Legislature(2017 - 2018)HOUSE FINANCE 519

01/20/2017 01:30 PM FINANCE

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Audio Topic
01:32:11 PM Start
01:32:11 PM Fy 18 Governor's Budget and Fiscal Summary: Legislative Finance Division
02:37:22 PM Fy 18 Governor's Fy 18 Budget Overview
03:36:26 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ FY18 Budget & Fiscal Summary by David Teal, TELECONFERENCED
Director, Legislative Finance Division
Overview: FY18 Budget by Pat Pitney, Director,
OMB, Office of the Governor
                  HOUSE FINANCE COMMITTEE                                                                                       
                      January 20, 2017                                                                                          
                         1:32 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:32:11 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Seaton called the House Finance Committee meeting                                                                      
to order at 1:32 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Dan Ortiz                                                                                                        
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Lance Pruitt                                                                                                     
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
David Teal, Director, Legislative Finance Division; Pat                                                                         
Pitney, Director, Office of Management and Budget, Office                                                                       
of the Governor.                                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
FY 18 GOVERNOR'S FY 18 BUDGET OVERVIEW: OFFICE OF                                                                               
MANAGEMENT AND BUDGET                                                                                                           
                                                                                                                                
FY 18 GOVERNOR'S BUDGET AND FISCAL SUMMARY: LEGISLATIVE                                                                         
FINANCE DIVISION                                                                                                                
                                                                                                                                
1:32:11 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton discussed the meeting agenda.                                                                                   
                                                                                                                                
^FY  18 GOVERNOR'S  BUDGET  AND FISCAL  SUMMARY:  LEGISLATIVE                                                                 
FINANCE DIVISION                                                                                                              
                                                                                                                                
1:33:30 PM                                                                                                                    
                                                                                                                                
DAVID   TEAL,   DIRECTOR,   LEGISLATIVE   FINANCE   DIVISION,                                                                   
provided a  PowerPoint presentation  titled "Overview  of the                                                                   
Governor's  FY18  Budget  Request"  dated  January  20,  2017                                                                   
(copy on  file). He  intended to point  out what  he believed                                                                   
was the  most important  issue  in the budget;  he could  not                                                                   
say  why  it  had  been  done,  but  he  could  explain  what                                                                   
happened.    He   encouraged    questions   throughout    the                                                                   
presentation.                                                                                                                   
                                                                                                                                
1:35:45 PM                                                                                                                    
                                                                                                                                
Mr. Teal  believed that  looking only  at the fiscal  summary                                                                   
did  not provide  a  perspective on  where  the numbers  came                                                                   
from and how they  compared to the past. He spoke  to a chart                                                                   
(Figure  1)  on  slide  2  showing   total  agency  operating                                                                   
budgets,  statewide items  and  capital budget  (unrestricted                                                                   
general  funds  (UGF)  only).   The  black  line  represented                                                                   
revenue  and the  bars  showed  expenditures.  He noted  that                                                                   
expenditures had  trended up from  2007 through 2014  and had                                                                   
fallen rapidly  through 2017. He  highlighted that FY  18 was                                                                   
indistinguishably  close to  FY  17. The  current budget  was                                                                   
not significantly  different than  the prior year  budget. He                                                                   
addressed  that  the  current   year  represented  the  sixth                                                                   
consecutive  year of  deficits,  where expenditures  exceeded                                                                   
revenue. The deficits  were not the small-type  that appeared                                                                   
if revenue  came in  under projections  and  the state  was a                                                                   
bit light  on its ability to  fully fund the budget.  As with                                                                   
the  past  five  budget  cycles,   there  was  a  very  large                                                                   
structural  deficit.  He did  not  intend to  address  fiscal                                                                   
plans or look beyond FY 18 in the current overview.                                                                             
                                                                                                                                
Vice-Chair Gara  pointed to  slide 2 and  observed FY  17 and                                                                   
the governor's  proposed FY 18  budget was flat.  He remarked                                                                   
it  was  much  lower than  the  budget  the  legislature  had                                                                   
passed the prior  year. He detailed that the  legislature had                                                                   
passed  a  budget the  previous  year  and the  governor  had                                                                   
engaged  in substantial  vetoes because  the legislature  had                                                                   
passed no  fiscal plan.  He mentioned  the budget related  to                                                                   
education, pupil  transportation, and  foster care.  He asked                                                                   
about  the  difference  between  the  budget  passed  by  the                                                                   
legislature and the governor's vetoes.                                                                                          
                                                                                                                                
                                                                                                                                
Mr. Teal  estimated the vetoes  added up to over  $1 billion.                                                                   
He detailed  that a large portion  was due to  Permanent Fund                                                                   
Dividend cut of  $700 million. Oil taxes were  vetoed down to                                                                   
the statutory minimum  of $30 million. He agreed  that if the                                                                   
vetoes  were restored  to the  FY 17 budget  the chart  would                                                                   
show a larger decline between FY 17 and FY 18.                                                                                  
                                                                                                                                
1:40:03 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  relayed  the  state  continued  to  struggle  with                                                                   
deficits  despite  the  spending reductions.  He  pointed  to                                                                   
peak  spending  of $9.4  billion,  which  had dropped  to  $5                                                                   
billion in  FY 17 and  FY 18. Many  people were thinking  the                                                                   
budget  was  $4.3  billion;  the  current  chart  used  a  $5                                                                   
billion  budget  because  it  included  the  governor's  $700                                                                   
million request for dividends.                                                                                                  
                                                                                                                                
1:41:01 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  stated that  most  Alaskans  knew oil  prices  had                                                                   
fallen and were  aware of the revenue decline.  However, some                                                                   
people remembered  when oil prices  had been $9 per  barrel -                                                                   
those  individuals reasoned  that if  the state  had made  it                                                                   
under such low  oil prices that it should be able  to make it                                                                   
under  the  current  prices.  When  individuals  heard  about                                                                   
large deficits,  it was understandable  why people  may think                                                                   
the   deficits    were   due    to   constantly    increasing                                                                   
expenditures.  Even though  people heard  about General  Fund                                                                   
expenditures  dropping,  they   believed  total  expenditures                                                                   
must still  be going  up and they  did not really  understand                                                                   
the  difference.  He moved  to  a  chart  on slide  4  titled                                                                   
"Figure  2:   Total  Operating   and  Capital  Budgets,"   in                                                                   
response  to the  notion that  total  spending had  increased                                                                   
even  as  UGF  went  down.  The  blue  portion  of  the  bars                                                                   
reflected UGF.  Designated general  funds (DGF),  other state                                                                   
funds, and  federal funds  were shown stacked  on top  of the                                                                   
UGF portion  of the  bars, which had  been a pretty  constant                                                                   
$600 million.  He continued that  adding $600 million  to the                                                                   
bars resulted in  the same pattern - increasing  expenditures                                                                   
and then reducing.  He pointed to  an oddity in FY  15 due to                                                                   
a  $3  billion expenditure  from  the  Constitutional  Budget                                                                   
Reserve (CBR) for the [unfunded] retirement liability.                                                                          
                                                                                                                                
                                                                                                                                
Mr. Teal  continued  that there  had been a  question in  the                                                                   
Senate  about much  of the cost  of government  going to  pay                                                                   
for positions.                                                                                                                  
                                                                                                                                
1:43:15 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  moved to  slide  5  and addressed  total  budgeted                                                                   
positions.  He detailed  that budgeted  positions had  fallen                                                                   
from about 25,000  to 22,000 (a reduction of  2,400 positions                                                                   
and approximately  10 percent).  He returned  to Figure  1 on                                                                   
slide 2  and pointed out that  at the same  time expenditures                                                                   
fell  by  about   $5.1  billion.  He  believed   the  easiest                                                                   
explanation  of how the  present differed  from the  past was                                                                   
that if the  state had a $5  billion budget back in  the days                                                                   
of  higher revenue  (2007  through  2013), on  average  there                                                                   
would have  been a  $3 billion  surplus. Whereas, at  present                                                                   
there was a $3  billion deficit in FY 17 and  $2.7 billion in                                                                   
FY  18.  The  revenue decline  was  the  component  that  had                                                                   
really hit  the state hard. He  did not believe  "crisis" was                                                                   
too strong  a word to use  when describing the  situation. He                                                                   
addressed that  the state had  built massive reserves  during                                                                   
years  of  revenue  surpluses.  As  long  as  the  state  had                                                                   
reserves to  fill deficits, there  really was not  a problem.                                                                   
He continued  that even  the second year  of low  oil prices,                                                                   
arguably  someone  may  say using  reserves  would  be  fine.                                                                   
Slide 6  showed what  six consecutive  years of deficits  had                                                                   
done to the  state's reserve balances. The CBR  and Statutory                                                                   
Budget Reserve (SBR)  had been up to over $16  billion [in FY                                                                   
13];  deficits had  chipped  away at  the  savings rapidly  -                                                                   
they would only  have about $2 billion left at  the end of FY                                                                   
18, which was  insufficient to get through FY  19 if business                                                                   
as  usual continued.  He elaborated  that  business as  usual                                                                   
meant  sticking  to  existing  revenue  sources,  maintaining                                                                   
expenditures  at the same  level, and using  the CBR  to plug                                                                   
the deficits.                                                                                                                   
                                                                                                                                
1:45:56 PM                                                                                                                    
                                                                                                                                
Mr. Teal noted  that spending in Figure 1 (slide  2) included                                                                   
spending from  the [Permanent Fund] Earnings  Reserve Account                                                                   
(ERA) for  inflation proofing  and dividends. He  stated that                                                                   
the  detail was  handled differently  in  a presentation  the                                                                   
committee  would  receive by  the  Office of  Management  and                                                                   
Budget (OMB).  He continued  that most of  the charts  in the                                                                   
OMB  presentation excluded  dividends. He  continued that  it                                                                   
was  a  way  to  make  the  proposed   budget  comparable  to                                                                   
historic  budgets.  The Legislative  Finance  Division  (LFD)                                                                   
opted to include  the dividend because it was  an overview of                                                                   
what the governor  did; LFD included dividends  and inflation                                                                   
proofing in all  historic budgets as well.  He explained that                                                                   
there had been  a major reclassification of  expenditures due                                                                   
to the way the  governor presented the budget.  He pointed to                                                                   
a  black  dashed  line  representing   total  revenue,  which                                                                   
showed that  under the governor's  proposed budget  there was                                                                   
a  payout from  the  ERA based  on  percent  of market  value                                                                   
(POMV). He detailed  that the amount coming  into the General                                                                   
Fund  from  the ERA  was  the  POMV payout;  the  amount  was                                                                   
roughly  $2.5  billion  per  year.   When  $700  million  was                                                                   
subtracted for  dividends there was  a net of $1.8  billion -                                                                   
the pre-POMV revenue  had moved up to match  the post-POMV on                                                                   
the slide. He  pointed to the solid black line  (UGF revenue)                                                                   
below the dashed line (total revenue)  and explained that the                                                                   
fiscal gap  that had been $2.7  billion was reduced  to under                                                                   
$1 billion  after the  transfer from  the ERA. He  considered                                                                   
the  transfer to  be  the issue  in the  budget.  He did  not                                                                   
disagree  with  any  of  OMB's  fiscal  summary  numbers.  He                                                                   
concluded  that  the  differences  between the  LFD  and  OMB                                                                   
presentations   of  the   governor's   proposed  budget   was                                                                   
insignificant.                                                                                                                  
                                                                                                                                
