Legislature(2017 - 2018)HOUSE FINANCE 519

02/23/2017 01:30 PM FINANCE

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01:33:31 PM Start
01:35:12 PM Presentation: Permanent Fund Forecasting Methodology, Variability and Volatility Discussion and Realized and Unrealized Earnings Presentation: Callan Associates, Inc.
02:35:36 PM HB57 || HB59
03:47:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Discussion: Permanent Fund Forecasting TELECONFERENCED
Methodology, Variability, & Volatility
+ Presentation: Realized & Unrealized Earnings TELECONFERENCED
By Callan Associates, Inc.
Heard & Held
Heard & Held
+ Subcommittee Reports; Amendment Proposals as TELECONFERENCED
- Office of the Governor
- Dept. of Military & Veterans' Affairs
- Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 23, 2017                                                                                          
                         1:33 p.m.                                                                                              
1:33:31 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Seaton  called the House Finance  Committee meeting                                                                    
to order at 1:33 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Steven  Center, Senior  Vice  President, Callan  Associates,                                                                    
Inc.;  Gregory Allen,  President and  Director of  Research,                                                                    
Callan Associates, Inc.;  Angela Rodell, Executive Director,                                                                    
Alaska Permanent Fund  Corporation; Dan DeBartolo, Director,                                                                    
Division of Administrative  Services, Department of Revenue;                                                                    
Jeff Jesse, Legislative Liaison,  Alaska Mental Health Trust                                                                    
Authority; Representative Lora Reinbold.                                                                                        
PRESENT VIA TELECONFERENCE                                                                                                    
Brandon   S.   Spanos,   Deputy  Director,   Tax   Division,                                                                    
Department of Revenue.                                                                                                          
HB 57     APPROP: OPERATING BUDGET/LOANS/FUNDS                                                                                  
          HB 57 was HEARD and HELD in committee for further                                                                     
HB 59     APPROP: MENTAL HEALTH BUDGET                                                                                          
          HB 59 was HEARD and HELD in committee for further                                                                     
PRESENTATION:   PERMANENT   FUND  FORECASTING   METHODOLOGY,                                                                    
VARIABILITY  and  VOLATILITY  DISCUSSION  and  REALIZED  and                                                                    
UNREALIZED EARNINGS PRESENTATION: CALLAN ASSOCIATES, INC.                                                                       
Co-Chair Seaton  reviewed the agenda  for the day.  He asked                                                                    
members to hold their questions until the presentation end.                                                                     
^PRESENTATION:   PERMANENT  FUND   FORECASTING  METHODOLOGY,                                                                  
VARIABILITY  and  VOLATILITY  DISCUSSION  and  REALIZED  and                                                                  
UNREALIZED EARNINGS PRESENTATION: CALLAN ASSOCIATES, INC.                                                                     
1:35:12 PM                                                                                                                    
GREGORY ALLEN,  PRESIDENT AND  DIRECTOR OF  RESEARCH, CALLAN                                                                    
ASSOCIATES,  INC.,  introduced  himself  and  provided  some                                                                    
background  information on  Callan Associates,  Inc. He  had                                                                    
been with  the company for 28  or 29 years, since  1988. His                                                                    
firm  worked with  large  institutional  investors like  the                                                                    
Alaska  Permanent  Fund  Corporation (APFC).  The  company's                                                                    
clients  represented  about  $2   trillion  in  assets.  The                                                                    
company worked with several  large public entities including                                                                    
public  pension  funds, foundations,  endowments,  corporate                                                                    
pension  funds, and  corporate  defined contribution  funds.                                                                    
The company provided three services.  It helped clients with                                                                    
strategic planning which entailed deciding  on a plan for an                                                                    
entity's  portfolio,  determining  which  asset  classes  to                                                                    
include,  estimating  the  expected return  over  time,  and                                                                    
establishing how  to implement  the asset classes.  The firm                                                                    
also   helped   companies   monitor  their   portfolios   by                                                                    
conducting  performance   measurements  and   reviewing  the                                                                    
investment   managers  who   handle   funding.  Callan   and                                                                    
Associates,   Inc.   had   a  team   that   specialized   in                                                                    
understanding    investment    managers    and    investment                                                                    
strategies.  The  company  had  assisted APFC  for  over  30                                                                    
years. He  had personally  been involved with  the Permanent                                                                    
Fund (PF) for the previously  20 years. He had been involved                                                                    
with  doing a  modeling  exercise to  look  at the  expected                                                                    
returns and the interaction of  the capital markets with the                                                                    
earnings  reserve  account  (ERA),  the  market  value,  and                                                                    
inflation proofing. He felt he had  a good handle on all the                                                                    
moving pieces  that went into understanding  the finances of                                                                    
the PF.                                                                                                                         
Co-Chair Seaton recognized Vice-Chair Gara in the room.                                                                         
Mr. Allen introduced  the PowerPoint Presentation: "Callan's                                                                    
Return  Projection  Methodology  for  the  Alaska  Permanent                                                                    
Fund:  Capital   Market  Expectations,  Total   Return,  and                                                                    
Statutory  Return"(copy  on file).  He  turned  to slide  2:                                                                    
"Projected Returns." He reported  the numbers to be nominal.                                                                    
for the Alaska Permanent Fund":                                                                                                 
   · Callan has maintained a financial model of the Alaska                                                                      
