Legislature(2017 - 2018)HOUSE FINANCE 519

02/03/2017 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 61 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
*+ HB 95 APPROP:SUPP; CAP; REAPPROP; AMEND; REPEAL TELECONFERENCED
Heard & Held
+ Pat Pitney, Director, Office of Management & TELECONFERENCED
Budget
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 3, 2017                                                                                           
                         1:36 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:36:01 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 1:36 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 Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative   Scott    Kawasaki;   Representative   Steve                                                                    
Thompson.                                                                                                                       
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Randall Hoffbeck, Commissioner, Department of Revenue; Pat                                                                      
Pitney, Director, Office of Management and Budget, Office                                                                       
of the Governor.                                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 61     PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS                                                                                 
                                                                                                                                
          HB 61 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
HB 95     APPROP:SUPP; CAP; REAPPROP; AMEND; REPEAL                                                                             
                                                                                                                                
          HB 95 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
Co-Chair Foster  indicated that Representative  Thompson and                                                                    
Representative  Kawasaki  were   excused.  He  reviewed  the                                                                    
agenda for the day.                                                                                                             
                                                                                                                                
HOUSE BILL NO. 61                                                                                                             
                                                                                                                                
     "An  Act   relating  to   the  Alaska   Permanent  Fund                                                                    
     Corporation,  the  earnings  of  the  Alaska  permanent                                                                    
     fund,  and the  earnings reserve  account; relating  to                                                                    
     the  mental health  trust  fund;  relating to  deposits                                                                    
     into the dividend fund; relating  to the calculation of                                                                    
     permanent  fund  dividends;  relating  to  unrestricted                                                                    
     state   revenue   available  for   appropriation;   and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
1:37:19 PM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
introduced   the   PowerPoint  presentation   titled   "PFPA                                                                    
MODELING" (copy on file). He  commented that on the previous                                                                    
day  the  committee had  covered  a  lot  of ground  on  the                                                                    
Permanent  Fund  Protection  Act   (PFPA).  There  had  been                                                                    
significant  concern  whether  the  5.25  percent  draw  was                                                                    
sustainable and  durable. He indicated  he would  be walking                                                                    
through  some  of  the  modeling   that  had  been  done  to                                                                    
determine  the durability  of the  proposed draw  amount. He                                                                    
would  also  be  discussing  the  impacts  of  some  of  the                                                                    
decisions  about other  fiscal issues  surrounding the  PFPA                                                                    
and  their  impacts  on the  durability  of  a  restructured                                                                    
Permanent Fund.                                                                                                                 
                                                                                                                                
Commissioner   Hoffbeck  turned   to  slide   2:  "Scenarios                                                                    
Modeled":                                                                                                                       
                                                                                                                                
   1. Status Quo: ad hoc use of permanent fund earnings to                                                                    
     fill budget deficit                                                                                                        
                                                                                                                                
   2. PFPA with $2.4 billion transfer to the CBR                                                                              
     • With Full Fiscal Solution                                                                                              
     • With No  Fiscal   Solution  for   remaining  budget                                                                    
        deficit.                                                                                                                
                                                                                                                                
   3. PFPA without transfer to the CBR                                                                                        
     • With Full Fiscal Solution                                                                                              
     • With No  Fiscal   Solution  for   remaining  budget                                                                    
        deficit.                                                                                                                
                                                                                                                                
Commissioner Hoffbeck explained that  the committee would be                                                                    
looking  at three  different modeling  scenarios. The  first                                                                    
model reflected  the status  quo where  no changes  would be                                                                    
made. The  state would continue to  spend the Constitutional                                                                    
Budget Reserve (CBR),  and when it was gone,  begin to spend                                                                    
from  the  Permanent  Fund  (PF)  earnings  reserve  account                                                                    
(ERA). The  second scenario reflected  the PFPA  proposed in                                                                    
the governor's bill, HB 61.  A proposed effective date of FY                                                                    
17, as  proposed in the budget,  would create a draw  for FY                                                                    
17 and  replace the CBR draw  using PF earnings to  fund the                                                                    
current  year's  budget. The  committee  would  look at  the                                                                    
second  scenario  in two  ways:  One  would reflect  a  full                                                                    
fiscal  solution closing  the remainder  of the  budget gap,                                                                    
and  another would  show a  budget gap.  The third  scenario                                                                    
reflected  an effective  date  of July  1,  2018. The  draws                                                                    
would start for the FY 18 budget.                                                                                               
                                                                                                                                
Representative   Wilson  had   heard  frequently   that  the                                                                    
legislature  was   doing  nothing.   She  opined   that  the                                                                    
legislature had  made several reductions  and put  two bills                                                                    
forward in the prior year to  help save the state money. She                                                                    
did not think it was appropriate  to tell the public that it                                                                    
appeared  the legislature  would  do the  usual. She  argued                                                                    
that the legislature had taken  significant steps to reach a                                                                    
sustainable  level  of  spending. Although  the  legislature                                                                    
might  not   have  made  enough   changes,  it   had  worked                                                                    
diligently to reduce costs.                                                                                                     
                                                                                                                                
1:41:01 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked if the  legislature had burned through                                                                    
close  to $6.5  billion  or  $7 billion  in  savings in  the                                                                    
previous 2 years. Commissioner  Hoffbeck responded, "That is                                                                    
correct."                                                                                                                       
                                                                                                                                
Vice-Chair Gara asked  what would be left in the  CBR if the                                                                    
legislature did nothing to address  the revenue issue in the                                                                    
current year.  He asked for a  number. Commissioner Hoffbeck                                                                    
responded  that  the  presentation   did  not  contain  many                                                                    
numbers but there were some numbers on the charts.                                                                              
                                                                                                                                
Vice-Chair Gara  asked what would  be left in the  CBR after                                                                    
FY  18,  under  the   governor's  proposed  budget,  if  the                                                                    
legislature failed to adopt revenue  measures in the current                                                                    
year  and  had  to  use  the CBR  to  pay  the  budget  gap.                                                                    
Commissioner  Hoffbeck  reported  that  it  was  about  $2.1                                                                    
billion.                                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  continued  to discuss  slide  2.  He                                                                    
noted the critical test when  looking at the modeling was to                                                                    
maximize the use  of the asset. The department  wanted to be                                                                    
able to extract as much  revenue from the PF without putting                                                                    
the corpus  of the fund  at risk. He suggested  that leaving                                                                    
any money  on the  table had the  effect of  limiting future                                                                    
options  for solving  the fiscal  crisis. He  continued that                                                                    
the idea was to find the  "sweet spot" extracting as much as                                                                    
possible while maintaining a durable fund into the future.                                                                      
                                                                                                                                
Commissioner   Hoffbeck  continued   to   slide  3:   "Model                                                                    
Sophistication  and Vetting."  He reviewed  some of  the key                                                                    
aspects of  the model.  The model  was probabilistic,  as it                                                                    
looked at  a range of  potential scenarios that  could occur                                                                    
over  time rather  than  deterministic. Deterministic  meant                                                                    
choosing a  single scenario and extrapolating  it over time.                                                                    
The  model   used  thousands   of  iterations   of  multiple                                                                    
scenarios and  produced a range  of potential  outcomes. The                                                                    
department  looked  at  the  median  within  the  range.  He                                                                    
thought the  modeling had been  a robust process.  The focus                                                                    
was  on how  the money  flowed between  the PF,  the general                                                                    
fund, and  the dividend  to identify any  potential failures                                                                    
in the  modeling. The modeling  addressed questions  such as                                                                    
whether there  was enough money to  fund government services                                                                    
and the  dividend, whether the  corpus of the fund  would be                                                                    
impacted, or  whether there was  enough money in the  ERA to                                                                    
make  the   annual  payment.  He  reported   using  as  many                                                                    
objective resources as possible  in calibrating the model to                                                                    
remove any  concern about the  model being skewed.  Later he                                                                    
would be  discussing some  of the data  the sources  used in                                                                    
the model.                                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck  reported  that the  department  used                                                                    
Monte Carlo  simulations to get  a range of results.  In the                                                                    
previous  year there  were multiple  hearings  in which  the                                                                    
modeling  process was  discussed.  The  department had  been                                                                    
asked to  bring back  a tremendous  number of  variations on                                                                    
that  modeling.  The  department   hired  the  McKinsey  and                                                                    
Company, an  international consulting  firm that  has worked                                                                    
with all  the sovereign  wealth funds  around the  world, to                                                                    
ensure that the  modeling was robust. The  company was asked                                                                    
to   review   the    department's   modeling   process   for                                                                    
reasonableness and  accuracy. The  company found  that there                                                                    
were no mechanical  errors in the state's  modeling and that                                                                    
the assumptions  were reasonable.  The company  approved the                                                                    
Monte Carlos process and suggested  some improvements to the                                                                    
modeling, which the Department of Revenue had incorporated.                                                                     
                                                                                                                                
1:46:10 PM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  reviewed the graph on  slide 4 titled                                                                    
"Budget Assumptions." He highlighted  the yellow line at the                                                                    
bottom that  represented the  fall forecasted  revenues from                                                                    
the 2006  Revenue Sources  Book less  unrestricted royalties                                                                    
and  production tax.  Royalties  and  production taxes  were                                                                    
taken out  because they were estimated  within the modeling.                                                                    
He  further  explained  that  they  were  removed  from  the                                                                    
baseline numbers  because they  became a  critical component                                                                    
in  the  modeling.  He  pointed   to  the  blue  line  which                                                                    
represented the  Office of  Management and  Budget's 10-year                                                                    
budget plan. In  the plan, the budget held  flat for several                                                                    
years, then increased with inflation going out in time.                                                                         
                                                                                                                                
Commissioner  Hoffbeck scrolled  to  slide  5: "Status  Quo:                                                                    
Method, Inputs,  And Assumptions"  The slide showed  how the                                                                    
PF earnings  performed overtime without changing  the budget                                                                    
or  increasing  revenues.  The  slide  showed  the  list  of                                                                    
assumptions used in the process.  The assumptions included a                                                                    
PF  starting balance  of $54.9  billion  (reflective of  the                                                                    
anticipated  amount at  the  end of  2017),  a 6.95  percent                                                                    
geometric  return with  a 12.32  percent standard  deviation                                                                    
(the return could be 6.95  percent, as high as 19.3 percent,                                                                    
or as  low as -5.5 percent),  and an inflation rate  of 2.25                                                                    
percent.  He   explained  that  about  90   percent  of  the                                                                    
investment returns  were realized  within the  statutory net                                                                    
income payout.                                                                                                                  
                                                                                                                                