1:48:56 PM                                                                                                                    
                                                                                                                                
Mr.  Teal continued  to  address  the chart  on  slide 2.  He                                                                   
noted that  the FY 17  and FY 18  budgets were very  close in                                                                   
terms  of money  spent. The  significant point  was that  the                                                                   
ERA  transfer  was  classified  as  UGF.  To  illustrate  his                                                                   
point, he addressed  how ERA appropriations had  been treated                                                                   
in the past (slide  7). The slide showed a portion  of the FY                                                                   
16  fiscal   summary,  which   showed  that  DGF   (including                                                                   
dividends)  totaled $941  million. Below  the sum,  dividends                                                                   
were listed  as $1.4  billion.  He stated that  it should  be                                                                   
obvious that  the $1.4  billion was not  included in  the DFG                                                                   
total of  $941 million; it  was not included  in any  roll up                                                                   
because since  the inception of  the Permanent Fund,  the ERA                                                                   
had  been   effectively  "off-budget."  He   elaborated  that                                                                   
expenditures and  revenue from the ERA had  not been counted.                                                                   
He stated  it was  a major  switch in  policy  or in the  way                                                                   
things were  classified -  it had  a very significant  impact                                                                   
on the way people  may view dividends. He continued  that the                                                                   
ERA was now  classified as UGF, dividends were  UGF payments,                                                                   
which was a  more technical way of indicating  that under the                                                                   
governor's proposed  budget, dividends would compete  with K-                                                                   
12 and all  other UGF expenditures. Dividends  were no longer                                                                   
"off-budget."                                                                                                                   
Mr. Teal  returned  to Figure  1 on slide  2, which  included                                                                   
dividends as general  funds. The chart included  $2.5 billion                                                                   
flowing   in,  less  the   $700  million   flowing  out   for                                                                   
dividends;  dividends  were  included  in  the  bars  and  in                                                                   
revenue on  the chart.  He explained that  FY 17  looked much                                                                   
the same because  the governor's operating budget  included a                                                                   
supplemental  FY  17  appropriation   from  the  ERA  to  the                                                                   
General Fund  for the  POMV payout. He  remarked that  it was                                                                   
not  obvious  in  the  bill  that  the  appropriation  was  a                                                                   
supplemental  request. The  governor  could request  anything                                                                   
he wanted,  but it did not  necessarily mean  the legislature                                                                   
had  to  fund  it.  The  Legislative   Finance  Division  was                                                                   
presenting the budget as submitted by the governor.                                                                             
                                                                                                                                
1:52:38 PM                                                                                                                    
                                                                                                                                
Mr.  Teal continued  to address  slide 2.  He explained  that                                                                   
the  ERA  off-budget  status had  been  a  reporting  problem                                                                   
since the  inception of  the Permanent  Fund. The courts  had                                                                   
clearly stated that  the ERA was available  for appropriation                                                                   
for any  purpose at any time,  which would normally  make the                                                                   
funds  UGF.  He  emphasized  he was  referring  to  the  full                                                                   
balance of  the ERA, which  could be  spent at any  time. The                                                                   
discussion was  about how  to get the  distortion out  of the                                                                   
reporting.  He  referred  to  FY  18  and  its  $2.7  billion                                                                   
deficit. He  detailed that  if the desire  was to  report the                                                                   
ERA  balance as  spendable  UGF, it  would  mean $10  billion                                                                   
could be  added to the state's  revenue - suddenly  the state                                                                   
would go  from having a  deficit to having revenue  exceeding                                                                   
$10  billion and  expenditures  of  $5 billion,  which  would                                                                   
mean a  budget surplus  in FY 18.  He reasoned that  thinking                                                                   
the  state  had  a surplus  could  impact  attitudes  in  the                                                                   
building  about  spending.  On   the  contrary,  being  in  a                                                                   
deficit  situation  probably  made people  think  more  about                                                                   
expenditures because  there was not an available  surplus. He                                                                   
explained the format  predated his time with  the Legislative                                                                   
Finance  Division.   The  significant  implication   was  the                                                                   
reclassification  to UGF should  have been  done a  long time                                                                   
ago. The  ERA had  designated spending  purposes in  statute,                                                                   
which allowed  the fund to  be classified as  designated. The                                                                   
statutory designations  were for inflation and  dividends. He                                                                   
relayed  that  the  proposed  budget  included  no  inflation                                                                   
proofing and  the appropriation  for dividends came  from the                                                                   
General Fund.  Therefore, neither of the  designated purposes                                                                   
of the ERA were  being met; in fact, the only  purpose of the                                                                   
ERA was  to transfer money  to the UGF.  Given that  fact, he                                                                   
asked how  the money  could be  classified as anything  other                                                                   
than UGF.                                                                                                                       
                                                                                                                                
1:56:21 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  turned  to  the fiscal  summary  on  slide  9.  He                                                                   
reviewed the four  fund classifications in reduced  amount of                                                                   
discretion.  He specified  that  UGF could  be  spent by  the                                                                   
legislature  for   any  purpose,  while  DGF   had  a  stated                                                                   
statutory purpose  (using the funds for that  purpose was not                                                                   
required  -  the  funding  was not  dedicated,  it  was  only                                                                   
designated). Other  funds were often dedicated  by the Alaska                                                                   
Constitution or  by federal rules  (e.g. Fish and  Game funds                                                                   
with  limited  purposes).  Federal  funds  often  had  strict                                                                   
limitations.    Expenditure   categories   included    agency                                                                   
appropriations,     statewide     appropriations,     capital                                                                   
appropriations, and the ERA appropriations.                                                                                     
                                                                                                                                
Mr. Teal  pointed to agency operations  in the second  to the                                                                   
last  column, third  row down  -  the proposed  FY 18  budget                                                                   
reduced  FY  17  agency  operations  by  $121.5  million.  He                                                                   
turned to  slide 10 and addressed  Figure 6: Partial  View of                                                                   
the Fiscal Summary.  He believed OMB would provide  detail on                                                                   
the  differences between  the  FY  17 and  FY  18 budget.  He                                                                   
intended  to address the  management plan  budget, which  was                                                                   
the budget  the Executive Branch  had started FY 17  with. He                                                                   
explained  that LFD  had removed  some items  from its  FY 18                                                                   
budget  explanation  as  directed   by  the  legislature.  He                                                                   
furthered that the  State of Alaska budget was  not like some                                                                   
states or  governments that  used pure incremental  budgeting                                                                   
where once  something was  in the budget  it remained  in the                                                                   
base.  One-time items  had been  added to  Alaska's budget  -                                                                   
things that caused  increments to be removed  from the budget                                                                   
the following  year. In  that vein,  the governor started  FY                                                                   
18  with an  easy removal  of $63  million. Similarly,  there                                                                   
were  other temporary  increments  (e.g.  three to  five-year                                                                   
increments),  which  were  small  and  not  enough  to  worry                                                                   
about.                                                                                                                          
                                                                                                                                
Mr.  Teal  continued  that  the   $12.4  million  maintenance                                                                   
increments  had  been  put in  the  language  during  special                                                                   
session  the previous  year as  part of  the negotiations  to                                                                   
secure the supermajority  vote to gain access to  the CBR the                                                                   
previous session.  The proposed  budget included  some salary                                                                   
increases;  it did not  really mean  contractual salaries  as                                                                   
much as  it had in  the past  - contractual salary  increases                                                                   
were near  zero because  of the  renegotiated contracts.  The                                                                   
increment  pertained  primarily  to  health  cost  increases.                                                                   
There  was  also  funding  related   to  language  and  carry                                                                   
forwards that was minimal.                                                                                                      
                                                                                                                                
2:00:44 PM                                                                                                                    
                                                                                                                                
Mr. Teal addressed  the FY 18 adjusted base on  slide 10. The                                                                   
governor  had  begun FY  18  with  an automatic  $30  million                                                                   
reduction  given by  the legislature;  therefore, the  budget                                                                   
started at  about $3.8 billion.  In addition to  the built-in                                                                   
reductions,  the governor  had  submitted  decrements of  $38                                                                   
million.  Decrements   were  offset   with  $31   million  of                                                                   
increments.   The  largest  adjustment   pertained   to  fund                                                                   
changes [$83.9  million]. He detailed  that most of  the fund                                                                   
change  increment  was $70  million  for  motor fuel  -  many                                                                   
people believed it  was not fair because motor  fuel had been                                                                   
UGF revenue  and expenditures in  the past. The  governor had                                                                   
moved the funds  from UGF to DGF. He elaborated  that because                                                                   
the  change  decreased  DGF spending,  it  was  possible  for                                                                   
someone  to say that  the governor's  distorted UGF  spending                                                                   
by $70  million. He continued  that it was not  a significant                                                                   
problem  -  the  motor  fuel taxes  could  have  and  perhaps                                                                   
should have  been designated  the entire  time. The  statutes                                                                   
specified the taxes  were to be used for  highway maintenance                                                                   
at present.  He elaborated  that  new law was  not needed  to                                                                   
move  the funds  -  it was  merely  something  that had  been                                                                   
missed   when  making   UGF  and   DGF  classifications.   He                                                                   
explained  that moving  the  funds did  not  really cost  any                                                                   
money; the entire  proceeds of the motor fuel  tax was spent,                                                                   
and it  helped the deficit because  there was $35  million in                                                                   
additional  revenue.  He continued  that  it did  not  really                                                                   
matter  whether the  item was  UGF or DGF.  Some fund  source                                                                   
changes were more advantageous.                                                                                                 
                                                                                                                                
