Legislature(2013 - 2014)HOUSE FINANCE 519

01/28/2014 01:30 PM FINANCE

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01:32:25 PM Start
01:32:52 PM HB265 || HB266 || HB267
01:33:15 PM Fy 15 Governor's Budget Overview: Department of Corrections
02:26:48 PM 2013 Fall Revenue Forecast Overview and State Savings Account Update: Department of Revenue
03:42:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- No Public Testimony --
Heard & Held
-- No Public Testimony --
Heard & Held
-- No Public Testimony --
+ - FY15 Governor's Budget Overview: TELECONFERENCED
Dept. of Corrections
+ - Overview of Fall 2013 Revenue Forecast: TELECONFERENCED
Dept. of Revenue
State Savings Account Update
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 28, 2014                                                                                           
                         1:32 p.m.                                                                                              
1:32:25 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Austerman  called   the  House  Finance  Committee                                                                    
meeting to order at 1:32 p.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Joseph  Schmidt,  Commissioner, Department  of  Corrections;                                                                    
Ron Taylor, Deputy  Commissioner, Department of Corrections;                                                                    
Leslie   Houston,   Deputy   Commissioner,   Department   of                                                                    
Corrections;  Angela  Rodell,  Commissioner,  Department  of                                                                    
Revenue; Michael  Pawlowski, Deputy  Commissioner, Strategic                                                                    
Finance,  Department   of  Revenue;  Pam   Leary,  Director,                                                                    
Treasury Division, Department of Revenue.                                                                                       
FY 15 GOVERNOR'S BUDGET OVERVIEW: DEPARTMENT OF CORRECTIONS                                                                     
2013  FALL  REVENUE  FORECAST  OVERVIEW  and  STATE  SAVINGS                                                                    
ACCOUNT UPDATE: DEPARTMENT OF REVENUE                                                                                           
HB 265    BUDGET: CAPITAL                                                                                                       
          HB 265 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
HB 266    APPROP: OPERATING BUDGET/LOANS/FUNDS                                                                                  
          HB 266 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
HB 267    APPROP: MENTAL HEALTH BUDGET                                                                                          
          HB 267 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
HOUSE BILL NO. 265                                                                                                            
     "An  Act   making  appropriations,   including  capital                                                                    
     appropriations   and   other   appropriations;   making                                                                    
     appropriations to capitalize funds."                                                                                       
HOUSE BILL NO. 266                                                                                                            
     "An  Act making  appropriations for  the operating  and                                                                    
     loan  program  expenses  of state  government  and  for                                                                    
     certain  programs,   capitalizing  funds,   and  making                                                                    
     reappropriations; making appropriations  under art. IX,                                                                    
     sec. 17(c),  Constitution of the State  of Alaska, from                                                                    
     the constitutional budget reserve fund."                                                                                   
HOUSE BILL NO. 267                                                                                                            
     "An  Act making  appropriations for  the operating  and                                                                    
     capital    expenses   of    the   state's    integrated                                                                    
     comprehensive mental health program."                                                                                      
1:32:52 PM                                                                                                                    
Co-Chair Austerman called the meeting to order.                                                                                 
^FY   15   GOVERNOR'S   BUDGET   OVERVIEW:   DEPARTMENT   OF                                                                  
1:33:15 PM                                                                                                                    
JOSEPH  SCHMIDT,  COMMISSIONER, DEPARTMENT  OF  CORRECTIONS,                                                                    
provided  a PowerPoint  presentation "FY2015  Overview House                                                                    
Finance Committee" (copy on file).                                                                                              
1:34:45 PM                                                                                                                    
Commissioner Schmidt began with slide 2: "Mission"                                                                              
     The  Alaska  Department  of  Corrections  enhances  the                                                                    
     safety   of   our   communities.  We   provide   secure                                                                    
     confinement,  reformative programs,  and  a process  of                                                                    
     supervised community reintegration.                                                                                        
He reported that  the Department of Corrections  (DOC) had a                                                                    
three-part   mission   statement   which   included   secure                                                                    
confinement,    reformative    programs,    and    community                                                                    
integration. The  department conducted  valuable assessments                                                                    
to   ensure  proper   confinement   for  inmates,   provided                                                                    
reformative  programs to  help  keep  inmates active  during                                                                    
incarceration, and assisted  with community reintegration to                                                                    
reduce recidivism.                                                                                                              
1:35:43 PM                                                                                                                    
Commissioner  Schmidt  continued with  slide  3:  "DOC at  a                                                                    
   · Alaska is one of six states in the nation that                                                                             
     operates a unified correctional system                                                                                     
   · In FY2013, DOC booked 39,203 offenders into its                                                                            
     facilities, including 3,726 Title 47 bookings                                                                              
   · As of June 30, 2013, 6,056 offenders are in prison, a                                                                      
     community residential center (CRC), or on electronic                                                                       
     monitoring (EM)                                                                                                            
   · As of June 30, 2013, 5,988 offenders are on probation                                                                      
     or parole                                                                                                                  
   · Thirteen facilities statewide (Goose Creek and Pt.                                                                         
     MacKenzie combine in FY2015) with a total capacity of                                                                      
     5,352 beds                                                                                                                 
   · Thirteen field probation offices statewide                                                                                 
   · Eight contract CRCs with a capacity of 839 beds                                                                            
  · EM operates in six communities with a capacity of 385                                                                       
   · Fifteen regional and community jail contracts with a                                                                       
     total capacity of 157 beds                                                                                                 
   · Reformative Programming                                                                                                    
Commissioner Schmidt  relayed that  the State of  Alaska was                                                                    
one of  six states  that had a  unified system  meaning that                                                                    
the  state  housed  all  of  the  misdemeanants  and  felons                                                                    
serving  a sentence  of any  length.   He also  informed the                                                                    
committee   that   DOC   booked   over   39,000   offenders,                                                                    
approximately  4,000  of  whom were  non-criminals  such  as                                                                    
inebriates. He emphasized that there  was a number of repeat                                                                    
offenders in the system. He  cited that of the 6,056 current                                                                    
offenders,  754  were in  CRC's  and  381  were on  EM.  The                                                                    
approximately  5,000  remaining  offenders  occupied  prison                                                                    
beds.   He reported  that another  6,000 offenders  where on                                                                    
probation  or parole.  One of  the things  DOC was  doing to                                                                    
reduce the  current year's budget  was to roll the  128 beds                                                                    
at the  Point Mackenzie correctional farm  facility into the                                                                    
Goose  Creek Correctional  Center.     Work  crews would  be                                                                    
transported  from Goose  Creek  to the  farm. He  elaborated                                                                    
that 95  percent of EM  participants were  finishing without                                                                    
incident  or  coming  back  to jail.  He  was  looking  into                                                                    
expanding the EM program due  to its proven success. He read                                                                    
the remaining items on the slide.                                                                                               
1:39:38 PM                                                                                                                    
Commissioner    Schmidt   presented    slide   4:    "Secure                                                                    
Confinement." He  stated that the  map depicted  the various                                                                    
institutions and community jails.                                                                                               
Commissioner   Schmidt   described  slide   5:   "Supervised                                                                    
Release." He indicated  that the map showed  where the state                                                                    
had its  EM programs,  field probation offices,  and halfway                                                                    
Commissioner Schmidt detailed  slide 6: "Standing Population                                                                    
and Crime Type." He noted the shift from violent to non-                                                                        
violent  offenders   since  2002.   He  reported   that  the                                                                    
percentage  of  non-violent   offenders  increased  from  44                                                                    
percent  to 56  percent  over the  past  eleven years  which                                                                    
resulted in the state incarcerating  a larger number of non-                                                                    
violent offenders  than violent  offenders. He  affirmed the                                                                    
importance of relaying incarceration trends to the public.                                                                      
1:41:29 PM                                                                                                                    
Commissioner   Schmidt  revealed   slide   7:  "Percent   of                                                                    
Offenders by Length of Stay  from Admission." He pointed out                                                                    
that the  percentage of  offenders remaining  imprisoned for                                                                    
37 months  or more  had almost doubled  in eleven  years. He                                                                    
surmised  that  non-violent  offenders were  serving  longer                                                                    
sentences  costing the  state more  money.   The slide  also                                                                    
showed that the  number of people getting between  a one and                                                                    
two-year   sentence  was   significantly  smaller   than  in                                                                    
previous years.                                                                                                                 
Commissioner   Schmidt  discussed   slide  8:   "Percent  of                                                                    
Incarcerated Offenders by Gender."  He mentioned an increase                                                                    
in incarcerated females  from 9.46 percent in  2003 to 12.41                                                                    
percent in  2013. He  warned that the  state would  be faced                                                                    
with   providing   additional   jail   facilities   if   the                                                                    
incarcerated  female population  continued  to  grow at  the                                                                    
current rate of  6.01 percent. He signified  that 15 percent                                                                    
of  the state  halfway house  population was  female, female                                                                    
probation  cases accounted  for  21 percent  of the  state's                                                                    
caseload,  and 27  percent of  EM program  participants were                                                                    
1:43:31 PM                                                                                                                    
Commissioner  Schmidt  introduced  slide  9:  "Institutional                                                                    
Inmate Population  2004-2021." He  pointed out that  the red                                                                    
line  represented the  state's total  number of  inmate beds                                                                    
and  the  blue  line  signified  the  projection  of  inmate                                                                    
