each of the five GDP                                                                   
was color coded.                                                                                                                
                                                                                                                                
3:13:13 PM                                                                                                                    
                                                                                                                                
Mr. Brooks also  provided members with a  chart demonstrating                                                                   
employee count  by bargaining unit and location.  He observed                                                                   
that each  of the bargaining  contracts address  geographical                                                                   
differentials. Some locations  have as many as four different                                                                   
geographical  differentials in  a single  city. He  mentioned                                                                   
the  geographic  difference  percentages   of  the  different                                                                   
bargaining units.  He observed that  the data used  for these                                                                   
differentials is 20 years old in some cases.                                                                                    
                                                                                                                                
Ms. Kreitzer  pointed out  the differences among  communities                                                                   
and bargaining  units. She noted  that arbitration is  also a                                                                   
contributing factor.                                                                                                            
                                                                                                                                
Mr. Brooks  concurred and pointed  to correction  officers in                                                                   
Juneau  and Ketchikan  and  their supervisors.  He  concluded                                                                   
that   geographical   differentials    are   complicated   to                                                                   
administer  and  that  the goal  is  to  achieve  consistency                                                                   
across bargaining units.                                                                                                        
                                                                                                                                
3:17:34 PM                                                                                                                    
                                                                                                                                
Representative  Doogan asked  if the  intent is  to not  only                                                                   
equalize  the  cost  of  living  in  contracts  but  to  also                                                                   
equalize the other pieces in contracts.  He observed that one                                                                   
bargaining  unit might  negotiate  a higher  differential  in                                                                   
exchange for less time off than another.                                                                                        
                                                                                                                                
Ms.  Kreitzer commented  that  the goal  is  to achieve  fair                                                                   
contracts.                                                                                                                      
                                                                                                                                
Representative    Seaton   commented    on   the    Fairbanks                                                                   
differential between different  covered employees. There is a                                                                   
ten percent  variation between various bargaining  units, but                                                                   
there  is  also  a 10  percent  variation  between  different                                                                   
cities.                                                                                                                         
                                                                                                                                
3:20:19 PM                                                                                                                    
                                                                                                                                
Ms. Kreitzer clarified that she  did not want to get into the                                                                   
specifics of their  intention. The purpose is  to provide the                                                                   
underlying methodology. Representative  Seaton clarified that                                                                   
he was  speaking to  the statistical  basis for the  variance                                                                   
and whether it is accepted in one format but not another.                                                                       
                                                                                                                                
Mr. Brooks commented that the  statistical analysis allowed a                                                                   
range of numbers. He stressed  that the differential is based                                                                   
on  the relative  difference of  the cost  of living  between                                                                   
Anchorage and other communities.                                                                                                
                                                                                                                                
3:23:01 PM                                                                                                                    
                                                                                                                                
Representative  Joule informed about  the state employees  in                                                                   
his  district.  Most state  employees  in his  district  have                                                                   
transferred  in to  the district.  He pointed  out that  high                                                                   
geographical  differentials allow  for greater retirement  in                                                                   
terms  of  an  employee's  three  high  years.  He  expressed                                                                   
concern  that motivation  for increased  retirement does  not                                                                   
always  translate to  a benefit  for the  area. Ms.  Kreitzer                                                                   
acknowledged the  issue but pointed  out that the  study does                                                                   
not   represent  a   change  from   current  practices.   She                                                                   
emphasized that the intent is to hire locally.                                                                                  
                                                                                                                                
3:27:18 PM                                                                                                                    
                                                                                                                                
Representative  Kelly  addressed  the issue  of  raising  pay                                                                   
levels where there is high unemployment.                                                                                        
                                                                                                                                
Mr. Calvin observed that the heart  of the economic situation                                                                   
is how  does cost of living  and pay differentials  relate to                                                                   
supply and  demand for labor in  a community and how  does it                                                                   
disjoint the economic  environment to have a  handful of high                                                                   
paying jobs where there may not  be qualified people or where                                                                   
it would be an inducement to pull people in temporarily.                                                                        
                                                                                                                                