Mr. Teal  pointed out  that the  Other spending category  had                                                                   
increased  (slide 10). Much  of the  increase related  to the                                                                   
Department of  Fish and Game.  He reminded committee  members                                                                   
that  [the cost  of] hunting  and fishing  licenses had  been                                                                   
increased by  the legislature,  meaning that more  money went                                                                   
into the Fish  and Game Fund (an "Other" dedicated  fund). As                                                                   
Fish  and  Game   Fund  expenditures  increased,   UGF  could                                                                   
decrease. There  was another reduction of $30  [million] from                                                                   
the base,  resulting in  the same $121  million shown  in the                                                                   
fiscal summary  pertaining to  agency operations.  He relayed                                                                   
it was  defined as the  day-to-day operations  of government.                                                                   
The fiscal  summary did  not show  that pupil  transportation                                                                   
was not  fully funded. He detailed  that there was  no change                                                                   
from  FY  17  to FY  18  because  the  governor  vetoed  $6.3                                                                   
million from pupil  transportation the previous  year and did                                                                   
not  restore or  replace  the  money in  the  proposed FY  18                                                                   
budget.                                                                                                                         
                                                                                                                                
2:04:24 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  looked at  slide 10. He  spoke to  the prior                                                                   
year's UGF spending  that was artificially lower  because the                                                                   
legislature had  used substantial  DGF to fund  normal things                                                                   
- things that  would have normally been funded  with UGF. The                                                                   
situation  meant  it was  much  harder  to cut  the  previous                                                                   
year's UGF budget  because it was artificially  low. He asked                                                                   
about  the kinds of  DGF spent  the previous  year that  made                                                                   
UGF spend  look lower. He  believed the items  included Power                                                                   
Cost Equalization (PCE) and higher education.                                                                                   
                                                                                                                                
Mr. Teal  suspected the governor  would agree it was  hard to                                                                   
cut from general  funds given the circumstances  of using DGF                                                                   
the previous  year; however,  the governor  continued  to use                                                                   
some of  those DGF sources in  the proposed budget.  He noted                                                                   
that it had not  occurred as much in agency  operations as it                                                                   
had in  other areas. He  turned to Figure  7 on slide  11. He                                                                   
highlighted  that debt  service had a  $27 million  increase.                                                                   
He  noted  that the  increase  in  the  debt service  may  be                                                                   
recognized  if one  recalled the  governor's  veto of  school                                                                   
debt  reimbursement the  previous  year. The  proposed FY  18                                                                   
budget   would   fully  fund   school   debt   reimbursement.                                                                   
Community  assistance  had  zero  funding in  FY  17  because                                                                   
Figure  7 only  included  UGF.  He explained  that  community                                                                   
assistance had  been funded the  previous year with  DGF (the                                                                   
PCE Fund).  Theoretically, PCE  investments were  supposed to                                                                   
fund  community  assistance  in  the  current  year  as  well                                                                   
(assuming there were  earnings in excess of  PCE's needs). He                                                                   
noted  the program  subsidized  rural  energy.  The hope  was                                                                   
that the approximately  $950 million PCE Fund  would spin off                                                                   
enough  earnings  to  fund  the  PCE  program  and  community                                                                   
assistance. He  elaborated that  PCE consumed $35  million to                                                                   
$40 million  in the  current year.  The state  had hoped  for                                                                   
earnings in excess  of that, but the earnings  had been about                                                                   
$9 million,  which was  not sufficient to  fund even  the PCE                                                                   
needs. There was  no money in the FY 18 budget  for community                                                                   
assistance. He explained  the $30 million flowing  out of the                                                                   
program  annually would  flow out  in FY 18,  but unless  the                                                                   
$30 million  was replaced  in FY 18,  the fund balance  would                                                                   
drop  and the  payout in  FY 19  would drop.  Instead of  $30                                                                   
million, the  amount would  be reduced to  $20 million  in FY                                                                   
19  to  be  spread  amongst  communities   (unless  community                                                                   
assistance was funded).                                                                                                         
                                                                                                                                
2:09:11 PM                                                                                                                    
                                                                                                                                
Mr. Teal  spoke to FY 17  oil and gas production  tax credits                                                                   
of  $30 million  UGF  on slide  11. There  had  been a  large                                                                   
governor's  veto  the  previous  year  down  to  the  minimum                                                                   
statutorily  required funding.  With higher  oil prices,  the                                                                   
minimum statutory  requirement was $74 million in  FY 18. The                                                                   
governor  was  stuck with  a  $44  million increase  in  that                                                                   
area.  He   continued  that   because  the  governor   vetoed                                                                   
municipal  debt service there  had also  been a reduction  in                                                                   
the Regional  Educational Attendance Area (REAA)  school fund                                                                   
because the  two programs were  tied together. With  the full                                                                   
funding of  municipal debt reimbursement,  the REAA  fund was                                                                   
also fully  funded (a $9 million  change in UGF).  Other fund                                                                   
capitalizations represented a smaller increment.                                                                                
                                                                                                                                
Mr.  Teal spoke  to retirement  costs and  referred to  Vice-                                                                   
Chair Gara's  comment that the  Higher Education  School Fund                                                                   
had  been used;  $90 million  had been  a big  use of  higher                                                                   
education  funds in  FY  17. The  numbers  from the  previous                                                                   
year  showed  that  in  FY 18  the  state's  requirement  for                                                                   
paying assistance  to school  districts, municipalities,  and                                                                   
the state  itself, would  fall by $90  million. The  idea had                                                                   
been to  take advantage  of the opportunity  by using  a one-                                                                   
time funding source,  meaning that the $90 million  would not                                                                   
have to  be replaced in  FY 18. The  scenario had  not played                                                                   
out as  desired; rates had fallen  by $30 million  instead of                                                                   
$90  million  -  there  was  still   $60  million  of  higher                                                                   
education  money   being  used  for  retirement   assistance.                                                                   
Higher  education  money  continued   to  be  used  in  other                                                                   
programs as  well -  he did not  believe the number  exceeded                                                                   
$12  million to  $15 million.  The  money was  still used  in                                                                   
agency operations,  primarily for programs in  the Department                                                                   
of  Education   and  Early   Development  (e.g.   Washington,                                                                   
Wyoming,  Alaska,   Montana,  and  Idaho   (WWAMI),  museums,                                                                   
mentoring, and other).  Judgements and claims were  down from                                                                   
the  previous  year   -  the  Moore  Settlement   related  to                                                                   
education funding.  Capital spending  was up by  $19 million,                                                                   
which was no surprise.                                                                                                          
                                                                                                                                
2:12:21 PM                                                                                                                    
                                                                                                                                
Representative Grenn  asked about the investment  strategy of                                                                   
the PCE  Fund. He wondered  why the balance  had been  so low                                                                   
in the past year and how it compared to years past.                                                                             
                                                                                                                                
Mr. Teal  responded that the  issue was not about  investment                                                                   
strategy.  He detailed  that the  at one time  the funds  had                                                                   
been  invested to  make a  7 percent  payout  (a fairly  high                                                                   
return) and the  returns had been achieved.  The returns were                                                                   
based on  FY 16  - the  calculation lagged  one year  to know                                                                   
how  much  money the  fund  had  instead  of trying  to  make                                                                   
predictions. He  continued that retirement funds  lost around                                                                   
0.04 percent  the in FY  16. He continued  that PCE  had been                                                                   
slightly  better, but  a  $9 million  return  on a  $900-plus                                                                   
million  fund was  not  very much.  He  did  not believe  the                                                                   
issue was as  much about investment strategy as  it was about                                                                   
a  bad  financial  that  had  impacted  the  Permanent  Fund,                                                                   
retirement funds,  and the PCE Fund; all had  done relatively                                                                   
poorly compared to most years.                                                                                                  
                                                                                                                                
Representative   Grenn   asked   for  verification   he   was                                                                   
referring to 2016. Mr. Teal responded in the affirmative.                                                                       
                                                                                                                                
Representative  Wilson referred  to the  motor fuel tax  that                                                                   
was supposed  to be designated  for highway maintenance.  She                                                                   
remarked that  the funds  also went  to public safety,  which                                                                   
was not related  to highway maintenance. She asked  if it did                                                                   
not  make  the  point  that  the  funds  could  be  used  for                                                                   
anything,  although   maybe  within  legislation   "it  might                                                                   
emphasize going somewhere."                                                                                                     
                                                                                                                                
Mr.  Teal replied  it did  make  that point.  His office  had                                                                   
spoken with the  Department of Public Safety  (DPS) about the                                                                   
issue.  The department  contended it  was a  fine use of  the                                                                   
funds  because,  for  example, the  department  responded  to                                                                   
accidents  on the Glenn  Highway. He  countered that  LFD did                                                                   
not  buy  the  argument.  He reasoned  the  service  was  not                                                                   
classified  as highway  maintenance  in  most people's  view.                                                                   
However,  it  emphasized  the  fact  that  designated  funds,                                                                   
regardless  of their designated  purpose,  could be spent  by                                                                   
the  legislature for  any purpose.  There was  an LFD  report                                                                   
his office could  run that showed all non-designated  uses of                                                                   
designated funds.                                                                                                               
                                                                                                                                
2:15:29 PM                                                                                                                    
                                                                                                                                
Representative  Wilson referred to  the governor's  desire to                                                                   
put  a significant  part of  the  ERA into  the General  Fund                                                                   
(including  the dividend).  She  asked about  the benefit  of                                                                   
all  the  different  funds,  when  they  could  be  used  for                                                                   
whatever  the legislature  wanted. She  surmised it would  be                                                                   
clearer for  investors if  the money was  all located  in one                                                                   
area to  have visibility of  the total savings.  She remarked                                                                   
that  expenditures on  PCE, higher  education, highways  were                                                                   
all  appropriated  within  the  General  Fund.  She  wondered                                                                   
about the benefit of having separate funds.                                                                                     
                                                                                                                                