population based on  a 2.7 percent growth  rate. He reported                                                                    
that the dip  in the red line  was due to the  caging of the                                                                    
Point  Mackenzie farm  facility (120  beds). He  stated that                                                                    
the 120  beds at the  farm facility  would be moved  back to                                                                    
Goose Creek when  needed. The graph did not  account for any                                                                    
increases for the  EM program or the  successes in probation                                                                    
supervision.  He stated  that  the trends  would affect  the                                                                    
graph's data.                                                                                                                   
1:45:18 PM                                                                                                                    
Commissioner Schmidt discussed slide 10: "Goals"                                                                                
   · Protect the public                                                                                                         
   · Reduce recidivism                                                                                                          
   · Delay the need for construction of a new prison                                                                            
   · Ensure that incarcerated offenders spend their time in                                                                     
     custody productively                                                                                                       
   · Work collaboratively with outside stakeholders to                                                                          
     achieve these goals                                                                                                        
He  emphasized  that  protecting  the public  was  the  most                                                                    
important responsibility  of the department. He  was pleased                                                                    
with the success of prisoners  who moved through the state's                                                                    
system   avoiding    recidivism.   He    advocated   working                                                                    
collaboratively  with communities  and  concluded that  when                                                                    
community members are engaged everyone wins.                                                                                    
1:47:22 PM                                                                                                                    
Co-Chair  Austerman noted  that Representative  Gara entered                                                                    
the room.                                                                                                                       
RON TAYLOR, DEPUTY  COMMISSIONER, DEPARTMENT OF CORRECTIONS,                                                                    
discussed   slide   11:  "Reentry   Outcomes:   Successfully                                                                    
Increasing  the Percent  of  Probationers  and Parolees  who                                                                    
Satisfy Court  Ordered Conditions  of Release."  He directed                                                                    
the  committee's attention  to the  graph which  depicted an                                                                    
increase in the last two  years of probationers and parolees                                                                    
satisfying court ordered conditions  of release. He spoke of                                                                    
the  main drivers  of prisoner  re-entry  and reported  that                                                                    
parole violations had declined.                                                                                                 
1:49:27 PM                                                                                                                    
Mr. Taylor  detailed slide 12: "Re-Entry  Outcomes: Reducing                                                                    
Criminal  Recidivism."  He  noted  that from  2006  to  2010                                                                    
recidivism  decreased.  He  believed it  would  continue  to                                                                    
decline  based on  the successes  reported  on the  previous                                                                    
1:50:46 PM                                                                                                                    
Mr.  Taylor  discussed   slide  13:  "Reformative  Outcomes:                                                                    
Offenders  Completing  an Institutional  or  Community-Based                                                                    
Substance  Abuse Treatment  Program." He  reported that  the                                                                    
department  was ensuring  that  its  programing was  aligned                                                                    
with its  Risk-Needs Assessment.   He stated  the importance                                                                    
of programming as  it related to recidivism.   He referenced                                                                    
the  Criminal  Attitudes  Program  which  saw  a  7  percent                                                                    
decline  in   recidivism.    He   suggested  the   need  for                                                                    
additional outpatient care for substance abuse.                                                                                 
1:51:49 PM                                                                                                                    
Mr.  Taylor   detailed  slide  14:   "Reformative  Outcomes:                                                                    
Polygraphed Sex  Offender Probationers." He cited  that over                                                                    
the last  three years polygraph  testing has proved to  be a                                                                    
useful tool in reducing recidivism.                                                                                             
Mr.  Taylor   detailed  slide  15:   "Reformative  Outcomes:                                                                    
Offenders  Who Receive  General Education  Development (GED)                                                                    
While  Incarcerated." He  acknowledged  that the  department                                                                    
needed to  institute renewed efforts  to provide the  GED to                                                                    
incarcerated individuals.                                                                                                       
1:52:47 PM                                                                                                                    
Mr.  Taylor  discussed slides  16  and  17: "Challenges  and                                                                    
   · Meet 24/7 operational needs while striving to remain                                                                       
     within fiscal parameters                                                                                                   
   · Connect soon to be released offenders to community-                                                                        
     based resources                                                                                                            
   · Since 2001, medical care costs in Anchorage have                                                                           
     increased by 63.0%, compared to 52.1% nationwide                                                                           
     (Alaska Economic Trends, July 2013)                                                                                        
   · Increases in chronic health issues and an aging inmate                                                                     
     population continue to increase the need for higher                                                                        
     acuity and specialized medical care                                                                                        
Mr.  Taylor affirmed  that meeting  the  needs of  offenders                                                                    
while  staying within  the state's  budget was  a challenge.                                                                    
He expressed concerns about providing  services to a growing                                                                    
female inmate  population and the  rising costs  of prisoner                                                                    
medical  care. He  opined that  the department  was doing  a                                                                    
fine job of  keeping costs contained and  was staying within                                                                    
its fiscal parameters.                                                                                                          
1:55:01 PM                                                                                                                    
LESLIE   HOUSTON,   DEPUTY   COMMISSIONER,   DEPARTMENT   OF                                                                    
CORRECTIONS,  skipped  to  slide  19:  "Alaska  Grown."  She                                                                    
reported that  over the last  four years the  department had                                                                    
emphasized educating  food services staff and  increased its                                                                    
purchasing of Alaska grown produce.                                                                                             
Ms.   Houston  advanced   to  slide   20:  "Inter-Department                                                                    
Resource Sharing"                                                                                                               
   · DHSS/ Pharmacist Relief Services                                                                                           
   · DHSS/Food Service  for Bethel,  Juneau, and  Nome Youth                                                                    
   · DOLWD/Provide minimum custody  inmate labor for seafood                                                                    
   · DOTPF/Currently  providing  laundry   services  to  the                                                                    
     Alaska  Marine  Highway  System;  and,  developing  new                                                                    
     agreements  to provide  services to  assist DOTPF  with                                                                    
     brush clearing,  snow removal,  and potential  for AMHS                                                                    
Ms. Houston communicated that the department looked to                                                                          
resource sharing as a means of reducing costs.                                                                                  
1:56:47 PM                                                                                                                    
Ms. Houston discussed slides 21 and 22: "Giving Back"                                                                           
   · Prisoners  at   Hiland  Mountain   Correctional  Center                                                                    
     (Eagle River) contributed 90  homemade quilts, 30 hats,                                                                    
     and 30 scarves to Mat-Su Valley elders.                                                                                    
   · A   team   of   six  inmates   from   Hiland   Mountain                                                                    
     Correctional Center provided  community work service in                                                                    
     assisting   the  Eagle   River  Parks   and  Recreation                                                                    
     Department with  clean-up of the Beach  Lake Chalet and                                                                    
     area trail maintenance over a period of six days.                                                                          
   · Throughout  the  summer  and  fall  of  2013,  prisoner                                                                    
     volunteers  from Palmer  Correctional Center  (minimum)                                                                    
     cleaned approximately 93 miles  of roadways in the Mat-                                                                    
     Su, picking up 12,200 pounds of trash.                                                                                     
   · Prisoners  at  Palmer  Correctional  Center's  (Sutton)                                                                    
     hobby  wood shop  constructed approximately  700 wooden                                                                    
     toy cars and trucks for donation to local charities.                                                                       
   · Wildwood  Correctional  Center  (Kenai) began  a  "Cell                                                                    
     Dog" program where  dogs from a local  shelter are sent                                                                    
     to  live  with  volunteer  inmates  who  provide  basic                                                                    
     obedience training and  socialization to better prepare                                                                    
     the dogs for adoption.                                                                                                     
   · A group  of prisoners  at Wildwood  Correctional Center                                                                    
     organized a  fundraiser among the prison  population to                                                                    
     benefit  a  local  child  with  pediatric  cancer.  The                                                                    
     effort  raised  $1,375  which   was  forwarded  to  the                                                                    
   · Prisoners  at  Wildwood Correctional  Facility  donated                                                                    
     hand-made  knit hats  to benefit  the  local Relay  for                                                                    
     Life, which honors cancer victims. The pink hats were                                                                      
     either given as prizes or auctioned.                                                                                       
   · An    arts-and-crafts   program    at   Yukon-Kuskokwim                                                                    
     Correctional  Center  (Bethel)  resulted  in  crocheted                                                                    
     hats  and headbands  finished and  donated  to the  Pre                                                                    
     Maternal Home, the Tundra  Women's Coalition, and local                                                                    
Ms. Houston  asserted the  department wanted  to demonstrate                                                                    
some of the good that inmates provided to communities.                                                                          
1:57:43 PM                                                                                                                    
Ms.  Houston  forwarded  to  slide   24:  "FY  15  Operating                                                                    
Changes." She detailed  that DOC was seeking  an increase in                                                                    
funds  of $935.6  thousand for  salary and  health insurance                                                                    
adjustments associated  with all bargaining  unit contracts.                                                                    
She indicated  a decrease  in the  current level  of service                                                                    
costs  of  $2.5 million  from  closing  the housing  at  Pt.                                                                    
Mackenzie  Correctional  Farm  and from  moving  inmates  to                                                                    
Goose Creek.   She also reported $1.6  million in reductions                                                                    