3:30:42 PM                                                                                                                    
                                                                                                                                
Ms.  Kreitzer  informed that  the  cost of  implementing  the                                                                   
study as presented  would be $35 million  including benefits.                                                                   
The  impact on  the  unfunded  liability for  retirement  and                                                                   
benefits would be $3.8 million  the first year. The impact on                                                                   
the unfunded liability is $50 million over 25 years.                                                                            
                                                                                                                                
Vice-Chair Thomas asked about  the effect on private industry                                                                   
in small  communities. Ms.  Kreitzer acknowledged  that there                                                                   
are a lot of policy implications.                                                                                               
                                                                                                                                
3:32:58 PM                                                                                                                    
                                                                                                                                
Mr. Brooks  clarified that no  one would see a  fifty percent                                                                   
increase  in   pay.  Any   increase  would  be   incremental.                                                                   
Geographical  differentials already exist  and would  only be                                                                   
updated.                                                                                                                        
                                                                                                                                
Representative  Dahlstrom  asked  for  the  definition  of  a                                                                   
confidential employee.  Ms. Kreitzer responded  that they are                                                                   
employees that  generally work for the Division  of Personnel                                                                   
on labor relations.                                                                                                             
                                                                                                                                
3:35:23 PM                                                                                                                    
                                                                                                                                
Ms. Kreitzer  reiterated that  it would  cost $35 million  to                                                                   
implement the geographical differentials  as presented in the                                                                   
study.                                                                                                                          
                                                                                                                                
AT EASE        3:36:22 PM                                                                                                     
RECONVENED     3:47:56 PM                                                                                                     
                                                                                                                                
ATTORNEY  GENERAL, DAN  SULLIVAN,  DEPARTMENT  OF LAW  (DOL),                                                                   
introduced his  staff. He  addressed the strategic  direction                                                                   
of  the Department  of Law,  which is  focused on  engagement                                                                   
with  the  legislature,  and different  elements  of  Alaskan                                                                   
society. He stressed  the importance of being  more proactive                                                                   
on litigation such as in the endangered species listing.                                                                        
                                                                                                                                
3:53:52 PM                                                                                                                    
                                                                                                                                
Commissioner Sullivan  observed that the four  core functions                                                                   
of  the Department  of  Law are:  protecting  the safety  and                                                                   
physical wellbeing of Alaskans,  fostering the conditions for                                                                   
economic opportunity  and responsible development  and use of                                                                   
the  state's   natural  resources,   protecting  the   fiscal                                                                   
integrity  of the  state, and  promoting  and defending  good                                                                   
governments.                                                                                                                    
                                                                                                                                
Commissioner   Sullivan   observed   that   criminal   issues                                                                   
including child, consumer, environmental  protection takes up                                                                   
67 percent  of DOL's  budget. The  department helps  to shape                                                                   
the  broader economic  environment  in  Alaska,  such as  the                                                                   
department's  support  in  the   Kensington  mine  case.  The                                                                   
department  protects  the  fiscal  health  of  the  state  by                                                                   
assuring payment  of taxes and  royalties, recovery  of money                                                                   
owed to the state, and defending  monetary claims against the                                                                   
state. Protecting  the state's fiscal integrity  accounts for                                                                   
19  percent   of  the  department's  budget.   Promoting  and                                                                   
defending good  governance includes ethic issues,  Indian law                                                                   
issues, elections  and initiatives,  legislation, and  public                                                                   
record requests.                                                                                                                
                                                                                                                                
3:57:47 PM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan felt  DOL  was a  good  return on  the                                                                   
state's  investment.  The  state  received  $560  million  in                                                                   
claims  and  judgments  as  a   result  of  the  department's                                                                   
efforts,  which  represents $6  dollars  on every  $1  dollar                                                                   
spent on the department or a 35  to 1 ratio if only the civil                                                                   
division is considered.                                                                                                         
                                                                                                                                
Commissioner Sullivan touched  briefly on four issues: cruise                                                                   
ship  tax   litigation,  Mercer   Case,  Carlson   Case,  and                                                                   
permanent fund loss accounting.                                                                                                 
                                                                                                                                
Co-Chair  Hawker  observed  that  any  confidential  material                                                                   
would be discussed in executive conference.                                                                                     
                                                                                                                                
