Legislature(2013 - 2014)HOUSE FINANCE 519

04/01/2014 01:30 PM FINANCE


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01:39:15 PM Start
01:39:20 PM HB278
04:38:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 278 EDUCATION: FUNDING/TAX CREDITS/PROGRAMS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 1, 2014                                                                                            
                         1:39 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:39:15 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the  House Finance Committee meeting                                                                    
to order at 1:39 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                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Michael  Hanley, Commissioner,  Department of  Education and                                                                    
Early  Development; Diane  Blumer, Commissioner,  Department                                                                    
of   Labor  and   Workforce   Development;  Angela   Rodell,                                                                    
Commissioner, Department  of Revenue; David  Teal, Director,                                                                    
Legislative  Finance  Division;   Michael  Barnhill,  Deputy                                                                    
Commissioner,  Department  of  Administration;  Gary  Bader,                                                                    
Chief Investment  Officer, Treasury Division,  Department of                                                                    
Revenue;   John  Boucher,   Senior   Economist,  Office   of                                                                    
Management  and  Budget,  Office   of  the  Governor;  Chris                                                                    
Christensen   III,  Associate   Vice  President   for  State                                                                    
Relations, University of Alaska.                                                                                                
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Robynn  Wilson, Audit  Supervisor, Tax  Division, Department                                                                    
of Revenue.                                                                                                                     
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 278    EDUCATION: FUNDING/TAX CREDITS/PROGRAMS                                                                               
                                                                                                                                
          HB 278 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HOUSE BILL NO. 278                                                                                                            
                                                                                                                                
     "An Act increasing the base  student allocation used in                                                                    
     the  formula for  state  funding  of public  education;                                                                    
     repealing the secondary  student competency examination                                                                    
     and  related  requirements;  relating  to  high  school                                                                    
     course credit earned through  assessment; relating to a                                                                    
     college and  career readiness assessment  for secondary                                                                    
     students;  relating   to  charter   school  application                                                                    
     appeals  and program  budgets; relating  to residential                                                                    
     school   applications;  increasing   the  stipend   for                                                                    
     boarding   school   students;  extending   unemployment                                                                    
     contributions for  the Alaska technical  and vocational                                                                    
     education  program;  relating  to earning  high  school                                                                    
     credit for  completion of vocational  education courses                                                                    
     offered   by  institutions   receiving  technical   and                                                                    
     vocational  education  program   funding;  relating  to                                                                    
     education  tax credits;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
1:39:20 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze discussed  the  meeting  agenda. He  noted                                                                    
there  would  be  a separate  conversation  related  to  the                                                                    
Teachers' Retirement System (TRS).  He asked the departments                                                                    
to  comment  on the  committee  substitute  [Work Draft  28-                                                                    
GH2716\G].                                                                                                                      
                                                                                                                                
MICHAEL  HANLEY, COMMISSIONER,  DEPARTMENT OF  EDUCATION AND                                                                    
EARLY DEVELOPMENT, walked through the  changes in the CS. He                                                                    
began  with the  "testing out"  component on  page 2  of the                                                                    
bill.  He  detailed that  the  House  Finance Committee  had                                                                    
reinserted   the  governor's   language  that   would  allow                                                                    
students to  test out [of  courses] and  identified specific                                                                    
subject  areas that  would apply.  He believed  limiting the                                                                    
subject  areas   was  less   burdensome  on   districts.  He                                                                    
supported  the change.  He  pointed to  language  on page  4                                                                    
requiring   districts  to   include  information   regarding                                                                    
students in  military families  in an  annual report  to the                                                                    
Department  of Education  and Early  Development (DEED).  He                                                                    
referenced the  state's large  military presence  and opined                                                                    
that the provision was appropriate.                                                                                             
                                                                                                                                
Co-Chair  Stoltze  interjected   that  the  committee  could                                                                    
potentially  deal  with  the subject  in  another  piece  of                                                                    
legislation (HB 318).                                                                                                           
                                                                                                                                
Commissioner  Hanley  continued  to  address  the  bill.  He                                                                    
believed  several  changes  to  the  bill's  charter  school                                                                    
component  still met  the governor's  intent for  equity and                                                                    
integrity  in the  charter  school  application process.  He                                                                    
spoke to  a self-imposed  rule that presented  an additional                                                                    
challenge  for   smaller  communities  specifying   that  if                                                                    
charter  school  enrollment fell  between  120  and 150  the                                                                    
school  would receive  95 percent  of the  funding. Language                                                                    
suggested by the  governor had been removed  that would have                                                                    
decreased the  number of students  to 75 and allow  for full                                                                    
funding.  The administration  felt  the governor's  language                                                                    
was important;  it did  have a  fiscal component  because it                                                                    
incorporated  a few  additional schools  that would  receive                                                                    
full funding as opposed to partial funding.                                                                                     
                                                                                                                                
1:44:20 PM                                                                                                                    
                                                                                                                                
Commissioner  Hanley  moved  to  page 9  of  the  bill  that                                                                    
included  an additional  component for  the board  report to                                                                    
the  legislature. He  believed the  component empowered  the                                                                    
state  board to  engage  directly with  the legislature.  He                                                                    
trusted  that the  term "method  of education  spending" was                                                                    
used intentionally. He noted that  typically the state board                                                                    
of education was  a policy and practice board  (with a focus                                                                    
on  pedagogies  on strategies  for  education)  and did  not                                                                    
usually  delve  into  how  money   was  spent;  however,  he                                                                    
believed the  language provided  flexibility on  where money                                                                    
was spent.                                                                                                                      
                                                                                                                                
Commissioner Hanley  spoke to  residential stipends  on page                                                                    
11.  The language  that allowed  an annual  open application                                                                    
period had been  maintained in the CS;  whereas the boarding                                                                    
stipend had been removed. He  relayed that the previous year                                                                    
the  legislature  had  passed  legislation  allowing  for  a                                                                    
variable-term  boarding  school  program. As  a  result,  an                                                                    
application period had been opened  and four new schools had                                                                    
been  added to  the existing  four residential  schools. The                                                                    
department believed the  additional stipend represented true                                                                    
costs  or   near  true  costs  for   housing  students.  The                                                                    
department also  believed the situation was  a challenge for                                                                    
school districts; the  state was not fully  meeting the cost                                                                    
to room  and board the  students; however, the bill  did not                                                                    
remove  the  funding.  There were  four  programs  currently                                                                    
working with the funding.                                                                                                       
                                                                                                                                
1:46:36 PM                                                                                                                    
                                                                                                                                
Commissioner Hanley  addressed a  funding change on  page 14                                                                    
of  the  bill.  He  referred to  testimony  by  David  Teal,                                                                    
Director, Legislative Finance  Division, related legislative                                                                    
intent associated  with education  funding. He  believed the                                                                    
intent was to remove the top  tiers in the chart on page 14.                                                                    
He  pointed  to  line  19 pertaining  to  schools  with  750                                                                    
students and above;  the multiplier was 0.84.  He noted that                                                                    
the  multiplier decreased  as school  size increased  due to                                                                    
economies of scale  (schools were funded less  as their size                                                                    
grew). Schools with  400 to 750 students would  be funded at                                                                    
0.92. He  relayed that  previously schools  with 250  to 400                                                                    
students were  funded at  0.97. The CS  removed the  top two                                                                    
tiers and funded schools (that  had previously received less                                                                    
funding)  at  0.97.  He detailed  that  the  change  allowed                                                                    
funding  to  go  to  districts   with  larger  schools  with                                                                    
particular   challenges   that    were   not   traditionally                                                                    
recognized in  funding formulas.  The change  represented an                                                                    
increase  of  $13.5 million;  $12.5  million  of the  amount                                                                    
would  go  towards  Anchorage, Fairbanks,  and  Mat-Su;  the                                                                    
remaining $1 million would be  split between eight districts                                                                    
that had at least one large school.                                                                                             
                                                                                                                                
Commissioner Hanley  turned to page 15  where teacher tenure                                                                    
had been changed  from three years to five  years. He opined                                                                    
that an  administrator should have the  ability to determine                                                                    
a teacher's  effectiveness within three years;  however, the                                                                    
bill  expanded   the  opportunity  for  teachers   to  prove                                                                    
themselves  before   receiving  tenure.   He  looked   at  a                                                                    
provision  on page  16 that  would allow  for the  review of                                                                    
teacher  tenure  every  five years.  He  observed  that  the                                                                    
review would  keep teachers fresh and  effective. He pointed                                                                    
to  language  that  a  district  may  terminate  tenure.  He                                                                    
wondered  about the  meaning and  wondered if  clarification                                                                    
may be  needed. He  was not concerned  about the  issue, but                                                                    
believed clarity may be necessary.                                                                                              
                                                                                                                                
Co-Chair Stoltze noted the comment.                                                                                             
                                                                                                                                
Commissioner  Hanley anticipated  that  the provision  would                                                                    
bring legal challenges  at the local level if  tenure was on                                                                    
the  line. He  suggested clarity  related to  language: "the                                                                    
teacher did  not adequately assist the  school district with                                                                    
the implementation..." (page 15).  He relayed that typically                                                                    
teachers  had a  longer  tenure than  school principals;  he                                                                    
wanted  ensure that  the teachers  were adequately  assisted                                                                    
with  the  school. He  thought  clarity  was needed  on  the                                                                    
issue.                                                                                                                          
                                                                                                                                
1:51:09 PM                                                                                                                    
                                                                                                                                
Commissioner Hanley spoke  to the repeal of  Section 48 that                                                                    
spoke to Bureau of Indian  Affairs schools; it was no longer                                                                    
in  effect when  school districts  joined. He  observed that                                                                    
the High School Graduation  Qualifying Exam (HSGQE) had been                                                                    
removed  from the  bill. He  believed it  was the  intent to                                                                    
recognize that  other bills  may contain  relevant education                                                                    
provisions.                                                                                                                     
                                                                                                                                
Co-Chair  Stoltze commented  that  the  language would  have                                                                    
been taken out if the bill was "stopping in this body."                                                                         
                                                                                                                                
Commissioner  Hanley relayed  that the  administration would                                                                    
like to see  the HSGQE removed [from  law]. Co-Chair Stoltze                                                                    
believed it  was the will  of the committee. He  referred to                                                                    
the committee's passage of HB 220.                                                                                              
                                                                                                                                
Commissioner   Hanley   turned   the  discussion   over   to                                                                    
Commissioner  Blumer  to  address the  Technical  Vocational                                                                    
Education Program (TVEP) component of the bill.                                                                                 
                                                                                                                                
1:52:12 PM                                                                                                                    
                                                                                                                                
DIANE   BLUMER,  COMMISSIONER,   DEPARTMENT  OF   LABOR  AND                                                                    
WORKFORCE  DEVELOPMENT,  addressed  Section 28  and  relayed                                                                    
that the department  would like to see a  longer sunset date                                                                    
[than June  30, 2017] for  certainty and stability  for TVEP                                                                    
recipients.                                                                                                                     
                                                                                                                                
Co-Chair  Stoltze noted  that the  shorter  sunset date  had                                                                    
been  included and  no other  changes had  been made  to the                                                                    
program. He  asked if  she would  prefer the  shorter sunset                                                                    
date or to open the program to a "free-for-all."                                                                                
                                                                                                                                
Commissioner Blumer  relayed that the department  would like                                                                    
to  see a  longer  sunset,  but did  not  want  to open  the                                                                    
program  up  for a  free-for-all.  She  reiterated that  the                                                                    
department  would   like  a  longer  sunset   to  allow  the                                                                    
reporting  structure  to  be   implemented  related  to  new                                                                    
articulation language. She pointed  to large projects on the                                                                    
horizon  including the  potential LNG  project, mining,  and                                                                    
infrastructure.  She  asked   the  committee  to  reconsider                                                                    
reinstating the  20 percent provision withholding  funds for                                                                    
recipients that did not report  fully or in a timely manner;                                                                    
it was the only mechanism  the department had to enforce the                                                                    
requirement.                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  intended  to  reinstate the  item  as  an                                                                    
amendment; the change had been made erroneously.                                                                                
                                                                                                                                
1:54:26 PM                                                                                                                    
                                                                                                                                
ANGELA  RODELL, COMMISSIONER,  DEPARTMENT OF  REVENUE, spoke                                                                    
to the tax credit changes  beginning in Section 36, page 22.                                                                    
She relayed  that the language encompassing  the tax changes                                                                    
was the same for each  type of education opportunity credit.                                                                    
There was  one major  change that  included the  addition of                                                                    
the  Science,  Technology,   Engineering  and  Math  program                                                                    
provided  by  a nonprofit  agency  or  school district.  The                                                                    
department  did not  object to  the change.  She pointed  to                                                                    
item  10 and  noted that  childhood early  learning programs                                                                    
were  provided  by   a  nonprofit  organization;  for-profit                                                                    
language had been removed. The  administration was fine with                                                                    
the language. She wanted to  ensure there was consistency in                                                                    
terminology    related   to    nonprofits   (e.g.    agency,                                                                    
organization,  or  corporation);  she   noted  there  was  a                                                                    
defined term  for a  nonprofit "organization"  under Section                                                                    
47, page 33.                                                                                                                    
                                                                                                                                
Co-Chair Stoltze  wanted the language to  work. Commissioner                                                                    
Rodell replied that the department also wanted it to work.                                                                      
                                                                                                                                