from inmates  not needing as  many medical services  as were                                                                    
budgeted.  She  cited a  net  increase  of $65  thousand  in                                                                    
federal funds for the  Residential Substance Abuse Treatment                                                                    
Program,   previously   a   pass-through  grant   from   the                                                                    
Department of  Public Safety  to DOC.   In the  current year                                                                    
the funding was  given directly to DOC  eliminating the need                                                                    
for a  pass-through relationship.  She outlined  an increase                                                                    
of $120  thousand from the  Mental Health Trust for  a pilot                                                                    
mental  health program  that  DOC would  be  taking up  that                                                                    
focuses on  fetal alcohol  syndrome and  culturally relevant                                                                    
mental health programing.                                                                                                       
Ms. Houston reviewed  slide 25: "FY2015 Adjusted  Base to FY                                                                    
15  Governor's Request."  She reported  that the  slide went                                                                    
into greater  detail on the  adjustments to the base  for FY                                                                    
2:01:44 PM                                                                                                                    
Ms.   Houston   discussed   slide   26:   FY2015   Operating                                                                    
Reallocations."  She reviewed  the Goose  Creek Correctional                                                                    
Center  authorization changes  as well  as the  out-of-state                                                                    
contractual authorization changes.                                                                                              
Ms.  Houston  presented  slide   27:  "Core  Service  Budget                                                                    
Allocation  Comparison." She  stated that  the slide  showed                                                                    
the  budget allocation  comparison of  the FY  14 management                                                                    
plan to the FY 15  governor's budget request, the net change                                                                    
of which was a decrement of $2.9 million.                                                                                       
Ms.  Houston turned  to slide  28: "FY  15 Operating  Budget                                                                    
Distribution  by  Core Service."    She  commented that  the                                                                    
largest portion of the department's  budget was allocated to                                                                    
secure confinement.                                                                                                             
2:03:31 PM                                                                                                                    
Ms.  Houston   directed  the  committee's  attention   to  a                                                                    
snapshot of the  department's FY 15 capital  budget in slide                                                                    
29: "FY2015 Capital  Budget."  She relayed  that 100 percent                                                                    
of  DOC's  $5.0  million  capital budget  went  to  deferred                                                                    
maintenance. She  mentioned that  slides 30 through  33 were                                                                    
prepared by the Legislative Finance Division.                                                                                   
Ms. Houston  directed attention to slide  30: "Department of                                                                    
Corrections  Share of  Total Agency  Operations (GF  Only)."                                                                    
Next she  advanced to slide  31: "Department  of Corrections                                                                    
Percent  of Total  Department's  Budget by  Fund Group  (All                                                                    
Funds)."  She  reviewed  the   designation  for  each  color                                                                    
depicted on the chart.                                                                                                          
Ms.   Houston  stated   that   slide   32:  "Department   of                                                                    
Corrections Continued  Growth Compared  to 10-Year  Plan (GF                                                                    
Only)"  was  very  similar  to   slide  33:  "Department  of                                                                    
Corrections Continued  Growth Compared to 10-Year  Plan (All                                                                    
Funds Only)." Both slides showed  the budget growth compared                                                                    
to  the  10-year plan.    She  anticipated that  the  budget                                                                    
growth would  more likely be  in line with the  10-year plan                                                                    
due to the  Goose Creek Correctional Center  phasing in over                                                                    
the next two fiscal years.                                                                                                      
2:04:51 PM                                                                                                                    
Co-Chair Austerman asked if slide  6 reflected the growth in                                                                    
prisoner population.                                                                                                            
Commissioner  Schmidt explained  that slide  6 did  not show                                                                    
population growth  but indicated the  population percentages                                                                    
of non-violent and violent prisoners.                                                                                           
Co-Chair Austerman  wondered if  it was the  same comparison                                                                    
numbers-to-numbers.  Commissioner  Schmidt answered  in  the                                                                    
affirmative. He  informed the committee that  the slides the                                                                    
department used previously were  based on calendar year-end.                                                                    
Currently, DOC  compiled its data  by fiscal  year-end, June                                                                    
Co-Chair  Austerman asked  about slide  12. He  wondered how                                                                    
Alaska's recidivism  rates compared  to national  rates. Mr.                                                                    
Taylor   replied  that   recidivism  rates   were  declining                                                                    
nationally. He stated that the  decline was due to a greater                                                                    
focus on reentry outcomes.                                                                                                      
Co-Chair Austerman  remarked that  he would prefer  the data                                                                    
in slide  13 compiled  in a percentage  format. Commissioner                                                                    
Schmidt acknowledged his preference.                                                                                            
2:07:34 PM                                                                                                                    
Co-Chair Stoltze asked the  commissioner to characterize the                                                                    
type of offense non-violent  criminals committed and whether                                                                    
or  not   the  department  used   additional  classification                                                                    
measures  to   decipher  between  non-violent   and  violent                                                                    
Commissioner Schmidt  replied that classification  was based                                                                    
only  on the  crime committed.  Any crime  against a  person                                                                    
including any sex offense was considered violent.                                                                               
Co-Chair  Stoltze  asked  what  type  of  crime  caused  the                                                                    
numbers to grow.                                                                                                                
Commissioner  Schmidt  replied that  sex-offender  sentences                                                                    
had doubled  in the previous  ten years. Sex  offenders made                                                                    
up  approximately   14  percent  of  the   state's  prisoner                                                                    
population. He agreed to provide  the committee with further                                                                    
2:09:12 PM                                                                                                                    
Co-Chair Stoltze  commented that slide 8  indicated a growth                                                                    
in female offenders.   He asked if the same  growth rate for                                                                    
females applied to Alaska Native females.                                                                                       
Commissioner Schmidt  offered to provide the  information at                                                                    
a later date.                                                                                                                   
Co-Chair Stoltze acknowledged the  efforts to support Alaska                                                                    
grown products. He wanted to  see a tracking system in place                                                                    
to ensure the use of Alaska grown products.                                                                                     
2:10:42 PM                                                                                                                    
Vice-Chair  Neuman referred  to  slide 13.  He informed  the                                                                    
committee  about a  meeting he  had attended  that addressed                                                                    
theft  in the  Matanuska-Susitna Valley.  He found  out that                                                                    
most  crimes  in the  valley  were  burglaries committed  to                                                                    
support  drug habits.  He asked  the  commissioner how  many                                                                    
inmates  had enrolled  in drug  treatment  programs and  how                                                                    
many were on a waiting list.                                                                                                    
2:11:36 PM                                                                                                                    
Commissioner Schmidt stated that  the department was lapsing                                                                    
monies in  its programs  because, although DOC  designed the                                                                    
program  plans, the  service providers  determined the  time                                                                    
tracks. He  reported that the state  had certain protections                                                                    
built into its service contracts  to avoid being charged for                                                                    
services not  provided. However, funding lapses  and gaps in                                                                    
service  resulted   because  of  limited   service  provider                                                                    
availability.  The state's  contracts  did  not address  the                                                                    
gaps of time  where services were not  available but funding                                                                    
was lapsing.  The department did  not want to spend money or                                                                    
transfer money just  to avoid a lapse.  The department would                                                                    
return unused funds, explain  the circumstances, and request                                                                    
full funding  in the following  budget cycle.  He understood                                                                    
that it  did not make sense  to expand a program  when funds                                                                    
went unused.  Nevertheless, he indicated the  department had                                                                    
a plan.  He requested that Mr. Taylor elaborate.                                                                                
Mr.  Taylor  cited  that  capacity   numbers  were  900  for                                                                    
outpatient programs and 180  for residential substance abuse                                                                    
treatment  programs.  The  problem   with  only  looking  at                                                                    
capacity numbers was  that a prisoner's ability  to get into                                                                    
a program was also  determined by counselor availability and                                                                    
whether  or not  there  was a  long  waitlist for  services.                                                                    
Regarding  need, the  department had  an outside  consultant                                                                    
evaluate  the   state's  overall  program  design.   It  was                                                                    
difficult for  the department to determine  the exact number                                                                    
needing   services  because   the  program   was  voluntary.                                                                    
However, it  was clear that  there was a need  for substance                                                                    
abuse  services  inside the  state's  system  based on  last                                                                    
year's  6,000 risk  assessments  that  were evaluated.  Many                                                                    
parolees  sought   treatment  in  their  communities   as  a                                                                    
condition of  their probation or  parole. In  some instances                                                                    
inmates were not required but  recommended to participate in                                                                    
a treatment program.                                                                                                            
2:15:04 PM                                                                                                                    
Vice-Chair  Neuman referred  to the  second bullet  point on                                                                    
slide 16.  He suggested the  Alaska Mental Health  Trust and                                                                    
the  Department  of  Health   and  Social  Services  fund  a                                                                    
position   to   assist    inmates   transitioning   out   of                                                                    
incarceration  to prequalify  for Medicaid.  His idea  would                                                                    