4:00:59 PM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan began  with the  cruise ship  head tax                                                                   
issue.  He had  an opportunity  to testify  before the  House                                                                   
Judiciary  Committee. The  Parnell  Administration has  great                                                                   
respect  for  the  cruise  ship   industry  and  the  tourism                                                                   
industry,  but he  stressed that  DOL is  defending the  suit                                                                   
diligently as is their statutory  duty. The economic benefits                                                                   
are clear as are  the impacts of one million  visitors a year                                                                   
to a state with  a population of 700 thousand.  He noted that                                                                   
state communities  have spent  funds to provide  services and                                                                   
build infrastructure.  He observed  that law allows  the user                                                                   
of  services  to   pay  their  fair  share   under  the  U.S.                                                                   
Constitution  when  local  communities   provide  significant                                                                   
infrastructure and  services to hosted travelers,  whether in                                                                   
or out of  state. The cruise ship industry  complaint focuses                                                                   
on the  violations of  the U.S.  Constitution in relation  to                                                                   
the Tonnage  Clause, Commerce  Clause and the  Transportation                                                                   
Security   Act   and   is  seeking   to   declare   the   tax                                                                   
unconstitutional  and enjoin  collection of  the tax  in cost                                                                   
and  fees. He  reiterated that  there is  a well  established                                                                   
principle  that passengers  can  be required  to  pay a  fair                                                                   
share for required  facilities and services.  The question is                                                                   
to  what  degree  the  $46  per   passenger  tax  is  roughly                                                                   
calibrated to cover the cost to  state and local communities.                                                                   
The department is undergoing a study on the issue                                                                               
                                                                                                                                
4:05:20 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker   noted  the   issue  of  documenting   that                                                                   
maintaining ports and harbors  is only a small portion of the                                                                   
cost  of   hosting  cruise   ship  passengers.   Commissioner                                                                   
Sullivan agreed  and explained  that the law allows  services                                                                   
in the areas where there are large numbers of passengers.                                                                       
                                                                                                                                
Representative  Austerman asked if  there is similarity  with                                                                   
the Carlson  case in terms of  a ratio of how much  the state                                                                   
pays versus the fees charged.                                                                                                   
                                                                                                                                
Commissioner Sullivan  stated that  one of the  concerns with                                                                   
the  Carlson  case is  the  way  in which  the  judgment  and                                                                   
interest  on judgment  continued  to  accrue.  There is  some                                                                   
similarity.                                                                                                                     
                                                                                                                                
4:08:31 PM                                                                                                                    
                                                                                                                                
Representative  Austerman  observed  that  the focus  of  the                                                                   
Carlson  case is how  much the  state was  paying to  provide                                                                   
services  versus  the  percentage  charged to  out  of  state                                                                   
applicants.                                                                                                                     
                                                                                                                                
Commissioner  Sullivan explained  that the  cruise ship  head                                                                   
tax is more of  a cost analysis and connection  of tax to the                                                                   
costs and services provided.                                                                                                    
                                                                                                                                
Co-Chair  Hawker  asked  if  the   current  operating  budget                                                                   
supports work  for these cases  or if additional  funds would                                                                   
be  requested  for litigation  costs.  Commissioner  Sullivan                                                                   
replied that  he is working  through the budget  process with                                                                   
the governor.                                                                                                                   
                                                                                                                                