Co-Chair  Stoltze asked  about the  Base Student  Allocation                                                                    
(BSA) component of the bill.  Commissioner Hanley noted that                                                                    
the governor  had included  an increase of  $85 to  the BSA.                                                                    
The CS  increased the $85  by $100 for  a total of  $185 for                                                                    
the current year.  There would be an annual  increase of $58                                                                    
for the subsequent two years.                                                                                                   
                                                                                                                                
Co-Chair Stoltze  remarked that the increases  would be $185                                                                    
[in the current  year], $243 [in the second  year], and $301                                                                    
[in the  third year].  Commissioner Hanley responded  in the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
1:57:48 PM                                                                                                                    
                                                                                                                                
Representative  Gara thanked  the  department for  providing                                                                    
the BSA  model. He  stated that Fairbanks  was facing  an $8                                                                    
million   deficit;  the   proposed   increase  would   raise                                                                    
approximately  $6.5 million  for  the  district. Juneau  was                                                                    
facing  a $4  million deficit;  the proposed  increase would                                                                    
raise just  under half  of the deficit.  Kenai was  facing a                                                                    
$4.5  million deficit;  the  proposed  increase would  raise                                                                    
$3.3  million  for the  district.  He  thought the  increase                                                                    
would  mean  another  year  of   layoffs  in  the  mentioned                                                                    
districts. He asked if he was incorrect.                                                                                        
                                                                                                                                
Co-Chair  Stoltze  asked  the  department  to  addendum  the                                                                    
bracketing as money that would go to the districts.                                                                             
                                                                                                                                
Commissioner    Hanley    replied    that    according    to                                                                    
Representative Gara's  numbers the districts would  not have                                                                    
full funding and  would require the districts  to make cuts.                                                                    
Based on conversations with districts  over the past year he                                                                    
believed  numbers  were  constantly  changing.  He  had  not                                                                    
spoken  to districts  recently about  their specific  needs,                                                                    
but he had  heard generally across the  state that districts                                                                    
were facing cuts.                                                                                                               
                                                                                                                                
Representative Gara  remarked that the increase  appeared to                                                                    
roughly match  the deficit of  approximately $23  million in                                                                    
his Anchorage district  in the first year,  but the increase                                                                    
of close  to $4.3 million in  the second and third  year was                                                                    
not close to  what the district would need to  hold even. He                                                                    
asked if DEED was comfortable with the decision.                                                                                
                                                                                                                                
Commissioner  Hanley replied  that the  governor had  put in                                                                    
$85  as   a  starting   point;  the  governor   trusted  the                                                                    
legislature  to  determine  the  necessary  BSA  number.  He                                                                    
detailed  that the  governor had  communicated  that in  the                                                                    
past three  years he  had been entrenched  in the  idea that                                                                    
money would not be put into  the BSA and that funds would be                                                                    
targeted;  however,  he had  changed  his  strategy and  was                                                                    
willing to put money into the BSA.                                                                                              
                                                                                                                                
2:00:43 PM                                                                                                                    
                                                                                                                                
Representative  Gara understood  that the  state was  facing                                                                    
budget  deficits; however,  there  had been  three years  of                                                                    
cuts.  Districts  were  facing  additional  cuts  in  future                                                                    
years.  He  pointed  to  teacher,  guidance  counselor,  and                                                                    
curriculum cuts. He wondered how  schools would move forward                                                                    
under the circumstances.                                                                                                        
                                                                                                                                
Commissioner  Hanley  replied  that  the  ball  was  in  the                                                                    
legislature's  court. He  reiterated  his earlier  statement                                                                    
that  the governor  had put  forward an  increase of  $85 to                                                                    
start the conversation.                                                                                                         
                                                                                                                                
Representative Gara asked if the  department was blaming the                                                                    
legislature for coming up with  a higher BSA number than the                                                                    
department  had presented.  Commissioner  Hanley replied  in                                                                    
the negative. He  elaborated that the governor  had used the                                                                    
$85 figure as a starting point.                                                                                                 
                                                                                                                                
2:02:47 PM                                                                                                                    
                                                                                                                                
Representative  Costello asked  about one-time  funding from                                                                    
recent  years.  She  wondered  if  DEED  or  another  entity                                                                    
tracked   how   districts   spent  the   one-time   funding.                                                                    
Commissioner  Hanley   replied  that  the  funds   had  been                                                                    
distributed  in the  past few  years  through the  formula's                                                                    
Adjusted Average Daily Membership  (AADM). He noted that the                                                                    
funding  did  not go  into  the  BSA. Without  clear  intent                                                                    
language  specifying the  department to  do so,  it had  not                                                                    
tracked the funding.  He pointed to $25  million provided to                                                                    
districts to address energy costs  and explained that it was                                                                    
up to the districts to determine how the funding was used.                                                                      
                                                                                                                                
Representative Costello  asked if the department  would need                                                                    
specific  direction  from  the   legislature  to  track  the                                                                    
funding.  She was  interested  to know  how  the funds  were                                                                    
spent  and   noted  that  it  was   not  easily  determined.                                                                    
Commissioner  Hanley  replied  that DEED  would  follow  the                                                                    
legislature's intent;  it did not  want to insert  itself in                                                                    
places  it  should  not.  He   relayed  that  at  times  the                                                                    
department had been  given direction on how  money should be                                                                    
distributed and  other times  there had  been accountability                                                                    
measures to report out.                                                                                                         
                                                                                                                                
Representative   Costello    understood   that    when   the                                                                    
legislature  allocated  money  it  was  distributed  to  the                                                                    
districts; whether  it was special needs,  intensive special                                                                    
needs, geographic  differential, AADM, or  one-time funding,                                                                    
the districts had  complete control and autonomy  on how the                                                                    
dollars were directed. She believed  the decision was solely                                                                    
up  to  the  local   school  district.  Commissioner  Hanley                                                                    
replied  that  her   understanding  was  accurate  generally                                                                    
speaking.                                                                                                                       
                                                                                                                                
Representative Wilson spoke to the  removal of the top tiers                                                                    
[page 14]  and efficiencies  that may  have been  in schools                                                                    
with enrollment above 400 or  750. She asked whether economy                                                                    
of  scale  still  existed when  the  enrollment  number  was                                                                    
reduced to  250 students  and every  student counted  for at                                                                    
least 0.97. She mentioned items  such as broadband that were                                                                    
based on something separate from the student.                                                                                   
                                                                                                                                
Commissioner Hanley  replied in the negative.  The component                                                                    
was  relatively  new and  the  department  had not  followed                                                                    
through on identifying efficiencies.  The change allowed for                                                                    
additional   funding  for   schools  that   had  a   smaller                                                                    
multiplier.  He could  not  speak to  the  direct impact  at                                                                    
present.                                                                                                                        
                                                                                                                                
2:06:16 PM                                                                                                                    
                                                                                                                                
Representative Wilson  addressed teacher tenure on  page 16.                                                                    
She asked Commissioner Hanley  to reiterate the department's                                                                    
concerns.                                                                                                                       
                                                                                                                                
Commissioner Hanley  did not have a  concern about reopening                                                                    
the issue.  He thought  clarification was needed  related to                                                                    
the tenure  termination language. He explained  that current                                                                    
language read  that a teacher's tenure  could be terminated,                                                                    
but  it did  not necessarily  mean the  employee would  lose                                                                    
their  job. He  wondered where  that left  the employee.  He                                                                    
asked  if an  employee could  earn the  tenure back  after a                                                                    
probation period or if they would start from the beginning.                                                                     
                                                                                                                                
Representative Wilson asked for  verification that a teacher                                                                    
could transfer  their tenure from  one district  to another.                                                                    
Commissioner Hanley believed  so. He would follow  up on the                                                                    
question.                                                                                                                       
                                                                                                                                
Representative Wilson  believed that  each district  had the                                                                    
option to decide differently on the issue.                                                                                      
                                                                                                                                
Representative Guttenberg  asked about page 16,  line 19. He                                                                    
pointed  to a  deletion and  observed that  the sentence  no                                                                    
longer   made  sense   grammatically.  Commissioner   Hanley                                                                    
replied that the figure changed  from 12.56 percent to 32.56                                                                    
percent (included on line 32).                                                                                                  
                                                                                                                                
2:09:20 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  asked  about teacher  tenure  on                                                                    
page  16,  line  9.  He  believed  that  the  bill  language                                                                    
essentially  meant that  there would  be no  teacher tenure.                                                                    
Under the section  if a teacher did not  adequately assist a                                                                    
school  district with  an  implementation  of a  school-wide                                                                    
change to the instructional model  it was grounds for tenure                                                                    
termination. He remarked that a  teacher may not be involved                                                                    
in the  specific curriculum. He  believed the  provision was                                                                    
arbitrary.                                                                                                                      
                                                                                                                                
Commissioner Hanley agreed; he  believed the language needed                                                                    
clarity. He  questioned whether  a teacher  implementing the                                                                    
strategies in a classroom was sufficient.                                                                                       
                                                                                                                                
Representative Guttenberg  looked at  the change  in formula                                                                    
on page  14. He assumed  that increasing the  multiplier for                                                                    
large  schools meant  there were  few efficiencies  based on                                                                    
school size.  He wondered about  the basis of the  change to                                                                    
remove the top  two tiers. He wondered what it  had done for                                                                    
other schools  and what  inefficiencies existed  for smaller                                                                    
schools.                                                                                                                        
                                                                                                                                
Commissioner  Hanley   could  not  speak  to   the  specific                                                                    
language.                                                                                                                       
                                                                                                                                
2:12:02 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg wondered where  a person doing the                                                                    
research would go to determine  the calculation. He wondered                                                                    
how a person would calculate where efficiencies existed.                                                                        
                                                                                                                                
Co-Chair Stoltze asked  if the question was  about the value                                                                    
of a student.                                                                                                                   
                                                                                                                                
Representative   Guttenberg   disputed    the   remark   and                                                                    
reiterated his question related  to value, efficiencies, and                                                                    
school size.                                                                                                                    
                                                                                                                                
Commissioner Hanley answered that  the department could help                                                                    
someone with the pursuit, but  it was necessary to look back                                                                    
at where the  numbers in the bill had  originally come from.                                                                    
He believed the intent was  to recognize economies of scale.                                                                    
He did  not know why  750 had  been selected related  to the                                                                    
number of  students. He believed  it represented  the number                                                                    
and size of schools in the  state and how to adequately fund                                                                    
them. The actual multipliers did become a term of value.                                                                        
                                                                                                                                
Representative  Costello   thought  school   districts  were                                                                    
struggling  to find  ways to  increase  efficiency and  that                                                                    
they had  reached a point  where cutting teachers  was their                                                                    
only solution.  She spoke to  the Anchorage  School District                                                                    
cutting  200  teachers.  She  commented  on  the  district's                                                                    
diversity  and  families  moving   from  smaller  to  larger                                                                    
districts in  order to take advantage  of opportunities. She                                                                    
believed the question  had been asked and  the districts had                                                                    
answered  that more  efficiencies could  not be  located and                                                                    
districts were  now cutting into  the marrow of  the purpose                                                                    
of education.  She had received calls  from constituents who                                                                    
were upset that their child was  not counted as one [a whole                                                                    
student].                                                                                                                       
                                                                                                                                
2:14:27 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman  discussed  TVEP.  He  mentioned  federal                                                                    
withholdings   related   to    the   Workers'   Compensation                                                                    
Employment Act.  He spoke to  training individuals  in order                                                                    
to help them  find employment to support  their families. He                                                                    
looked at  changes in the  CS and  noted that there  was one                                                                    
full  page of  new recommendations  on how  to regulate  $11                                                                    
million  for  TVEP.  He  did  not  believe  the  change  was                                                                    
streamlining the  process. He believed a  new division would                                                                    
be needed to  look at the provision [due to  the workload it                                                                    
would  create]. He  pointed to  language pertaining  to data                                                                    
collection on page 18, line  10 related to the percentage of                                                                    
former participants  who had jobs,  the median  wage, former                                                                    
participants who  were employed, and other.  He wondered why                                                                    
the data  was needed  and how  it would  be used.  He opined                                                                    
that  the  data collection  would  be  a full-time  job.  He                                                                    
thought  it would  be easier  to include  language that  the                                                                    
commissioner shall  make a determination to  ensure that the                                                                    
funds  were   distributed  in  an  equitable   fashion  that                                                                    
addressed employment needs statewide.  He believed the state                                                                    
tried to  overregulate and  provide over  accountability. He                                                                    
asked  the Department  of  Labor  and Workforce  Development                                                                    
(DLWD) to provide comment on the issues.                                                                                        
                                                                                                                                
2:17:11 PM                                                                                                                    
                                                                                                                                
Commissioner  Blumer clarified  that the  funds came  out of                                                                    
the Unemployment  Insurance Trust  Fund from  the employees'                                                                    
portion. She  communicated that the  numbers 1 through  5 of                                                                    
the criteria had  been set in 2009. The TVEP  funds were set                                                                    
out  to  keep individuals  from  being  on unemployment  and                                                                    
drawing   from   the   fund.  The   articulation   agreement                                                                    
components  had been  added to  encourage regional  training                                                                    
centers to  work with  the local  school districts  to equip                                                                    
the  state's  youth  with employability  skills  after  high                                                                    
school.  She  highlighted   that  nationally  students  were                                                                    
underequipped   for   the   workforce  after   high   school                                                                    
graduation and some two-year degree  programs. The intent of                                                                    
the  articulation agreement  was  to  provide students  with                                                                    
dual credit and to  give them technical education experience                                                                    
to  help them  move  more quickly  into  the workforce.  She                                                                    
addressed whether  the reporting  structure could be  put on                                                                    
the DLWD  commissioner to increase efficiency.  She believed                                                                    
criteria was needed because the  money was designated by the                                                                    
legislature   and   formula   funded;  she   thought   clear                                                                    
guidelines  were needed  for  the  reporting structure.  She                                                                    
noted that  the 20  percent mechanism she  discussed earlier                                                                    
was the only  way the department could have  any leverage to                                                                    
receive the information. She  reiterated that the department                                                                    
already  did  items 1  through  5;  therefore, she  did  not                                                                    
believe adding  the two additional components  would require                                                                    
new staff.                                                                                                                      
                                                                                                                                