Mr. Teal  believed the framers  of the [Alaska]  Constitution                                                                   
would  agree  completely  -  they  had  tried  to  avoid  the                                                                   
situation  by prohibiting  dedicated revenue.  The state  had                                                                   
veered very  far from that  original intent, while  remaining                                                                   
within the  constitutional requirements. He  underscored that                                                                   
funds  were designated,  not dedicated.  If the  designations                                                                   
were followed,  there was  not a  large difference  between a                                                                   
dedication  and a  dedication, except  legal. The  designated                                                                   
funds   could  all   be  used   for   whatever  purpose   the                                                                   
legislature  chose.  He  questioned  why the  money  was  not                                                                   
counted as available  to pay any state obligation,  which was                                                                   
what investors had  said. He noted that the  revenue forecast                                                                   
included  discussion on  the point  -  Wall Street  indicated                                                                   
Alaska  did  not  have  as big  a  problem  as  it  indicated                                                                   
because  it  had much  more  revenue  available than  it  was                                                                   
reporting. For  that reason, the  ERA had been moved  to UGF.                                                                   
The issue  could be  taken another  step by  saying that  all                                                                   
the designated  funds were simply  fooling the  public, while                                                                   
others  would say  they really  did want  cigarette tax  used                                                                   
for  health  services   or  alcohol  tax  used   for  alcohol                                                                   
rehabilitation.  It  was simply  one  legislature  specifying                                                                   
that  a  particular  revenue  source should  be  used  for  a                                                                   
specific  purpose; however,  one legislature  could not  bind                                                                   
the hands of future legislatures.                                                                                               
                                                                                                                                
Representative  Wilson  surmised  that  the  various  revenue                                                                   
sources were all  invested differently than if  they were all                                                                   
commingled   where  a   portion   could   be  invested   more                                                                   
aggressively. She  thought it would be helpful  to know about                                                                   
all the  different funds  and their amounts  to get  a better                                                                   
understanding  of how well  the state's  money was  working -                                                                   
prior to  consider taking money  from the people.  She wanted                                                                   
the ability  to compare the funds'  returns to the  ERA, CBR,                                                                   
and SBR.                                                                                                                        
                                                                                                                                
2:19:53 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton believed  the  report was  available on  the                                                                   
LFD website.                                                                                                                    
                                                                                                                                
Representative  Wilson  responded  that  the report  did  not                                                                   
disclose how  the funds were  invested. She stated  that some                                                                   
of the  funds were  invested more  aggressively than  others.                                                                   
She believed it  had been pointed out with  PCE that required                                                                   
an  aggressive  investment  strategy  to hit  its  7  percent                                                                   
return  target. She  did not believe  the detail  was on  the                                                                   
website.                                                                                                                        
                                                                                                                                
Mr. Teal  agreed. He detailed that  page 2 of the  LFD fiscal                                                                   
summary  included  a  number  of  the  large  reserve  funds;                                                                   
however,  the Department  of Revenue's  (DOR) website  showed                                                                   
individual funds  with balances and returns. He  did not know                                                                   
how  many were  available,  but  the information  would  come                                                                   
from  DOR.   Additionally,  the   Permanent  Fund   published                                                                   
monthly  projections.  Information  about  the PCE  Fund  and                                                                   
others should be on the DOR site.                                                                                               
                                                                                                                                
2:21:41 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  agreed with Representative Wilson.  He spoke                                                                   
to the prior  session, which he believed was  extreme related                                                                   
to people  trying to  make UGF  expenditures look smaller  by                                                                   
spending a  substantial amount of  money from DGF.  He stated                                                                   
that many legislators  would be judged by what  they had done                                                                   
to the  UGF budget  compared to  the previous year;  however,                                                                   
the previous  year's UGF budget  looked much smaller  than it                                                                   
would  have  if  there  had  been   lower  DGF  spending.  He                                                                   
believed  it was  a  fake comparison.  He  wondered if  there                                                                   
should be  a category showing the  use of DGF to pay  for UGF                                                                   
spending.  He  asked  if  there   should  be  a  category  of                                                                   
combined  DGF and  UGF  spending.  He reasoned  it  reflected                                                                   
state  spending.  The  public  wanted  to  know  about  state                                                                   
spending and did not care about how it was named.                                                                               
                                                                                                                                
Mr. Teal answered  that the fiscal summary on  slide 9 showed                                                                   
the  information. The  slide did  not  provide a  comparison,                                                                   
but the  math could  be done if  desired. He elucidated  that                                                                   
DGF, other,  and federal  funds were  fairly consistent  from                                                                   
year-to-year. It  was not the  classification of  those funds                                                                   
that was inconsistent;  the inconsistency was the  use of the                                                                   
funds.  He  continued that  it  was  as Vice-Chair  Gara  had                                                                   
specified -  if the designated  funds (i.e. Higher  Education                                                                   
Fund)  were drained  by using  $100 million  to $150  million                                                                   
UGF  for non-designated  purposes,  the fund  would not  have                                                                   
the ability  to pay for  its intended purpose.  He elaborated                                                                   
that  if  the  Higher Education  Fund  was  used  beyond  the                                                                   
current year [for  other items], it would not  pay grants and                                                                   
scholarships.  One of the  problems was  that people  compare                                                                   
spending levels,  which he  did not  believe should  be done.                                                                   
He  specified that  spending  levels were  easily  distorted,                                                                   
and it was  much better to look  at the deficit. He  moved to                                                                   
Figure  7 on slide  11. It  was much  easier to  look at  the                                                                   
deficit.  For example,  the spending  level could  be cut  by                                                                   
$700  million   or  $800  million   at  present  -   all  the                                                                   
legislature  had   to  do  was  pass  a  law   that  incoming                                                                   
royalties were  put into the  Public Education Fund  and were                                                                   
to  be used  for  education. He  explained  that the  outcome                                                                   
would  be  reduced  UGF  spending by  $700  million  to  $800                                                                   
million;  the use  would  be  classified as  designated.  The                                                                   
action  would  also   reduce  the  revenue  stream   by  $700                                                                   
million; therefore,  the deficit  would not have  changed. He                                                                   
encouraged the  legislature to focus  on the deficit  and not                                                                   
on the spending level.                                                                                                          
                                                                                                                                
2:25:34 PM                                                                                                                    
                                                                                                                                
Mr. Teal  moved to Figure 8  on slide 12. The  capital budget                                                                   
was up  $19 million, which was  no surprise because  a number                                                                   
of one-time  fund sources  had been  used the previous  year.                                                                   
The proposed  capital budget  was the  bare minimum  required                                                                   
to get available  federal match -  there was not much  in the                                                                   
budget that  was just pure  state projects. The  total budget                                                                   
authorization  shown  on  the  slide  was  $4.3  billion.  He                                                                   
reminded committee  members that  in Figure  1 he had  talked                                                                   
about  the  $5  billion  budget.  In the  old  way  of  doing                                                                   
business,  expenditures  would have  been  specified as  $4.3                                                                   
billion  and  the  deficit was  $2.7  billion;  however,  the                                                                   
current budget added the ERA.                                                                                                   
                                                                                                                                
Mr. Teal  turned to  slide 13  to illustrate  his point  with                                                                   
Figure  9. The  figure  compared the  previous  way of  doing                                                                   
things  (base) [with  the  governor's request].  He  detailed                                                                   
that  the  base   method  excluded  the  POMV   payout  ($2.5                                                                   
billion)  from revenue  and  the additional  royalties  under                                                                   
the  Permanent  Fund  Protection Act  (PFPA).  He  elaborated                                                                   
that  it  referred  to  changing  the  flow  of  royalty  oil                                                                   
[revenue] to  the Permanent Fund  from the constitutional  25                                                                   
percent  plus  the  existing  statute's  25  percent  of  new                                                                   
production. The PFPA  would repeal the extra  25 percent from                                                                   
the fields, meaning  it would go to the General  Fund instead                                                                   
of  the Permanent  Fund.  He continued  to  address the  base                                                                   
method.  Spending would  be the  governor's proposed  budget,                                                                   
with dividends  classified  as DGF. There  were no  revisions                                                                   
to what  was considered  traditional revenue  sources  - base                                                                   
revenue  (primarily from  oil). The  total authorization  was                                                                   
$4.292  billion.  He  pointed  to the  $2.7  billion  deficit                                                                   
shown at the bottom of Figure 9.                                                                                                
                                                                                                                                
Mr.  Teal continued  to  review Figure  9  and addressed  the                                                                   
governor's  request   [in  comparison  to  the   base  method                                                                   
discussed above].  Revenue was slightly higher  - the Capital                                                                   
Income Fund  was added because it  was a part of the  ERA and                                                                   
was considered UGF  revenue under the governor's  request. He                                                                   
pointed  to the  POMV payout  and extra  revenue coming  from                                                                   
royalties  ($55  million) that  would  be diverted  from  the                                                                   
Permanent  Fund  to the  General  Fund. Revised  revenue  was                                                                   
approximately  $4.2  billion.  The  spending  level  was  the                                                                   
same, but dividends  were counted as UGF. The  Capital Income                                                                   
Fund   moved  from   other   classifications   to  UGF.   The                                                                   
governor's request  showed a  $5.1 billion authorization  and                                                                   
an $874  million deficit. The  method used in  the governor's                                                                   
proposed  budget  was  a  different way  of  looking  at  the                                                                   
budget. He  underscored that it  was not possible to  use the                                                                   
different  methods in  FY 17 and  FY 18  with an  expectation                                                                   
there  could be  a  comparison.  Even though  the  governor's                                                                   
budget included  the dividend  as part  of general  funds, to                                                                   
make things comparable  OMB had presented the  information by                                                                   
subtracting  dividends  from  the  various  expenditures.  He                                                                   
believed   OMB   would   address  the   method   during   its                                                                   
presentation  to the committee.  He hoped  OMB would  explain                                                                   
why it had used the particular method.                                                                                          
                                                                                                                                