4:10:46 PM                                                                                                                    
                                                                                                                                
Commissioner Sullivan  discussed the Mercer case.  Mercer was                                                                   
the actuary  for the  public and  teacher retirement  systems                                                                   
since 1974. A  2002 audit recommended a number  of changes to                                                                   
the  modeling by  Mercer. The  recommendations  by the  audit                                                                   
firm   were  largely   adopted  by   the  Public   Employees'                                                                   
Retirement  System  (PERS) and  Teachers'  Retirement  System                                                                   
(TRS)  boards.  Mercer  made   changes  based  on  the  audit                                                                   
recommendations. In  2003, Mercer advised that  PERS and TERS                                                                   
were unfunded  to the total amount  of $4.4 billion.  Of this                                                                   
amount, $1.3  billion was a  result of correcting  the errors                                                                   
identified  by the auditors  in relation  to Mercer's  health                                                                   
cost  modeling.  An  additional   $500  million  in  unfunded                                                                   
liability was discovered  as the result of coding  errors. In                                                                   
2005, there  was legislation  enacted to  close the  PERS and                                                                   
TRS  defined  benefit  plans  to  new  participants.  Defined                                                                   
contribution  plans  were  created   for  new  PERS  and  TRS                                                                   
employees. In  2006, the Department  of Law investigated  the                                                                   
work  of Mercer  and concluded  that  there was  a basis  for                                                                   
cause of action  for negligence in the case.  The Wall Street                                                                   
firm of Paul  Weiss was retained on a contingency  fee basis.                                                                   
A  complaint  was  filed  in  December  2007.  The  complaint                                                                   
alleged  professional  negligence,   malpractice,  breach  of                                                                   
contract,  negligent  misrepresentation,   and  unfair  trade                                                                   
practices, alleging  damages of $1.8 billion.  There has been                                                                   
extensive discovery. The complaint  was amended in May to add                                                                   
fraud  and   punitive  damages  claims  when   the  actuaries                                                                   
testified under oath that they  discovered an error in the FY                                                                   
02 PERS valuation that if corrected  would have increased the                                                                   
PERS  unfunded  liability  $1  billion.  The  error  was  not                                                                   
corrected.  Mercer  representatives further  testified  under                                                                   
oath that they falsified the FY  03 PERS valuation to conceal                                                                   
the  error  and reduce  the  PERS  unfunded liability  by  $1                                                                   
billion. A motion to dismiss was  filed and argued in Juneau.                                                                   
The trial was moved to July from  March. The state intends to                                                                   
take case to trial and win.                                                                                                     
                                                                                                                                
4:14:48 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker  pointed  out the  seriousness  of  alleging                                                                   
fraud and an intent to deceive.  Commissioner Sullivan agreed                                                                   
and noted  that their  NY firm  also agreed. Co-Chair  Hawker                                                                   
understood  that  the allegation  was  not made  lightly.  He                                                                   
commended DOL for the hard work.                                                                                                
                                                                                                                                
Commissioner Sullivan  credited his co-workers  with the hard                                                                   
work. He stated  that he would continue to  press forward and                                                                   
was disappointed in the delay of the trial.                                                                                     
                                                                                                                                
4:17:42 PM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan  discussed the  Carlson  case and  the                                                                   
significant  developments  in the  case.  The  case has  been                                                                   
under litigation for  25 years. The case has  been before the                                                                   
Alaska  Supreme Court  four times.  The original  suit was  a                                                                   
class  action  that  claimed  out  of  state  fisherman  were                                                                   
discriminated  against based  on the  Commerce Clause  of the                                                                   
U.S. Constitution and the Privileges  and Immunity Clause due                                                                   
to the  differential in the  permits and crew  licensing fees                                                                   
for instate and out of state fisherman.  The state received a                                                                   
setback on  the third  time the case  went before  the court.                                                                   
The court ruled  that the interest accrued on  the case would                                                                   
be  11 percent  quarterly  compounded  back  to the  original                                                                   
judgment. The  state's primary liability is the  interest due                                                                   
to this ruling.  Last spring was the last time  the case went                                                                   
to  the  Alaska  Supreme  Court.  The  overall  judgment  was                                                                   
reduced  by 50  percent,  but the  total  liability is  still                                                                   
significant. The interest on the  case is $20 thousand a day.                                                                   
Refunds would cost  $68.3 million, which would  have been $93                                                                   
million  if  they  had  not  been  reduced.  The  plaintiff's                                                                   
attorney is  asking for $21 million  but has only  spent $250                                                                   
thousand. There has not been a  final judgment; a judgment is                                                                   
expected  in January.  An accounting  firm  is reviewing  the                                                                   
numbers.                                                                                                                        
                                                                                                                                
4:23:00 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  asked if there  is any ability  or mechanism                                                                   
to  stop  the  accrual  of  interest  on  the  damage  award.                                                                   
Commissioner  Sullivan  was  reluctant   to  discuss  options                                                                   
publically.                                                                                                                     
                                                                                                                                
Co-Chair Stoltze  asked if there were other  settlements that                                                                   
might accrue  interest.  He also observed  that the  tourists                                                                   
and non-residence  are paying toward  the building of  a fish                                                                   
hatchery in Fairbanks.                                                                                                          
                                                                                                                                