connect inmates to services necessary  to be successful once                                                                    
released  from jail.  He asked  if the  commissioner thought                                                                    
the idea would be effective in reducing recidivism.                                                                             
Commissioner  Schmidt affirmed  the value  of Representative                                                                    
Neuman's  suggestion  to  reduce  recidivism.  He  revisited                                                                    
program  capacity.   He  confirmed  that  there was  a  need                                                                    
beyond  what  the  department  was  providing.  However,  he                                                                    
indicated there was reconciling  that needed to be completed                                                                    
from the previous year  before requesting additional program                                                                    
Vice-Chair  Neuman  remarked that  the  state  needed to  be                                                                    
taping  into federal  assistance funds  for inmate  programs                                                                    
that would otherwise be funded by the state.                                                                                    
2:17:17 PM                                                                                                                    
Co-Chair Stoltze made a humorous remark.                                                                                        
Representative Gara referenced  the importance of recidivism                                                                    
because it  saved the  state money  and it  kept communities                                                                    
safer. He was unclear about  the state's success in reducing                                                                    
recidivism because the  state only looks at  the first three                                                                    
years following  a prisoner's release. He  wondered what the                                                                    
results would show after four or five years.                                                                                    
Commissioner Schmidt  specified that most  reoffenders acted                                                                    
within the  first six  months of  release. The  potential of                                                                    
reoffending  tapered off  dramatically after  one, two,  and                                                                    
three years. The judicial council  led the charge in setting                                                                    
a three-year monitoring period.                                                                                                 
Representative Gara noted  DOC's vocational training efforts                                                                    
for  its  inmates.  He  asked   if  the  department  tracked                                                                    
prisoner  employment  rates  and  other  outcomes  following                                                                    
vocational  training and  incarceration. He  wanted to  make                                                                    
sure  vocational  training  expenditures were  being  wisely                                                                    
2:19:55 PM                                                                                                                    
Commissioner  Schmidt replied  that  DOC did  not track  the                                                                    
information the  representative was  looking for,  but would                                                                    
request the information through  the Department of Labor and                                                                    
Workforce Development.                                                                                                          
Representative  Gara reiterated  the  importance of  knowing                                                                    
whether  or  not  the  training   provided  to  inmates  was                                                                    
Representative  Gara  assumed   the  costs  associated  with                                                                    
longer  sentencing   for  non-violent   criminals  increased                                                                    
proportionately.  He asked  for an  analysis that  confirmed                                                                    
his  conclusion.  He  also  wanted   to  know  which  crimes                                                                    
constituted  longer sentences.  The commissioner  offered to                                                                    
provide the requested information.                                                                                              
Representative Gara  clarified that he wanted  to know which                                                                    
crimes had  been assigned increased  sentences. Commissioner                                                                    
Schmidt reconfirmed  that he  would provide  the information                                                                    
to committee members.                                                                                                           
2:23:08 PM                                                                                                                    
Co-Chair  Austerman  agreed   with  Representative  Gara  in                                                                    
reference  to tracking  vocational training  in the  state's                                                                    
correctional facilities.  He believed a  recommendation from                                                                    
the  department on  how to  track the  information would  be                                                                    
helpful. He asserted  that if the outcomes  of training were                                                                    
poor, then  providing the training  would not  be justified.                                                                    
The commissioner  agreed that the department  needed to know                                                                    
how many offenders were working  after being released before                                                                    
it could uncover the contributing factors.                                                                                      
Co-Chair Austerman  stated his  concerns with  future budget                                                                    
cuts and indicated the importance  of being able to evaluate                                                                    
the   soundness  of   expenditures.  The   more  information                                                                    
provided the better.                                                                                                            
2:24:35 PM                                                                                                                    
Representative   Wilson  asked   if  judges   were  imposing                                                                    
different   sentences   than    established   prison   terms                                                                    
associated with various  crimes. Commissioner Schmidt stated                                                                    
that he  would compile  data so  that he  and Representative                                                                    
Wilson could start a conversation about sentencing terms.                                                                       
^2013  FALL  REVENUE  FORECAST OVERVIEW  and  STATE  SAVINGS                                                                  
ACCOUNT UPDATE: DEPARTMENT OF REVENUE                                                                                         
2:26:48 PM                                                                                                                    
ANGELA   RODELL,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
provided  a   PowerPoint  presentation  titled   "Fall  2013                                                                    
Revenue   Forecast"   (copy   on  file).   She   began   her                                                                    
presentation by  reminding the  committee that  the forecast                                                                    
was not a  description of the potential  revenues for Alaska                                                                    
including heavy oil production  or exploration activities by                                                                    
Repsol  and  British  Petroleum   (BP).  The  Department  of                                                                    
Revenue (DOR)  tried to create  a reliable  revenue forecast                                                                    
from which  the legislature  could make  decisions regarding                                                                    
the following year's budget and Alaska's future.                                                                                
She  advanced to  slide  3:  "Unrestricted Revenue  Forecast                                                                    
2012-2022."  She noted  the revenue  forecast reflected  the                                                                    
actual revenue for FY 12 and  FY 13. There were four primary                                                                    
factors that  influenced the forecast including  oil prices,                                                                    
production,  deductible lease  expenses, and  transportation                                                                    
costs. In FY  12 the state saw an oil  price of $112.65 that                                                                    
declined to  $107.57 in FY 13.   The price was  projected to                                                                    
decline  to  $105.68  in  FY   14  and  $105.06  in  FY  15.                                                                    
Production in  FY 12  was 579 thousand  barrels per  day and                                                                    
declined in  FY 13 by over  40 thousand barrels down  to 531                                                                    
thousand  barrels  per  day.  The  department  forecasted  a                                                                    
continued decline to  508 thousand barrels per day  in FY 14                                                                    
and leveling  off at about  498 thousand barrels per  day in                                                                    
FY 15.   Deductible  lease expenses were  approximately $4.4                                                                    
billion in FY  12 with a slight increase to  $4.9 billion in                                                                    
FY  13. In  2014 there  was a  more substantial  increase of                                                                    
deductible  lease  expenditures  to $6.6  billion  and  even                                                                    
further to $7.2  billion in FY 15.  The substantial increase                                                                    
in  lease expenditures  reflected  correlating increases  in                                                                    
activity   on  the   North   Slope   and  potential   future                                                                    
production. General  fund (GF) unrestricted revenues  for FY                                                                    
2012 were  $9.4 billion and  declined to $6.9 billion  in FY                                                                    
13.    The department  forecasted  FY  14 revenues  at  $4.9                                                                    
billion  decreasing to  $4.5 billion  in FY  15.   She noted                                                                    
that there was  a substantial decline in  the production tax                                                                    
value per  taxable barrel.   In FY 12 the  value calculation                                                                    
was $79.33  per barrel value.   It receded by more  than $12                                                                    
to $67.76 in  FY 13. The value decreased even  further in FY                                                                    
14 to  $54.67 and in  FY 15  to $49.04 production  tax value                                                                    
per taxable barrel.                                                                                                             
Commissioner  Rodell continued  with slide  4: "Contributors                                                                    
of Change in  FY 13 Revenue - Actual." She  pointed out that                                                                    
between FY  12 and  FY 13 daily  production dropped  by 47.8                                                                    
thousand  barrels and  $5.08  price  per barrel.  Deductible                                                                    
lease   expenditures   increased   by   $519   million   and                                                                    
transportation  costs  rose  by   $0.95  per  barrel.    The                                                                    
components  contributed  to  the   decline  of  the  average                                                                    
production tax value per barrel.                                                                                                
Commissioner   Rodell  moved   to   slide   5:  "Fall   2013                                                                    
   · Oil price and production levels have been reduced                                                                          
     relative to the 2013 Spring Forecast.                                                                                      
   · Correspondingly, unrestricted revenues have been                                                                           
     revised down from the Spring 2013 Forecast.                                                                                
  · Revenue impacts largely due to changes in oil price,                                                                        
     production, lease expenditures, and tariffs.                                                                               
   · Substantial (~$10 billion) increase in spending on the                                                                     
     North Slope over the next 10 years.                                                                                        
   · Oil companies project increased North Slope production                                                                     
     following the increased activity.                                                                                          
   · DOR continues to prudently assess future production                                                                        
    and the forecast is not intended as a comprehensive                                                                         
     assessment of all the potential activity or projects                                                                       
     under evaluation.                                                                                                          
   · State investment earnings are strong                                                                                       
2:32:23 PM                                                                                                                    
Commissioner  Rodell   presented  slide  6:   "General  Fund                                                                    
Unrestricted  Oil Revenues."   She  reported that  petroleum                                                                    
revenue  made  up  the  largest  portion  of  oil  revenues;                                                                    
production tax  accounted for 58.5  percent and  net royalty                                                                    
accounted for 25.5  percent in FY 13.   The corporate income                                                                    
tax revenues remained  steady at 6.3 percent.   Property tax                                                                    