2:30:04 PM                                                                                                                    
                                                                                                                                
Mr. Teal  turned to Figure 10  on slide 14. He  addressed the                                                                   
types of  holes in the budget.  The deficit was  $870 million                                                                   
to $900  million in  FY 18.  He explained  that if the  motor                                                                   
fuel  taxes were  not  reclassified, UGF  expenditures  would                                                                   
increase by  $70 million. He  underscored that the  money was                                                                   
being spent  at present,  but as DGF.  He stated that  if the                                                                   
legislature wanted  to fund community assistance  it may find                                                                   
other  fund  sources or  may  decide  to  pay with  UGF.  The                                                                   
legislature  may  decide  it  did  not  want  to  use  higher                                                                   
education  funds to pay  for retirement  assistance (UGF  was                                                                   
used  as  well).  The  proposed  budget  included  no  school                                                                   
construction or  major maintenance; there was no  $10 million                                                                   
or $25 million  for University deferred maintenance.  Oil tax                                                                   
credits were  currently $74 million  - the legislature  could                                                                   
choose  to fund  them at  $974 million.  The legislature  was                                                                   
not necessarily looking  at holes, because they  did not have                                                                   
to  be  filled,  but  they were  issues  that  needed  to  be                                                                   
addressed. If  the legislature  chose to address  the issues,                                                                   
it was  looking at a  deficit of roughly  $1 billion.  He did                                                                   
not  want  to get  into  how  the legislature  may  fill  the                                                                   
deficit; it pertained to a fiscal plan.                                                                                         
                                                                                                                                
2:32:20 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:37:22 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
^FY 18 GOVERNOR'S FY 18 BUDGET OVERVIEW                                                                                       
                                                                                                                                
2:37:22 PM                                                                                                                    
                                                                                                                                
PAT  PITNEY,  DIRECTOR,  OFFICE  OF  MANAGEMENT  AND  BUDGET,                                                                   
OFFICE OF  THE GOVERNOR,  introduced herself  and provided  a                                                                   
PowerPoint  presentation  titled   "FY2018  Budget  Overview:                                                                   
House  Finance Committee"  dated  January 20,  2017 (copy  on                                                                   
file).  She agreed  it  had been  helpful  to  have Mr.  Teal                                                                   
provide  the  LFD   overview  first.  She  agreed   with  the                                                                   
construct  of including  UGF in  total  to reduce  confusion.                                                                   
She turned  to slide 2 titled  "Alaska's Budget  in Household                                                                   
Terms."  She reasoned  it was  challenging to  get people  to                                                                   
understand the  large numbers and the presentation  attempted                                                                   
to boil the  information down to common household  terms. She                                                                   
reviewed the slide:                                                                                                             
                                                                                                                                
     Income has dropped more than 80%                                                                                           
        · Your annual income dropped from $80,000 to                                                                            
          $16,000                                                                                                               
     Spending has been reduced 44%                                                                                              
        · You have been able to reduce your rent or                                                                             
          mortgage, heat, food, every day travel, and                                                                           
          vacations. You stopped building your cabin,                                                                           
          stopped remodeling, and you'll keep your old car.                                                                     
     Expenses have been cut from $80,000 to $45,000                                                                             
     Savings has one year remaining                                                                                             
        · You had $130,000 in the bank, but now only                                                                            
          $25,000                                                                                                               
     Investment accounts have been growing steadily                                                                             
        · You have $500,000 in an IRA and you need to                                                                           
          decide whether to use it and how much you can                                                                         
          prudently use                                                                                                         
          An income/spending gap remains                                                                                        
                                                                                                                                
Ms.  Pitney elaborated  that the  state's investment  account                                                                   
had to last in perpetuity.                                                                                                      
                                                                                                                                
2:40:54 PM                                                                                                                    
                                                                                                                                
Ms.  Pitney turned  to  slide  3: "Governor  Walker's  FY2018                                                                   
Fiscal Plan":                                                                                                                   
                                                                                                                                
     To foster safer communities, resource development, and                                                                     
     economic security requires sustainable and balanced                                                                        
     budgets long term, and to that end the Governor's                                                                          
                                                                                                                                
     FY2018 budget is comprised of three necessary                                                                              
     elements:                                                                                                                  
                                                                                                                                
        1. Continue to reduce state spending                                                                                    
        2. Draw from Permanent Fund earnings to support                                                                         
          vital state services and protect the dividend                                                                         
        3. Generate more revenue                                                                                                
                                                                                                                                
Ms. Pitney expounded  that the Permanent Fund  Protection Act                                                                   
(PFPA)  had three  protections:  1) it  protected the  fund's                                                                   
value,  growing  with  inflation;  2)  the  Earnings  Reserve                                                                   
Account  (ERA) was  protected  to ensure  available  funding;                                                                   
and  3)  the dividend  payout  of  approximately  $1,000  per                                                                   
person was protected.  She spoke generating more  revenue and                                                                   
relayed the  administration was comfortable working  with the                                                                   
legislature  on  additional  broad-based   tax  to  fill  the                                                                   
budget gap.  The administration  believed that over  time oil                                                                   
would increase to  $60 per barrel on average;  therefore, the                                                                   
necessary additional  tax would  be between $600  million and                                                                   
$700 million (beyond what the governor's budget proposed).                                                                      
                                                                                                                                
Ms.  Pitney relayed  that the  pie  chart on  slide 4  titled                                                                   
"FY2018   Budget   by   All   Fund   Sources"   provided   an                                                                   
illustration of all  funds that came through  the state. One-                                                                   
third of the  state budget came from federal  funds (shown in                                                                   
blue). The  administration  had looked  for ways to  maximize                                                                   
the  federal   funds.  She  listed  Medicaid   expansion  and                                                                   
ensuring  the  state  met  matches   for  the  Department  of                                                                   
Transportation  and Public  Facilities  (DOT)  and water  and                                                                   
sewer  projects  as  examples.  Federal  funds  were  equally                                                                   
split  - one-third  came from  DOT  highway funds,  one-third                                                                   
came  from Medicaid,  and one-third  was  classified as  "all                                                                   
other"  (the University  comprised  a  large portion  of  the                                                                   
last  segment).  She  reiterated the  importance  of  federal                                                                   
funds  and  expressed  the  administration's  hope  that  the                                                                   
funds increased.  She explained the  concept was the  same as                                                                   
trying to keep  the military in the state.  Additionally, the                                                                   
budget   included  7   percent   Other   funds,  10   percent                                                                   
designated  general funds  (DGF),  7 percent  Permanent  Fund                                                                   
Dividend,  and 42  percent or  $4.3  billion in  unrestricted                                                                   
general  funds   (UGF).  Including  the  dividend,   the  UGF                                                                   
portion of the budget was $5 billion.                                                                                           
                                                                                                                                
2:44:21 PM                                                                                                                    
                                                                                                                                
Ms. Pitney continued  to slide 5 titled  "FY2018 Unrestricted                                                                   
General Fund  Spending Without Dividends: $4.3  Billion." She                                                                   
relayed  that she  preferred  Mr.  Teal's slide  showing  all                                                                   
funds  over time  (adjusted).  She addressed  major  spending                                                                   
categories in  FY 13, FY 15,  and FY 18. Categories  included                                                                   
agencies  without  K-12, K-12,  retirement  contribution  and                                                                   
debt, capital,  oil and gas  tax credits, and  dividends. She                                                                   
referred  to   the  retirement  contribution  and   debt  and                                                                   
explained  that  if  the legislature  had  not  deposited  $3                                                                   
billion  into  the retirement  account,  the  retirement  and                                                                   
debt expenditure  would remain near  the FY 13 level.  The $3                                                                   
billion  had  dramatically  reduced  the  ongoing  retirement                                                                   
liability  and  had  helped  significantly.  She  noted  that                                                                   
capital  spending had  been reduced  dramatically from  close                                                                   
to $2  billion  in FY 13  to just  over $100  million in  the                                                                   
proposed FY 18  budget. Tax credits were down  to $74 million                                                                   
and the dividend  was $695 million. She pointed  to the green                                                                   
bars that represented  FY 18 UGF spending and  explained that                                                                   
the various  categories represented options  where reductions                                                                   
or increases could be made to increase or decrease savings.                                                                     
                                                                                                                                
2:46:35 PM                                                                                                                    
                                                                                                                                
Ms. Pitney  moved to  slide 7:  "FY2018 Unrestricted  General                                                                   
Fund  Operating Spending  Without  Dividends: $4.2  Billion."                                                                   
She reported that  UGF spending had decreased from  a peak $6                                                                   
billion to  $4.215 billion; it  represented a  small decrease                                                                   
from  FY  17.   She  turned  to  slide  8   that  provided  a                                                                   
historical perspective  of the UGF agency  operating budgets.                                                                   
Agency operating  budgets totaled approximately  $3.7 billion                                                                   
at present;  it was nominally the  same level it had  been in                                                                   
FY 11  (a rollback  of seven years).  When only factoring  in                                                                   
inflation, the  budget was equivalent  to FY 08  levels. When                                                                   
adjusting for  inflation and population  the budget  was back                                                                   
to FY 02 levels.                                                                                                                
                                                                                                                                
2:48:03 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  asked whether  the UGF agency  operations on                                                                   
slide 8 included  DGF. He was interested in  the total agency                                                                   
expenditures.   Ms.  Pitney  answered   that  slide   8  only                                                                   
included  UGF for agency  operations. She  believed she  also                                                                   
had the  graph for DGF. Co-Chair  Seaton asked Ms.  Pitney to                                                                   
send the information. Ms. Pitney agreed.                                                                                        
                                                                                                                                
Ms.  Pitney turned  to  slide 9  titled  "Budget Guidance  to                                                                   
Agencies."  The  slide  included   questions  OMB  had  asked                                                                   
commissioners when  it began developing its  agency operating                                                                   
budget. She  was pleased  the questions  were similar  to the                                                                   
ones  asked in  the legislature's  subcommittee process.  She                                                                   
shared   that  OMB  had   looked  through   an  analysis   of                                                                   
constitutional  and  statutorily  required  programs  and  96                                                                   
percent  of   the  budgetary   components  had  a   statutory                                                                   
requirement.  She  clarified it  did  not mean  every  dollar                                                                   
within   the  components   was   statutorily  required.   She                                                                   
explained it  meant that  making further reductions,  similar                                                                   
to  what had  been  done  with  justice reform  and  Medicaid                                                                   
reform, in many cases it would require statutory changes.                                                                       
                                                                                                                                
Ms.  Pitney  addressed  slide  10 titled  "All  Agencies  are                                                                   
Making Reductions."  The graph showed reductions  in UGF with                                                                   
two  adjustments. The  right  side of  the  graph showed  the                                                                   
percent reduction  for each  agency and  the left showed  the                                                                   
dollar  amount.   She  specified   that  the  Department   of                                                                   
Commerce,  Community  and Economic  Development  (DCCED)  and                                                                   
DOT  each had  an adjustment.  The adjustment  for DCCED  was                                                                   
the removal  of the tourism budget  at the beginning  and the                                                                   
end to normalize  for the tourism budget that  had been moved                                                                   
to the  capital budget;  DCCED had  the largest reduction  at                                                                   
54 percent.  She elaborated that  DOT had been reduced  by 22                                                                   
percent to adjust for the motor fuel tax fund change.                                                                           
                                                                                                                                