2:19:27 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman  noted  that  the funds  came  out  of  a                                                                    
person's   federal   withholdings    through   the   Federal                                                                    
Employment   Compensation   Act.   He  wondered   what   the                                                                    
information would be used for.                                                                                                  
                                                                                                                                
Commissioner  Blumer replied  that  the department  provided                                                                    
the data to the legislature  annually. She detailed that the                                                                    
department  was working  to identify  some of  the items  it                                                                    
wanted regional training  centers to look at  to ensure that                                                                    
trainees were  moving into employment. Most  of the measures                                                                    
had  been   implemented  in  2009;  only   the  articulation                                                                    
agreement had been added in the bill.                                                                                           
                                                                                                                                
Vice-Chair   Neuman  would   continue  to   work  with   the                                                                    
commissioner to provide additional streamlining.                                                                                
                                                                                                                                
Representative Munoz pointed to  the change in employer rate                                                                    
from  12.56 percent  to 32.56  percent. She  noted that  the                                                                    
bill allowed  compensation through the formula  to reimburse                                                                    
the school  districts, but it  did not  direct reimbursement                                                                    
to  other TRS  employers including  DEED. She  detailed that                                                                    
the impact was estimated to  be around $700,000 to DEED. She                                                                    
asked for comment from the department.                                                                                          
                                                                                                                                
Commissioner Hanley deferred the question to others.                                                                            
                                                                                                                                
Representative  Munoz  noted that  there  would  also be  an                                                                    
impact  on  the  University  of Alaska  and  other  affected                                                                    
agencies.                                                                                                                       
                                                                                                                                
2:22:07 PM                                                                                                                    
                                                                                                                                
Representative Gara  spoke to the  revenue generated  by the                                                                    
BSA  including $22  million for  Anchorage and  $6.9 million                                                                    
for Fairbanks for the first  year. He asked for verification                                                                    
that the  funds would  only be  available if  the additional                                                                    
$25  million  to  be distributed  through  the  BSA  formula                                                                    
remained in the operating budget.                                                                                               
                                                                                                                                
Commissioner Hanley would follow up on the question.                                                                            
                                                                                                                                
Representative Gara  was bothered that the  commissioner did                                                                    
not know the answer. He pointed  to page 11 and spoke to the                                                                    
current  public education  fund  that  distributed money  to                                                                    
school  districts, boarding  schools, correspondence  study,                                                                    
and  for transportation  (items the  BSA was  used for).  He                                                                    
noted  that the  bill included  a provision  that the  funds                                                                    
could  be spent  on TRS.  He  was concerned  that the  funds                                                                    
would  be   taken  from  classrooms.  He   wondered  if  the                                                                    
department shared the concern.                                                                                                  
                                                                                                                                
Commissioner Hanley  believed that the intent  was for money                                                                    
to be placed  into and withdrawn from the fund  for TRS; the                                                                    
portion of TRS currently paid by  the state would be paid by                                                                    
school  districts. He  deferred the  question to  David Teal                                                                    
for further detail.                                                                                                             
                                                                                                                                
Representative  Gara wondered  if the  committee would  hear                                                                    
from  someone   else  related   to  the   Public  Employees'                                                                    
Retirement System (PERS)/TRS portions of the bill.                                                                              
                                                                                                                                
Co-Chair  Stoltze  replied  that  the  bill  was  associated                                                                    
primarily with TRS, but there were some PERS elements.                                                                          
                                                                                                                                
Representative Gara pointed to  new language associated with                                                                    
the  educational  credits  on  page 22  that  let  companies                                                                    
receive tax credits by putting  money into private nonprofit                                                                    
elementary or  secondary schools  (line 27). He  wondered if                                                                    
the provision  applied to private  or religious  schools. He                                                                    
surmised that  it would allow  state money to go  to private                                                                    
schools.                                                                                                                        
                                                                                                                                
Commissioner   Rodell  replied   in  the   affirmative.  She                                                                    
elaborated   that  the   provision   mirrored  the   federal                                                                    
deduction that was  currently in place. She  agreed that the                                                                    
provision could allow for a  donation to a private nonprofit                                                                    
that may have a religious affiliation.                                                                                          
                                                                                                                                
Representative  Gara  noted  that  it  was  allowable  under                                                                    
federal law, because  there was no ban under  federal law on                                                                    
public money  being used for  private or  religious schools,                                                                    
but there was a ban  under the Alaska State Constitution. He                                                                    
wondered   how   the   provision   did   not   violate   the                                                                    
constitution.                                                                                                                   
                                                                                                                                
Commissioner Rodell deferred the  question to the Department                                                                    
of Law.                                                                                                                         
                                                                                                                                
Representative Costello  asked if the education  tax credits                                                                    
were transferable.                                                                                                              
                                                                                                                                
ROBYNN  WILSON, AUDIT  SUPERVISOR, TAX  DIVISION, DEPARTMENT                                                                    
OF REVENUE (via teleconference),  replied that the education                                                                    
tax  credits were  not transferrable  under existing  law or                                                                    
under the bill.                                                                                                                 
                                                                                                                                
Vice-Chair Neuman  discussed the  education tax  credits. He                                                                    
relayed that if a company  owed the state corporate taxes it                                                                    
would receive  nontransferable tax credits if  it gave money                                                                    
to a private nonprofit for a vocational education purpose.                                                                      
                                                                                                                                
2:27:56 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg asked  about the  recommendations                                                                    
for  reports  from  the  state   (page  9).  He  noted  that                                                                    
curriculum  and  information  relevant to  efforts  made  to                                                                    
improve  the education  system were  already included  under                                                                    
items 2  and 3. He  asked for clarification on  the addition                                                                    
of item 4  pertaining to recommendations for  changes in the                                                                    
method  of   education  spending,  district   cost  factors,                                                                    
efficiencies, and other.                                                                                                        
                                                                                                                                
Commissioner  Hanley replied  that he  was not  sure of  the                                                                    
intent of  item 4. He  observed that the  component included                                                                    
recommendations to  the legislature  as opposed  to previous                                                                    
components that only reported on  the state board's actions.                                                                    
He believed  it was broad  enough to incorporate all  of the                                                                    
components.                                                                                                                     
                                                                                                                                
Representative Guttenberg asked  for verification that there                                                                    
was  not  currently  an annual  report  of  recommendations.                                                                    
Commissioner  Hanley  replied  that  an  annual  report  was                                                                    
presented to both education committees.                                                                                         
                                                                                                                                
2:30:08 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg surmised  that  an assessment  of                                                                    
the district  efficiencies and  cost factors  (e.g. heating,                                                                    
maintenance,  transportation, and  other)  was an  intensive                                                                    
report to  conduct annually. He wondered  if the information                                                                    
was already included in the report.                                                                                             
                                                                                                                                
Commissioner  Hanley replied  that the  information was  not                                                                    
currently  included  in the  report.  He  detailed that  the                                                                    
report included  work the state  board had conducted  in the                                                                    
areas, but it did  not include recommendations. Cost factors                                                                    
fell under  the purview of  local school districts  and were                                                                    
not typically included in the report.                                                                                           
                                                                                                                                
Representative  Guttenberg asked  for verification  that the                                                                    
district  cost  factors  were accumulated  at  the  district                                                                    
school  board level.  Commissioner Hanley  replied that  the                                                                    
cost factors were accumulated at the local level.                                                                               
                                                                                                                                
Representative Guttenberg  asked how  the cost  factors were                                                                    
accumulated into  a calculation for state  funding. He noted                                                                    
that currently  a formula determined amounts  to be received                                                                    
by  district  based  on  need. He  understood  that  no  two                                                                    
districts  were   equal.  He  wondered  whether   there  was                                                                    
oversight to determine whether the method was accurate.                                                                         
                                                                                                                                
Commissioner  Hanley   replied  that  the   geographic  cost                                                                    
factors  associated  with  revenue were  determined  by  the                                                                    
legislature; however,  the actual  district cost  was driven                                                                    
by conversations between the  districts and the legislature.                                                                    
The actual  costs at the  local level were not  monitored by                                                                    
the state.                                                                                                                      
                                                                                                                                
Representative  Guttenberg  stated   that  the  gasoline  in                                                                    
Kivalina  was  over $13  per  gallon.  He wondered  how  the                                                                    
increased  costs  for  communities  were  reflected  in  the                                                                    
overall formula.                                                                                                                
                                                                                                                                
Commissioner Hanley replied that  the geographic cost factor                                                                    
was designed  to reflect costs  in a community;  however, he                                                                    
doubted that  it would  reflect the  annual changes  in fuel                                                                    
costs.  The  idea  of  the geographic  cost  factor  was  to                                                                    
recognize and  compensate for the  increased costs  in rural                                                                    
areas.                                                                                                                          
                                                                                                                                
2:32:42 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze  referred to the bracketing  change related                                                                    
to the  large school students.  He asked what  percentage of                                                                    
the  total  student  population the  large  school  students                                                                    
comprised. Commissioner  Hanley replied that the  large five                                                                    
school districts  accounted for slightly over  80 percent of                                                                    
the state's students.                                                                                                           
                                                                                                                                
Co-Chair Stoltze remarked that  the provision impacted above                                                                    
80  percent  of the  state's  students.  He pointed  to  the                                                                    
significance of counting the students as whole students.                                                                        
                                                                                                                                
Representative  Edgmon  asked   about  smaller  schools  and                                                                    
unknown  expenses. He  stressed that  the cost  structure in                                                                    
rural Alaska  was exponentially higher  than in  urban areas                                                                    
that  had natural  gas and  other efficiencies.  He was  not                                                                    
opposed to the  change in Section 17.  His district included                                                                    
a portion  of 10 school  districts and he was  troubled that                                                                    
the  costs  would  increase for  small  schools  with  fewer                                                                    
students. He appreciated the additional  BSA funding, but he                                                                    
was worried  that the bill  did not recognize  the expenses.                                                                    
He wondered if  the department kept a handle  on the various                                                                    
cost  structures  in  smaller  schools  compared  to  larger                                                                    
schools.                                                                                                                        
                                                                                                                                
Commissioner Hanley replied in the negative.                                                                                    
                                                                                                                                
Representative Guttenberg  asked for verification  that DEED                                                                    
would be tracking  the data as a result of  the new language                                                                    
on page 9 of the bill.  Commissioner Hanley did not read the                                                                    
provision  in that  way. He  surmised that  the board  would                                                                    
present  recommendations  for  changes   in  the  method  of                                                                    
education spending. He  did not believe the  board was being                                                                    
asked to  specifically recommend  where to direct  funds. He                                                                    
thought the  provision outlined a  method of  spending (e.g.                                                                    
that   money   should   be   focused   on   the   classroom,                                                                    
infrastructure,  teachers,  or  other). He  was  unsure  the                                                                    
board  had the  capacity to  address the  issue on  a deeper                                                                    
level.                                                                                                                          
                                                                                                                                
Representative Guttenberg surmised that  the change would be                                                                    
included in a fiscal  note. Commissioner Hanley replied that                                                                    
the department  had not intended  to generate a  fiscal note                                                                    
on the item.                                                                                                                    
                                                                                                                                
Representative Guttenberg  thought that  that intent  of the                                                                    
provision may need clarity.                                                                                                     
                                                                                                                                
Representative  Wilson understood  that districts  needed to                                                                    
provide  significant information  through  audits and  other                                                                    
methods. She  noted that DEED  had extensive  information on                                                                    
its website. She  observed that the website  did not include                                                                    
a  specific form  that included  information on  energy. She                                                                    
wondered if  the department had considered  including a form                                                                    
on  its  website  with   more  clarifying  information.  She                                                                    
wondered if  it would  be possible for  DEED to  compile the                                                                    
information without creating additional work for districts.                                                                     
                                                                                                                                
Commissioner Hanley  replied that  DEED had not  pursued the                                                                    
idea because  it was  a burden  on districts.  He questioned                                                                    
how much  information was really  needed. He added  that the                                                                    
department  could pursue  the issue  if the  information was                                                                    
needed.   He   communicated   that  districts   needed   the                                                                    
flexibility to move funds around  as energy costs increased.                                                                    
The department  had not felt  the need to  monitor districts                                                                    
that closely.                                                                                                                   
                                                                                                                                
Representative  Wilson clarified  that she  did not  want to                                                                    
monitor  districts  that  closely.  She  detailed  that  the                                                                    
education task  force had looked  at drivers of  the formula                                                                    
and it was difficult to  determine needs; a $25 million one-                                                                    
time increment  had been provided  to address  rising energy                                                                    
costs; however,  costs continued to  rise. She did  not know                                                                    
how  the  legislature  would   address  the  entire  formula                                                                    
without the  information. She believed  it would  be helpful                                                                    
if the department could provide  the cost driver information                                                                    
in one place.                                                                                                                   
                                                                                                                                