revenue was  the smallest component of  petroleum revenue at                                                                    
1.4  percent.   The total  petroleum revenue  for FY  13 was                                                                    
$6.3 billion.   Total petroleum revenue  forecasts were $4.3                                                                    
million in FY 14 and $3.9 billion in FY 15.                                                                                     
Commissioner  Rodell  advanced  to slide  7:  "General  Fund                                                                    
Unrestricted  Other  Revenues." She  reported  non-petroleum                                                                    
revenue;  revenues from  mining, tobacco,  and other  taxes.                                                                    
Corporate  income  tax was  the  largest  component of  non-                                                                    
petroleum  revenues  at  19.5  percent  in  FY  13  with  an                                                                    
expected decrease to  15.4 percent in FY 14  and an increase                                                                    
to  21.3 percent  in FY  15. Mining  tax remained  steady as                                                                    
well  as insurance  premiums, tobacco  tax,  and motor  fuel                                                                    
taxes. The department administered  over 20 different taxes.                                                                    
The department  rolled all of  the lesser tax  revenue types                                                                    
into  one  category,  "other   taxes."  She  emphasized  the                                                                    
importance of  investment income totaling $86  million in FY                                                                    
14. This  differed slightly from  the state  savings account                                                                    
presentation because  it included  principle balances  as of                                                                    
December  31,  2013  versus DOR's  numbers  in  the  revenue                                                                    
sources book  which were captured  two months prior.   Total                                                                    
non-oil revenue was approximately $577 million in FY 13.                                                                        
Commissioner Rodell drew the  committee's attention to slide                                                                    
8:  "Total  Revenue Forecast  -  FY  13,  14, and  15."  She                                                                    
reported the designated GF revenue  forecasted for FY 14 was                                                                    
$329  million and  $327.6  million in  FY  15. Under  "Other                                                                    
Restricted  Revenue" Permanent  Fund  earnings  made up  the                                                                    
majority of  the investment revenues  in the amount  of $3.5                                                                    
billion in FY 14 and  15 projections.  Federal revenues were                                                                    
expected  to   increase  slightly   due  to   moving  beyond                                                                    
Commissioner  Rodell  pointed  to  slide  9:  "General  Fund                                                                    
Unrestricted Revenue Price Sensitivity  FY 14-16." The chart                                                                    
showed  the state's  sensitivity of  revenues to  oil prices                                                                    
based on the state's production  forecast for FY 14, 15, and                                                                    
16. She indicated  the state has narrowed  the volatility of                                                                    
revenue  and  believed  there   was  greater  potential  for                                                                    
revenue. The  forecast showed that  if the price of  oil per                                                                    
barrel was  $50 dollars the  state's revenues would  be $2.3                                                                    
billion   and  at   $150  per   barrel  revenues   would  be                                                                    
approximately $9.4 billion.                                                                                                     
2:36:33 PM                                                                                                                    
Commissioner Rodell  referred to slide 10:  "Fall 2013 Total                                                                    
Revenue  Forecast." She  noted the  department reviewed  the                                                                    
prior ten years of historical  data in comparison to what it                                                                    
had  forecasted.   It focused  on examining  the ability  to                                                                    
forecast accurately  or within  a specific margin  of error.                                                                    
Ultimately  the department  wanted to  reduce its  margin of                                                                    
error when calculating projections.                                                                                             
Commissioner   Rodell  discussed   slide   11:  "Fall   2013                                                                    
Production Forecast and Methodology."  She reported that the                                                                    
department was  working diligently  to reduce the  margin of                                                                    
error  between the  state's production  forecast and  actual                                                                    
Commissioner  Rodell  advanced   to  slide  12:  "Production                                                                    
History  and Forecast."   The  slide  depicted which  fields                                                                    
have produced the most barrels  of oil. She stated that more                                                                    
and more  production was coming  online from  fields outside                                                                    
of Prudhoe  Bay and  Kuparuk - fields  such as  Endicott and                                                                    
Alpine.   The  development of  such fields  would be  a very                                                                    
important component in forecasting future oil production.                                                                       
Commissioner   Rodell   summarized   slide  13:   "ANS   Oil                                                                    
Production Forecast." The state's  intent was to improve its                                                                    
forecast  by studying  previous forecasts.  She pointed  out                                                                    
that the 2005 predictions for  2013 were much higher at more                                                                    
than  800 thousand  barrels of  oil  per day.  FY 13  actual                                                                    
numbers came in at 538 barrels of oil per day.                                                                                  
2:40:00 PM                                                                                                                    
Commissioner  Rodell moved  to slides  14 and  15: "ANS  oil                                                                    
Production  Forecast."  She  explained that  previously  the                                                                    
state  used  three  categories  for  forecasting;  oil  from                                                                    
currently  producing  wells,  oil from  projects  that  were                                                                    
under  development (UD),  and oil  from  projects that  were                                                                    
under  evaluation   (UE).  The   department  took   all  the                                                                    
information  provided by  the  oil  companies, compiled  the                                                                    
data, and  worked with the  Department of  Natural Resources                                                                    
to produce  a forecast. The  old method did not  account for                                                                    
the highly speculative  nature of the UD and  UE numbers. In                                                                    
order  to to  be more  prudent in  what it  included in  its                                                                    
projections the state changed its  method to include numbers                                                                    
from two  categories; new oil  production (a  combination of                                                                    
UD and UE numbers adjusted  for risk) and current production                                                                    
numbers.   The  state created  a  trend line  using the  new                                                                    
method currently in place.                                                                                                      
Commissioner Rodell  turned to  slides 16  and 17:  "ANS Oil                                                                    
Production  - Actuals  and Forecast."  She  cited the  trend                                                                    
line   for  actual   production  calculated   on  historical                                                                    
performance.   The  state   took  the   data,  did   a  risk                                                                    
adjustment, calculated  a floor as  if there was no  new oil                                                                    
production,  and  derived a  new  forecast.   She  presented                                                                    
slide  18: "North  Slope  Production  Forecast." She  stated                                                                    
that   the  slide   designated  two   categories;  currently                                                                    
producing oil and new oil.   It also showed upside potential                                                                    
had  the   state  completed  the  forecast   using  its  old                                                                    
Commissioner Rodell  introduced slide  19: "Fall  2013 Price                                                                    
Forecast,"  and slide  20: "Alaska  North  Slope Crude  West                                                                    
Coast  Price."   She  commented  that  the   department  was                                                                    
examining ways to  reduce the volatility of  the state's oil                                                                    
price  forecast.  She  reviewed factors  that  affected  the                                                                    
price of  oil over the  prior two years. She  referenced the                                                                    
Arab Spring,  production in the  lower 48, and  the European                                                                    
Union's  summit to  address its  banking crisis.  She stated                                                                    
that  the price  remained in  the  band shown  on the  slide                                                                    
between $100 and  $120 dollars per barrel.  Since April 2013                                                                    
prices have lowered due to  negotiations with Syria and Iran                                                                    
as well as China moving into a recession.                                                                                       
2:43:39 PM                                                                                                                    
Commissioner  Rodell referenced  slide  21:  "key Oil  Price                                                                    
   · Supply & Demand                                                                                                            
        o There are two main factors to monitor.                                                                                
             ƒGlobal spare capacity, since it is both a                                                                        
               reflection of supply and demand. In other                                                                        
               words, the Organization of Petroleum                                                                             
               Exporting Countries (OPEC) spare capacity                                                                        
               (flipping a switch) is key.                                                                                      
             ƒCost of developing new oil supply.                                                                               
       o Department is developing a probability and                                                                             
          statistical model incorporating spare capacity                                                                        
         and cost of developing new supply to help                                                                              
          forecast ANS prices in the future.                                                                                    
Commissioner  Rodell  relayed   slide  22:  "Price  Forecast                                                                    
   · Price Forecasting Session                                                                                                  
        o Held a day long oil price forecasting session on                                                                      
          October 1, 2013.                                                                                                      
       o Speakers provided insight into oil markets,                                                                            
          probability and analysis, modeling, and financial                                                                     
          aspects of commodity markets.                                                                                         
        o 39 participants from state government, academia                                                                       
          and the private sector.                                                                                               
             ƒDOR, DNR, DOL, OMB, University, Legislative                                                                      
               Finance and outside participants.                                                                                
        o Participants were asked to forecast real ANS                                                                          
          prices for the West Coast.                                                                                            
             ƒReal prices were converted to nominal using                                                                      
               a 2.5% inflation assumption.                                                                                     
       o Median price path was chosen for each time                                                                             
Commissioner Rodell moved to slide  23: "Historical ANS West                                                                    
Coast FY Oil Price Bands."  She noted that the volatility in                                                                    
oil price bands has narrowed in  the previous two years.  In                                                                    
2007 the  actual price per  barrel was $61.60 with  the band                                                                    
ranging from  $45.00 to $75.00.   In 2009 the band  was much                                                                    
more variable due to the global recession at the time.                                                                          
2:46:03 PM                                                                                                                    
Commissioner  Rodell advanced  to  slide  25: "Comparison  -                                                                    