Vice-Chair  Gara referred  to slide  5. He  asked about  the                                                                    
6.95 percent return assumption on  the PF and the 50 percent                                                                    
probable 6.24 percent.  Commissioner Hoffbeck responded that                                                                    
the  second  line represented  the  realized  returns -  the                                                                    
statutory net income. He further  explained that of the 6.95                                                                    
percent total  fund return, 6.24 percent  would be realized,                                                                    
a 90 percent realization.                                                                                                       
                                                                                                                                
Commissioner  Hoffbeck  discussed   slide  6:  "Status  Quo:                                                                    
Method,   Inputs,  And   Assumptions."  He   explained  that                                                                    
probabilistic  modeling  (used  in  generating  the  revenue                                                                    
sources book) was applied to  oil price production. Deposits                                                                    
to  the  fund consisted  of  31  percent of  royalties,  the                                                                    
weighted average of the deposit  that occurred. There was no                                                                    
planned payout from [to] the  general fund from the ERA, but                                                                    
unplanned  payouts would  occur after  the depletion  of the                                                                    
CBR. The  balance of the  CBR would  be $4.4 billion  at the                                                                    
beginning  of  2018  with  a 2.25  percent  rate  of  return                                                                    
projected.                                                                                                                      
                                                                                                                                
1:50:00 PM                                                                                                                    
                                                                                                                                
Representative Pruitt referred to  slide 6. He recalled that                                                                    
in a meeting in the prior  year the CBR was expected to have                                                                    
a balance of $3.5 billion in  2018. He asked about the shift                                                                    
to $4.4 billion.                                                                                                                
                                                                                                                                
Commissioner Hoffbeck answered that  the original number was                                                                    
$3.2  billion,   but  multiple   things  had   happened.  He                                                                    
elaborated that  the $4.4 billion  number was a  cash versus                                                                    
accrual accounting  number - the  cash that would be  in the                                                                    
fund. There  were some items  such as capital  projects that                                                                    
had  been approved  but  not  funded that  would  show as  a                                                                    
decrement on  an accrual basis.  He continued that  the $3.2                                                                    
billion  number was  an accrual  number rather  than a  cash                                                                    
number.  He  continued that  much  of  the shift  was  being                                                                    
driven by the fact that in  FY 16 the state had $100 million                                                                    
less in  draws than anticipated.  Also, in  FY 16 and  FY 17                                                                    
the state  had received  more revenues than  anticipated. It                                                                    
was  a combination  of some  accounting  issues and  better-                                                                    
than-projected  returns   from  the  time  the   number  was                                                                    
published in the previous year.                                                                                                 
                                                                                                                                
Representative Pruitt asked about  the balance on an accrual                                                                    
basis  to  compare  apples-to-apples.  He  wondered  if  the                                                                    
number would be  $4.4 billion. He suspected it  would not be                                                                    
as  low as  $3.2  billion. Commissioner  Hoffbeck would  get                                                                    
back to him with an answer.                                                                                                     
                                                                                                                                
Representative  Pruitt  asked  about  the  statutory  budget                                                                    
reserve (SBR) balance.  Commissioner Hoffbeck responded that                                                                    
it  was  $200  million.  He  added  that  the  $4.4  billion                                                                    
included the balances of both the CBR and the SBR.                                                                              
                                                                                                                                
Commissioner  Hoffbeck continued  to slide  7: "Status  Quo:                                                                    
Method, Inputs, And Assumptions":                                                                                               
                                                                                                                                
     STATUS QUO: METHOD, INPUTS, AND ASSUMPTIONS                                                                                
                                                                                                                                
     Dividend Calculation:                                                                                                      
        • Total distributed is equal to half of the sum of                                                                    
          the last 5 years' statutory net income multiplied                                                                     
          by 0.21 or half of the ERA, whichever is less                                                                         
                                                                                                                                
     Inflation Proofing:                                                                                                        
        • The fund's principal is inflation proofed at the                                                                    
          predicted inflation rate.                                                                                             
                                                                                                                                
Commissioner Hoffbeck reported  the dividend calculation was                                                                    
the  last 21  percent of  the previous  5 years'  earnings -                                                                    
essentially  the  average  of  the previous  5  years,  just                                                                    
slightly   more.    Inflation   proofing   was    a   direct                                                                    
appropriation based  on the measured inflation  of the prior                                                                    
year. He  reiterated he was  speaking of the status  quo. He                                                                    
noted that  the dividend calculation  was 21 percent  of the                                                                    
prior 5 years  or half of the remaining ERA,  which ever was                                                                    
less. In other words, when  the state started to deplete the                                                                    
ERA the  dividend would decrease  because it could  never be                                                                    
more than half of the ERA balance.                                                                                              
                                                                                                                                
Vice-Chair Gara  did not  agree with  the term  "status quo"                                                                    
because in  the previous year  the legislature did  not fund                                                                    
inflation   proofing.   He   asked  if   he   was   correct.                                                                    
Commissioner   Hoffbeck   confirmed  Vice-Chair   Gara   was                                                                    
correct.  The  commissioner  was  explaining  the  statutory                                                                    
status quo.                                                                                                                     
                                                                                                                                
Representative  Wilson had  heard  about a  50/50 plan.  She                                                                    
asked about  what would have  been left  in the ERA  had the                                                                    
state paid  the full  dividend amount of  approximately $1.2                                                                    
billion.  She  wanted  to  know   the  figure  for  realized                                                                    
earnings.  Commissioner Hoffbeck  asked  her  to repeat  her                                                                    
question.                                                                                                                       
                                                                                                                                
Representative  Wilson thought  that  the  state would  have                                                                    
paid out about $1.2 billion  in dividends had the amount not                                                                    
been  reduced.  She  surmised that  there  would  have  been                                                                    
another $1.2  billion left  to put in  the ERA  and utilized                                                                    
with  a 21  vote.  Commissioner Hoffbeck  indicated she  was                                                                    
correct.   He   furthered   that  the   portion   that   had                                                                    
historically  been used  for inflation  proofing could  have                                                                    
been  used in  the previous  year. He  noted that  the state                                                                    
could  have used  any amount  that was  in the  ERA balance,                                                                    
about $8.0 billion, with a simple majority vote.                                                                                
                                                                                                                                
1:54:33 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck advanced  to  the chart  on slide  8:                                                                    
"Status Quo, No  Fiscal Plan: Dividend paid  per Person." He                                                                    
indicated that the  slide showed the dividend  that would be                                                                    
paid per  person under  the status quo  plan. He  noted that                                                                    
the 2018 value would be  about $2400 based on the forecasted                                                                    
PF returns. He reported that  the 2041 median value, the end                                                                    
of the  modeling period, would  be zero. He  emphasized that                                                                    
there would  be no  dividend. He  explained that  the yellow                                                                    
bar  represented  between the  median  and  a factor  of  75                                                                    
percent. The blue bar represented  the median to a factor of                                                                    
25  percent. The  median fell  between the  yellow and  blue                                                                    
lines  on  the chart.  The  whiskers  represented the  total                                                                    
range of  the forecast. The  chart showed how far  the total                                                                    
range  could deviate  over time.  It fell  off precipitously                                                                    
after  only  a few  years.  He  added  that the  status  quo                                                                    
without a fiscal plan would result  in a median value of $67                                                                    
billion in  2041. The real  value would be  $39.563 billion.                                                                    
He redirected members'  attention to the first  slide of the                                                                    
presentation  that  showed  a real  fund  balance  of  $54.9                                                                    
billion.                                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  turned  to  the chart  on  slide  9:                                                                    
"Status  Quo,  No  Fiscal  Plan:   Nominal  Fund  Size."  He                                                                    
reported that the  value of the fund  would be significantly                                                                    
degraded under the status quo.  The ERA failure rate over 24                                                                    
years was 98.24 percent. There  was absolute surety that the                                                                    
ERA would run out of money during the forecast period.                                                                          
                                                                                                                                
Commissioner  Hoffbeck  spoke  to  the chart  on  slide  10:                                                                    
"Status Quo,  No Fiscal Plan: Cumulative  ERA Failure Rate."                                                                    
He  thought the  graph provided  a  good visual  of the  ERA                                                                    
failure rate.  He stressed that  the dividend was  paid from                                                                    
the ERA. Therefore, when the  ERA failed, the dividend would                                                                    
likely be  reduced to zero.  He highlighted that by  2023 or                                                                    
2024 there  would be a  50/50 chance  of having no  money in                                                                    
the ERA and  no dividend without a different  plan in place.                                                                    
It was  clear that  the status  quo plan  would lead  to the                                                                    
depletion and failure of the fund.                                                                                              
                                                                                                                                
Commissioner  Hoffbeck reviewed  slide 11:  "APFPA with  CBR                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
     APFPA WITH CBR TRANSFER: METHOD, INPUTS, AND                                                                               
     ASSUMPTIONS                                                                                                                
                                                                                                                                
     • Permanent Fund Starting Value: $53.4 billion                                                                           
          • Realized portion of corpus: $40.7 billion                                                                         
         • Realized portion of ERA: $6.3 billion                                                                              
          • Unrealized earnings held by the fund: $6.3                                                                        
             billion                                                                                                            
          • Starting value was estimated based on the                                                                         
             following:                                                                                                         
               • $54.9 billion estimated EOY 2017 balance                                                                     
                  of PF under status quo                                                                                        
               • Plus $0.8 billion from the difference in                                                                     
                  the calendar year (CY) 2017 dividend                                                                          
                  calculation                                                                                                   
               • Less $2.4 billon transfer to CBR (repaying                                                                   
                  for last year's withdrawal as if we                                                                           
                  started PFPA a year earlier)                                                                                  
                                                                                                                                