2:40:21 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:48:19 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Stoltze discussed the intent to address TRS.                                                                           
                                                                                                                                
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
addressed three cost  drivers including Medicaid, education,                                                                    
and retirement; HB 278 dealt  with education and retirement.                                                                    
Under  the   legislation,  K-12  costs  would   increase  by                                                                    
approximately $900  million to $1 billion  over the upcoming                                                                    
10  years. He  shared  that TRS  retirement  costs would  be                                                                    
approximately $4.3 billion during  the upcoming 10 years. He                                                                    
detailed  that the  governor's plan  would decrease  the TRS                                                                    
costs  to   approximately  $4.2  billion  during   the  same                                                                    
timeframe;  the TRS  costs would  decrease  to $3.3  billion                                                                    
under  HB 278.  He  communicated that  essentially the  $900                                                                    
million  in savings  under the  HB 278  TRS plan  offset the                                                                    
education  increase in  the bill.  Offsetting the  education                                                                    
increase was important due to  annual deficits of $2 billion                                                                    
to $2.5 billion under a  no-growth scenario. The state's $15                                                                    
billion in reserves  were estimated to be  depleted by 2024.                                                                    
He believed  the no-growth  scenario was  optimistic because                                                                    
Medicaid costs  were projected to increase  by approximately                                                                    
$2 billion during the upcoming 10 years.                                                                                        
                                                                                                                                
Mr. Teal relayed that the  state was looking at consuming $2                                                                    
billion for Medicaid, $1 billion  for education, and another                                                                    
$3 billion or more for  retirement in the upcoming 10 years,                                                                    
which represented roughly one-third  of the state's savings.                                                                    
He emphasized  that the figures  did not factor in  PERS. He                                                                    
relayed that action  by the legislature was  not required if                                                                    
the  state  could  afford  the   current  TRS  payments.  He                                                                    
detailed that if the state  maintained the current TRS path,                                                                    
the  TRS  problems  would  be  fixed  within  25  years.  He                                                                    
believed  the appropriate  question  was  whether the  state                                                                    
could afford  to make  the current  TRS payments.  He stated                                                                    
that the goal was to extend  the life of the reserves, which                                                                    
would  be  accomplished  with  HB  278,  but  not  with  the                                                                    
governor's proposed  plan. He added  that over  the upcoming                                                                    
10 years  the governor's plan  spent almost the  same amount                                                                    
on TRS as the current payment plan.                                                                                             
                                                                                                                                
2:53:04 PM                                                                                                                    
                                                                                                                                
MICHAEL   BARNHILL,  DEPUTY   COMMISSIONER,  DEPARTMENT   OF                                                                    
ADMINISTRATION,  believed the  legislature was  owed a  deep                                                                    
debt of gratitude  for its assistance to TRS  since 2008. He                                                                    
detailed that  since 2008  the legislature  had appropriated                                                                    
about $1.7 billion to TRS.  He believed the level of support                                                                    
was   impressive.  He   pointed   to   other  states   where                                                                    
municipalities  were going  bankrupt under  the pressure  of                                                                    
unfunded  liabilities  from  defined  benefit  systems.  The                                                                    
department appreciated the  additional $1.4 billion proposed                                                                    
in the CS  and believed it was needed; it  was more than the                                                                    
governor's  $1.1 billion  proposal. However,  the department                                                                    
did not know where the money would come from.                                                                                   
                                                                                                                                
Co-Chair  Stoltze asked  where  the  department thought  the                                                                    
money  would come  from. He  noted that  the governor  had a                                                                    
fund  source.  He  asked  if   the  department  thought  the                                                                    
legislature  had  a  different  fund  source.  Mr.  Barnhill                                                                    
replied that  if the funding  source was not  different than                                                                    
the  governor's  that  helped clarify  the  issue.  Co-Chair                                                                    
Stoltze replied that it was not.                                                                                                
                                                                                                                                
Mr.  Barnhill addressed  the complexity  of the  (retirement                                                                    
and  education)   issues.  He  relayed  that   the  governor                                                                    
respectfully believed that the  two issues should be treated                                                                    
separately.   He  pointed   to   similarities  between   the                                                                    
governor's plan  and the Legislative Finance  Division (LFD)                                                                    
plan   presented   in  the   CS.   Both   plans  sought   an                                                                    
appropriation  in  excess  of  $1 billion  and  both  had  a                                                                    
certain amount  of money  on a go-forward  basis from  FY 16                                                                    
moving  forward that  would be  used  in the  form of  state                                                                    
assistance alongside  the BSA formula.  The issue  came down                                                                    
to  philosophy, where  there  was  a significant  difference                                                                    
between the governor's  plan and LFD plan.  He detailed that                                                                    
LFD  plan contemplated  the possibility  that the  TRS trust                                                                    
fund would  exhaust in the  early 2050s. He  elaborated that                                                                    
the type  of plan could be  referred to as a  "pay-go" plan.                                                                    
Whereas, the governor's plan proposed  fully funding the TRS                                                                    
trust  fund in  order  to secure  promises  made to  defined                                                                    
benefit  teachers.   He  stressed  the  importance   of  the                                                                    
philosophical difference. He  communicated that the governor                                                                    
was unwilling to contemplate the  possibility that the state                                                                    
could run the  TRS trust fund dry in  the future; therefore,                                                                    
he  had   put  forward  a   plan  that  from   an  actuarial                                                                    
perspective  would   fully  fund   the  system.   Under  the                                                                    
assumptions made, there  was not a risk that  the trust fund                                                                    
would run  dry. He  noted that  the administration  found it                                                                    
problematic that  under the  bill's plan  there could  be an                                                                    
economic  downturn  at  any time  that  would  threaten  the                                                                    
economic  security of  the TRS  trust  fund; the  governor's                                                                    
plan did not begin with that assumption.                                                                                        
                                                                                                                                
2:59:18 PM                                                                                                                    
                                                                                                                                
Mr. Barnhill communicated that many  people were impacted by                                                                    
TRS;  currently   there  were  approximately   6,500  active                                                                    
defined  benefit  teachers across  the  state  and close  to                                                                    
12,000 defined  benefit TRS  retirees. When  dependents were                                                                    
factored  in  there  were over  30,000  people  impacted  by                                                                    
current decisions  on TRS. The  administration did  not want                                                                    
to send the  message that it would be okay  to let the trust                                                                    
fund exhaust prematurely.                                                                                                       
                                                                                                                                
Co-Chair  Stoltze asked  if  the  administration had  useful                                                                    
information to  provide the committee. Mr.  Barnhill replied                                                                    
in the affirmative.                                                                                                             
                                                                                                                                
Representative Gara asked for  clarification on the document                                                                    
being discussed.                                                                                                                
                                                                                                                                
Mr. Barnhill was  addressing version G of HB  278. He looked                                                                    
at pages  11 and 12 that  made changes to the  AADM formula.                                                                    
The  administration  believed  the  intent  was  to  provide                                                                    
funding  for the  increased employer  contribution rate  for                                                                    
school district employers. He  explained that under existing                                                                    
law the school district  employer contribution rate had been                                                                    
capped at 12.56 percent of  payroll; the bill would increase                                                                    
the cap to  32.56 percent and would provide  funding for the                                                                    
increased  rate through  changes  to the  AADM  on page  12,                                                                    
lines 17 through 25. The  formula would provide funds to the                                                                    
school districts  to make the  increased payment.  He turned                                                                    
to  Section 21  on  pages  14 and  15.  When  the money  was                                                                    
appropriated through the amended  AADM formula to the Public                                                                    
Education  Fund, the  DEED commissioner  could withhold  the                                                                    
funds from  school districts and  pay the money  directly to                                                                    
the Department of Revenue (DOR)  for investment. The purpose                                                                    
of the  section was  to capture the  full-time value  of the                                                                    
funds  for investment  at the  beginning of  a year  as they                                                                    
were invested at present.                                                                                                       
                                                                                                                                
Mr. Barnhill  relayed that the  TRS actuarial rate  was high                                                                    
(it  would be  over  70  percent in  the  coming year);  the                                                                    
difference between  72 percent  of payroll and  the employer                                                                    
contribution  rate  cap  of  12   percent  was  60  percent.                                                                    
Currently   the   legislature    appropriated   the   entire                                                                    
difference  through   state  assistance  in   the  operating                                                                    
budget;   the  funds   were  sent   to  the   Department  of                                                                    
Administration and  were then provided to  DOR for immediate                                                                    
investment.  He relayed  that by  routing  an additional  20                                                                    
percent  through the  school districts  there was  a concern                                                                    
that  the  funds would  come  back  to  the state  in  equal                                                                    
installments over a 10-month period  and that DOR would lose                                                                    
the ability  to invest the  funds over the  10-month period.                                                                    
He  detailed  that  the  provision  resolved  the  issue  by                                                                    
designating that the money would be given directly to DOR.                                                                      
                                                                                                                                
3:04:50 PM                                                                                                                    
                                                                                                                                
Mr.  Barnhill moved  to  Section  25 on  page  16 where  the                                                                    
employer  contribution rate  cap  was  increased from  12.56                                                                    
percent  to  32.56  percent.  The   bill  also  included  an                                                                    
alternative rate on lines 23  to 27. The Legislative Finance                                                                    
Division  had  explained  to  the  administration  that  the                                                                    
alternative rate (pension benefits  divided by salary) would                                                                    
not  take  effect  until  2050.   He  addressed  an  earlier                                                                    
question  from  Representative  Gara   about  how  the  rate                                                                    
increase  would   impact  the  state  (the   state  and  the                                                                    
University of  Alaska were  both members  of TRS).  Based on                                                                    
information  collected by  the  Division  of Retirement  and                                                                    
Benefits, state  assistance had been  paid on behalf  of the                                                                    
state in  the amount  of $2.3 million  and $16.2  million on                                                                    
behalf  of  the  university  in  FY  13.  He  detailed  that                                                                    
approximately  one-third  of  the  total would  need  to  be                                                                    
included  in each  of  the two  entity's  budgets under  the                                                                    
legislation  (approximately $700,000  for the  state and  $5                                                                    
million for the university).                                                                                                    
                                                                                                                                
3:06:52 PM                                                                                                                    
                                                                                                                                
Mr.  Barnhill addressed  Section 27  on page  17 that  would                                                                    
implement  the  pay-go  provision. The  section  amended  AS                                                                    
14.25.085 that  was originally enacted  into law in  2008 as                                                                    
part of  SB 125; the section  had provided that for  TRS the                                                                    
state   could  appropriate   the   difference  between   the                                                                    
actuarial  rate  and 12.56  percent  in  the form  of  state                                                                    
assistance.   To  date   the   appropriations  amounted   to                                                                    
approximately $1.7  billion. Under  changes proposed  in the                                                                    
bill no  appropriation would be  made if the balance  of the                                                                    
trust  funds  (the amount  appropriated  to  the trust  fund                                                                    
appropriated  from the  reserve account  established by  the                                                                    
bill)   and  employee   and   employer  contributions   were                                                                    
insufficient to  pay anticipated  benefits for  the upcoming                                                                    
year.  He  believed  the  change   was  fairly  radical.  He                                                                    
reiterated that  the section contemplated a  pay-go approach                                                                    
to TRS.                                                                                                                         
                                                                                                                                
Mr. Barnhill addressed Section 33,  page 19, lines 21 and 22                                                                    
that  established  the  Alaska Retirement  Management  Board                                                                    
(ARMB) as  the trustee  of a  new Teachers'  Pension Reserve                                                                    
Fund (created  in Section 35  and established as  a sub-fund                                                                    
of  the  general  fund). Section  34  amended  AS  37.10.220                                                                    
related  to the  powers  of ARMB.  Page 31,  lines  5 and  6                                                                    
removed the power of ARMB  to conduct past service liability                                                                    
rate making, which  the board had done since  2005. Page 22,                                                                    
lines  7  and 8  authorized  ARMB  to manage  the  Teachers'                                                                    
Pension Reserve Fund.                                                                                                           
                                                                                                                                
3:09:52 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze wondered  whether bond  raters would  have                                                                    
concern about the state's pension  reserve even if the state                                                                    
was  making  the  payments  and   had  a  record  of  making                                                                    
payments.                                                                                                                       
                                                                                                                                
GARY  BADER, CHIEF  INVESTMENT  OFFICER, TREASURY  DIVISION,                                                                    
DEPARTMENT   OF   REVENUE,    deferred   the   question   to                                                                    
Commissioner Rodell.                                                                                                            
                                                                                                                                
Co-Chair  Stoltze  requested that  DOR  enable  Mr. Teal  on                                                                    
behalf of the House and Senate  to make inquiries of some of                                                                    
the  state's bond  rating agencies.  Mr.  Bader deferred  to                                                                    
Commissioner Rodell.                                                                                                            
                                                                                                                                
Co-Chair Stoltze asked if Mr.  Bader could foresee a problem                                                                    
with the request. Mr. Bader replied in the negative.                                                                            
                                                                                                                                
Co-Chair Stoltze asked  that Mr. Teal act as  a fact checker                                                                    
to help the legislature make an independent determination.                                                                      
                                                                                                                                