4:25:54 PM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan observed that  it would be  worthwhile                                                                   
to work  with the legislature  to prevent similar  results in                                                                   
other cases.                                                                                                                    
                                                                                                                                
4:27:18 PM                                                                                                                    
                                                                                                                                
Commissioner Sullivan highlighted  the issue of the permanent                                                                   
fund  realized losses  in  FY  09 of  $2.5  billion; of  this                                                                   
amount, $2.2 billion was attributable  to realized investment                                                                   
loss   and  principle,   the  remaining   $300  million   was                                                                   
attributable  to realized  investment  loss  in the  Earnings                                                                   
Reserve Account. The issue is  whether booking a $2.2 billion                                                                   
loss  from  the  principle  and   earnings  reserve  accounts                                                                   
requires  legislative authorization  because  it reduces  the                                                                   
balance of the Earnings Reserve  Account, which is subject to                                                                   
appropriation.   This  issue  is   not  in  litigation.   The                                                                   
department is making recommendations to the governor.                                                                           
                                                                                                                                
4:30:53 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  noted that there are executive  policy calls                                                                   
involved.                                                                                                                       
                                                                                                                                
Mr.  Teal  pointed out  that  how  the losses  are  accounted                                                                   
affects  the   legislature's   power  of  appropriation.   He                                                                   
suggested that  it may be  appropriate to consider  statutory                                                                   
changes. From  the fiscal  prospective, $2.5 billion  missing                                                                   
from the  Earnings Reserve Account  could result in a  cap on                                                                   
dividends. Dividends  are capped  by the amount  of statutory                                                                   
income and the  qualifier that they cannot exceed  50 percent                                                                   
of the amount  in the Earnings Reserve Account.  The Earnings                                                                   
Reserve Account is now at $400  million dollars instead of $3                                                                   
billion  dollars since  the losses  were  attributed to  this                                                                   
account.                                                                                                                        
                                                                                                                                
Co-Chair  Stoltze  stressed  that  there  are  policy  issues                                                                   
involved.                                                                                                                       
                                                                                                                                
Mr. Teal noted that a lower reserve  balance also affects the                                                                   
17b draw or legislative appropriation from the CBR.                                                                             
                                                                                                                                
4:35:30 PM                                                                                                                    
                                                                                                                                
Mr.  Teal observed  that FY  2010 revenues  are $2.7  billion                                                                   
lower than 2009.  This creates the basis for  the amount that                                                                   
would  be  drawn  from  the  Constitutional   Budget  Reserve                                                                   
Account.  The draw  also includes  the  amount available  for                                                                   
appropriations,  which includes  the balance  of the  Earning                                                                   
Reserve  Account.  Subtract the  $400  million  and the  draw                                                                   
becomes $2.3 billion. If the balance  were $3 billion instead                                                                   
of a half a billion, the potential  17b CBR draw would "fold"                                                                   
substantially. Other revenue increases  would also affect the                                                                   
draw. He  observed that FY 2010  revenues may only be  half a                                                                   
billion lower than FY 2009. The  Earnings Reserve Account may                                                                   
also recover  a billion  dollars of the  realized loss  in FY                                                                   
2010, which would  reduce the 17b draw to zero.  He could not                                                                   
predict  the end point.  He acknowledged  that the  Permanent                                                                   
Fund Division has a different opinion.                                                                                          
                                                                                                                                
4:37:56 PM                                                                                                                    
                                                                                                                                
Co-Chair   Stoltze  asked   if   the  intent   was  to   make                                                                   
recommendations  or investment  advice  regarding the  fund's                                                                   
board  of  trustees. He  asked  if  more oversight  would  be                                                                   
advantageous. Mr. Teal did not  have a recommendation; he had                                                                   
no  investment  advice.  His   intent  was  to  clear-up  the                                                                   
statutory  treatment whether  an appropriation  is needed  to                                                                   
move funds  from the Earnings  Reserve Account  to principle.                                                                   
Co-Chair Hawker added that the  statutory oversight is vested                                                                   
with the Legislative Budget and Audit Committee.                                                                                
                                                                                                                                