        • Investment Return: Callan Associate's 10-year                                                                       
          forecast                                                                                                              
               • Total return: 6.95 percent geometric,                                                                        
                  12.32 percent standard deviation                                                                              
               • Statutory return: P10 = 3.70 percent, P50                                                                    
                  = 6.24 percent, P90 = 8.14 percent                                                                            
             • Inflation rate: 2.25 percent                                                                                   
                                                                                                                                
Commissioner  Hoffbeck clarified  that the  Alaska Permanent                                                                    
Fund  Protection  Act (APFPA)  had  a  2017 effective  date,                                                                    
essentially   creating   a   transfer  to   the   CBR.   The                                                                    
constitutional Budget  Reserve draw  would be  replaced with                                                                    
PF  earnings. The  Permanent Fund  starting  value would  be                                                                    
about $53.4 billion.  He pointed to the middle  of the slide                                                                    
which showed  the calculation of  how to go down  from $54.9                                                                    
to $53.4. The investment returns were the same.                                                                                 
                                                                                                                                
1:58:19 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck spoke  to slide  12: "APFPA  with CBR                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   • Petroleum Revenues:                                                                                                      
        • Oil price: Probabilistic analysis of ANS oil                                                                        
          prices using a PERT distribution from the fall                                                                        
          2016 price forecasting session.                                                                                       
        • Production: Probabilistic analysis of ANS oil                                                                       
          prices using a PERT distribution from the DNR                                                                         
          provided Fall 2016 RSB                                                                                                
   • Deposits: 25% of royalties deposited into the                                                                            
     permanent fund.                                                                                                            
   • Payout Calculation: 5.25% of the average of first 5 of                                                                   
     the last 6 years' total  fund size. This value can then                                                                    
     be  decreased if  the combined  royalty and  production                                                                    
     tax revenues  for the year  are above $1.2  billion, by                                                                    
     the amount over  $1.2 billion. This can  not reduce the                                                                    
     payout amount by more than 80%.                                                                                            
   • Unplanned Payouts: After depleting the CBR, budget                                                                       
     deficits are filled from the ERA.                                                                                          
                                                                                                                                
   • CBR: $6.8 billion BOY 2018 balance with Rate of Return                                                                   
     of 2.25%                                                                                                                   
                                                                                                                                
        • Initial Balance of $6.8 billion is estimated                                                                        
          based on a forecasted balance of $4.4 billion and                                                                     
          a $2.4 billion transfer from the ERA                                                                                  
                                                                                                                                
Commissioner  Hoffbeck reported  that the  petroleum revenue                                                                    
calculations would  be the same. However,  the percentage of                                                                    
royalties  being deposited  would be  reduced to  25 percent                                                                    
from  31 percent.  He detailed  that the  only deposit  that                                                                    
would be  made in  the APFPA  would be  the constitutionally                                                                    
required deposit.  The plan did  not include  the additional                                                                    
statutory deposit. He detailed  the payout calculation which                                                                    
would be  5.25 percent of the  average of the first  5 years                                                                    
of  the previous  6 years.  There  was a  $1.2 billion  draw                                                                    
limit. Once  the state reached  $1.2 billion in oil  and gas                                                                    
severance  tax and  royalties, the  payout  of the  dividend                                                                    
would  be  reduced  dollar  for  dollar.  He  observed  that                                                                    
everything that had  been discussed in the  prior year would                                                                    
be  imbedded  within  the  calculation.  He  continued  that                                                                    
unplanned payouts  would come out  of the ERA after  the CBR                                                                    
was entirely depleted. Although,  under the scenario where a                                                                    
full fiscal plan would be  in place, it was anticipated that                                                                    
the budget  gap would  be closed  and, therefore,  would not                                                                    
require additional  draws. He  clarified that  if additional                                                                    
draws were necessary,  the money would come out  of the ERA.                                                                    
He added that  the CBR would begin with a  higher balance of                                                                    
$6.8  billion because  the $2.4  billion draw  from the  CBR                                                                    
would be replaced with a $2.4 billion draw from the ERA.                                                                        
                                                                                                                                
Commissioner Hoffbeck  discussed slide  13: "APFPA  with CBR                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   • Dividend Calculation:                                                                                                    
     • The sum of:                                                                                                            
        • 20% of the POMV payout before any reduction, and                                                                    
        • 20% of the unrestricted royalties (about 15% of                                                                     
          total royalties) from the most recent FY ended                                                                        
        • Overwriting the above calculation there is a                                                                        
          fixed dividend of $1,000 per person for CY 2018.                                                                      
                                                                                                                                
   • Inflation Proofing:                                                                                                      
                                                                                                                                
     • If four times the 5.25% POMV payout (21% of the total                                                                  
        fund value) remains in the ERA after the POMV transfer,                                                                 
        the amount over the four times the POMV is transferred                                                                  
        into the corpus.                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  reviewed  the  dividend  calculation                                                                    
under the  new 20/20 formula.  It equaled 20 percent  of the                                                                    
percent of  market value  (POMV) payment  and 20  percent of                                                                    
unrestricted royalties. Inflation proofing  would be tied to                                                                    
the 4-times draw  (once the ERA had 4-times  the annual draw                                                                    
money would flow  back into the corpus of the  PF). He noted                                                                    
that  the  structure  when  doing   the  modeling  had  been                                                                    
discussed in the previous day.                                                                                                  
                                                                                                                                
Co-Chair Seaton  asked about the calculation.  He reiterated                                                                    
that if  the POMV percentage  was fixed and after  it flowed                                                                    
in,  20  percent  of  the  POMV deposit  would  go  out.  He                                                                    
wondered if it would go out  prior to the money flowing back                                                                    
to  inflation proofing  or whether  the POMV  draw would  be                                                                    
reduced.  Commissioner   Hoffbeck  responded  that   the  20                                                                    
percent of  5.25 percent would always  be calculated against                                                                    
the  maximum draw.  He  continued that  as  the actual  draw                                                                    
started to  be reduced, the  dividend would not  be reduced.                                                                    
The dividend would always be  calculated on the maximum draw                                                                    
amount rather than the actual draw.                                                                                             
                                                                                                                                
Vice-Chair Gara referred to slide  13 and asked about the 20                                                                    
percent  of  unrestricted  royalties.  He  wondered  if  the                                                                    
amount  would come  out of  the  POMV or  out of  royalties.                                                                    
Commissioner Hoffbeck responded that  it would come directly                                                                    
from royalties,  the portion of the  royalties not dedicated                                                                    
in the constitution to the corpus  of the fund (the other 75                                                                    
percent).                                                                                                                       
                                                                                                                                
Vice-Chair Gara stated  that if the state had  a deficit and                                                                    
20  percent was  taken from  royalties instead  of from  the                                                                    
ERA,  it  would  come  out  of the  CBR.  It  would  not  be                                                                    
additional money until  there was no deficit  left. He asked                                                                    
if   he  was   accurate.  Commissioner   Hoffbeck  did   not                                                                    
understand the representative's question.                                                                                       
                                                                                                                                
Vice-Chair Gara restated his question.  He suggested that if                                                                    
the state was in a  position where revenues did not approach                                                                    
expenditures  and the  state wanted  to take  20 percent  of                                                                    
royalties  to pay  for  part of  the PF,  it  would mean  20                                                                    
percent less for  general fund spending. It  would require a                                                                    
larger CBR draw.  He continued that instead  of taking money                                                                    
from the  ERA the money  would be taken  out of the  CBR. He                                                                    
asked if  he was  accurate. Commissioner  Hoffbeck answered,                                                                    
"yes." He added  that the intent was for the  monies to come                                                                    
out of royalties first. The net  effect was if there was not                                                                    
enough in the general fund, a  larger CBR draw would have to                                                                    
be  made.  It  did  not  make  any  mathematical  difference                                                                    
whether the money was used  for the dividend or for covering                                                                    
the remaining general fund expenditures.                                                                                        
                                                                                                                                
2:03:06 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck   detailed  slide  14:   "APFPA  with                                                                    
Transfer, Full  Fiscal Plan: Dividend  paid per  Person." He                                                                    
reported that  the plan had  a guaranteed dividend  of $1000                                                                    
until  2041 when  it would  increase to  $1416. Essentially,                                                                    
the dividend  amount would  be about  $1000 for  the 24-year                                                                    
life of the forecast.                                                                                                           
                                                                                                                                
Commissioner  Hoffbeck advanced  to  slide  15: "APFPA  with                                                                    
Transfer, Full Fiscal Plan: Nominal  Fund Size." He detailed                                                                    
that  the 2041  value of  the PF  would be  $99.254 billion,                                                                    
which would  start at $53.4  billion. The real value  of $99                                                                    
billion  would  equal $58.188  million.  The  fund would  be                                                                    
growing at a rate greater  than inflation. It would not only                                                                    
protect the fund  but would allow the fund  to grow slightly                                                                    
over time.  The earnings reserve account  failure rate would                                                                    
be 1.2  percent. There  would be very  little chance  of the                                                                    
ERA being  depleted to  the point  where the  annual payment                                                                    
would not be  viable. The failure rate was  reflected in the                                                                    
following slide.                                                                                                                
                                                                                                                                
Commissioner  Hoffbeck continued  to slide  16: "APFPA  with                                                                    
Transfer, Full  Fiscal Plan:  Cumulative ERA  Failure Rate."                                                                    
He made the  point that the chart did not  show much because                                                                    
the failure rate followed the same line as the base line.                                                                       
                                                                                                                                
Representative Ortiz  returned to  slide 14 that  showed the                                                                    
projected dividends  until 2041. He asked  about the factors                                                                    
in play that  would prevent the dividend  from increasing in                                                                    
value with  at least inflation. He  thought the commissioner                                                                    
was saying that it would  remain around $1000 into 2041. The                                                                    
value would  consistently go down.  He wondered what  was in                                                                    
the  formula that  would prevent  the dividend  from keeping                                                                    
pace with inflation. Commissioner  Hoffbeck answered that it                                                                    
was primarily  the production forecast. The  royalty side of                                                                    
the  equation   was  based  on  price   and  production.  He                                                                    
indicated the  state did not  see large price  increases and                                                                    
saw falling production over time.  He commented, "That piece                                                                    
is going to drop."                                                                                                              
                                                                                                                                