Representative Wilson did  not appreciate the administration                                                                    
insinuating  that   the  committee  did  not   take  teacher                                                                    
retirement  seriously  because it  did  not  agree with  the                                                                    
governor's  plan. She  believed the  legislature was  taking                                                                    
the issue more  seriously because it was working  to put the                                                                    
payment   plan   in   statute.  She   wondered   where   the                                                                    
administration planned  to obtain $500 million  annually for                                                                    
the fund  and how  many years the  annual payments  would be                                                                    
needed.                                                                                                                         
                                                                                                                                
Mr.  Barnhill replied  that the  governor's plan  called for                                                                    
$343  million for  TRS  annually from  FY 16  to  FY 36.  He                                                                    
referred  back to  his testimony  that  the legislature  was                                                                    
owed  a huge  debt of  gratitude for  the commitment  it had                                                                    
shown TRS.                                                                                                                      
                                                                                                                                
Co-Chair Stoltze  referred to Mr. Barnhill's  testimony that                                                                    
there was  not a gulf  of disagreement between  the governor                                                                    
and the legislature.                                                                                                            
                                                                                                                                
Mr. Barnhill  believed the statement  was fair.  He detailed                                                                    
that  the  amount  of  money   under  the  legislative  plan                                                                    
beginning in  FY 16 was  $157 million grading up  over time;                                                                    
whereas,  the governor's  plan was  $343 million.  He stated                                                                    
that the difference  was small in terms of  numbers, but the                                                                    
philosophy  was significantly  different. He  concluded that                                                                    
there was  a respectful disagreement between  the governor's                                                                    
and legislature's proposals.                                                                                                    
                                                                                                                                
Representative   Wilson  asked   where  the   administration                                                                    
believed  the $343  million would  come  from. Mr.  Barnhill                                                                    
deferred  the  question  to the  Office  of  Management  and                                                                    
Budget.                                                                                                                         
                                                                                                                                
JOHN  BOUCHER, SENIOR  ECONOMIST, OFFICE  OF MANAGEMENT  AND                                                                    
BUDGET, OFFICE  OF THE GOVERNOR,  answered that some  of the                                                                    
cost  drivers  the  administration was  working  to  address                                                                    
(e.g. retirement, Medicaid,  growing prison populations, and                                                                    
investment in  infrastructure) would  be challenges  for the                                                                    
administration going  forward. In  the immediate  future the                                                                    
general fund (primarily through  petroleum revenue) would be                                                                    
the driving force  in addition to the  state's reserves. The                                                                    
administration  believed that  the  combination  of the  two                                                                    
fund  sources would  cover the  costs  until gas  production                                                                    
began.                                                                                                                          
                                                                                                                                
3:13:43 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  stated  that  she did  not  hear  an                                                                    
answer to her question. She  equated the plans to taking out                                                                    
a home  mortgage. She detailed  that one plan looked  at the                                                                    
state's ability to  afford a 15-year loan or  a 40-year loan                                                                    
based on its revenue. She  opined that selecting the 40-year                                                                    
plan did not mean she took  the debt less seriously; it just                                                                    
used what she believed the  state could afford. She believed                                                                    
that if  the state  chose the 40-year  debt option  it could                                                                    
continue to  make major  payments; the  plans would  be very                                                                    
similar if the  $343 million could be  infused annually. She                                                                    
was  interested  in   an  apples-to-apples  comparison.  She                                                                    
wondered    if   there    was   anything    preventing   the                                                                    
administration from  using the 40-year plan  while providing                                                                    
$343 million installments to reduce the debt quicker.                                                                           
                                                                                                                                
Mr. Boucher  replied that  the bill  did not  prohibit extra                                                                    
money from going  to the fund should the  legislature or the                                                                    
governor  propose it.  He believed  the administration  just                                                                    
had a  different target in terms  of where it would  like to                                                                    
be in  25 years related  to a healthy, in-tact  reserve fund                                                                    
(versus exhausting  the funds). He  stated that there  was a                                                                    
downside to  not having a  trust fund  in place to  pay down                                                                    
the ongoing debt.                                                                                                               
                                                                                                                                
Representative  Wilson understood  that the  governor's plan                                                                    
used a  shorter timeframe.  She surmised  that HB  278 would                                                                    
require an annual infusion of  $343 million in order to make                                                                    
its timeframe  shorter. She asked for  verification that the                                                                    
plans would get to the same place.                                                                                              
                                                                                                                                
Mr. Boucher  answered that the  governor's plan  to allocate                                                                    
$343  million  to   TRS  was  based  on   the  $1.2  billion                                                                    
appropriation  in the  first year;  if a  higher number  was                                                                    
used the $343 million figure  would drop. He referred to the                                                                    
home  mortgage scenario  and explained  that  a larger  down                                                                    
payment  would   change  the   ongoing  level   payment.  He                                                                    
explained  that   by  short-funding  the  fund   the  models                                                                    
indicated that  the trust would  be exhausted.  He concluded                                                                    
that if the trust fund were  to go bankrupt the only ongoing                                                                    
revenue would be contributions from employers.                                                                                  
                                                                                                                                
Co-Chair  Stoltze asked  if bankrupt  was the  correct word.                                                                    
Mr. Boucher clarified that exhausted  was a more appropriate                                                                    
term.                                                                                                                           
                                                                                                                                
Representative Wilson  surmised that the fund  would only be                                                                    
exhausted if  the $343 million  was not paid in.  She shared                                                                    
that  she  had  purchased  a  car  based  on  her  husband's                                                                    
projected  overtime  payments;   subsequently,  he  had  not                                                                    
received as much overtime as planned  and they had to cut in                                                                    
other areas  to account for  the car payment. She  wanted to                                                                    
ensure  that  the state  was  paying  what it  could  afford                                                                    
(accounting for  Medicaid, education, and other).  She hoped                                                                    
that the legislature could find  the $343 million for annual                                                                    
infusions  that  would  pay  the   debt  off  in  a  quicker                                                                    
timeframe.  However,  until she  knew  where  the money  was                                                                    
coming from  she did  not want to  give the  appearance that                                                                    
the funds would be available  one year and not available the                                                                    
next. She opined  that the funds may not be  as easy to come                                                                    
by as believed.                                                                                                                 
                                                                                                                                
Co-Chair Stoltze  referred to another one  of the governor's                                                                    
bills  (SB 138).  He  wondered where  the  funds would  come                                                                    
from.                                                                                                                           
                                                                                                                                
3:20:00 PM                                                                                                                    
                                                                                                                                
Mr. Barnhill  noted that Representative  Wilson made  a fair                                                                    
point about  different terms used  to amortize  the unfunded                                                                    
liability; sometimes  the unfunded liability was  likened to                                                                    
a home  mortgage. The administration had  considered various                                                                    
amortization terms  (20 to  40 years);  it had  selected the                                                                    
term  because it  believed  the state  could  afford it.  He                                                                    
pointed to  another option of  amortizing a debt  through an                                                                    
interest-only loan  where the interest  was paid off  at the                                                                    
end of the loan term and  the borrower was faced with paying                                                                    
the  principal in-full  or foreclosing  on the  property. He                                                                    
believed the proposal by LFD  was closer to an interest-only                                                                    
loan  than it  was  to  a fully  amortizing  loan under  any                                                                    
particular  term.  The   administration  had  submitted  the                                                                    
numbers to its actuary and  was waiting for the judgment. He                                                                    
believed it queued up a  policy discussion about whether the                                                                    
state  wanted to  address the  issue  with an  interest-only                                                                    
approach where the entire principal  would be due at the end                                                                    
of the loan period.                                                                                                             
                                                                                                                                
Representative  Gara  was  uncomfortable  taking  everyone's                                                                    
interpretation  of  the  bill.  He  discussed  that  at  the                                                                    
beginning  of  the  year  the governor  had  proposed  a  $3                                                                    
billion pay-down of PERS/TRS (roughly  $2 billion would be a                                                                    
pay-down and  $1 billion  would be  the annual  payment). He                                                                    
understood that the  idea was to put a  substantial sum down                                                                    
in order  to reduce future  annual payments. He  thought the                                                                    
proposal  had  covered  both  PERS  and  TRS.  He  expressed                                                                    
confusion in relation to the current debate about TRS.                                                                          
                                                                                                                                
Co-Chair  Stoltze  clarified that  the  proposal  in HB  278                                                                    
would  bifurcate the  $3 billion  between PERS  and TRS.  He                                                                    
added that it would appropriate more to the TRS side.                                                                           
                                                                                                                                
Representative   Gara  asked   for  verification   that  the                                                                    
governor's  original  plan  had   not  split  PERS  and  TRS                                                                    
payments  (roughly $2  billion would  be a  pay-down and  $1                                                                    
billion would  be the annual payment).  Mr. Barnhill replied                                                                    
that the summary was roughly  accurate. He detailed that the                                                                    
governor's plan was $3 billion  with $1.88 billion allocated                                                                    
to  PERS   and  $1.12   billion  to  TRS.   Each  allocation                                                                    
encompassed the FY  15 payment that was due.  Under the ARMB                                                                    
level dollar  methodology, $900 million  of the  total would                                                                    
be the FY  15 payment. Under the previous  percentage of pay                                                                    
methodology $703 million would be the FY 15 payment.                                                                            
                                                                                                                                
Representative Gara wondered when the  PERS and TRS debt had                                                                    
been  split up.  Mr. Barnhill  replied that  the change  had                                                                    
occurred in the new CS.                                                                                                         
                                                                                                                                
Co-Chair Stoltze noted  that there had been  an awareness of                                                                    
discussion.                                                                                                                     
                                                                                                                                
Mr.  Barnhill  added  that  there  were  different  ways  of                                                                    
addressing  PERS  and  TRS. He  relayed  that  the  employer                                                                    
contribution rate cap  in TRS was intended for  the state to                                                                    
pay nearly the entirety of the past-service liability.                                                                          
                                                                                                                                
Co-Chair Stoltze  equated it to  a single-payer  system. Mr.                                                                    
Barnhill  replied that  the current  structure reflected  an                                                                    
understanding that the debt was the state's liability.                                                                          
                                                                                                                                
3:25:21 PM                                                                                                                    
                                                                                                                                
Representative Gara believed  that all presentations to-date                                                                    
had  involved  a  combined  way  to  address  PERS  and  TRS                                                                    
together.                                                                                                                       
                                                                                                                                
Co-Chair  Stoltze   replied  that  there  had   not  been  a                                                                    
governor's  bill  to  analyze;   there  had  been  a  budget                                                                    
submission.                                                                                                                     
                                                                                                                                
Representative  Gara referred  to the  discussion about  the                                                                    
governor's plan  to put $343  million into TRS and  the plan                                                                    
in  HB 278  to put  $157 million  into TRS.  He thought  the                                                                    
governor's only  plan had been  the $3 billion  budget plan.                                                                    
He wondered  where the governor's  plan had been  related to                                                                    
the $343 million into TRS.                                                                                                      
                                                                                                                                
Mr. Barnhill replied that the  governor's plan was as he had                                                                    
described earlier in the meeting.  The governor had proposed                                                                    
a $3  billion payment  to PERS/TRS  and to  appropriate $500                                                                    
million annually ($157  million to PERS and  $343 million to                                                                    
TRS) from FY 16 to FY 36.                                                                                                       
                                                                                                                                
Representative  Gara  wondered  whether  the  PERS  and  TRS                                                                    
sections in  the bill would impact  the BSA in any  way. Mr.                                                                    
Barnhill  clarified that  the bill  contained no  provisions                                                                    
related to  PERS. He replied  that the change in  the capped                                                                    
rate from  12.56 percent  to 32.56  percent also  included a                                                                    
change to the AADM formula  that was intended to provide the                                                                    
difference in  funding (it was  intended to hold  the school                                                                    
districts harmless).                                                                                                            
                                                                                                                                
Representative  Gara  asked  for the  section  where  school                                                                    
districts would be  made whole by the  funding. Mr. Barnhill                                                                    
directed attention to Section 16,  page 12, lines 17 through                                                                    
25. Co-Chair  Stoltze noted that the  administration was not                                                                    
a proponent of the approach,  which he believed added to the                                                                    
veracity of Mr. Barnhill's statement.                                                                                           
                                                                                                                                
Representative Gara looked at page  11. He stated that there                                                                    
was  currently a  public  education fund  for  the types  of                                                                    
things the  BSA was  used for. He  pointed to  language that                                                                    
would  allow the  fund  to be  used  for BSA-type  classroom                                                                    
items,  transportation,   or  TRS  (without   specifying  an                                                                    
amount).  He wondered  what would  prevent the  funding from                                                                    
going entirely to TRS so that less money went to schools.                                                                       
                                                                                                                                
3:31:32 PM                                                                                                                    
                                                                                                                                
Mr. Barnhill  pointed to Sections  15 and 21. The  change to                                                                    
the  AADM   was  intended  to  provide   funding  to  school                                                                    
districts to make  up the 20 percent  difference (from 12.56                                                                    
percent   to   32.56    percent).   When   the   legislature                                                                    
appropriated the money  it would go to  the Public Education                                                                    
Fund. Under  Section 21 the DEED  commissioner could provide                                                                    
it directly  to DOR  for investment.  As he  understood, the                                                                    
intent  was  to  protect  the time-value  of  the  funds  by                                                                    
investing them  at the beginning  of the year (as  they were                                                                    
currently)  rather   than  sending   the  funds   to  school                                                                    
districts  and  bringing  the  money  to  DOR  in  10  equal                                                                    
installments over the course of a year.                                                                                         
                                                                                                                                