Fall vs.  Spring 2013 Forecasts."  She pointed out  that the                                                                    
higher  forecast for  FY  14 generated  in  spring 2013  was                                                                    
driven  by the  negative  activity occurring  in the  Middle                                                                    
East.  Prices started to  recede as concerns about Syria and                                                                    
Iran  subsided resulting  in a  lower forecast  generated in                                                                    
fall 2013. Oil price  and production projections declined by                                                                    
3.6 and 3.5  percent respectively from spring  to fall 2013.                                                                    
The oil production  projection changed in large  part due to                                                                    
an  extended  summer  maintenance   season.  She  noted  the                                                                    
unrestricted GF  revenue forecast for  FY 14 declined  by 30                                                                    
percent from spring to fall 2013 projections.                                                                                   
Commissioner Rodell  reported that similar  adjustments were                                                                    
made to the spring and fall forecasts for FY 15.                                                                                
2:47:28 PM                                                                                                                    
Commissioner Rodell  referred to slide 26:  "Contributors of                                                                    
Changes  in   FY2014  Revenue   Forecast,"  and   slide  27:                                                                    
"Contributors  of Changes  in FY  15 Revenue  Forecast." She                                                                    
pointed  out the  detailed  changes in  FY  14 including  an                                                                    
increase in  lease expenditures of  $454 million and  a rise                                                                    
in transportation costs due to  there being fewer barrels of                                                                    
oil to spread  the costs against. Also, the  state assumed a                                                                    
12.5 percent royalty.                                                                                                           
The commissioner  explained that in  the forecast for  FY 15                                                                    
the  deductible  lease   expenditures  nearly  doubled  from                                                                    
spring  to  fall  2013  projections,  a  net  change  of  $1                                                                    
2:48:27 PM                                                                                                                    
Commissioner Rodell displayed  slide 28: "Major Contributors                                                                    
of Changes  in Revenue  Forecast (FY 14-15)."  She specified                                                                    
that the bulk  of the changes in the FY  14 forecast was due                                                                    
to  reduced  price  expectations.   The  slide  reflected  a                                                                    
forecast reduction  of over $500  million.  In  addition, an                                                                    
increase  of $300  million in  lease  expenditures played  a                                                                    
major  role  in the  variance  of  revenue projections  from                                                                    
spring  to  fall.  Production decline  and  an  increase  in                                                                    
transportation  costs impacted  the  forecast  as well.  The                                                                    
close  out  of  capital  credits under  Alaska's  Clear  and                                                                    
Equitable  Share (ACES)  affected  the  projections by  $200                                                                    
million.  She explained  that forecasted  revenues decreased                                                                    
because  of  the  adoption  of  a new  tax  system.    Other                                                                    
contributing  factors  to  the  adjusted  forecast  included                                                                    
property tax  and corporate income  tax changes  and non-oil                                                                    
Commissioner Rodell drew the  committee's attention to slide                                                                    
29: "North  Slope Lease  Expenditure Forecast  Change (Total                                                                    
North Slope  CAPEX)." She  pointed out  the upward  trend in                                                                    
capital lease  expenditures from  the forecast in  spring to                                                                    
fall 2013.                                                                                                                      
Commissioner Rodell  turned to slide 30:  "North Slope Lease                                                                    
Expenditure Forecast  Change (Total North Slope  OPEX)." She                                                                    
reported   a  much   greater  increase   in  the   operating                                                                    
expenditures for  FY 14.   She opined  that the  increase in                                                                    
expenditures had  to do with  the ramping up of  activity on                                                                    
the  North Slope.  Expenditure projections  into the  future                                                                    
tapered off.                                                                                                                    
2:51:41 PM                                                                                                                    
Vice-Chair Neuman  asked about  the average cost  per barrel                                                                    
for standard  allowable deductions for  capital expenditures                                                                    
(CAPEX) and operational expenditures (OPEX).                                                                                    
Commissioner  Rodell replied  that total  lease expenditures                                                                    
were approximately $45.99 per  barrel. She affirmed that the                                                                    
information  is  listed in  the  appendices  of the  revenue                                                                    
sources book for the public.                                                                                                    
Vice-Chair   Neuman  asked   about  increases   in  standard                                                                    
allowable  deductions  in   the  prior  4  to   5  years  by                                                                    
MICHAEL PAWLOWSKI,  DEPUTY COMMISSIONER,  STRATEGIC FINANCE,                                                                    
DEPARTMENT OF  REVENUE, replied that the  production decline                                                                    
over the  previous two years  was much more  pronounced than                                                                    
anticipated.  At the  same  time there  was  an increase  in                                                                    
investment. The  lease deduction  system worked  by dividing                                                                    
the expenditures by  the number of barrels  of oil produced.                                                                    
He explained  that if expenditures exceeded  barrels of oil,                                                                    
the value  of the  lease deductions  would increase.   Until                                                                    
the  production curve  materially turned  around, the  lease                                                                    
expenditures per barrel would remain high.                                                                                      
2:54:16 PM                                                                                                                    
Vice-Chair   Neuman   clarified  that   standard   allowable                                                                    
deductions  did  not alter  even  with  the changes  in  tax                                                                    
structure.  He asked  about industry  growth resulting  from                                                                    
the most recent oil taxation format.                                                                                            
Mr. Pawlowski referred to slide  10 as part of his response.                                                                    
He  stated that  in 2008,  the  state saw  15 thousand  more                                                                    
barrels   of  oil   produced  per   day.  Since   the  lease                                                                    
expenditures  had not  really changed,  the fact  that there                                                                    
were fewer barrels resulted in  the change in deductions per                                                                    
barrel.  He signified that  there was a dramatic increase in                                                                    
forecast investment.  He opined that  it was emature  to add                                                                    
in  barrels  of  production until  the  forecast  investment                                                                    
proved itself.                                                                                                                  
2:56:17 PM                                                                                                                    
Representative Costello  asked about the  lease expenditures                                                                    
under SB 21 [Note: Oil  tax legislation that passed in 2013]                                                                    
and  the   capital  expenditure  credits  under   ACES.  She                                                                    
continued  by  inquiring   if  lease  expenditures  provided                                                                    
information about production  versus the capital expenditure                                                                    
Commissioner  Rodell responded  that the  fundamental change                                                                    
between ACES and SB 21  was that tax credits became directly                                                                    
tied  to oil  production under  the new  tax structure.  Tax                                                                    
credits under SB  21 would only be  applied after production                                                                    
was realized. Since the passing of  SB 21 the state had seen                                                                    
a   substantial  increase   in   lease  expenditures   which                                                                    
translated into  companies making more  capital investments,                                                                    
thus,  increasing  production  and  realizing  tax  credits.                                                                    
Companies also benefited by being  able to better plan based                                                                    
on a more  reliable tax regime. She stated  that under ACES,                                                                    
company  revenues  depended  more  on  oil  prices  than  on                                                                    
production.  Now companies  could focus  more on  production                                                                    
due to the credits they could  count on from the state under                                                                    
SB 21.                                                                                                                          
Representative Costello  discussed the  idea of  hedging the                                                                    
state's oil.                                                                                                                    
Commissioner  Rodell responded  that the  state periodically                                                                    
reviewed  the  option  of   hedging  but  was  traditionally                                                                    
uncomfortable  with it.   However,  she  welcomed a  further                                                                    
discussion on the subject.                                                                                                      
3:01:03 PM                                                                                                                    
Representative  Gara clarified  that the  state changed  the                                                                    
way it forecasted oil production.  The change was first seen                                                                    
in   the  Spring   2013  Revenue   Sources  Book   in  which                                                                    
speculative oil  was calculated  at a  lower rate  and known                                                                    
oil  was  computed at  a  higher  rate. Commissioner  Rodell                                                                    
responded in the affirmative.                                                                                                   
Representative  Gara asked  about  the  variance in  decline                                                                    
rates for North  Slope oil production under ACES  and SB 21.                                                                    
He restated that he wanted  to know about the discrepancy in                                                                    
the million barrels  of oil a day and asked  why the decline                                                                    
rate  was greater  now  than when  the  spring 2013  revenue                                                                    
source book came out.                                                                                                           
3:04:04 PM                                                                                                                    
Commissioner   Rodell  replied   that  in   calculating  the                                                                    
forecast the  state used currently producing  oil numbers as                                                                    
its starting  point as well as  conducting risk assessments.                                                                    
Every six months,  when the forecast was  updated, the state                                                                    
incorporated  a new  set of  knowledge and  applied the  new                                                                    
methodology for  greater consistency between  forecasts from                                                                    
spring  to  fall and  fall  to  spring. The  state  received                                                                    
feedback  about expected  dates, current  activities, future                                                                    
activities,  and  run-out  rate updates  for  the  producing                                                                    
Mr. Pawlowski added that what  has changed substantially was                                                                    
a consideration of  actual data.  The decline from  FY 12 to                                                                    
FY 13  and from FY 13  to FY 14 was  significantly more than                                                                    
the  state anticipated.   The  forecast  going forward  from                                                                    