Commissioner  Hoffbeck   detailed  slide  17:   "APFPA  with                                                                    
Transfer,  No Fiscal  Plan: Dividend  paid per  Person." The                                                                    
slide  assumed that  the  current  structural deficit  would                                                                    
remain in  the budget. Once  the CBR was depleted  the state                                                                    
would turn to the ERA to  continue to fill the gap. He posed                                                                    
the  question  about  what  impact  it  would  have  on  the                                                                    
durability  of the  PF and  the  size of  the dividend.  The                                                                    
dividend would start  out at $1000 and would  grow to $1,239                                                                    
over the 24-year  projection which was about  $200 less than                                                                    
under a full  fiscal plan. The real value was  less than the                                                                    
$1000.                                                                                                                          
                                                                                                                                
2:07:03 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck advanced  to  slide  18: "APFPA  with                                                                    
Transfer, No  Fiscal Plan: Nominal  Fund Size." In  2041 the                                                                    
median  value  of  the  fund  would  be  $76  billion  which                                                                    
provided a nominal  value of $44.6 billion.  The start value                                                                    
was $53.4  billion. In the  current scenario there  would be                                                                    
degradation of the fund itself  over the period. There would                                                                    
be an  ERA failure rate of  45.38 percent. There was  a very                                                                    
good chance that  at some point there would not  be money in                                                                    
the  ERA  to  make  the  dividend  payment  or  for  funding                                                                    
government expenditures.                                                                                                        
                                                                                                                                
Vice-Chair  Gara commented  that he  had heard  Commissioner                                                                    
Hoffbeck state  that without a  fiscal plan the  state would                                                                    
run  out of  savings and  earnings  reserve money  to pay  a                                                                    
dividend. He  thought the commissioner was  saying that with                                                                    
no fiscal  plan the  state would still  have a  dividend. He                                                                    
asked  for clarity  about the  chart. Commissioner  Hoffbeck                                                                    
indicated  that the  chart reflected  a permanent  fund only                                                                    
solution. All  that would  be done  would be  to restructure                                                                    
the PF without any other changes.                                                                                               
                                                                                                                                
Representative Wilson  asked about the amount  of the budget                                                                    
and about the  growth rate. She wondered  about the starting                                                                    
number without a fiscal plan.  She wondered about the growth                                                                    
rate  and  a  percentage  decrement.  Commissioner  Hoffbeck                                                                    
directed members to slide 4  which showed the budget numbers                                                                    
in a  graph. The budget stayed  flat through FY 20  and then                                                                    
started to grow with inflation.                                                                                                 
                                                                                                                                
Representative  Wilson clarified  that  flat  meant no  gain                                                                    
whatsoever  and  no  new  contracts. She  asked  if  he  was                                                                    
talking  about the  same amount  until FY  20 at  which time                                                                    
inflation   would   be   included.   Commissioner   Hoffbeck                                                                    
responded  that he  could not  drill down  specifically, but                                                                    
confirmed      that      the      budget      amount      of                                                                    
$4.2  billion would  essentially  be what  it was  currently                                                                    
through 2020.                                                                                                                   
                                                                                                                                
Representative Wilson  thought it  would be very  helpful to                                                                    
get  further clarification  about  how  the numbers  worked.                                                                    
Commissioner  Hoffbeck commented  that there  was no  dollar                                                                    
growth in  the budget through  2020. If there  were contract                                                                    
increases,  they would  be absorbed  in other  parts of  the                                                                    
budget.  After 2020,  growth would  be seen  at the  rate of                                                                    
inflation.                                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck continued  to slide  19: "APFPA  with                                                                    
Transfer, No Fiscal Plan: Cumulative  ERA Failure Rate." The                                                                    
chart  showed   when  the  state  would   start  seeing  the                                                                    
potential for failure in the  ERA without a fiscal plan. The                                                                    
earnings reserve  account would stay  stable up to  the late                                                                    
2020s. The  chance of failure would  grow dramatically after                                                                    
that time.                                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck continued  to  slide  20 "APFPA  with                                                                    
Transfer,  No Fiscal  Plan: Median  UGF Revenue/Budget."  He                                                                    
explained that the  reason the chance of  failure would grow                                                                    
dramatically after  2028 was because,  under the  APFPA only                                                                    
solution with the  FY 17 transfer, there would  be CBR money                                                                    
available to fill  the void until 2028, after  which the ERA                                                                    
would be tapped.                                                                                                                
                                                                                                                                
Co-Chair  Seaton asked  if  "Other  revenue Draws"  included                                                                    
only the  CBR. He wondered  if it included drawing  from the                                                                    
higher education  fund or the Power  Cost Equalization fund.                                                                    
Commissioner Hoffbeck responded, "That's only the CBR."                                                                         
                                                                                                                                
Commissioner Hoffbeck relayed slide  21: "APFPA without CBRF                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   Permanent  Fund  Starting   Value:  $55.8   billion  (See                                                                    
   estimate below)                                                                                                              
   • Realized portion of corpus: $40.7 billion                                                                                
   • Realized portion of ERA: $8.7 billion                                                                                    
   • Unrealized earnings held by the fund: $6.3 billion                                                                       
 • Starting value was estimated based on the following:                                                                       
   • $54.9 billion estimated EOY 2017 balance of  PF under                                                                    
     status quo                                                                                                                 
   • Plus $0.8 billion from the difference in the  CY 2017                                                                    
     dividend calculation                                                                                                       
                                                                                                                                
  Investment Return: Callan Associate's 10-year forecast                                                                        
   • Total return:   6.95%  geometric,   12.32%   standard                                                                    
     deviation                                                                                                                  
   • Statutory return: P10 =  3.70%, P50  =  6.24%, P90  =                                                                    
     8.14%                                                                                                                      
   • Inflation rate: 2.25%                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  indicated the  slide reflected  an FY                                                                    
18 start. He reported that  the scenario was very similar to                                                                    
the  previous  two  scenarios he  had  just  discussed.  The                                                                    
difference was  that there  would not  be an  FY 17  draw. A                                                                    
draw  would begin  in FY  18. The  scenario would  include a                                                                    
full  plan to  fix everything  as well  as implementing  the                                                                    
APFPA.  The Permanent  Fund starting  value would  be higher                                                                    
because of  a lack of an  FY 17 draw. The  other significant                                                                    
difference could be found on the following slide.                                                                               
                                                                                                                                
Commissioner Hoffbeck relayed slide  22: "APFPA without CBRF                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   Permanent  Fund  Starting   Value:  $55.8   billion  (See                                                                    
   estimate below)                                                                                                              
   • Realized portion of corpus: $40.7 billion                                                                                
   • Realized portion of ERA: $8.7 billion                                                                                    
   • Unrealized earnings held by the fund: $6.3 billion                                                                       
 • Starting value was estimated based on the following:                                                                       
     • $54.9 billion estimated EOY 2017 balance of PF under                                                                   
        status quo                                                                                                              
     • Plus $0.8 billion from the difference in the CY 2017                                                                   
        dividend calculation                                                                                                    
                                                                                                                                
  Investment Return: Callan Associate's 10-year forecast                                                                        
   • Total return:   6.95%  geometric,   12.32%   standard                                                                    
     deviation                                                                                                                  
   • Statutory return: P10 = 3.70%, P50 = 6.24%, P90 =                                                                        
     8.14%                                                                                                                      
   • Inflation rate: 2.25%                                                                                                    
                                                                                                                                
Commissioner Hoffbeck explained that  the CBR would be lower                                                                    
because of not including the payback to the CBR.                                                                                
                                                                                                                                
Commissioner Hoffbeck relayed slide  23: "APFPA without CBRF                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
• Dividend Calculation:                                                                                                       
   • The sum of:                                                                                                              
     • 20% of the POMV payout before reductions, and                                                                          
     • 20% of the unrestricted royalties (about 15% of                                                                        
      total royalties) from the most recent FY ended                                                                            
   • Overwriting the above calculation, the dividend for                                                                      
     CY2018 is $1,000/person.                                                                                                   
                                                                                                                                
• Inflation Proofing:                                                                                                         
   • If four times the 5.25% POMV payout remains in the ERA                                                                   
     after the POMV transfer, the amount over the four                                                                          
     times the POMV is transferred into the corpus.                                                                             
                                                                                                                                
Commissioner   Hoffbeck    reported   that    the   dividend                                                                    
calculation would be the same as previously calculated.                                                                         
                                                                                                                                
2:12:31 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  detailed  slide 24:  "APFPA  without                                                                    
Transfer, Full  Fiscal Plan: Dividend  paid per  Person." He                                                                    
detailed the impact  on the dividend. He  relayed that, with                                                                    
a FY 18  starting date and a full fiscal  plan, the dividend                                                                    
would start at  $1000 and grow to $1468. He  added that with                                                                    
an FY 17  draw it would equal $1416 -  a difference of about                                                                    
$50 without a FY 17 draw.                                                                                                       
                                                                                                                                
Co-Chair Seaton asked about slide  22. He was looking at the                                                                    
CBR value  of $4.4  billion. On  slide 6  the CBR  value was                                                                    
listed  at  $4.4  billion.  However,  he  thought  that  the                                                                    
commissioner had stated  that if the draw did  not occur the                                                                    
CBR would  be higher.  Commissioner Hoffbeck  suggested that                                                                    
rather than looking at slide  6, Co-Chair Seaton should look                                                                    
at  slide 12.  It showed  the  CBR listed  at $6.8  billion.                                                                    
Slide 12 reflected an effective date of FY 17.                                                                                  
                                                                                                                                
Commissioner Hoffbeck  advanced to slide 25:  "APFPA without                                                                    
Transfer, Full Fiscal Plan: Nominal  Fund Size." He reported                                                                    
that the  slide showed  the effect  on the PF  with a  FY 18                                                                    
effective date. The  fund would grow to  $104,079 billion in                                                                    
a 24-year  period. The fund would  have a real value  of $61                                                                    
billion.  The fund  would  start out  at  $55.8 billion  and                                                                    
would  grow to  $61 billion.  In  the scenario  with a  full                                                                    
fiscal  plan the  fund would  grow  at a  rate greater  than                                                                    
inflation. The  earnings rate  estimated failure  rate would                                                                    
be 0.18 percent or less than one-fifth of 1 percent.                                                                            
                                                                                                                                