Representative  Gara  did  not  see  anything  limiting  the                                                                    
amount  of money  that  could  be taken  out  of the  public                                                                    
education fund for TRS. Mr.  Barnhill did not believe it was                                                                    
the  intent  to take  any  more  funding  out above  the  20                                                                    
percent.                                                                                                                        
                                                                                                                                
Representative Gara understood the  intention, but wanted to                                                                    
ensure the bill clarified the intent.                                                                                           
                                                                                                                                
Co-Chair Stoltze stated that  the bill recognized retirement                                                                    
as  a  cost   driver  of  education.  He   stated  that  the                                                                    
legislature had  intent and  a track  record of  holding the                                                                    
school  districts  harmless.  He  believed  the  items  were                                                                    
indisputable.                                                                                                                   
                                                                                                                                
Mr. Barnhill believed the comments were fair.                                                                                   
                                                                                                                                
Co-Chair  Stoltze discussed  that the  committee would  hear                                                                    
from Mr. Teal.                                                                                                                  
                                                                                                                                
Representative  Munoz stated  that through  the formula  the                                                                    
legislation included  reimbursement for the  additional cost                                                                    
to districts,  but did not  address additional costs  to the                                                                    
university,  DEED, the  Southeast Regional  Resource Center,                                                                    
or  the Special  Education Services  Agency. She  believed a                                                                    
better  understanding of  the total  costs  was needed.  She                                                                    
stated  that  the costs  would  clearly  have an  impact  on                                                                    
future  operating budgets.  She stated  that in  the current                                                                    
year  the  university had  taken  an  $11 million  cut;  she                                                                    
surmised that the  bill would mean an  additional $5 million                                                                    
to $7 million  cut. She was concerned that  under the bill's                                                                    
plan the  payoff would increase  from 20 years to  40 years,                                                                    
but at  the end  of the  40 years the  trust funds  would be                                                                    
gone and  the obligation would remain.  The benefit payments                                                                    
were estimated to  be around $3.5 billion for  PERS and TRS.                                                                    
She  wondered  how  to  contemplate  covering  future  costs                                                                    
without the benefit of the trust funds.                                                                                         
                                                                                                                                
Mr. Bader replied  that when the trust  funds were exhausted                                                                    
the  contribution  rate  (based  on payrolls  at  the  time)                                                                    
should  be  sufficient to  cover  benefits.  The trust  fund                                                                    
would essentially go to zero,  but the employer contribution                                                                    
rate should  be enough to  cover benefits. He added  that if                                                                    
the contributions were not sufficient,  the state would have                                                                    
missed an  opportunity to  have earnings  of the  trust fund                                                                    
pay the  benefits. The crux  of the governor's  proposal was                                                                    
that benefits would  be paid out of earnings  and not solely                                                                    
from employer  contributions after the initial  deposit into                                                                    
the fund.                                                                                                                       
                                                                                                                                
3:36:31 PM                                                                                                                    
                                                                                                                                
Representative Munoz  asked what the trust  funds had earned                                                                    
in  the past  year. Mr.  Bader  replied that  the funds  had                                                                    
earned 18.7 percent in the past calendar year.                                                                                  
                                                                                                                                
Representative Munoz  asked about  the dollar amount  of the                                                                    
earnings.  Mr.   Bader  responded  that  he   would  need  a                                                                    
calculator to  provide the dollar  amount. He  detailed that                                                                    
the  earnings  were  substantially   higher  than  what  was                                                                    
anticipated in the ARMB earnings assumption.                                                                                    
                                                                                                                                
Co-Chair Stoltze  asked about the fund's  historic earnings.                                                                    
Mr. Bader  answered that historic  earnings depended  on the                                                                    
specific time period.  He detailed that returns  for the TRS                                                                    
fund over  20 years  were about 7.9  percent. Returns  for a                                                                    
period  of 3  years  were  much higher  than  the 8  percent                                                                    
earnings  assumption.  Whereas, returns  were  significantly                                                                    
lower  in 5-year  period that  included 2008.  He elaborated                                                                    
that  the administration  believed  the governor's  proposal                                                                    
that  would put  money into  the trust  fund for  investment                                                                    
over  a long  period of  time was  preferable way  to obtain                                                                    
earnings  due  to  volatility  that  existed  in  investment                                                                    
returns. He explained that investing  the money on an annual                                                                    
basis  (instead of  over the  long-term) ran  the risk  of a                                                                    
significant market decline.                                                                                                     
                                                                                                                                
Representative Munoz  wondered what the approach  did to the                                                                    
state's  creditworthiness  and  how   it  would  impact  the                                                                    
state's ability to seek financing for a gasline.                                                                                
                                                                                                                                
Commissioner Rodell  believed the plan before  the committee                                                                    
would raise flags with ratings  agencies. She noted that the                                                                    
agencies may  just flag  the change  in a  report initially.                                                                    
She  believed it  would cause  credit  concerns because  the                                                                    
change would be  viewed as a backing away  from a commitment                                                                    
made by  the state; therefore,  there was concern  about how                                                                    
the change  would impact  the state's  ratings in  the long-                                                                    
term.  She opined  that  agencies would  take  some time  to                                                                    
react because they would watch  to ensure that the issue was                                                                    
on-going  as opposed  to something  that  may be  corrected.                                                                    
Placing items  in statute  led to  a more  immediate concern                                                                    
from ratings  agencies. She relayed that  DOR had envisioned                                                                    
that the  state was  taking care  of current  liabilities so                                                                    
that  in 2018  the  state  would be  in  the best  financial                                                                    
position  possible (to  make the  most flexible  and lowest-                                                                    
cost  decisions)  when  it looked  for  a  final  investment                                                                    
decision  on the  gasline. She  was  concerned that  actions                                                                    
considered under  the bill would  tie the state's  hands and                                                                    
would eliminate  its flexibility  to make the  best decision                                                                    
for  the  gasline and  other  decisions  due to  a  deferred                                                                    
liability.                                                                                                                      
                                                                                                                                
3:41:05 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  requested that  DOR  enable  Mr. Teal  on                                                                    
behalf of the House and Senate  to make inquiries of some of                                                                    
the state's bond rating agencies.                                                                                               
                                                                                                                                
Commissioner   Rodell  replied   that  DOR   could  set   up                                                                    
conversations with  ratings agencies. She offered  to invite                                                                    
state  analysts  as  well.  She  provided  the  caveat  that                                                                    
ratings agencies were operating  under a stricter regulatory                                                                    
environment  and would  not  necessarily  respond to  direct                                                                    
proposals. For  example, it was unlikely  the agencies would                                                                    
provide  an answer  if they  were asked  whether they  would                                                                    
downgrade  the state's  rating if  it took  certain actions.                                                                    
However, it  was possible to  obtain good  information about                                                                    
how   the  agencies   viewed  liabilities,   pensions,  debt                                                                    
capacity, and other.                                                                                                            
                                                                                                                                
Co-Chair Stoltze asked Commissioner  Rodell to work with the                                                                    
committee  on the  issue. Commissioner  Rodell was  happy to                                                                    
facilitate any conversations.                                                                                                   
                                                                                                                                
Co-Chair Stoltze  asked for verification that  DOR would not                                                                    
be  an  impediment  to  the  agencies'  ability  to  provide                                                                    
information.    Commissioner   Rodell    replied   in    the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Representative Munoz referred to  a prior conversation where                                                                    
Commissioner  Rodell had  discussed  her  experience in  the                                                                    
Commonwealth  of  Virginia,  Chicago,  and  possibly  Puerto                                                                    
Rico. She  recalled the commissioner's comment  that some of                                                                    
the jurisdictions  had implemented  a system similar  to the                                                                    
one under  consideration by the committee.  She believed the                                                                    
commissioner   had  stated   that   the   system  had   been                                                                    
unsuccessful. She asked for further detail.                                                                                     
                                                                                                                                
Commissioner Rodell  replied that she did  not work directly                                                                    
with Puerto  Rico, but was  familiar with the  case history.                                                                    
She  detailed  that  Puerto  Rico  had  closed  its  defined                                                                    
benefit system in 2000; it  had subsequently run into budget                                                                    
problems  and  began  to  rely  on the  trust  fund  to  pay                                                                    
benefits.  At  present  the  trust   funds  for  the  public                                                                    
employees were  4.5 percent funded.  For a variety  of other                                                                    
reasons Puerto Rico  had to borrow funds on  a regular basis                                                                    
to manage  its own cash  liquidity needs; its  credit rating                                                                    
was  currently at  BB (junk-grade).  The  rating meant  that                                                                    
bond  funds were  no  longer allowed  to  buy Puerto  Rico's                                                                    
debt. She detailed  that Puerto Rico had  recently sold debt                                                                    
the same  week as  the State  of Alaska.  Alaska had  sold a                                                                    
one-year note at 0.001 percent;  Puerto Rico had to sell 30-                                                                    
year debt with a term maturity  for one year of cash at 8.78                                                                    
percent.                                                                                                                        
                                                                                                                                
3:46:01 PM                                                                                                                    
                                                                                                                                
Commissioner   Rodell  provided   a   second  example   that                                                                    
pertained  to  the  State of  Illinois.  She  detailed  that                                                                    
Illinois  had an  open benefit  plan; its  issue related  to                                                                    
over extension  and not funding  pensions as a  mechanism to                                                                    
fund  other  state  priorities.  Due  to  the  actions,  the                                                                    
state's  unfunded liability  had  grown considerably,  which                                                                    
impacted  the  state's ability  to  borrow;  its rating  was                                                                    
currently an  A- (speculative grade). The  state was looking                                                                    
at  cutting benefits.  She believed  Alaska  had been  given                                                                    
significant  credit for  continuing  to  fund pensions  even                                                                    
under revenue volatility.                                                                                                       
                                                                                                                                
Representative Munoz  asked about  an actuarial  analysis of                                                                    
the  proposal. Commissioner  Rodell replied  that Buck,  the                                                                    
ARMB actuary was in the  process reviewing the proposal. She                                                                    
hoped to receive the results shortly.                                                                                           
                                                                                                                                
Co-Chair  Stoltze  asked about  the  size  of Puerto  Rico's                                                                    
permanent   fund,  earnings   reserve,  and   statutory  and                                                                    
constitutional budget reserve  accounts. Commissioner Rodell                                                                    
replied that Puerto Rico's accounts were at zero.                                                                               
                                                                                                                                
Co-Chair Stoltze  surmised that the  lack of funds  could be                                                                    
part   of  the   reason   for  Puerto   Rico's  BB   rating.                                                                    
Commissioner Rodell agreed.                                                                                                     
                                                                                                                                
3:48:04 PM                                                                                                                    
                                                                                                                                
Representative Costello  spoke to  her understanding  of the                                                                    
administration's  proposed plan  that would  have the  state                                                                    
make larger  contributions of  $343 million  per year  for a                                                                    
shorter  period of  time. She  believed the  plan meant  the                                                                    
state would coast on earnings.  She stated that under HB 278                                                                    
the  state  would make  a  larger  upfront contribution  and                                                                    
contributions  would pay  for the  liability. She  asked how                                                                    
coasting on  earnings was  more reliable  and secure  than a                                                                    
statutory   commitment    to   pay   the    liability   with                                                                    
contributions.                                                                                                                  
                                                                                                                                
Commissioner Rodell  replied that she was  more confident in                                                                    
putting money in the trust fund  and providing it with 10 to                                                                    
20 years to earn the  needed money and to deposit additional                                                                    
contributions.  She relayed  that  the  strategy equated  to                                                                    
forward funding. She  had more confidence in  the ability of                                                                    
the  trust funds  to  have  and earn  the  money under  ARMB                                                                    
management. She  was concerned  that under  the contribution                                                                    
scenario the  needed contributions could compete  with other                                                                    
funding  items. She  believed a  system where  earnings were                                                                    
generated   removed  the   subject  from   future  political                                                                    
dialogue about what to fund.                                                                                                    
                                                                                                                                
3:49:57 PM                                                                                                                    
                                                                                                                                
Representative  Costello  observed that  the  administration                                                                    
had not  commented on the  interest earning  reserve account                                                                    
established   in  the   bill.   She  wondered   if  it   was                                                                    
insignificant from the administration's perspective.                                                                            
                                                                                                                                
Mr.   Bader   replied   that    $100   million   was   never                                                                    
insignificant,  but  compared  to  the scale  of  the  total                                                                    
proposal it did  not match the importance  of the philosophy                                                                    
behind the other  component in the bill.  He elaborated that                                                                    
the bill contemplated  that the state would  invest money in                                                                    
a way  that would  generate the required  rate of  return to                                                                    
fund   the  system.   The  funds   could  not   be  invested                                                                    
identically to the trust funds  because the department would                                                                    
have to consider that the  legislature may call on the funds                                                                    
at  some  point.  He  believed   the  legislature  would  be                                                                    
disappointed  with the  department if  there were  long-term                                                                    
illiquid  funds that  were inaccessible.  He added  that the                                                                    
funds  could be  invested to  earn  close to  what the  ARMB                                                                    
believed the other funds would make.                                                                                            
                                                                                                                                