present day started  from a much lower base  than from where                                                                    
the  state  thought  it would  begin  previously.  Slide  26                                                                    
showed  that   the  state's  spring   FY  13   forecast  had                                                                    
overestimated  FY 14  oil production  by 18,000  barrels per                                                                    
day.  The  state revised  FY  15  predictions down  by  14.4                                                                    
thousand barrels  of oil  per day based  on actual  data. He                                                                    
emphasized the importance of  using a consistent methodology                                                                    
from one  year to the  next and furthered that  the forecast                                                                    
was not a  total assessment of potential  production, it was                                                                    
a component  of a  revenue forecast.   The department  had a                                                                    
record of  not being conservative  or prudent in  giving the                                                                    
legislature a  long-term production  forecast as a  base for                                                                    
revenue  projections.   The  department  had  tried to  keep                                                                    
forecasts consistent  from year-to-year,  but the  state had                                                                    
seen  much larger  declines  than  predicted. Adjusting  the                                                                    
base  founded  on  current  actual  numbers  changed  future                                                                    
3:08:04 PM                                                                                                                    
Representative Gara stated that the  promise under SB 21 was                                                                    
that there  would be new  oil production.   However, between                                                                    
FY 17  and FY 22 the  decline rate was faster  using the new                                                                    
forecasting  methodology   than  it   was  under   ACES.  He                                                                    
summarized that  the production decline  under ACES  was 130                                                                    
thousand barrels  versus 142 thousand  barrels under  SB 21.                                                                    
He asked Mr. Pawlowski to explain.                                                                                              
Mr. Pawlowski  indicated two areas  of opportunity.   First,                                                                    
lease  expenditures  were  on a  dramatic  incline.  Second,                                                                    
increased investment  translated into  increased production.                                                                    
However,  the  department  was   cautious  about  using  the                                                                    
numbers to do forecasting at the time.                                                                                          
3:10:29 PM                                                                                                                    
Representative  Gara  discussed  the revenue  forecasts.  He                                                                    
noted   that  the   spring   forecast   showed  revenue   of                                                                    
approximately $3.6 billion dollars in  FY 18 and in the most                                                                    
recent forecast revenue  was down to $2.2 billion.  In FY 22                                                                    
the spring  forecast equaled $2.8 million  in production tax                                                                    
revenue, whereas,  under the new forecasting  method revenue                                                                    
was down to $2.05 billion. He  asked why new revenue was not                                                                    
reflected in the newest numbers for FY 22.                                                                                      
Commissioner Rodell commented that  the largest component of                                                                    
petroleum revenue was the production  tax. She reported that                                                                    
when there was  a decline in production tax,  there was also                                                                    
a  decline in  price.  She furthered  that  the increase  in                                                                    
lease expenditures  translated into  a decline  in petroleum                                                                    
revenue,  primarily   in  the  production  tax   which  then                                                                    
adjusted the total unrestricted  GF revenue available to the                                                                    
Co-Chair Austerman asked if Cook  Inlet gas and oil revenues                                                                    
were included in the state's new forecasts.                                                                                     
Commissioner Rodell  responded that  the state  included gas                                                                    
revenues. However,  she informed the committee  that the oil                                                                    
tax  rate for  Cook Inlet  was zero.  The gas  tax rate  was                                                                    
approximately 18 percent.  She  noted activity and increased                                                                    
production in Cook Inlet.                                                                                                       
Co-Chair  Austerman  asked  if Cook  Inlet's  revenues  were                                                                    
separated out in DOR's forecast book.                                                                                           
Mr. Pawlowski  relayed that the  state did not  separate out                                                                    
revenues for  Cook Inlet  production. However,  he indicated                                                                    
that  the department  tried to  break out  Cook Inlet  lease                                                                    
expenditures in order to do some calculations.                                                                                  
Co-Chair Austerman  asked if  DOR kept  track of  Cook Inlet                                                                    
production. Mr. Pawlowski  responded affirmatively but added                                                                    
that the department did not  keep track of a distinct number                                                                    
of the revenues from Cook Inlet's production.                                                                                   
3:14:19 PM                                                                                                                    
Co-Chair  Austerman asked  why the  department did  not keep                                                                    
track  of the  revenues  from Cook  Inlet's production.  Mr.                                                                    
Pawlowski replied that it was  because, until recently, Cook                                                                    
Inlet's  production  was  modest.  The  department  was  not                                                                    
paying detailed attention to  Cook Inlet's revenue component                                                                    
but would be going forward.                                                                                                     
Co-Chair Austerman  asked if the  state paid out  credits on                                                                    
Cook   Inlet   gas   and    oil.   Mr.   Pawlowski   replied                                                                    
affirmatively. Co-Chair Austerman believed  that it would be                                                                    
helpful for  the committee  to see  actual numbers  for Cook                                                                    
Inlet  production  and  for  that  information  to  be  made                                                                    
available  to the  public. Mr.  Pawlowski agreed  to provide                                                                    
the information.                                                                                                                
Co-Chair Stoltze welcomed Commissioner Rodell to her post.                                                                      
3:16:09 PM                                                                                                                    
Representative  Guttenberg  asked  about  economic  activity                                                                    
that was not included in DOR's report and its relevancy.                                                                        
Commissioner Rodell responded  that economic activity became                                                                    
more  relevant to  the production  forecast when  activities                                                                    
moved  from   the  evaluation  to  the   development  stage.                                                                    
Evaluation  activities  included  exploration  efforts  like                                                                    
drilling  test  holes.  Examples of  development  activities                                                                    
included  laying   drill  pads   and  drilling   wells.  She                                                                    
referenced  the   Liberty  field  specifying  that   for  an                                                                    
extended  time  the  state included  in  its  projections  a                                                                    
tremendous amount of production that never materialized.                                                                        
Representative Guttenberg  referred to slide 5  and asked if                                                                    
the  $10 billion  increase in  spending on  the North  Slope                                                                    
over the  next ten  years was  included in  the department's                                                                    
forecast calculations.                                                                                                          
Commissioner  Rodell  stated it  was  a  forecasted plan  of                                                                    
expenditure  given  to DNR  to  incorporate  into its  plan.                                                                    
Actual  expectations were  often  larger  and were  adjusted                                                                    
using other information.                                                                                                        
3:19:48 PM                                                                                                                    
Representative  Guttenberg  opined  that the  facilities  at                                                                    
Prudhoe   Bay  were   outdated.  He   was  concerned   about                                                                    
inefficiencies  and related  maintenance costs.  He inquired                                                                    
as to  whether or not  the commissioner had  seen additional                                                                    
operating  expenditures   due  to  the  use   of  antiquated                                                                    
Commissioner  Rodell  replied  that  she  had  seen  capital                                                                    
rather than operating expenditures  allocated for repairs to                                                                    
aged facilities.   Producers spent money to  extend the life                                                                    
of a facility  when the remaining yield of wells  on a field                                                                    
proved  economically   viable.  She  believed   that  larger                                                                    
investments would be allocated for new infrastructure.                                                                          
Representative  Guttenberg asked  if  the commissioner  felt                                                                    
she  had a  clear  understanding of  the difference  between                                                                    
CAPEX and OPEX  considering the state was far  behind in its                                                                    
audits.  Commissioner Rodell  reported  that her  department                                                                    
had  a   very  good   sense  of  operating   versus  capital                                                                    
expenditures. She  confirmed that  the department  was doing                                                                    
monthly desk  audits and  had a  very good  understanding of                                                                    
what the oil companies were doing on a regular basis.                                                                           
3:22:21 PM                                                                                                                    
Commissioner  Rodell  delivered a  PowerPoint  presentation:                                                                    
"State  of   Alaska,  An  Update  on   the  State's  Savings                                                                    
Accounts."  She   began  her  presentation  with   slide  3:                                                                    
"General   Fund   and   other   non-segregated   investments                                                                    
(GeFONSI)." She reported  that the markets had  been kind to                                                                    
the state in calendar year  2013.  She identified GeFONSI as                                                                    
the base GF from which the  state managed its cash from day-                                                                    
to-day. She  indicated GeFONSi had  a moderate  risk profile                                                                    
with   a  short-to-intermediate   investment  horizon.   She                                                                    
directed  the  committee's  attention to  the  market  value                                                                    
actuals of $11.8  billion in December 2012  dropping to $5.7                                                                    
billion by December 2013. She  explained that previously the                                                                    
state kept  the Statutory  Budget Reserve (SBR)  in GeFONSI.                                                                    
However, in  2013 the  state moved the  funds to  a separate                                                                    
asset  allocation within  the GF  to  extend the  investment                                                                    
term slightly. She reiterated that  the reserve continued to                                                                    
rest in  the state's GF.   She reported  that by the  end of                                                                    
the  calendar year  2013 GeFONSI's  year-to-date return  was                                                                    
0.22  percent.  The  fiscal  year-to-date  return  was  0.28                                                                    
percent surpassing the state's benchmark.                                                                                       
Commissioner  Rodell turned  to slide  4: "Statutory  Budget                                                                    
Reserve  Fund."  She  acknowledged   that  the  fund  had  a                                                                    
moderate risk  and an intermediate  investment horizon.   In                                                                    