Commissioner Hoffbeck continued to  slide 26: "APFPA without                                                                    
Transfer, Full  Fiscal Plan:  Cumulative ERA  Failure Rate."                                                                    
He remarked  that there  would be  little chance  of failure                                                                    
under the scenario.                                                                                                             
                                                                                                                                
Commissioner  Hoffbeck  detailed  slide 27:  "APFPA  without                                                                    
Transfer,  No Fiscal  Plan: Dividend  paid  per Person."  He                                                                    
explained  that the  slide  reflected a  scenario  in FY  18                                                                    
without  solving any  of the  fiscal  issues. The  Permanent                                                                    
Fund Dividend would  go from $1468 under the  full plan down                                                                    
to $1271 over the life of the 24-year projection.                                                                               
                                                                                                                                
Commissioner Hoffbeck  advanced to slide 28:  "APFPA without                                                                    
Transfer, No  Fiscal Plan: Nominal  Fund Size."  He reported                                                                    
that  the nominal  value of  the  fund would  drop to  $46.3                                                                    
billion  down   from  $55.8  billion.   There  would   be  a                                                                    
degradation of the fund without  fixing the remainder of the                                                                    
fiscal  problem  as  well as  implementing  the  APFPA.  The                                                                    
failure rate of the ERA would be 44.61 percent.                                                                                 
                                                                                                                                
Commissioner Hoffbeck continued to  slide 29: "APFPA without                                                                    
Transfer, No  Fiscal Plan: Cumulative ERA  Failure Rate." He                                                                    
highlighted that  the failure rate  would start to  climb in                                                                    
the late 2020s.                                                                                                                 
                                                                                                                                
Commissioner Hoffbeck continued to  slide 30: "APFPA without                                                                    
Transfer,  No Fiscal  Plan:  Median  UGF Revenue/Budget.  He                                                                    
emphasized that the  CBR would start to run out  in the late                                                                    
2020s at  which time the  state would  have to tap  into the                                                                    
ERA to fill the void.                                                                                                           
                                                                                                                                
2:16:36 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck presented  the conclusions  listed on                                                                    
slide 31 "Conclusions":                                                                                                         
                                                                                                                                
   Status quo situation:                                                                                                        
   • Dividend will collapse                                                                                                   
   • Permanent Fund will be used to fill budget deficits,                                                                     
     depleting value                                                                                                            
                                                                                                                                
   Permanent Fund Protection Act:                                                                                               
   • Stabilizes the dividend and budget with or without CBR                                                                   
     transfer                                                                                                                   
   • However, additional revenue measures or budget cuts                                                                      
     are  required  to  protect  the  fund.  Otherwise,  the                                                                    
     remaining   budget   gap   will   lead   to   unplanned                                                                    
     withdrawals from  the permanent fund that  will degrade                                                                    
     its value.                                                                                                                 
                                                                                                                                
Commissioner Hoffbeck  concluded that there was  very little                                                                    
difference in  durability with  or without  the FY  17 draw.                                                                    
The fund  would be slightly  more durable, as it  would grow                                                                    
larger  and the  dividend would  be slightly  larger with  a                                                                    
start  date in  FY 18.  He suggested  that the  5.25 percent                                                                    
draw  worked  under  the  modeling  -  it  was  durable  and                                                                    
sustainable. All  models containing  a full  fiscal solution                                                                    
worked. However, models without  a full fiscal solution were                                                                    
not  sustainable. Stand-Alone  models  were  not durable  or                                                                    
sustainable. A broader plan was necessary.                                                                                      
                                                                                                                                
Co-Chair  Foster  would be  passing  the  gavel to  Co-Chair                                                                    
Seaton  to discuss  the supplemental  budget.  He asked  for                                                                    
questions from the committee.                                                                                                   
                                                                                                                                
Commissioner   Hoffbeck   indicated  Emma   Pokon,   Special                                                                    
Assistant,  Office of  the Attorney  General, Department  of                                                                    
Law,  was available  for anyone  wanting more  detail or  to                                                                    
walk through  the various forecasts.  She was happy  to meet                                                                    
with   anyone  one-on-one   that  wanted   more  information                                                                    
regarding the modeling.                                                                                                         
                                                                                                                                
Co-Chair  Seaton asked  about the  transfer of  the PFD  for                                                                    
prisoners. He  thought it was  calculated based on  the full                                                                    
dividend.  He  wondered  if  there was  a  necessity  for  a                                                                    
transfer from another  account to fund the  amount. He asked                                                                    
how the amount was accounted. He  wanted to get it on record                                                                    
that there  was a  calculation or a  fund transfer  that the                                                                    
legislature wanted to see.                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck would  have to  get back  to Co-Chair                                                                    
Seaton.                                                                                                                         
                                                                                                                                
HB  61  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
2:19:15 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:25:13 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
HOUSE BILL NO. 95                                                                                                             
                                                                                                                                
     "An  Act  making supplemental  appropriations,  capital                                                                    
     appropriations,   and   other  appropriations;   making                                                                    
     reappropriations;  amending  appropriations;  repealing                                                                    
     appropriations; and providing for an effective date."                                                                      
                                                                                                                                
2:25:13 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton invited Ms. Pitney to come to the table.                                                                        
                                                                                                                                
PAT  PITNEY,  DIRECTOR,  OFFICE OF  MANAGEMENT  AND  BUDGET,                                                                    
OFFICE OF  THE GOVERNOR,  would be reviewing  the components                                                                    
of  the supplemental  budget  request.  She would  highlight                                                                    
some of  the more significant items.  The information packet                                                                    
provided to members had a  list of every change presented in                                                                    
the "FY 2017 Supplemental Bill" (copy on file).                                                                                 
                                                                                                                                
Ms. Pitney reviewed slide  2: "FY2017 Supplemental Summary."                                                                    
She reported  that the total supplemental  request was $51.7                                                                    
million unrestricted  general funds  (UGF) and  $113 million                                                                    
in total. The  supplemental request under review  was one of                                                                    
the smaller requests in the past several years.                                                                                 
                                                                                                                                
Ms. Pitney continued to  slide 3: "UGF/DGF/Other/Fed Summary                                                                    
by Department  (1088)." She indicated that  the slide showed                                                                    
a  breakout   of  the  operating  supplemental   request  by                                                                    
department. The unrestricted  general fund operating request                                                                    
totaled $51.6 million and $95 million in total funds.                                                                           
                                                                                                                                
Ms. Pitney  detailed slide 4: "Statewide  Department Summary                                                                    
-  Capital  Budget (1183)."  The  slide  showed the  capital                                                                    
appropriations which totaled $75,000  UGF and $18 million in                                                                    
total funds.                                                                                                                    
                                                                                                                                
Ms. Pitney advanced to the  detail sheet on slide 5: "FY2017                                                                    
Supplemental  Bill -  Page 1  of 10."  She would  not review                                                                    
every item but  was happy to answer any  questions about any                                                                    
numbers  she did  not cover.  She  referred to  line 2.  The                                                                    
first  request was  an  increase which  included  UGF for  a                                                                    
health   insurance  rate   increase.  The   rate  would   be                                                                    
increasing from $1346  per month to $1555 per  month. In the                                                                    
previous year the administration  had requested an amendment                                                                    
for the  FY 17  budget once it  recognized that  the state's                                                                    
reserves were getting  low and that the state  would need to                                                                    
have a  rate increase for  FY 17. She continued  that rather                                                                    
than a rate  increase, there was a deposit  into the working                                                                    
reserve  in FY  16  that bolstered  the  reserve amount.  It                                                                    
allowed  the state  to receive  the same  rate from  July to                                                                    
January.  The  Department  of   Administration  had  put  in                                                                    
savings  measures   and  had  increased  the   cost  to  all                                                                    
employees for  their health care  premiums. All  the actions                                                                    
were not enough to keep  the reserve healthy. Therefore, the                                                                    
department had to impose a  mid-year rate increase which was                                                                    
out of  the ordinary. It was  the same rate that  was in the                                                                    
FY  18 budget  request. The  total came  to $6.0  million of                                                                    
which  $5.3  million  was  UGF.  She  relayed  that  in  the                                                                    
previous  year the  UGF was  not provided,  but many  of the                                                                    
non-general fund components were  provided for a health rate                                                                    
increase. It  was the reason  the general fund was  a larger                                                                    
part currently.                                                                                                                 
                                                                                                                                
Ms. Pitney moved to the item  listed on line 3. She reported                                                                    
that  furlough  days  were negotiated  into  the  supervisor                                                                    
union contracts. The negotiation  ended after the budget was                                                                    
put  together the  previous year.  The result  was that  the                                                                    
budget was reduced in accordance  with the mandated furlough                                                                    
days.                                                                                                                           
                                                                                                                                
Vice-Chair  Gara  commented  that  the court  system  had  a                                                                    
budget  savings  measure  by offering  their  own  voluntary                                                                    
retirement  incentive plan.  If a  person was  3 years  past                                                                    
retirement age they were offered  3 months pay. As a result,                                                                    
several   folks  retired   generating  a   significant  cost                                                                    
savings. He  wondered if such a  plan was in place  in other                                                                    
departments.  Ms.  Pitney  thought  the  question  would  be                                                                    
better answered another day.                                                                                                    
                                                                                                                                
                                                                                                                                
2:31:41 PM                                                                                                                    
                                                                                                                                
Ms.   Pitney  scrolled   to  slide   6  (Page   2):  "FY2017                                                                    
Supplemental Bill  - Page 2 of  10." She pointed to  line 6.                                                                    
She  explained  that  the Public  Defender  agency  received                                                                    
receipts  from collections  for representing  clients. Often                                                                    
those collections  came from  garnishing clients'  PFDs. The                                                                    
collections were  down because  of the lower  dividend rate.                                                                    
The supplemental  request would replace the  amount expected                                                                    
from collections not materialized.                                                                                              
                                                                                                                                