Mr.  Boucher  added  that when  neutral  parties  looked  at                                                                    
things like  the reserve  fund that they  did not  allow the                                                                    
accrued  interest  in   the  models  due  to   the  risk  of                                                                    
reappropriation for  other purposes.  He stated that  if the                                                                    
primary goal was to address  the unfunded liability it would                                                                    
be  no  different  than  having  the  $100  million  in  the                                                                    
constitutional  budget  reserve   fund  from  the  actuary's                                                                    
perspective. He  agreed that  the money  would earn,  but it                                                                    
would be  difficult to convince  any actuary that  the money                                                                    
or the  earnings were dedicated towards  paying the unfunded                                                                    
liability.                                                                                                                      
                                                                                                                                
Representative  Costello stated  that  under the  governor's                                                                    
proposal the $343 million would  be offered as a budget item                                                                    
that would compete against all  other demands on the general                                                                    
fund  including  the  operating and  capital  budgets,  cash                                                                    
calls  for the  gasline, education,  and Medicaid;  whereas,                                                                    
the HB  278 plan would  include the funding in  statute. She                                                                    
asked  for verification  that  Commissioner  Rodell saw  the                                                                    
plan under HB 278 as less certain option.                                                                                       
                                                                                                                                
Commissioner Rodell  replied in the affirmative.  She stated                                                                    
that the legislature had a  history of funding the items and                                                                    
recognizing  the   importance  of  the  requests.   She  was                                                                    
concerned that if  the legislature wrote it  in statute that                                                                    
"it might have needed to be something different."                                                                               
                                                                                                                                
Mr.  Boucher understood  that in  the  current proposal  the                                                                    
amount dedicated  to TRS (outside of  the education formula)                                                                    
would  be   approximately  $156   million  and   would  grow                                                                    
annually.  He  surmised  it  would   be  a  built-in  annual                                                                    
increment until  at least 2050.  He believed the  item would                                                                    
grow to over $600 million.  Although the governor's plan was                                                                    
more  expensive upfront,  it would  remain  at $343  million                                                                    
annually.  From a  budgetary standpoint,  the administration                                                                    
believed  that  a  more   predictable,  stable,  and  higher                                                                    
payment that would ultimately fully  fund the trust fund was                                                                    
a better alternative.                                                                                                           
                                                                                                                                
3:54:57 PM                                                                                                                    
                                                                                                                                
Representative Costello saw the  two proposals being couched                                                                    
as philosophical  in nature.  She believed  the conversation                                                                    
was  about whether  the  legislative  or the  administrative                                                                    
branches  provided  bond  raters with  more  assurance.  She                                                                    
looked at the challenge in  light of other challenges facing                                                                    
the state. She understood  that under ideal circumstances it                                                                    
would  be best  to  pay  down more  upfront  to shorten  the                                                                    
payoff  period;  however,  the  state  had  other  budgetary                                                                    
concerns  as   well,  which  made  the   pay-as-you-go  plan                                                                    
appealing instead of a plan  that was based on earnings. She                                                                    
believed that  both plans had  risk. She opined that  it was                                                                    
not  possible to  address a  $12 billion  unfunded liability                                                                    
without  risk. She  asked for  verification  that under  the                                                                    
governor's plan it was  conceivable that additional payments                                                                    
may be necessary even after the scheduled end-date.                                                                             
                                                                                                                                
Mr. Boucher  replied that  there was the  risk. He  spoke to                                                                    
the  difference between  the  two  approaches. He  discussed                                                                    
that a  world with the trust  fund was similar to  a current                                                                    
situation  with  the  constitutional  budget  reserve  fund;                                                                    
there were  ongoing bills that  were paid and  incoming cash                                                                    
flow.  A trust  fund to  pay benefits  provided a  much less                                                                    
risky situation  than relying  on employers  to consistently                                                                    
make  payrolls  and  contributions  to  pay  benefits  on  a                                                                    
monthly basis.                                                                                                                  
                                                                                                                                
3:57:26 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze  asked Mr. Teal  to address  the committee.                                                                    
He noted that items  highlighted by Representative Munoz had                                                                    
come from an LFD document. He  noted that the items would be                                                                    
included in a fiscal note.                                                                                                      
                                                                                                                                
Representative Munoz requested to  hear from the university.                                                                    
She believed  the amount  in the [LFD]  memo was  lower than                                                                    
the university's estimate.                                                                                                      
                                                                                                                                
Co-Chair   Stoltze  asked   for   verification  that   Chris                                                                    
Christensen   III,  Associate   Vice  President   for  State                                                                    
Relations, University  of Alaska  was present on  a lobbying                                                                    
function.                                                                                                                       
                                                                                                                                
CHRIS CHRISTENSEN  III, ASSOCIATE  VICE PRESIDENT  FOR STATE                                                                    
RELATIONS,  UNIVERSITY  OF  ALASKA,   replied  that  he  was                                                                    
representing the university. He  relayed that the bill would                                                                    
have  an  impact  of  approximately   $7.2  million  on  the                                                                    
university  (the  amount  was  higher than  the  $5  million                                                                    
mentioned earlier  in the meeting). He  highlighted that the                                                                    
FY  15  operating  budget  had   received  a  $15.9  million                                                                    
unallocated  reduction; the  budgets  covered  less than  40                                                                    
percent of  fixed cost increases  the university  would have                                                                    
in the  coming year  for items  such as  pay raises  and the                                                                    
opening  of four  new buildings.  He  communicated that  the                                                                    
university would  need to reallocate $28  million internally                                                                    
through  cuts  to  operations,   existing  programs,  or  by                                                                    
raising new revenue.  He commented on the large  size of the                                                                    
figure. He stated that under  the bill's proposal if TRS was                                                                    
unfunded  it would  create a  hole of  $35 million  that the                                                                    
university would have to begin  covering on July 1, 2014. He                                                                    
did  not  know   where  the  funds  would   come  from.  The                                                                    
university  had  created  a  defined  contribution  Optional                                                                    
Retirement  Plan  (ORP)  in  1990; 16  years  prior  to  the                                                                    
creation  of  other  state defined  contribution  plans.  He                                                                    
detailed  that  the  plan  was  optional  but  many  faculty                                                                    
members had  opted in over  the years because they  wanted a                                                                    
portable plan they  could take elsewhere, which  was why the                                                                    
impact would only  be $7.2 million. He  communicated that it                                                                    
had  always cost  the university  and state  less money  for                                                                    
university employees  to be  enrolled in  ORP as  opposed to                                                                    
TRS or PERS;  the state had saved  approximately $90 million                                                                    
since  the  plan's  creation.  He  detailed  that  24  years                                                                    
earlier the Board of Regents  had decided to start getting a                                                                    
handle on the university's  retirement costs. The university                                                                    
requested funding for the rate increase if adopted.                                                                             
                                                                                                                                
Co-Chair  Stoltze requested  that  the  university keep  the                                                                    
legislature involved  in the conversation in  the future. He                                                                    
appreciated having the information on the record.                                                                               
                                                                                                                                
4:01:33 PM                                                                                                                    
                                                                                                                                
Mr.  Teal spoke  to the  fiscal note.  He communicated  that                                                                    
there were  two issues with the  university's funding level.                                                                    
There  was no  intention  for  there to  be  a reduction  to                                                                    
university  funds.  The  bill's  intention  was  to  include                                                                    
fiscal notes that  restored funding to the  four agencies in                                                                    
addition  to school  districts. He  stated that  the formula                                                                    
addressed school  districts; there  were four  agencies that                                                                    
could  not be  affected by  the formula.  He relayed  that a                                                                    
couple of ways  to get funds to the  entities included using                                                                    
current  statutes to  pay off  their share  of the  unfunded                                                                    
liability and  to leave  the rate the  same. He  stated that                                                                    
there were  ways to get  the entities  money to pay  just as                                                                    
was done for  school districts. He did not  know what option                                                                    
the committee  may choose, but  it was  not a new  issue. He                                                                    
knew that the university was preparing the fiscal note.                                                                         
                                                                                                                                
4:03:45 PM                                                                                                                    
                                                                                                                                
Mr. Teal  recognized that  Mr. Bader,  Mr. Boucher,  and Mr.                                                                    
Barnhill  all   understood  the  issue.  He   addressed  the                                                                    
testimony  that the  governor's  plan  secured promises  and                                                                    
that the trust  fund would not be  exhausted prematurely. He                                                                    
believed the statements  implied that the plan  under HB 278                                                                    
did not  secure retirement. He understood  existing concerns                                                                    
about the  retirement plan. He reassured  the committee that                                                                    
any plan  under consideration  was intended to  pay benefits                                                                    
when due. He stressed that  the benefits were not in danger.                                                                    
The   plans   used   the   same   numbers   with   different                                                                    
philosophies.  He believed  the  governor's  plan was  solid                                                                    
because  in  intended  to  pay benefits  when  due,  but  no                                                                    
legislation  had been  proposed  to change  the schedule  of                                                                    
payments.   He  paraphrased   earlier  testimony   that  the                                                                    
administration did not  want the plan in  statute and wanted                                                                    
to have  flexibility. He  believed flexibility  implied that                                                                    
the administration wanted  the ability to pay  less than the                                                                    
$343 million or the statutory  rate. He relayed that without                                                                    
a change in  statute the state would owe  the full statutory                                                                    
rate. He  detailed that paying  $343 million did  not comply                                                                    
with statutes.  He explained that under  the governor's plan                                                                    
the  legislature could  always choose  to reduce  the amount                                                                    
paid; if the  state needed liquidity for a  gasline or other                                                                    
projects it could  choose to reduce payments  to statute. He                                                                    
believed there was protection built  in under the plan in HB                                                                    
278; the rate  was set in statute. He  believed the mortgage                                                                    
analogy  used   by  the   committee  was   appropriate;  the                                                                    
legislature could choose to pay more.                                                                                           
                                                                                                                                
Co-Chair Stoltze asked  Mr. Teal to respond  to the proposal                                                                    
in the CS.                                                                                                                      
                                                                                                                                
Mr. Teal  replied that the  flexibility of having  the rates                                                                    
in  statute was  that state  assistance was  relatively low.                                                                    
The legislature  could choose to pay  higher annual payments                                                                    
than the  amount the bill  would set in statute.  He relayed                                                                    
that payments  did go up  with payroll, but $600  million in                                                                    
2050 was  less than  the $150 million  to $160  million that                                                                    
would be paid  at present; the cost rose  with inflation. He                                                                    
elaborated that  the numbers in  real terms would  remain at                                                                    
the  $150   million  to  $160  million   level.  The  second                                                                    
protection  was a  cash infusion  plus  contributions on  an                                                                    
annual basis that should pay  benefits until the state could                                                                    
move  to  a  pay-as-you-go   plan.  Additionally,  the  bill                                                                    
created a reserve fund as  another backup; if the trust fund                                                                    
was insufficient  money would be transferred  from reserves.                                                                    
He confirmed  that from an  actuarial perspective  the trust                                                                    
fund would not be counted as  part of the system reserve. He                                                                    
asked  how  annual  appropriations  could be  counted  as  a                                                                    
given. He did not believe  there was any guarantee that $343                                                                    
million would be paid annually under the governor's plan.                                                                       
                                                                                                                                
4:09:46 PM                                                                                                                    
                                                                                                                                
Mr. Teal  opined that  using reserve  was not  essential; it                                                                    
was a helpful buffer, but  was not the underlying issue. The                                                                    
bill included a  provision that made the state  the payer of                                                                    
last  resort.  He  disputed the  administration's  testimony                                                                    
that the trust  fund could run out of  money prematurely. He                                                                    
elaborated  that  the  fund  would run  out  of  money  when                                                                    
benefits  could be  paid strictly  with  contributions at  a                                                                    
rate of 32 percent or lower.  The state would become a payer                                                                    
of  last resort  if  anything happened;  there were  several                                                                    
layers of protection built in  for the trust fund and future                                                                    
benefits. He disagreed  with the administration's comparison                                                                    
of the bill's plan to  an interest-only loan. He stated that                                                                    
unfunded liability  made sense in a  big-balance approach to                                                                    
the system, which meant having  a large trust fund and using                                                                    
earnings  to make  the payments.  He opined  that there  was                                                                    
nothing wrong with the approach.                                                                                                
                                                                                                                                
Mr.  Teal addressed  relying  on  contributions rather  than                                                                    
earnings.  He stated  that the  big balance  related to  the                                                                    
timing  of contribution  payments; it  was possible  to make                                                                    
payments at  present, to build  up a balance and  then coast                                                                    
or to pay them later when  benefits were due. Under the pay-                                                                    
go  plan there  was  not  a balance,  which  resulted in  an                                                                    
unfunded  liability. He  contended  that it  was a  nonsense                                                                    
number because  there was  a plan to  pay the  benefits with                                                                    
contributions, not  with the trust fund.  He reiterated that                                                                    
the  plans  constituted  a  difference  in  philosophy;  one                                                                    
coasted   on   earnings   and   the   other   assumed   that                                                                    
contributions were more reliable.  He stated that the latter                                                                    
was  more  stable and  predictable.  He  relayed that  there                                                                    
would  be a  balance of  $10 billion  or more  if the  state                                                                    
relied on  earnings; reliance on  an 8 percent  return meant                                                                    
that the state could pay benefits  as long as it earned $800                                                                    
million  per  year. He  stressed  that  if there  were  zero                                                                    
earnings in one year the  state would be $800 million short,                                                                    
which  meant   a  contribution  from  the   state  would  be                                                                    
required.  He questioned  where the  money would  come from.                                                                    
The numbers  in the  plans were  very similar  because costs                                                                    
were  very similar.  He reiterated  that  one plan  required                                                                    
significant  money  upfront  and  coasting  versus  what  he                                                                    
characterized  as   the  more  affordable  route   of  lower                                                                    
contributions.  He  did  not   believe  there  was  a  great                                                                    
difference  between the  plans.  He relayed  that the  plans                                                                    
became identical  if the legislature chose  to allocate $343                                                                    
million  annually   instead  of  the  required   amount.  He                                                                    
questioned  how  bond rating  agencies  would  react if  the                                                                    
state fell off its schedule.                                                                                                    
                                                                                                                                