2012 the  market value balance  in the GF  was approximately                                                                    
$5.5 billion. By  the end of calendar year  2013 the balance                                                                    
had  dropped to  $4.77 billion.  She informed  the committee                                                                    
that the  change was due  to the draw  used to close  out FY                                                                    
13. The  fund's performance was  0.31 percent by the  end of                                                                    
FY 13.   The  year-to-date performance on  the SBR  was 1.08                                                                    
percent confirming  the value of  extending the  duration of                                                                    
the fund.   The state's fiscal year-to-date  return was 1.15                                                                    
percent, again surpassing the benchmark.                                                                                        
Commissioner  Rodell advanced  to  slide 5:  "Constitutional                                                                    
Budget  Reserve Fund  (Main and  Sub)." She  cited that  the                                                                    
Constitutional Budget  Reserve (CBR)  had two funds;  a main                                                                    
fund and a subaccount fund.  The main account had a moderate                                                                    
risk and  an intermediate investment horizon  with a balance                                                                    
of $5.8 billion  on December 31, 2013 and a  FY 13 return of                                                                    
0.18  percent. The  year-to-date return  was (0.25)  percent                                                                    
primarily due  to the  fund's exposure  to the  bond market.                                                                    
She  reported  that the  department  was  examining what  it                                                                    
could do  to mitigate  against potential losses  as interest                                                                    
rates  climbed.  The  subaccount  had  a  high  risk  and  a                                                                    
moderately long  investment horizon.  The  account performed                                                                    
very well  in 2013 with  its exposure to the  equity market.                                                                    
The subaccount had a return of  11.75 percent for FY 13. The                                                                    
year-to-date return was already at  15.85 percent.  The fund                                                                    
amount increased  from $5.5 billion to  $6.3 billion dollars                                                                    
in a one-year period, creating a very healthy reserve.                                                                          
3:27:15 PM                                                                                                                    
Commissioner   Rodell  discussed   slide   6:  "Power   Cost                                                                    
Equalization  Fund." She  relayed that  the fund  in statute                                                                    
required the department to target  a 7 percent return, which                                                                    
translated   into   approximately    9   percent   including                                                                    
inflation.   The Power  Cost Equalization  Fund (PCE)  had a                                                                    
very  high  equity concentration  of  80  percent. The  fund                                                                    
benefited substantially  from the equity  market performance                                                                    
in  calendar year  2013.   The fund  balance went  from $787                                                                    
million to $937 million over the course of a year.                                                                              
Commissioner  Rodell moved  on  to slide  7: "Public  School                                                                    
Trust  Fund." She  announced that  the  Public school  Trust                                                                    
Fund had  a more moderate  risk profile.   It had  an equity                                                                    
allocation of  approximately 42  percent. It  also benefited                                                                    
from  having an  investment in  equities but  not nearly  as                                                                    
much of a return as the  PCE.  It increased its balance from                                                                    
$487 million to  $536 million in one year.   It had a fiscal                                                                    
return of  8.19 percent.   Year-to-date it  had a  return of                                                                    
10.6  percent.   Earnings were  moved into  the income  fund                                                                    
which is invested in short-term instruments.                                                                                    
3:28:38 PM                                                                                                                    
Commissioner Rodell  detailed slide  8: "PERS and  TRS." The                                                                    
targeted  return  for  Public Employees'  Retirement  System                                                                    
(PERS)  was   8  percent.   Given  its   long-term,  30-year                                                                    
investment  horizon the  state was  allowed to  take a  more                                                                    
expansive  asset  allocation  investing  in  assets  not  as                                                                    
liquid as equities or bonds.  The PERS account had increased                                                                    
from  $12  billion   to  $14  billion  from   2012  to  2013                                                                    
benefiting from  the equity market performance  in 2013. The                                                                    
Teacher  Retirement System  funds  went from  $5 billion  to                                                                    
$5.8  billion with  returns  at  12.6 percent,  considerably                                                                    
better than the CBR fund with a shorter time horizon.                                                                           
Commissioner  Rodell advanced  to  slide  9: "APFC"  [Alaska                                                                    
Permanent  Fund Corporation].  She asserted  that the  state                                                                    
had a long-term  goal of achieving a real rate  of return of                                                                    
5 percent per  year. The fund was designed  to be maintained                                                                    
into perpetuity.  On December 31,  2012 it had a  balance of                                                                    
$43.6 billion  and by the  end of 2013  it had a  balance of                                                                    
$49.2 billion.  The performance rate  of the fund  was 10.93                                                                    
in  FY  13.  Year-to-date   the  fund  return  reached  12.7                                                                    
3:30:47 PM                                                                                                                    
Commissioner Rodell  pointed to slide 11:  "FY 14 Investment                                                                    
Revenue  Forecast." She  indicated that  the numbers  on the                                                                    
slide were  actual performance numbers through  December 31,                                                                    
2013 and included a forecast for  the balance of 6 months in                                                                    
FY 14.  The state  increased the amount of investment income                                                                    
for  FY 14  from approximately  $80 million  to over  $101.9                                                                    
million for the unrestricted  GF revenue. The CBR subaccount                                                                    
would increase almost $778 million  for FY 14.  She reported                                                                    
a total  investment revenue of $4.9  billion, which included                                                                    
PFD revenues, for the state by the end of FY 14.                                                                                
3:32:03 PM                                                                                                                    
Representative Gara  addressed slide  4. He  understood that                                                                    
$1 billion  was used to  balance the budget. He  asked about                                                                    
whether some of  the money was put into state  savings or if                                                                    
it was used as a draw due to state spending.                                                                                    
Commissioner Rodell  replied that the $700  million was used                                                                    
to  reconcile state  accounts rather  than applied  to state                                                                    
savings accounts.                                                                                                               
Representative Gara  directed his  attention to slide  8. He                                                                    
noted  that in  reference  to  PERS from  2011  to 2013  the                                                                    
balance increased  by $4  million to  about $14  million. He                                                                    
asked  whether   the  balance  was  keeping   pace  with  or                                                                    
exceeding the liabilities.                                                                                                      
Commissioner  Rodell  replied   that  the  liabilities  were                                                                    
increasing  faster than  the earnings,  which explained  the                                                                    
governor's proposal to  move $3 billion into  the PERS fund.                                                                    
The state's  current liability was $12  billion dollars. She                                                                    
noted that  a loss such  as the 20 percent  loss experienced                                                                    
in 2009  created even more  of a burden.   The state  had to                                                                    
make up both the 20 percent  loss and the 8 percent earnings                                                                    
it had  anticipated for  the same year.  She noted  that the                                                                    
three-year  and the  five-year actuals  no longer  reflected                                                                    
2009 figures.                                                                                                                   
3:34:46 PM                                                                                                                    
Representative  Costello  inquired  about  the  use  of  the                                                                    
Public School Trust Fund.                                                                                                       
Commissioner Rodell deferred the question.                                                                                      
PAM  LEARY,  DIRECTOR,   TREASURY  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE, stated that the trust  fund provided a component to                                                                    
the  formula foundation.  One  half of  one  percent of  the                                                                    
state's  oil  revenues  were deposited  into  the  principal                                                                    
portion of the  trust fund.  She explained  that as earnings                                                                    
from the  fund grew  the interest  and dividend  monies went                                                                    
into the income fund for the education budget.                                                                                  
Representative Costello asked whether  the state was forward                                                                    
funding  education through  the  Public  School Trust  Fund.                                                                    
Commissioner  Rodell replied  in the  negative and  deferred                                                                    
Representative  Costello to  the  Office  of Management  and                                                                    
Budget   for  information   regarding  forward   funding  of                                                                    
Representative  Costello asked  for clarification  about the                                                                    
use of the  fund. Commissioner Rodell replied  that the fund                                                                    
was  set up  as  a  specific entitlement  from  oil and  tax                                                                    
revenue for education appropriations.                                                                                           
Representative Costello  asked if the commissioner  had read                                                                    
any  film  scripts since  taking  on  her position  at  DOR.                                                                    
Commissioner Rodell stated that  the department received and                                                                    
reviewed film scripts on a monthly basis.                                                                                       
3:37:39 PM                                                                                                                    
Co-Chair Stoltze discussed HB 265.                                                                                              
Vice-Chair Neuman MOVED HB 265 before the committee.                                                                            
Co-Chair  Stoltze informed  the committee  that he  hoped to                                                                    
arrange  joint meetings  with the  Senate Finance  Committee                                                                    
early in  the session  to review the  governor's submissions                                                                    
and to bring up questions about the capital budget.                                                                             
Vice-Chair  Neuman  MOVED  HB  266 and  HB  267  before  the                                                                    
HB  265  was  HEARD  and   HELD  in  committee  for  further                                                                    
HB  266  was  HEARD  and   HELD  in  committee  for  further                                                                    
HB  267  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair Austerman discussed the  schedule for the following                                                                    
3:42:00 PM                                                                                                                    
The meeting was adjourned at 3:42 p.m.                                                                                          

Document Name Date/Time Subjects
FY2015 Full House DOC Department Overview - 01282014.pdf HFIN 1/28/2014 1:30:00 PM
DOC Overview HFIN
State Savings Accounts Update House Finance 1.28.14.pdf HFIN 1/28/2014 1:30:00 PM
DOR Revenue Forecast HFIN
Fall 2013 Forecast Presentation House Finance 1.28.14.pdf HFIN 1/28/2014 1:30:00 PM
DOR HFIN Savings
DOC 2014HFCBudgetResponse.pdf HFIN 1/28/2014 1:30:00 PM
DOC Response HFIN