2:51:23 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara referred  to the  fund change  in the  motor                                                                   
fuel tax.  He knew  the governor  had proposed  a motor  fuel                                                                   
tax  increase.  He asked  for  details  about the  change  in                                                                   
categorizing motor fuel tax revenue.                                                                                            
                                                                                                                                
Ms.  Pitney answered  that a  motor  fuel tax  bill had  been                                                                   
submitted   by  the   governor.  The   designation  was   for                                                                   
infrastructure    (i.e.    highways,     airports,    marine,                                                                   
infrastructure, and  safety). Because the  classification was                                                                   
DGF,  she was  comfortable  in  the concepts  discussed  that                                                                   
things coming  from General Fund  could be classified  as UGF                                                                   
(e.g. alcohol tax,  motor fuel tax, Power  Cost Equalization,                                                                   
Higher Education  Fund, and other).  She believed  things the                                                                   
legislature was  paying directly for should remain  DGF (e.g.                                                                   
tuition for a  student, ferry fares, business  licenses). She                                                                   
explained it  would be a weird  public policy to  use tuition                                                                   
fees for something  like public safety. She  used ferry fares                                                                   
and business  licenses  as another example  and believed  the                                                                   
fees were  appropriately DGF.  She agreed  it would  make the                                                                   
future look  more transparent.  She added  that OMB  took its                                                                   
lead on the  designations from LFD with the  exception of the                                                                   
proposal on motor fuels.                                                                                                        
                                                                                                                                
2:54:36 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Gara   asked   if  the   budget   included   the                                                                   
presumption  the  legislature   was  passing  the  governor's                                                                   
motor  fuel tax.  He believed  that  was unique  and did  not                                                                   
fall in the normal process.                                                                                                     
                                                                                                                                
Ms. Pitney  replied that typically  the state was not  in the                                                                   
current   budget    situation.   The   previous    year   the                                                                   
administration  had proposed  the  Permanent Fund  Protection                                                                   
Act  (PFPA) and  nine  revenue bills,  it  had presumed  they                                                                   
would  all pass. The  same question  had been  asked at  that                                                                   
time, but  with much more  consternation. She  continued that                                                                   
it was a  proposal; a bill  had been submitted for  the motor                                                                   
fuels   tax  and   the  PFPA.   She  conceded   it  was   not                                                                   
traditional, but a sixth year of deficits was unacceptable.                                                                     
                                                                                                                                
Co-Chair Seaton remarked  that the DOT budget  showed a [UGF]                                                                   
reduction  of 22  percent  [on  slide 10].  He  asked if  the                                                                   
reduction  included  revenue  from  the motor  fuel  tax.  He                                                                   
wondered if  the reduction was  much greater than  22 percent                                                                   
because projected revenue was included.                                                                                         
                                                                                                                                
Ms. Pitney answered  if the slide only looked at  the UGF and                                                                   
the reduction from  FY 15 to the FY 18 proposal,  it would be                                                                   
closer  to 45  percent. She  explained that  the $70  million                                                                   
that  had been  reclassified had  been  normalized. The  true                                                                   
reduction  was  22 percent;  DOT's  operating  reduction  had                                                                   
been reduced by 22 percent.                                                                                                     
                                                                                                                                
Co-Chair Seaton surmised  it was through FY  18 including the                                                                   
designated revenue from the tax. Ms. Pitney agreed.                                                                             
                                                                                                                                
2:57:26 PM                                                                                                                    
                                                                                                                                
Representative  Ortiz  referenced  the  cycle  of  consistent                                                                   
reductions  to agencies.  He furthered  that  Ms. Pitney  had                                                                   
talked  about  having  to  determine  whether  services  were                                                                   
constitutionally required  or mandated in some  way. He asked                                                                   
if  agencies  had  been  given an  opportunity  to  tell  the                                                                   
administration  how  well  they  were able  to  fulfil  their                                                                   
mission,  based  on  the reductions  that  had  occurred.  He                                                                   
wondered if agencies  had been able to say  how their ability                                                                   
to do their job was being hurt.                                                                                                 
                                                                                                                                
Ms. Pitney replied  there had been numerous  discussions. She                                                                   
stated it  was very  difficult for  the reductions  to occur;                                                                   
it  was very  hard for  the agencies  to  continue levels  of                                                                   
service  with  significant  reductions.  She relayed  it  had                                                                   
been  a big  part of  the ongoing  discussion. She  continued                                                                   
that  then  it was  a  reality  check  to determine  if  they                                                                   
really wanted to "do this."                                                                                                     
                                                                                                                                
Representative  Ortiz asked if  the discussions included  the                                                                   
potential overall impact to the economy and other.                                                                              
                                                                                                                                
Ms. Pitney answered  that the office was conscious  and aware                                                                   
there  were  choices;  they  were trying  to  make  the  best                                                                   
choices,  while  maintaining   as  much  of  the  economy  as                                                                   
possible. One  of its  main choices was  to ensure  the state                                                                   
continued  to meet  its  federal  matches. She  relayed  that                                                                   
losing  more  federal  funds  had a  tenfold  impact  on  the                                                                   
state's  economy.  The  administration  had  also  considered                                                                   
ways  to shift  funding  -  much  of the  Medicaid  expansion                                                                   
efforts had been  to use federal funding for  things that had                                                                   
previously used state funds.                                                                                                    
                                                                                                                                
3:00:21 PM                                                                                                                    
                                                                                                                                
Representative  Wilson pointed  to the  Department of  Health                                                                   
and Social  Services (DHSS) and  remarked that slide  10 only                                                                   
pertained  to  UGF.  She  referred to  a  bill  sponsored  by                                                                   
Senator  Pete Kelly  that had  passed, which  aimed at  using                                                                   
waivers and federal  funding. She noted that some  of the UGF                                                                   
that  had  been  removed  from  DHSS  had  been  replaced  by                                                                   
federal funds and programs were still in operation.                                                                             
                                                                                                                                
Ms. Pitney agreed.                                                                                                              
                                                                                                                                
Representative  Wilson asked if  there was a graph  depicting                                                                   
items that would  have been funded by UGF if it  were not for                                                                   
federal  funds or  motor  fuel tax  funds.  She remarked  the                                                                   
chart made it  look like a bigger drop in  services, whereas,                                                                   
it was more of a transfer of funds to DGF or federal funds.                                                                     
                                                                                                                                
Ms. Pitney  answered she could  provide the total  funds over                                                                   
the timeframe.                                                                                                                  
                                                                                                                                
Co-Chair Seaton  would provide  the information to  committee                                                                   
members.                                                                                                                        
                                                                                                                                
Ms. Pitney continued  that one of OMB's primary  goals was to                                                                   
capture the federal funds around Medicaid expansion ($300-                                                                      
plus  million  into  the  state's economy)  at  a  time  when                                                                   
substantial funding was taking place through other cuts.                                                                        
                                                                                                                                
3:02:07 PM                                                                                                                    
                                                                                                                                
Ms.  Pitney  addressed   a  pie  chart  showing   UGF  agency                                                                   
operating budget  priorities on slide 11. She  explained that                                                                   
the chart helped  reflect the priorities and  where money was                                                                   
pulled from.  She specified that  UGF funding  for education,                                                                   
the University,  and the  Alaska Vocational Technical  Center                                                                   
(AVTEC) was  down 9 percent and  accounted for 43  percent of                                                                   
the  state's  budget.  She  furthered   that  UGF  funds  for                                                                   
health,  life,   safety,  and  justice  (the   Department  of                                                                   
Corrections,  the  Department  of Public  Safety,  DHSS,  the                                                                   
Office of  Public Advocacy, the  Public Defender  Agency, and                                                                   
the Court  System) was down 13  percent and accounted  for 44                                                                   
percent of the  state's budget. She relayed  that UGF funding                                                                   
for all other  executive agencies (Alaska  State Legislature,                                                                   
Office  of   the  Governor,  Department   of  Administration,                                                                   
Department  of Labor  and Workforce  Development,  Department                                                                   
of  Revenue, and  other) was  down 41  percent and  accounted                                                                   
for just over 10 percent of the state's budget.                                                                                 
                                                                                                                                
Co-Chair  Seaton asked  if the agency  operating budgets  [on                                                                   
slide 11] reflected grants.                                                                                                     
                                                                                                                                
Ms.  Pitney answered  that  the  slide included  grants.  She                                                                   
elaborated   that  46   percent  of   the  operating   budget                                                                   
represented money  directly out the door to  an organization,                                                                   
community,   and  other.   Only   44  percent   remained   in                                                                   
government.  The 46 percent  included all  funds -  including                                                                   
Medicaid.                                                                                                                       
                                                                                                                                
3:04:39 PM                                                                                                                    
                                                                                                                                
Ms.  Pitney turned  to slide  12 and  addressed ongoing  cost                                                                   
containment efforts to continue reducing spending:                                                                              
                                                                                                                                
        · 2500 fewer state employees since FY2015                                                                               
        · State employee savings through eliminated pay                                                                         
          increases, furloughs, and healthcare cost passed                                                                      
          to employees                                                                                                          
        · Executive branch travel reductions                                                                                    
        · Reduced and consolidated leases                                                                                       
                                                                                                                                
Ms. Pitney  elaborated that the  governor had  introduced pay                                                                   
freeze  legislation  in  the  current  year -  prior  to  the                                                                   
current  year, cost  of  living  allowances (COLA)  had  been                                                                   
eliminated  and  all  union  contracts  had  been  negotiated                                                                   
during the current  administration. Healthcare  cost had been                                                                   
passed on  to employees to  limit how  much the state  had to                                                                   
cover  in  the employee  health  insurance  plans.  Executive                                                                   
branch travel  was expected to be  down by 41 percent  by the                                                                   
end of the  year. Additionally, 100,000 square  feet had been                                                                   
reduced in lease facilities, which amounted to $3 million.                                                                      
                                                                                                                                