Representative  Wilson   asked  when   the  last   time  the                                                                    
administration reviewed  the criteria  for qualifying  for a                                                                    
public defender.  She was aware  that a formula  was applied                                                                    
based on income. There were  some clients that would qualify                                                                    
even  though  they  did  not  have  money  immediately.  She                                                                    
thought that  was the reason  for the $455,000  request. She                                                                    
wondered  if  the  criteria   needed  updating.  Ms.  Pitney                                                                    
responded that  the amount a  defendant paid was based  on a                                                                    
court decision.  The issue concerning  the criteria  used by                                                                    
judges to  determine how much  should be paid  was currently                                                                    
being addressed. She commented  that conversations among the                                                                    
different affected  parties were  some of the  best outcomes                                                                    
of the justice reform effort in the previous year.                                                                              
                                                                                                                                
Ms.  Pitney reviewed  item  7, a  federal  grant that  would                                                                    
allow the state  to address some audit  issues pertaining to                                                                    
commercial  driver's  license  examiners.  The  state  would                                                                    
incur  an ongoing  cost  of $36,000  for  the software  that                                                                    
would be implemented.                                                                                                           
                                                                                                                                
Ms. Pitney  detailed that line  8 was  an increase due  to a                                                                    
classification   study  completed   in  December   of  2016.                                                                    
Occupational licensing examiners would  move from a range 13                                                                    
to a range 14. There was  also a corresponding amount in the                                                                    
FY 18 budget.                                                                                                                   
                                                                                                                                
Representative  Pruitt  asked  for the  amount.  Ms.  Pitney                                                                    
responded that  it was  approximately $165,000  or $170,000.                                                                    
She would provide the exact number later.                                                                                       
                                                                                                                                
Ms. Pitney  discussed slide 7:  "FY2017 Supplemental  Bill -                                                                    
Page  3 of  10."  The  two items  listed  were technical  in                                                                    
nature.                                                                                                                         
                                                                                                                                
Ms. Pitney  spoke to  slide 8:  "FY2017 Supplemental  Bill -                                                                    
Page 4  of 10."  Lines 11,  12, 13,  and line  14 on  page 5                                                                    
[slide  8]  were  supplemental  requests  for  the  Medicaid                                                                    
program. She  recalled that  in the  prior summer  the state                                                                    
relayed payments  in FY 16  pushing them into FY  17 because                                                                    
the FY  16 budget  was insufficient  to cover  the payments.                                                                    
The state  essentially wrote 2  checks in FY 17.  The amount                                                                    
requested reflected  the 2  checks. The  amount of  money in                                                                    
Medicaid  was about  $580 million.  The total  would be  $27                                                                    
million higher  with the supplemental request.  She reported                                                                    
that the amount  was just over $60 million less  than it had                                                                    
been  in  FY  15.  In  FY 17,  not  counting  the  expansion                                                                    
population, there  had been a 9  percent enrollment increase                                                                    
and  a 12  percent increase  in utilization.  Therefore, all                                                                    
the  reform efforts  moving billing  from  state funding  to                                                                    
federal funding  has allowed the Medicaid  program to remain                                                                    
steady and below where the state was in FY 15.                                                                                  
                                                                                                                                
2:37:33 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  asked her to  repeat her  previous comments                                                                    
about  the  increase  in   utilization  and  the  associated                                                                    
increase in  costs and the comparison  between fiscal years.                                                                    
Ms.  Pitney  reported that  in  2017  the number  of  people                                                                    
eligible for  Medicaid increased 9 percent.  The utilization                                                                    
was  up  a  total  of  12 percent.  She  clarified  she  was                                                                    
speaking of the regular  Medicaid program, the non-expansion                                                                    
program.  She reported  that there  were reform  efforts and                                                                    
several savings  initiatives occurring  prior to  the reform                                                                    
efforts. The state was about  $60 million below where it was                                                                    
in FY 16 on an annual basis. It was a recurring savings.                                                                        
                                                                                                                                
Co-Chair  Seaton  asked  if  it  was  before  or  after  the                                                                    
supplemental  request.   Ms.  Pitney  responded   after  the                                                                    
request.                                                                                                                        
                                                                                                                                
Representative  Wilson   asked  for  an  actual   number  of                                                                    
participants. She wanted to know  how many participants made                                                                    
up the 9  percent she mentioned. She  thought the percentage                                                                    
was substantial.  She wondered what  the reason was  for the                                                                    
substantial increase.  Ms. Pitney could provide  the numbers                                                                    
after the  meeting. She thought the  increase was reflective                                                                    
of the  economy and  job losses and  the number  of Alaska's                                                                    
aging population.                                                                                                               
                                                                                                                                
Representative Wilson was aware there  was not a cap for the                                                                    
regular Medicaid program. She  thought that for the optional                                                                    
portions of Medicaid  a limit could be set.  She thought the                                                                    
legislature  had  set  a  limit. She  wondered  if  she  was                                                                    
correct.  Ms.   Pitney  would  have  to   consult  with  the                                                                    
Department of Health and Social Services.                                                                                       
                                                                                                                                
Representative Wilson wanted the  information. She was under                                                                    
the impression  that the optional programs  were capped. She                                                                    
knew the  medical portion cold  not be capped.  However, the                                                                    
dental and other programs could be capped.                                                                                      
                                                                                                                                
Co-Chair Seaton  asked if Representative Wilson  was talking                                                                    
about   a  dollar   cap  or   a   limitation  of   services.                                                                    
Representative  Wilson thought  there was  a dollar  cap for                                                                    
the optional plans. Co-Chair Seaton suggested asking HSS.                                                                       
                                                                                                                                
2:42:28 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara was  confused. He referred to pages  4 and 5                                                                    
[slides  8 and  9] and  noted that  for each  line item  the                                                                    
descriptions reflected  FY 16 costs  that the  state delayed                                                                    
paying until  FY 17.  He indicated there  were 4  items with                                                                    
various  amounts including:  $2.9  million, $219,000,  $15.9                                                                    
million,  and $7.6  million. There  were also  unanticipated                                                                    
costs associated with  more people using Medicaid  in FY 17.                                                                    
He only saw delayed payments on the slides.                                                                                     
                                                                                                                                
Ms.   Pitney  responded   that   the  savings   initiatives,                                                                    
memorandum  of  agreements  with providers  allowing  higher                                                                    
billing  on the  federal  side,  and utilization  management                                                                    
initiatives put  in place  by the  Department of  Health and                                                                    
Social  Services (DHSS)  would offset  unanticipated growth.                                                                    
The program was  being managed to keep  costs contained. She                                                                    
suggested  that, had  the department  not had  to write  the                                                                    
checks in  FY 17 from FY  16, it would have  met the overall                                                                    
budget  target. They  were doing  many things  and would  be                                                                    
very  tight  at   the  end  of  the  year   in  meeting  the                                                                    
department's  overall  costs.  She reported  the  department                                                                    
believed  it  would "Squeak  in  under  the wire"  with  the                                                                    
savings initiatives and the reforms put into place.                                                                             
                                                                                                                                
Vice-Chair Gara  stated that in  terms of  the unanticipated                                                                    
increase in the number of  people applying for Medicaid, the                                                                    
state was not seeking  a supplemental request because enough                                                                    
savings  had been  generated. The  savings would  compensate                                                                    
for  the increase  in the  number of  people qualifying  for                                                                    
Medicaid and  who the state was  paying for. He asked  if he                                                                    
was accurate. Ms. Pitney made one correction - 17.                                                                              
                                                                                                                                
Vice-Chair Gara  asked why  the line  items were  4 separate                                                                    
components.  Ms. Pitney  replied  that  each were  different                                                                    
allocations within the appropriation.                                                                                           
                                                                                                                                
Ms. Pitney  addressed to slide 9:  "FY2017 Supplemental Bill                                                                    
- Page  5 of 10."  She noted that the  rest of the  items on                                                                    
page 5  and the first  few items on  page 6 [slide  10] were                                                                    
smaller grants or accounting technical changes.                                                                                 
                                                                                                                                
Ms. Pitney explained to slide  10: "FY2017 Supplemental Bill                                                                    
- Page 6 of 10." She  referred to line 24, the first capital                                                                    
supplemental  request  for  the  Whale  Pass  organizational                                                                    
grant. She explained that when a  new city was formed it was                                                                    
entitled  to   a  $75,000  grant  from   the  Department  of                                                                    
Commerce,  Community  and  Economic  Development.  The  item                                                                    
satisfied statute.                                                                                                              
                                                                                                                                
2:46:48 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg asked about  the money provided to                                                                    
new  municipalities.  He  asked  if  calculations  had  been                                                                    
created  for  second  class  cities.  He  mentioned  student                                                                    
enrollment  counts  and  municipal  assistance.  Ms.  Pitney                                                                    
would  have to  get back  to him.  She noted  that community                                                                    
revenue sharing would be a factor.                                                                                              
                                                                                                                                
Vice-Chair   Gara  stated   that  the   previous  year   the                                                                    
department had come to the  legislature reporting they would                                                                    
be  getting more  aggressive with  leveraging extra  federal                                                                    
funds to try  to replace state funds. He  recalled that many                                                                    
initiatives  had  been presented  to  reduce  the FY  17  by                                                                    
generating extra  federal funds. Currently, more  people had                                                                    
applied  for Medicaid  than  anticipated  (12 percent  more)                                                                    
generating extra costs.  He wondered how the  costs would be                                                                    
offset  by  federal savings  which  he  thought was  already                                                                    
reflected in the  budget in the prior year. He  did not want                                                                    
to see  the department  absorb all the  extra costs.  He was                                                                    
unclear  about  the  real  costs   having  to  do  with  the                                                                    
increased Medicaid  recipients. He asked if  there was extra                                                                    
federal savings  that the department generated  that was not                                                                    
reflected in the FY 17 budget.                                                                                                  
                                                                                                                                
Ms.   Pitney   relayed   that  9   percent   reflected   the                                                                    
additionally eligible, and 12  percent was the actual change                                                                    
year  over  year.  Some of  the  increase  was  anticipated,                                                                    
However, 12  percent was not anticipated.  She thought Vice-                                                                    
Chair Gara's  question was  complex. She  would be  happy to                                                                    
sit down  with DHSS  to discuss  the numbers.  She mentioned                                                                    
that  among  the  savings  initiatives,  some  were  working                                                                    
faster   than  others   generating  a   higher-than-expected                                                                    
savings. She  mentioned pharmacy and travel  agreements. She                                                                    
would be happy to have a stand-alone discussion.                                                                                
                                                                                                                                