4:40:52 PM                                                                                                                    
                                                                                                                                
Representative  Seaton  recalled   that  the  Permanent  Fund                                                                   
Corporation  was   allowed  to  increase   their  alternative                                                                   
investments from 5 to 15 percent.  The legislature has no way                                                                   
of  knowing how  the alternative  investments are  made.   He                                                                   
opined that  Co-Chair Stoltze's  question was valid  as there                                                                   
is so much potential exposure to derivatives.                                                                                   
                                                                                                                                
Co-Chair  Hawker encouraged  review of  guidelines for  these                                                                   
funds.  He  appreciated  the   diversion  to  illustrate  the                                                                   
complexity of the issue.                                                                                                        
                                                                                                                                
Commissioner  Sullivan  acknowledged  the complexity  of  the                                                                   
issue and noted  that DOL has not been looked  at the broader                                                                   
issue.                                                                                                                          
                                                                                                                                
4:43:48 PM                                                                                                                    
                                                                                                                                
Representative  Austerman suggested the  need for a  full day                                                                   
committee to address  the issue of where the  state of Alaska                                                                   
wants to  be in fifteen years  in regards to finances  and if                                                                   
the House  Finance Committee should  lead the  discussion. He                                                                   
noted  that  last  year's  budget  was  not  sustainable.  He                                                                   
maintained that the legislature  is not looking at the 30,000                                                                   
foot level in regards  to a long term vision.  He opined that                                                                   
the House  Finance Committee should  be the driving  force to                                                                   
form a statewide vision.                                                                                                        
                                                                                                                                
4:47:44 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  referred to  HB 125, which  was passed  in a                                                                   
previous  session. The  legislation  requires departments  to                                                                   
create  a  10  year  plan.  He   agreed  with  Representative                                                                   
Austerman.  Discussion  ensued   regarding  timing  for  more                                                                   
discussions  on  the issue.  Representative  Kelly  requested                                                                   
material   about  other   states  or   countries  that   have                                                                   
benefitted from this type of vision  or plan and stressed the                                                                   
importance of leadership by the executive branch.                                                                               
                                                                                                                                
4:51:16 PM                                                                                                                    
                                                                                                                                
Representative   Austerman  observed   that  some   work  has                                                                   
occurred  in   the  House   Finance  Commerce  and   Economic                                                                   
Development  Subcommittee. Some  other  states have  employed                                                                   
private sector groups for commerce  and economic development.                                                                   
                                                                                                                                
Co-Chair  Stoltze  advised  that   in  the  absence  of  more                                                                   
pressing  legislative   issues,  there  would   be  time  for                                                                   
discussions  during the  legislative session.  Representative                                                                   
Joule  agreed on  the importance  of  long-range review  that                                                                   
follows across departments.                                                                                                     
                                                                                                                                
4:55:43 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  MOVED to convene an executive  session under                                                                   
Uniform  Rule   22(b)(1)  for  discussion  of   matters,  the                                                                   
immediate  knowledge  of  which would  adversely  affect  the                                                                   
finances of a  government unit. There being  NO OBJECTION, it                                                                   
was so ordered.                                                                                                                 
                                                                                                                                
4:56:03 PM Executive Session                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 5:45 PM.                                                                                           

Document Name Date/Time Subjects
Alaska GDS 2008 Final.pdf HFIN 11/5/2009 9:00:00 AM
Geo Differentials
background.pdf HFIN 11/5/2009 9:00:00 AM
Geographical Differentials
HFC Agenda Nov 09 Final.docx HFIN 11/4/2009 9:00:00 AM
HFIN 11/5/2009 9:00:00 AM
BudgetedWages.pdf HFIN 11/5/2009 9:00:00 AM
Geographical Differentials
EmployeeCountLocation.pdf HFIN 11/5/2009 9:00:00 AM
Geographical Differentials
Letter090506.pdf HFIN 11/5/2009 9:00:00 AM
Geographical Differentials
timeline.pdf HFIN 11/5/2009 9:00:00 AM
Geographical Differentials
geoDiffChart.pdf HFIN 11/5/2009 9:00:00 AM
McDowell Group GDS Presentation 2009.ppt HFIN 11/5/2009 9:00:00 AM
Geographical Differentials
Legislative Finance Division presentation.pdf HFIN 11/5/2009 9:00:00 AM
LFD Workshop