Vice-Chair  Gara  stated that  the  Alaska Court  System  had                                                                   
pitched something  that was working successfully  in terms of                                                                   
cost savings. He  discussed that the state used  to have what                                                                   
he  considered "crazy"  early  retirement  programs that  had                                                                   
always been controversial.  The Court System had  proposed to                                                                   
employees who were  at least three years into  being eligible                                                                   
to retire  that they  could retire  early with three  months'                                                                   
severance pay.  The negative side  was losing  knowledge, but                                                                   
the  benefit was  people who  were  high-step employees  with                                                                   
high salaries  would be  replaced with  younger workers  at a                                                                   
great savings. The  Court System relayed that  the option had                                                                   
saved  a substantial  amount  of  money.  He asked  if  other                                                                   
agencies had considered the option voluntarily.                                                                                 
                                                                                                                                
Ms. Pitney answered  that many people had already  elected to                                                                   
retire, which was  part of the 2,500 fewer  paychecks (listed                                                                   
on slide 12);  very few of the positions were  being replaced                                                                   
at  present.  The  idea of  a  retirement  incentive  program                                                                   
often involved  an employee that  would require  hiring three                                                                   
people to replace  them. She furthered that the  option was a                                                                   
consideration and  would have to be  done in a smart  way and                                                                   
would  involve  the  unions.  She stated  it  would  also  be                                                                   
across  the  board instead  of  targeted  as the  courts  had                                                                   
done.                                                                                                                           
                                                                                                                                
Vice-Chair  Gara  noted  the positive  side  meant  replacing                                                                   
tenured   employees  with   people   looking   for  new   job                                                                   
opportunities entering the workforce at a cost savings.                                                                         
                                                                                                                                
3:09:04 PM                                                                                                                    
                                                                                                                                
Ms.  Pitney  returned  to  slide 10.  She  pointed  out  that                                                                   
Judiciary  had received  the lowest  reductions; Fridays  had                                                                   
been  reduced  to half-day,  which  was  a pay  reduction  to                                                                   
every  employee  and  represented  about  two-thirds  of  the                                                                   
reduction.  The department  was  "people  dependent," but  it                                                                   
was  facing a  very  different  budget environment  than  the                                                                   
other departments  (e.g. DLWD, DCCED,  DOR, or the  Office of                                                                   
the Governor).  Very different actions  were required at  a 6                                                                   
percent reduction versus a 25 percent reduction.                                                                                
                                                                                                                                
Vice-Chair Gara understood.                                                                                                     
                                                                                                                                
Representative  Thompson asked  how many  of the 2,500  fewer                                                                   
state employees  had received a  pink slip and had  been laid                                                                   
off versus old positions being eliminated.                                                                                      
                                                                                                                                
Ms.  Pitney answered  the 2,500  fewer  state employees  were                                                                   
actual  employees no  longer working.  She  detailed that  in                                                                   
the executive  branch at the end  of FY 15 there had  been 37                                                                   
layoffs. At  the end of FY  16 another 40 employees  had been                                                                   
laid off.  She viewed  it as  the fourth  layoff notice.  She                                                                   
shared  that in  the coming  September and  October, OMB  was                                                                   
working  with agencies  on  "heads  up" meetings  where  they                                                                   
would  provide budget  targets  and  so forth.  The  agencies                                                                   
were  making their  budget decisions  and  were beginning  to                                                                   
talk to  their divisions  about what  their budget  reduction                                                                   
recommendations  to  the  administration  would be.  At  that                                                                   
time the  agencies would  give notice  to their employees  if                                                                   
funds for their  positions would be eliminated at  the end of                                                                   
the  year. The  governor's office  submitted a  list of  PCNs                                                                   
[position  control numbers]  for  reduction  on December  15;                                                                   
any person in one  of those PCNs would be looking  for a job.                                                                   
The legislature  then added to program reductions  often with                                                                   
specific  PCNs. The  commissioners would  tell the  employees                                                                   
that would be  affected what was coming. She  elaborated that                                                                   
the  administration did  not  issue a  union-required  layoff                                                                   
until 30 days  prior to the end  of the fiscal year.  She was                                                                   
proud  of  the state  for  having  so  few, relative  to  the                                                                   
reduction  in employees  over  the timeframe.  She stated  it                                                                   
was  a last  ditch  unfortunate  event,  at which  point  the                                                                   
impacted individuals were on unemployment insurance.                                                                            
                                                                                                                                
3:13:15 PM                                                                                                                    
                                                                                                                                
Ms. Pitney  turned to  slide 14  showing position  reductions                                                                   
since  FY   15.  The   current  state   employee  level   was                                                                   
equivalent  to  the FY  02  level.  She reported  that  2,259                                                                   
positions  had been  deleted.  She noted  that  Mr. Teal  had                                                                   
reported  2,402 -  the  difference was  that  slide 14  began                                                                   
with FY  15 and  Mr. Teal had  begun with  FY 14. She  stated                                                                   
that  positions  were a  number  and  a classification  on  a                                                                   
list; just because  a department had a position  did not mean                                                                   
it  was  budgeted.  For example,  the  Department  of  Public                                                                   
Safety  (DPS) had  positions  in  particular locations  -  if                                                                   
there was a  higher need in one location versus  another, the                                                                   
department  could  choose  to   fill  the  position  in  that                                                                   
location when  an employee resigns.  She elaborated  that for                                                                   
DPS to  meet its budget,  it had to  have 42 empty  positions                                                                   
every day of the  year. Over the past year, DPS  had a low of                                                                   
29 vacant  positions to  a high of  60 vacant. She  explained                                                                   
it was  a number  with a  classification of  an employee  and                                                                   
characteristics   that   administratively    meant   it   was                                                                   
necessary to  have equal pay and  many things; however,  in a                                                                   
sense it was  unbudgeted. There were PCNs that  were unfilled                                                                   
and unbudgeted.                                                                                                                 
                                                                                                                                
Co-Chair Seaton  surmised the vacancy factor would  depend on                                                                   
which   agency  they   were   discussing.   For  example,   a                                                                   
department  with  800  employees  and a  10  percent  vacancy                                                                   
factor meant  that 80  positions would not  be funded  in the                                                                   
budget.                                                                                                                         
                                                                                                                                
Ms. Pitney replied in the affirmative.                                                                                          
                                                                                                                                
Ms.  Pitney moved  to  slide 15  and addressed  ongoing  cost                                                                   
containment    efforts     and    complex     state    policy                                                                   
considerations. The  items on the list were  the "big rocks,"                                                                   
the  complex,  difficult  state  policy  considerations  that                                                                   
could have  cost implications  either direction.  The justice                                                                   
reform  effort in  the past year  was an  excellent piece  of                                                                   
legislation; it  was not without  issues and required  tweaks                                                                   
over  time. She  detailed  that  the justice  reform  brought                                                                   
cost-savings in  prison beds, but cost increases  in pretrial                                                                   
services,  substance  abuse, and  recidivism  programs.  Over                                                                   
time, the  investment would contain  the costs of  prisons in                                                                   
the  future. The  biggest  fear  was continuing  business  as                                                                   
usual  would require  opening  another prison.  A prison  was                                                                   
roughly 300  people, which cost  an average of  over $100,000                                                                   
per  person  including benefits  -  a  cost of  $300  million                                                                   
(excluding costs  to build the facility). She  emphasized the                                                                   
importance  of  keeping  the  prison  population  low,  while                                                                   
keeping society safe.                                                                                                           
                                                                                                                                
Ms. Pitney  addressed healthcare  and relayed there  had been                                                                   
several beneficial  healthcare changes  that had  allowed the                                                                   
state to contain  costs; however, healthcare continued  to be                                                                   
the major  cost driver.  Medicaid expansion  had allowed  the                                                                   
state  to  bring  in  federal   funds  and  had  saved  state                                                                   
dollars. The  Medicaid reform bill  allowed the state  to try                                                                   
out some things  and incentivized reform efforts;  there were                                                                   
19  different  groups  currently   in  Medicaid  reform.  She                                                                   
addressed redesigning  healthcare employee and  retiree plans                                                                   
and finding  providers. The healthcare authority  may provide                                                                   
a roadmap  for  all the  items. Additionally,  there was  the                                                                   
private health  insurance market.  All the items  were driven                                                                   
by  the underlying  cost of  the  state's healthcare  system.                                                                   
She stressed  that the costs could  not be maintained  at the                                                                   
current   level   without   addressing    the   system.   The                                                                   
administration  was working  on each  item individually,  but                                                                   
was beginning to  include them under one broad  umbrella. The                                                                   
administration   looked   forward   to   working   with   the                                                                   
legislature  on  how to  address  reducing costs  within  the                                                                   
overall  healthcare  system. She  underscored  that  everyone                                                                   
wanted quality,  affordable, and  accessible healthcare.  She                                                                   
highlighted  the importance  of proceeding  forward with  all                                                                   
involved   stakeholders.  She   concluded  that  failing   to                                                                   
address the system meant it would "continue to move out."                                                                       
                                                                                                                                
3:19:40 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  spoke to the  high cost of medical  care. He                                                                   
noted  the  best  chart  had  always  been  the  increase  in                                                                   
Medicaid cost.  The increase  was not  due to providing  more                                                                   
services,  but to  additional  people and  a  higher cost  of                                                                   
healthcare.  He had been  asked if he  would lead  the effort                                                                   
to stop the rise  in medical costs to get to  a more rational                                                                   
medical  cost  system   in  Alaska.  He  did   not  have  the                                                                   
expertise.  He  asked  if the  administration  was  going  to                                                                   
undertake  the  lead  on  the  issue  and  whether  it  would                                                                   
happen. He remarked that the problem was daunting.                                                                              
                                                                                                                                
Ms. Pitney agreed  that the issue was daunting.  Fortunately,                                                                   
there  were individual  departments  working on  each of  the                                                                   
healthcare  items (listed on  slide 15).  She had been  given                                                                   
the  task of  corralling the  issue  and coming  up with  the                                                                   
next step.  She underscored  it was not  possible to  come up                                                                   
with  the  next  step  "unless  we're  all  in."  She  looked                                                                   
forward to  working with  the legislature  on the issue.  The                                                                   
administration   would  be  leading   education  efforts   by                                                                   
bringing  stakeholders  in and  bringing  each  of the  items                                                                   
forward  during  the  current   session.  The  administration                                                                   
believed  the session would  be an  education opportunity  to                                                                   
determine  the right  way to  address the  issues. She  added                                                                   
that  each  of   the  items  was  currently   being  actively                                                                   
addressed.  She agreed  that  the administration  would  take                                                                   
the  issue on  in  earnest and  hoped  the legislature  would                                                                   
participate.                                                                                                                    
                                                                                                                                