Co-Chair Stoltze  hoped the committee  would get  to discuss                                                                    
the issue with  bond raters. Mr. Teal hoped to  have the DOR                                                                    
commissioner  involved  in  a  conversation  with  the  bond                                                                    
rater. Co-Chair Stoltze replied that it was the intention.                                                                      
                                                                                                                                
Mr.  Teal  concluded  that both  plans  under  consideration                                                                    
would  work. The  choice pertained  to which  plan was  more                                                                    
affordable.                                                                                                                     
                                                                                                                                
4:14:53 PM                                                                                                                    
                                                                                                                                
Representative  Gara referred  to PERS.  He did  not believe                                                                    
that   either  plan   under   consideration   was  bad.   He                                                                    
communicated that  he had  supported a  plan similar  to the                                                                    
governor's in the  past. He opined that one  of the benefits                                                                    
of infusing an extra $2  billion cash infusion (plus another                                                                    
$1  billion  that  was  already  owed)  the  state's  annual                                                                    
payments  would be  significantly lower.  The cash  infusion                                                                    
would  bring annual  payments down  to $500  million for  20                                                                    
years.  He  believed the  plan  would  leave money  to  fund                                                                    
infrastructure,  children's  services, and  other  important                                                                    
items. He surmised that if  nothing was done the annual ARMB                                                                    
recommended  payments  would be  well  over  $1 billion  per                                                                    
year, which  meant less money  for other items.  His concern                                                                    
with the  bill's plan was that  it began with a  low payment                                                                    
of  roughly   $100  million  for  TRS;   however,  the  PERS                                                                    
component  would  also  need  to be  paid.  He  referred  to                                                                    
earlier testimony that  in the future the  TRS portion would                                                                    
exceed $600 million per year and  payments would go on for a                                                                    
longer period.  He noted that  in the mortgage  world people                                                                    
preferred  to  take  out shorter  mortgages  if  they  could                                                                    
afford it.  He surmised that  the governor's plan  left more                                                                    
money on  the table  to address the  state's needs  over the                                                                    
long-term.                                                                                                                      
                                                                                                                                
Mr. Teal chose not to address  the PERS issue because it was                                                                    
not included in the bill.  He confirmed that the bill called                                                                    
for  TRS  payments that  escalated  over  time; however,  he                                                                    
stated that  the payments in  real dollars did  not escalate                                                                    
by much. He added that  they would increase due to increases                                                                    
in payroll  and inflation.  He stated  that in  real dollars                                                                    
$600 million 40  years out was worth less  than $160 million                                                                    
in current dollars. He argued  that the governor's plan took                                                                    
$343 million  off the table  every year; whereas  the bill's                                                                    
plan left  $200 million  more per year  on the  table (which                                                                    
would decline over time). He  explained that the whole point                                                                    
was that  people chose a  lower term mortgage if  they could                                                                    
afford  it. He  agreed that  the cheapest  way to  solve the                                                                    
problem  was to  pay the  entire unfunded  liability off  at                                                                    
present.  He remarked  that people  chose 30-year  mortgages                                                                    
not because  they were cheaper,  but because they  were more                                                                    
affordable. That was  the call the legislature  had to make.                                                                    
He noted  that the issue  centered on how much  money should                                                                    
be left on the table for other things.                                                                                          
                                                                                                                                
4:20:07 PM                                                                                                                    
                                                                                                                                
Representative Gara did not believe  Mr. Teal was wrong, but                                                                    
he preferred the governor's approach.  He would also be more                                                                    
comfortable  if   the  governor's   plan  was   included  in                                                                    
legislation.  He  contended  that the  $500  million  annual                                                                    
payment under  the governor's approach  would be  reduced in                                                                    
real dollars  just like the  $600 million in the  future was                                                                    
less  in real  dollars.  The problem  was  that the  state's                                                                    
revenue  was not  increasing with  inflation. He  noted that                                                                    
state revenue was declining and  wondered how it played into                                                                    
the issue.                                                                                                                      
                                                                                                                                
Mr. Teal replied he had been  instructed to find a plan that                                                                    
worked. He  noted that any  model that did not  pay benefits                                                                    
was  a nonstarter.  He communicated  that the  situation was                                                                    
different  than   that  in  Illinois  or   Puerto  Rico.  He                                                                    
emphasized  that  the  payment   plan  needed  to  work.  He                                                                    
detailed that  the needed return  under the pay-go  plan was                                                                    
as low  as 4.8 percent.  He believed the  earnings estimates                                                                    
under  the   bill's  plan  were  actually   understated.  He                                                                    
observed that  if earnings  exceeded expectations  the state                                                                    
could contribute  less later  on. He did  not want  to begin                                                                    
with  an assumption  that the  state  would earn  optimistic                                                                    
returns.  He had  been instructed  to keep  a cash  infusion                                                                    
below $3 billion due to  concern about maintaining reserves.                                                                    
Third, benefits were  fixed; the governor's plan  had to pay                                                                    
the same  benefits that any other  plan had to pay.  Given a                                                                    
down payment  and the fact that  the debt would be  paid off                                                                    
the  question became  how  much was  required  on an  annual                                                                    
basis  and  for how  long,  which  was the  only  difference                                                                    
between the plans.  The concern was not so  much about which                                                                    
plan  was cheapest  in the  long-term, but  about which  was                                                                    
cheapest for  the next 10  to 15 years  when there may  be a                                                                    
cash call  for a gasline  and other  items. The plan  in the                                                                    
bill  reduced  annual costs  at  the  consequence of  higher                                                                    
payments later on.                                                                                                              
                                                                                                                                
4:24:19 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  asked  if   members  had  any  additional                                                                    
questions about the TRS component of the bill.                                                                                  
                                                                                                                                
Representative  Holmes directed  attention to  pages 13  and                                                                    
14. She observed that the  section changed the percentage of                                                                    
a  district's basic  need used  to calculate  required local                                                                    
contributions from  45 to 40  percent. She asked  for detail                                                                    
on the proposed change.                                                                                                         
                                                                                                                                
Mr. Teal answered that as  TRS payments were run through the                                                                    
foundation formula  the funds were  added to basic  need. He                                                                    
detailed  that  basic  need  would  be  increased  in  every                                                                    
district and was  totaled by $150 million or  more per year.                                                                    
In most communities the required  local effort was unrelated                                                                    
to  BSA and  basic need  in any  way; the  payment was  2.65                                                                    
mills  multiplied by  a property.  He detailed  that in  the                                                                    
North Slope  Borough, Skagway, and  Valdez due  to expensive                                                                    
nonresidential property  it became  a huge amount  of money;                                                                    
therefore, the  amount was  limited to  45 percent  of basic                                                                    
need.  He elaborated  that if  basic  need was  going to  be                                                                    
increased by the  large sum; 45 percent of  basic need would                                                                    
be  increased.  He  explained   that  the  school  districts                                                                    
received their  share of  the $150 million,  but it  did not                                                                    
add to  the total they  had to spend. Reducing  the required                                                                    
local  contribution from  45 percent  to 40  percent allowed                                                                    
school districts to escape paying tax on the TRS portion.                                                                       
                                                                                                                                
Representative  Holmes  asked   for  verification  that  the                                                                    
provision was  not intended  to change  the amount  of local                                                                    
contribution  once  the  funds  were  funneled  through  the                                                                    
formula.   The   intent   was   to   hold   required   local                                                                    
contributions steady.  Mr. Teal replied in  the affirmative.                                                                    
He added that it only applied to three communities.                                                                             
                                                                                                                                
Representative  Wilson  surmised  that the  districts  would                                                                    
look  at the  2.65 mills  or the  40 percent;  whichever was                                                                    
more. She wondered  if the 2.65 mills could  be lowered. Mr.                                                                    
Teal replied in  the affirmative. He elaborated  that if the                                                                    
communities  paid 2.65  mills they  would pay  significantly                                                                    
more   money;  the   40  percent   would  cap   their  local                                                                    
contribution. He confirmed that the  2.65 mill rate could be                                                                    
changed; it would  not change the amount  received by school                                                                    
districts,  but would  shift costs  from local  to state  or                                                                    
vice  versa.  He  expounded  that   if  the  mill  rate  was                                                                    
increased  costs  would  be  shifted  from  state  to  local                                                                    
government; whereas,  a reduced  rate meant the  state would                                                                    
pay more.                                                                                                                       
                                                                                                                                
Representative Wilson  wondered whether  the change  from 45                                                                    
percent  to 40  percent  would alter  the  amount the  three                                                                    
districts received from  the state. Mr. Teal  replied in the                                                                    
negative. He  detailed that it  was a rough attempt  to keep                                                                    
the district's  current contributions  the same.  Basic need                                                                    
was increased;  the districts would receive  the same amount                                                                    
of money,  only the share  would differ. He  elaborated that                                                                    
40 percent  of basic need plus  TRS was equal to  45 percent                                                                    
of what the districts currently received.                                                                                       
                                                                                                                                
Representative  Wilson  surmised  that  the  adjustment  was                                                                    
necessary  because the  TRS component  had  been added.  Mr.                                                                    
Teal replied in the affirmative.                                                                                                
                                                                                                                                
4:30:08 PM                                                                                                                    
                                                                                                                                
Representative Gara  spoke to the  amounts of money  the BSA                                                                    
raised for various districts under  the bill. He referred to                                                                    
an $8 million  deficit in the Fairbanks  school district. He                                                                    
asked  for verification  that the  bill raised  roughly $6.5                                                                    
million [for Fairbanks]. Mr. Teal did not know.                                                                                 
                                                                                                                                
Representative Gara  referred to projections that  under the                                                                    
bill the BSA increase would  result in an extra $6.5 million                                                                    
for  Fairbanks.  He  wondered  if  LFD  had  looked  at  the                                                                    
figures.  Mr.  Teal  replied  that he  had  only  looked  at                                                                    
totals.                                                                                                                         
                                                                                                                                
Co-Chair   Stoltze   interjected  that   concise   documents                                                                    
including  the   information  would   be  provided   to  the                                                                    
committee.                                                                                                                      
                                                                                                                                
Representative Gara  asked for  verification that  the money                                                                    
projected  to  be  raised  assumed   that  the  $25  million                                                                    
included in the  operating budget (and distributed  as if it                                                                    
was BSA funding) remained.                                                                                                      
                                                                                                                                
Mr. Teal replied in the  affirmative. He noted that the bill                                                                    
was seen as  "what does this bill do." He  did not know what                                                                    
the legislature would  decide on the money  in the operating                                                                    
budget.                                                                                                                         
                                                                                                                                
Co-Chair Stoltze  surmised that  Mr. Teal assumed  the money                                                                    
was new. Mr.  Teal replied that his assumption  was that the                                                                    
bill  raised the  BSA by  $185.  He elaborated  that if  the                                                                    
operating  budget  conference   committee  took  the  Senate                                                                    
position that  included $100 million  outside the  BSA there                                                                    
would be substantial money  designated for school districts.                                                                    
However, if  the decision  was made  that the  $185 increase                                                                    
allowed other funding  to be reduced to zero,  it would back                                                                    
off $25 million of the increase.                                                                                                
                                                                                                                                
Representative Gara asked  if the $25 million  was no longer                                                                    
in  the budget  the BSA  increase  under the  bill would  be                                                                    
roughly $100  less than projections.  Mr. Teal  replied that                                                                    
the BSA  increase in the bill  was $185. He relayed  that if                                                                    
the  operating  budget outside  of  the  formula money  were                                                                    
removed the effective increase would fall to $85.                                                                               
                                                                                                                                
Co-Chair  Stoltze   remarked  that  irrespective   of  other                                                                    
actions there would be $185  in the BSA; with the additional                                                                    
increment the figure  would increase to $243.  The BSA would                                                                    
increase by $301 in two years' time.                                                                                            
                                                                                                                                
4:34:24 PM                                                                                                                    
                                                                                                                                
Mr. Teal replied in the affirmative.                                                                                            
                                                                                                                                
Co-Chair  Stoltze stated  that  the increases  would all  be                                                                    
permanent, but  were "not subject  to the vagaries  of year-                                                                    
to-year appropriations."                                                                                                        
                                                                                                                                
Representative Gara  noted that no one  legislator spoke for                                                                    
another  legislator;  however,  he   had  concerns  about  a                                                                    
statement  he  had  heard  that the  $25  million  would  be                                                                    
removed. He  surmised that  if the  $25 million  was removed                                                                    
the BSA increase in the bill  would be $85. Mr. Teal replied                                                                    
in the affirmative.                                                                                                             
                                                                                                                                
Co-Chair Stoltze asked members  to provide amendments to his                                                                    
office by 5:00 p.m. that day.                                                                                                   
                                                                                                                                
HB  278  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
4:38:21 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 4:38 p.m.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB 278 email messages.pdf HFIN 4/1/2014 1:30:00 PM
HB 278