2:50:46 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  was concerned with  having a large  gap for                                                                    
the budget  in FY 17 for  Medicaid. The budget in  FY 18 for                                                                    
Medicaid would  reflect the extra  people. He  was concerned                                                                    
with the FY 17 budget absorbing  all the costs for the extra                                                                    
people. He was unsure if  the comparison of the budget years                                                                    
would be true.                                                                                                                  
                                                                                                                                
Co-Chair  Seaton  thought  there   was  some  confusion.  He                                                                    
clarified  that Ms.  Pitney was  saying  that in  FY 17  the                                                                    
state had 9  percent more eligible people and  the state had                                                                    
12  percent   greater  Medicaid  utilization   overall.  The                                                                    
increases  were  offset  in  FY 17  with  savings  that  had                                                                    
occurred. The  costs from FY 16  that were being paid  in FY                                                                    
17 were  independent of  the number  of new  eligible people                                                                    
and the  utilization rate. He  asked if he was  correct. Ms.                                                                    
Pitney responded, "That is correct."                                                                                            
                                                                                                                                
Co-Chair Seaton further commented  that the committee should                                                                    
have had  2 conversations  separately because the  number of                                                                    
people eligible  and the utilization rate  were not included                                                                    
in any of the figures. The  costs were being absorbed in the                                                                    
cost  savings  generated in  the  current  year. He  thought                                                                    
Vice-Chair Gara was asking if  the state had anticipated the                                                                    
questions  and  had reduced  the  budget  by the  amount  of                                                                    
savings, or was the savings  greater than anticipated for FY                                                                    
17.                                                                                                                             
                                                                                                                                
Ms. Pitney responded  the FY 17 budget was  reduced from the                                                                    
FY  16 budget  for  savings initiatives.  Many  of the  cost                                                                    
savings were going well and  others were not. Independently,                                                                    
the  Medicaid group  was managing  the program  and managing                                                                    
their care  utilization to limit  costs where  possible. The                                                                    
administration was asking the  department to manage as tight                                                                    
as possible.  The administration  believed the FY  17 budget                                                                    
would be  adequate to meet  FY 17  costs. There was  a small                                                                    
chance  the state  might have  to  check write  into FY  18.                                                                    
Early on,  it became apparent that  the administration would                                                                    
have to come back to the committee.                                                                                             
                                                                                                                                
2:54:58 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  thought  the  math  did  not  add  up.  He                                                                    
reported that  he had  heard from  the department  that they                                                                    
were trying  to achieve  the federal  savings in  the budget                                                                    
the prior year. The department  had not been able to achieve                                                                    
all the  savings. On  one hand, the  state had  less federal                                                                    
money  coming in  than was  expected. Also,  there was  some                                                                    
portion of  the 12 percent  of people seeking  Medicaid that                                                                    
the state  anticipated in the  previous year and put  in the                                                                    
budget. Additionally,  there were more people  that received                                                                    
Medicaid services. It appeared  that Alaska had less federal                                                                    
dollars  coming in  for federal  replacement money  than the                                                                    
state had  hoped for and  more Medicaid costs going  out. He                                                                    
did not  understand how  there could  be less  federal funds                                                                    
and   more  state   expenditures,  without   asking  for   a                                                                    
supplemental.                                                                                                                   
                                                                                                                                
Ms. Pitney  responded that his  logic was fair.  The federal                                                                    
savings  did not  line up  program-by-program, but  lined up                                                                    
collectively.  The  state  would   receive  a  savings.  The                                                                    
administration was  watching the department  items including                                                                    
expenditures and  every check that was  written monthly. The                                                                    
administration  believed   that  through   the  department's                                                                    
efforts it  could get through  the current fiscal  year with                                                                    
the  amount of  money being  requested. There  was a  slight                                                                    
chance that  a small amount would  have to be written  in FY                                                                    
18.                                                                                                                             
                                                                                                                                
Vice-Chair Gara was frustrated because  the costs were FY 17                                                                    
expenses.  He anticipated  that there  would be  real FY  17                                                                    
costs. He argued that more  people could not be treated with                                                                    
Medicaid services for free with  annual increases to medical                                                                    
care costs. He  opined that there would be an  FY 18 amended                                                                    
budget that  would add  costs to the  budget when  they were                                                                    
really  FY 17  costs that  should  be paid.  He thought  the                                                                    
budget comparison  between years  would be skewed  making it                                                                    
appear that the budget was increasing.                                                                                          
                                                                                                                                
Ms.  Pitney  acknowledged  Vice-Chair Gara'S  concerns.  The                                                                    
administration was  confident enough  that the FY  17 budget                                                                    
would meet the FY 17 needs.  There was a chance that all the                                                                    
management efforts  would fall a  little short. If  that was                                                                    
the  case,  the  administration   would  come  back  to  the                                                                    
legislature.  The administration  felt confident  enough. It                                                                    
wanted to  keep the supplemental requests  low while leaving                                                                    
the pressure to manage  the program high. The administration                                                                    
thought  it could  get  through the  current  year with  the                                                                    
amount requested.                                                                                                               
                                                                                                                                
Representative  Guttenberg reported  that  the expansion  of                                                                    
Medicaid  brought  in  a  new group  of  people,  more  than                                                                    
anticipated. Some  of the projected savings  was intangible.                                                                    
He spoke  of fewer  emergency rooms  and better  handling of                                                                    
chronic  illnesses.  He asked  if  there  was an  aspect  of                                                                    
measuring the changes.  He wondered about the  effect of the                                                                    
new group  on intangible items.  He asked if  the department                                                                    
was  trying  to  measure  the   changes  with  the  expanded                                                                    
Medicare    [Medicaid]   group.    Ms.   Pitney    responded                                                                    
affirmatively.                                                                                                                  
                                                                                                                                
2:59:46 PM                                                                                                                    
                                                                                                                                
Representative  Ortiz  returned  to   the  $60  million.  He                                                                    
understood  that  the  state  spent  $60  million  less  for                                                                    
Medicaid than it  did in 2015. He asked if  he was accurate.                                                                    
Ms.  Pitney answered,  "Yes." Representative  Ortiz replied,                                                                    
"I feel good about that. Thanks."                                                                                               
                                                                                                                                
Ms. Pitney  advanced to slide 11:  "FY2017 Supplemental Bill                                                                    
- Page  7 of 10."  She explained that  items 25 and  26 were                                                                    
the  Department   of  Fish   and  Game   (DFG)  supplemental                                                                    
requests. The first  was for a continuation  of studies that                                                                    
began  in  2013.  There  were   2  groups,  Pacific  Seafood                                                                    
Processors  and  Northern   Southeast  Regional  Aquaculture                                                                    
Association    Incorporated,   that    were   funding    the                                                                    
continuation of the studies. The  second request fulfilled a                                                                    
necessary  match  and  the  federal  funds  to  receive  the                                                                    
Pittman Robertson funds that were  available for Alaska. The                                                                    
match  source would  come from  DFG  funding. She  expounded                                                                    
that the  money was designated for  several capital projects                                                                    
that were part of a prioritized list.                                                                                           
                                                                                                                                
Co-Chair  Seaton asked  whether the  funding match  would be                                                                    
ongoing  or   if  additional  federal  funding   had  become                                                                    
available  that   had  not  been  anticipated.   Ms.  Pitney                                                                    
reported  there  had  been  periodic  capital  requests  for                                                                    
Pittman Robertson  funding. The current item  was a periodic                                                                    
request. In  the past, the  request had been submitted  on a                                                                    
regular basis  as part of  the supplemental bill,  which she                                                                    
had not  been aware  of. However,  she believed  the request                                                                    
should have been part of the FY 17 or FY 19 budget.                                                                             
                                                                                                                                
Ms. Pitney  highlighted line  30 on page  7 [slide  11]. The                                                                    
request was technical in nature.  She explained that 2 years                                                                    
prior, capital project funding had  been inserted because of                                                                    
several ongoing  negotiations. The  request would  allow the                                                                    
Department of  Administration to  continue to use  the funds                                                                    
in labor negotiations as necessary.                                                                                             
                                                                                                                                
Ms.  Pitney continued  to line  31  on the  same slide.  She                                                                    
detailed  the request  for an  appropriation for  the Alaska                                                                    
Land Mobile Radio (ALMAR) system.  The amount of the request                                                                    
was $3 million. The amount  would come from money originally                                                                    
appropriated for  a car  driving range  at the  Sitka Police                                                                    
Academy.  The Department  of Public  Safety  felt the  money                                                                    
would  be better  spent maintaining  the  ALMAR system.  The                                                                    
administration was  $1.5 million  short of the  needed funds                                                                    
outside  of the  $3 million  and was  currently looking  for                                                                    
another source for the additional monies.                                                                                       
                                                                                                                                
3:04:51 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  asked if the  money would be  used to                                                                    
maintain or  upgrade the system.  Ms. Pitney  responded that                                                                    
the money would  be used for both  the equipment maintenance                                                                    
and a refresh of the system.                                                                                                    
                                                                                                                                
Representative  Pruitt  asked  about  what  the  legislature                                                                    
should expect  in the future  in terms of  funding requests.                                                                    
Ms. Pitney  indicated that the  amount would  be consistent.                                                                    
State records  showed $5 million  to $7 million  being spent                                                                    
on the  system each  year. It was  an expensive  system used                                                                    
throughout the state by public  safety employees. It was the                                                                    
state's statewide emergency communications system.                                                                              
                                                                                                                                
Representative  Pruitt  asked  if  the  state  upgraded  the                                                                    
system  each year.  He asked  for clarification.  Ms. Pitney                                                                    
used the example  of software upgrades. They  did not happen                                                                    
every  year.  However,  the equipment  maintenance  happened                                                                    
every year. It  depended on what maintenance  was being done                                                                    
each year. It was cyclical.                                                                                                     
                                                                                                                                