3:21:45 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  noted  the  Healthcare  Taskforce                                                                   
would  sunset  the  following  year.  He  detailed  that  the                                                                   
taskforce  had published  five years  of reports  on ways  to                                                                   
improve   and  drive   down  costs.   He   stated  that   the                                                                   
legislature  had addressed  one of  many recommendations.  He                                                                   
surmised   the   legislature   had  basically   ignored   the                                                                   
recommendations. He  had testified on the  80-percentile rule                                                                   
on   out-of-network   healthcare    costs.   He   had   asked                                                                   
Commissioner  Valerie Davidson [of  the Department  of Health                                                                   
and Social Services]  to help provide any changes  she wanted                                                                   
to see.  He explained  that it had  not been functioning  for                                                                   
the past  two years  because the  legislature would  not fund                                                                   
it. He believed  it was critical for establishing  a roadmap.                                                                   
The   legislature    had   not   seriously    addressed   the                                                                   
recommendations  from  over the  years.  He believed  it  was                                                                   
necessary to  start looking  at work that  had been  done. He                                                                   
was  concerned  that  a  new   federal  administration  would                                                                   
prevent  everyone from  having a  clear view  until they  lay                                                                   
out a  plan in the future.  Many of the recommendations  were                                                                   
very  good,  but  they  had  never  been  addressed.  It  was                                                                   
clearly  one of  the most  expensive  employee related  costs                                                                   
for the  state and private  sector. He stressed  the enormity                                                                   
of the work that  had already been done by the  taskforce. He                                                                   
believed  feedback   from  Commissioner  Davidson   would  be                                                                   
helpful.   He  concluded   that   the  taskforce   had   done                                                                   
significant work  and the legislature  had not yet  taken the                                                                   
issue up.                                                                                                                       
                                                                                                                                
3:24:37 PM                                                                                                                    
                                                                                                                                
Ms.  Pitney   addressed  education  and  the   system  reform                                                                   
process on  slide 15. The  administration did  not anticipate                                                                   
a  decrease in  the cost  of education,  but  the quality  of                                                                   
education  could increase.  There had  always been  criticism                                                                   
of  the  K-12 outcomes  in  Alaska.  The  administration  was                                                                   
looking for  ongoing cost containment and  increased quality.                                                                   
She  elaborated  that  Department   of  Education  and  Early                                                                   
Development  Commissioner Michael  Johnson had  set out  five                                                                   
goals and  was establishing a  process and taskforce  to move                                                                   
through  broad  systemic  reform  for  review  the  following                                                                   
legislative  session.  She noted  that the  taskforces  would                                                                   
include  legislators   as  well.   The  items  on   slide  15                                                                   
represented  the  largest budgetary  cost  increase  drivers.                                                                   
She emphasized the  importance of tackling the  issue to keep                                                                   
the  cost  of government  from  rising  dramatically  in  the                                                                   
future.  She noted that  inflation was  anticipated and  with                                                                   
reforms   the   state   could   anticipate   long-term   cost                                                                   
containment.                                                                                                                    
                                                                                                                                
Ms.  Pitney turned  to  reorganization  efforts  on slide  17                                                                   
including    shared    services,    information    technology                                                                   
consolidation,  and  optimizing  DOT  project  delivery.  The                                                                   
items on the  slide did not impact the mission,  but impacted                                                                   
how  well the  mission was  accomplished  with the  available                                                                   
money.   She   detailed   that   Shared   Services   involved                                                                   
consolidating  backroom   administrative  functions   in  the                                                                   
Department of  Administration (DOA) and changing  the process                                                                   
to  reduce costs.  She elaborated  that  funding remained  in                                                                   
the agencies  and agencies would  pay DOA on  a service-level                                                                   
agreement.  Agencies  would  pay  a set  amount  for  DOA  to                                                                   
handle accounts  payable, travel  and expense reporting,  and                                                                   
other. The  administration anticipated  a 10 percent  savings                                                                   
in the first year,  a 30 percent savings in  the second year,                                                                   
and  at  maturity  reductions  in  cost  (of  performing  the                                                                   
service) could  reach 40 to  50 percent. The  proposed budget                                                                   
would transfer  70 PCNs from  other departments into  DOA for                                                                   
Shared  Services.  She relayed  that  Information  Technology                                                                   
(IT)  consolidation  was  a similar  approach;  68  positions                                                                   
would be  transferred from other  departments into  DOA under                                                                   
the  proposed  budget.  The increase  in  positions  for  DOA                                                                   
shown  in  the  proposed  budget  was  due  to  consolidation                                                                   
efforts.   The   last   major   reorganization   effort   the                                                                   
administration  was working  on was for  the optimization  of                                                                   
project delivery in DOT.                                                                                                        
                                                                                                                                
3:28:52 PM                                                                                                                    
                                                                                                                                
Ms. Pitney  continued to  address DOT  project delivery.  She                                                                   
explained  that  the state  had  a  fixed amount  of  federal                                                                   
highway matching  funds; the  goal was  to complete  the most                                                                   
highway,  airport, and  port projects  as  possible with  the                                                                   
money. She  detailed that  76 positions  associated with  the                                                                   
reorganization  effort had been  reduced within the  proposed                                                                   
budget.  She   addressed  slide   18  related  to   statewide                                                                   
obligations.  She  characterized  the cuts  as  daunting  and                                                                   
explained  they  had  all been  taken  in  nonformula  agency                                                                   
operating budgets  and had been  largely offset  by statewide                                                                   
obligation  increases.  The oil  and gas  statutory  increase                                                                   
was $44  million, bringing the  total to $74  million. School                                                                   
debt reimbursement  and Regional Educational  Attendance Area                                                                   
(REAA) funding had  added $40 million in UGF  spending. There                                                                   
was not an increase  in UGF for retirement  payments, but she                                                                   
agreed with  Mr. Teal  that it  was the  last year the  state                                                                   
could use the  Higher Education Fund for anything  other than                                                                   
funding the scholarship program it was designed for.                                                                            
                                                                                                                                
Ms. Pitney  remarked that  Mr. Teal  had addressed  community                                                                   
assistance. The  last item was the private  insurance market.                                                                   
She explained that  the $55 million had come  on the previous                                                                   
year and continued  into FY 18; it was a piece  of one of the                                                                   
major  budgetary  cost  drivers.  She  elaborated  it  was  a                                                                   
subsidization   of   the  private   insurance   market.   She                                                                   
explained  that  it  kept  the rates  lower  for  the  25,000                                                                   
people  who did  not receive  insurance  through Medicaid  or                                                                   
their   employer.  She   noted   there   were  some   federal                                                                   
implications  and  significant  uncertainty  on  the  federal                                                                   
side. The  long-term nature of  the issue would be  an active                                                                   
discussion during session.                                                                                                      
                                                                                                                                
3:31:19 PM                                                                                                                    
                                                                                                                                
Ms.  Pitney  moved to  slide  19  and addressed  examples  of                                                                   
direct state funding.  She referred to her  earlier statement                                                                   
that  46  percent  of  the  operating   budget  funding  went                                                                   
directly  to   communities.  The   items  on  slide   19  all                                                                   
reflected  General Fund  payments to  communities. The  chart                                                                   
provided a  table showing  what portion  of the $4.2  billion                                                                   
operating  budget  went  to  payments   to  communities.  For                                                                   
example,  Anchorage   received  a  direct  payment   of  $470                                                                   
million, Mat-Su  received $228  million, Kenai received  $100                                                                   
million,  and  Fairbanks  received $162  million.  The  money                                                                   
directly went directly  to communities for operation  and was                                                                   
not state  employee related.  The administration  had largely                                                                   
tried  to  maintain community  support  areas.  She  reasoned                                                                   
that   continued    reductions   would   get    pushed   into                                                                   
communities.                                                                                                                    
                                                                                                                                
Representative Guttenberg  knew there had been  a significant                                                                   
push in  the past to get  school districts to  increase pupil                                                                   
transportation efficiency.  He noted some districts  had been                                                                   
successful   and   others   had   not.  He   asked   if   the                                                                   
administration  had   looked  at  pupil   transportation.  He                                                                   
remarked  it  was easy  to  be  inefficient when  picking  up                                                                   
students.  He wondered  if the  administration had  revisited                                                                   
the  issue to  determine if  there  was room  to drive  costs                                                                   
down.                                                                                                                           
                                                                                                                                
Ms. Pitney  answered that  the topic  would be considered  by                                                                   
Commissioner  Johnson   as  part  of  an   overall  education                                                                   
reform.  The   question  was  about  determining   the  right                                                                   
incentives  for   everyone  to  focus  on  quality   for  the                                                                   
individual  student. There had  been a  veto of $6.3  million                                                                   
in  the last  year's budget  to  pupil transportation,  which                                                                   
had been maintained in the current budget.                                                                                      
                                                                                                                                
Ms.  Pitney  briefly  highlighted slide  20,  which  included                                                                   
revenue measures  that would have their own  legislation. She                                                                   
moved to  slide 21, which  showed a bar  chart of  ERA draws.                                                                   
The chart  included UGF and DGF  totals from FY 15  to FY 18.                                                                   
There had  been no  Permanent Fund  draw in  FY 16 and  there                                                                   
had been a draw  in FY 17. The governor was  proposing a draw                                                                   
in  FY 18  as well.  The  chart also  showed  an increase  in                                                                   
federal and other revenue sources.                                                                                              
                                                                                                                                
3:35:29 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  asked  any   information  provided  by  the                                                                   
administration to  be sent to  his office directly.  He would                                                                   
disseminate the information to committee members.                                                                               
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:36:26 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:36 p.m.                                                                                          

Document Name Date/Time Subjects
Condensed Budget Comparison.pdf HFIN 1/20/2017 1:30:00 PM
OMB FY18 Budget Overview
FY18_Fiscal_Summary_Detail_12-15-16.pdf HFIN 1/20/2017 1:30:00 PM
OMB FY 18 Fiscal Summary
House Budget Overview 1-20-17.pdf HFIN 1/20/2017 1:30:00 PM
OMB
1 20 17 HFC FY18 Overview.pdf HFIN 1/20/2017 1:30:00 PM
LFD Budget Overview FY 18