Ms. Pitney  advanced to slide 12:  "FY2017 Supplemental Bill                                                                    
- Page  8 of 10."  She spoke to  line 32, which  would allow                                                                    
the  state  to  receive  a  federal grant.  Line  33  was  a                                                                    
significant item. The  amount of the request  was $8 million                                                                    
for  the  Department  of  Corrections   (DOC).  One  of  the                                                                    
Medicaid  expansion   savings  came  in  the   form  of  the                                                                    
department  being  able  to   bill  Medicaid  for  prisoners                                                                    
hospitalized  for  more  than   24  hours.  She  noted  that                                                                    
although  the provision  was working,  the total  healthcare                                                                    
costs for  inmates did not  materially change by  being able                                                                    
to  bill for  extended  hospital stays.  The department  was                                                                    
seeing  increased costs  because of  nursing staff  turnover                                                                    
resulting  in overtime  and temporary  hiring costs.  Higher                                                                    
drug  costs and  higher  than  anticipated utilization  also                                                                    
contributed  to  increased  costs.  She  reported  that  the                                                                    
department had  asked for  $11 million  to cover  the costs.                                                                    
The  administration worked  with the  department to  look at                                                                    
management action that could be  taken to contain costs. The                                                                    
funding of $11  million included the $8  million request and                                                                    
cost savings  resulting from  tighter management  within the                                                                    
healthcare area. Hiring nurses  to provide adequate coverage                                                                    
would be the most effective  method of reducing costs within                                                                    
the  department.   She  asked   the  commissioner   and  his                                                                    
management team to scrutinize every  cost to find $3 million                                                                    
in savings.  She reiterated that  only $8 million  was being                                                                    
requested from the general fund.                                                                                                
                                                                                                                                
3:10:22 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  understood if  an  inmate  was at  a                                                                    
halfway  house or  on electronic  monitoring  they would  be                                                                    
able  to  take advantage  of  Medicaid  expansion. Yet,  the                                                                    
Department of Corrections had reduced  the number of halfway                                                                    
houses  by  about  $8  million.  The  electronic  monitoring                                                                    
program (EMP) had also been cut  in half from 400 to 200. In                                                                    
terms of  high medical  costs, halfway  houses and  EMP were                                                                    
two  avenues the  state  was not  utilizing.  She had  heard                                                                    
stories of  people walking away  from halfway  houses, which                                                                    
she considered to  be a contract issue. She  believed it was                                                                    
up  to the  contractor to  make  sure [people  did not  walk                                                                    
away]. She  thought it was  unreasonable to hope to  see the                                                                    
savings by  prisoners only being hospitalized  for 24 hours.                                                                    
She imagined  hospitals would want  to them  [prisoners] out                                                                    
as  soon as  possible to  avoid paperwork.  She thought  the                                                                    
high costs were  due to prisoners not being  able to utilize                                                                    
options such as halfway houses  and the EMP. She argued that                                                                    
further  savings  could  not   only  be  found  in  Medicaid                                                                    
expansion but  within the prison  system itself.  Ms. Pitney                                                                    
would investigate the issue.                                                                                                    
                                                                                                                                
Vice-Chair Gara  was concerned  with the  corrections issue.                                                                    
The commissioner  of DOC  had said  that the  department had                                                                    
$11   million  in   unanticipated   costs.  The   department                                                                    
requested  an  $11  million  increment   to  deal  with  the                                                                    
shortfall.   In  turn,   the  administration   directed  the                                                                    
department to  find $3.7 million  in savings that  was never                                                                    
identified in  the budget in  the previous year  and limited                                                                    
its supplemental request  to $8 million. He asked  if he was                                                                    
right in his interpretation. Ms. Pitney replied, "Yes."                                                                         
                                                                                                                                
Co-Chair Seaton  stated that DOC  had identified one  of the                                                                    
problems   having  to   do  with   medical  facilities   not                                                                    
identifying  the  times   people  were  out  [hospitalized],                                                                    
hence, the 24-hour period was  not tracked. Therefore, there                                                                    
was  no  mechanism  to  bill Medicaid  for  the  95  percent                                                                    
federal reimbursement. He asked if  the issue had been taken                                                                    
care  of.  Ms.  Pitney  responded  that  the  staff  of  the                                                                    
commissioner's  office looked  at the  bills to  confirm the                                                                    
timeframe. The  office was actively  managing the  issue. In                                                                    
the case  where someone had  stayed over 24-hours  they sent                                                                    
it back.  The office  was managing the  issue on  a case-by-                                                                    
case basis.                                                                                                                     
                                                                                                                                
Co-Chair  Seaton  asked if  things  were  now being  tracked                                                                    
properly.   Ms.   Pitney   responded  that   there   was   a                                                                    
disincentive for  the provider:  It was  easier to  bill DOC                                                                    
than  to  bill  Medicaid. Also,  providers  received  higher                                                                    
reimbursements if they billed  DOC rather than Medicaid. She                                                                    
relayed  that  there  were   some  built-in  incentives  and                                                                    
disincentives  that she  hoped  to manage.  She thought  the                                                                    
issues were longer-term contract management issues.                                                                             
                                                                                                                                
3:15:09 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg suggested  that  if the  provider                                                                    
billed DOC  they received a  higher reimbursement  rate than                                                                    
if they  billed Medicaid.  He wondered  what rate  the state                                                                    
received when  it returned to  Medicaid for billing  for the                                                                    
same service  - the higher  or lower rate. Ms.  Pitney asked                                                                    
Representative Guttenberg to repeat his question.                                                                               
                                                                                                                                
Representative Guttenberg  heard Ms.  Pitney state  that the                                                                    
provider  would  rather bill  DOC  because  they received  a                                                                    
higher  reimbursement  rate  than if  they  billed  Medicaid                                                                    
directly.  He  wondered  if  the   state  got  reimbursed  a                                                                    
comparable  amount.  He  wondered  which  number  the  state                                                                    
received.  Ms. Pitney  answered that  the provider  received                                                                    
the Medicaid rate if they  were billed on Medicaid which was                                                                    
lower than if  they billed DOC directly. She  added that the                                                                    
rate could be adjusted after the transition.                                                                                    
                                                                                                                                
Vice-Chair Gara asked  if the $11 million  shortfall for DOC                                                                    
had  anything  to do  with  withheld  felon PFD  funds.  Ms.                                                                    
Pitney responded  in the negative. The  current year's felon                                                                    
funds  were based  on  the prior  year's  check amount.  The                                                                    
amount in the budget was lagging a year.                                                                                        
                                                                                                                                
Ms. Pitney  advanced to slide 13:  "FY2017 Supplemental Bill                                                                    
- Page 9  of 10." She spoke  to line 37 which  was a special                                                                    
appropriation for  a class V injection  well consent decree.                                                                    
The agreement  between the Department of  Transportation and                                                                    
Public  Facilities and  the Environmental  Protection Agency                                                                    
had to do with the clean-up  of how oil was collected in the                                                                    
maintenance  stations. She  addressed line  38 having  to do                                                                    
with refinancing.  There was  a savings  of $655  million by                                                                    
refinancing the Goose Creek debt.                                                                                               
                                                                                                                                
Representative  Pruitt  asked  what  terms  changed  in  the                                                                    
refinancing agreement.  He wondered if the  state obtained a                                                                    
better  financing  rate  or extended  the  financing  for  a                                                                    
longer time. Ms.  Pitney was happy to  provide more details.                                                                    
However,  the  change  was  made  primarily  because  of  an                                                                    
interest rate reduction.  Representative Pruitt confirmed he                                                                    
wanted to see the refinancing details.                                                                                          
                                                                                                                                
3:19:11 PM                                                                                                                    
                                                                                                                                
Ms. Pitney  advanced to slide 14:  "FY2017 Supplemental Bill                                                                    
- Page 10  of 10." Ms. Pitney spoke about  line 39 regarding                                                                    
a $3 million request for  the disaster relief fund. The fund                                                                    
balance  was currently  about $2  million. The  amount would                                                                    
replenish the fund to the  normal level of about $5 million.                                                                    
She thought that  in the years before her  tenor she thought                                                                    
the amount might have been significantly higher.                                                                                
                                                                                                                                
Representative Wilson  noted that wildfire relief  was not a                                                                    
part of the current  supplemental request. Typically, relief                                                                    
funding associated with wildfires  in Fairbanks would appear                                                                    
in the supplemental request each  year. She asked if, in the                                                                    
current year, relief  funding for wildfires was  paid for by                                                                    
the federal government. Ms. Pitney  would have to check into                                                                    
the issue. She thought plenty of funds were available.                                                                          
                                                                                                                                
Representative  Wilson wondered  how much  was in  the fund.                                                                    
She  indicated there  had been  discussion about  putting an                                                                    
actual amount in the fund.                                                                                                      
                                                                                                                                
Co-Chair Seaton asked if it  was different than the disaster                                                                    
relief fund. Ms. Pitney would get back to the committee.                                                                        
                                                                                                                                
Representative  Pruitt  would  love  to  see  if  the  state                                                                    
returned money to  the general fund for  wildfire relief. He                                                                    
commented that  the state issued  its "make  whole" payments                                                                    
to welfare  recipients in October  because of  the Permanent                                                                    
Fund. He  asked if  the PF  was reduced to  a point  where a                                                                    
supplemental request was necessary.  Ms. Pitney would follow                                                                    
up with an answer.                                                                                                              
                                                                                                                                
Vice-Chair  Gara  was   told  by  a  few   people  that  the                                                                    
legislature would  see a  supplemental for  fire suppression                                                                    
expenses  in the  current year.  He asked  if the  state was                                                                    
using up more  of the fund than normal. In  other words, was                                                                    
the state  changing its policy  about the amount  of reserve                                                                    
funds  to have  available for  fire suppression.  Ms. Pitney                                                                    
reported  that  the  administration  was  not  changing  the                                                                    
policy.  She had  not received  a supplemental  request from                                                                    
the Department of Natural Resources. She would find out.                                                                        
                                                                                                                                
HB  95  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Seaton  thanked Ms. Pitney and  reviewed the agenda                                                                    
for the following meeting.                                                                                                      
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:24:22 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:24 p.m.