     Permanent  Fund for  the past  15  years, and  provides                                                                    
     projections  to  assist  the Board  and  Staff  in  the                                                                    
     management of the Fund.                                                                                                    
   · The   model   employs    capital   market   projections                                                                    
     maintained   by  Callan,   Fund  specific   information                                                                    
     provided  by  APFC  Staff,   and  a  sophisticated  and                                                                    
     flexible model of the accounting  framework to allow us                                                                    
     to   test  various   spending   and  asset   allocation                                                                    
   · The model uses Monte Carlo simulation to generate a                                                                        
     full  range of  potential  outcomes  from best-case  to                                                                    
     worst-case, with associated probabilities.                                                                                 
   · The model provides projections for many key financial                                                                      
     variables including                                                                                                        
        o Total Return                                                                                                          
        o Statutory Return                                                                                                      
        o Market Value                                                                                                          
        o Earnings Reserve Balance                                                                                              
        o Distributions                                                                                                         
   · The model has been used many times over the years to                                                                       
     analyze  various  proposals  related to  the  Permanent                                                                    
     Fund,   including   three  legislative   proposals   in                                                                    
     February of 2016.                                                                                                          
Mr. Allen  explained that Callan had  maintained a financial                                                                    
model of the  PF, the Monte Carlo simulation  model, for the                                                                    
prior   20  years.   The  model   employed  capital   market                                                                    
projections  which   he  would  be  discussing.   They  were                                                                    
Callan's expectations for return,  risk, and correlation for                                                                    
the  various   capital  markets   that  were  used   in  the                                                                    
investment portfolio. The  firm was able to  generate a wide                                                                    
range of outcomes from best-case  to worst-case. He stressed                                                                    
that typically  when discussing  returns, people  focused on                                                                    
the  midpoint of  the distribution  of returns.  However, it                                                                    
was unknown  what the return would  be in any one  year. The                                                                    
Monte Carlo  simulation allowed his  company to look  at the                                                                    
full  range of  returns and  to assign  probabilities around                                                                    
them. The  model allowed Callan  to do projections  not only                                                                    
for return  but for statutory return  (the realized return),                                                                    
the market  value, the ERA balance,  and distributions under                                                                    
various formulas.  For example,  the company used  the model                                                                    
in  the  previous  February to  evaluate  three  legislative                                                                    
proposals that  had been brought forward  for different ways                                                                    
to tap the PF going forward.                                                                                                    
1:39:01 PM                                                                                                                    
Mr.  Allen  advanced  to slide  3:  "Return  Projections  FY                                                                    
Latest Projections for Total and Statutory Return:                                                                              
   · Return projection period was assumed to begin July 1,                                                                      
   · Market values and cost-basis inputs were as of June                                                                        
     30, 2016.                                                                                                                  
   · 1-year returns for FY 2017 do not take into account                                                                        
     performance in the first half of the fiscal year.                                                                          
   · Median 10-year total real return expectation is 4.70%,                                                                     
     below the 5% real return expectation that has been                                                                         
     employed as a target by the APFC.                                                                                          
   · The mid-point of these distributions is just one                                                                           
     potential outcome.  It is important to  recognized that                                                                    
     the  Fund   takes  on  risk  therefore   there  can  be                                                                    
     significant   variance   relative  to   the   mid-point                                                                    
Mr. Allen explained that the  slide showed the latest return                                                                    
projections.  They were  calculated in  the previous  summer                                                                    
and fall of 2016. They  reflected statutory and total return                                                                    
projections. The  10-year projections were reflected  at the                                                                    
top  of the  slide. He  pointed to  the highlighted  section                                                                    
which  showed the  midpoint. He  reported that  6.95 percent                                                                    
was the  total return  projection and  6.24 percent  was the                                                                    
total statutory return. He indicated  that they were nominal                                                                    
and that the  inflation projection over the  same period was                                                                    
about  2.25 percent.  He relayed  that  by subtracting  2.25                                                                    
percent the result would equal  the real return projections.                                                                    
He re-emphasized that he was  highlighting the midpoints. It                                                                    
was  important to  note  that in  Callan's  way of  thinking                                                                    
there was  about a 50  percent chance that the  return could                                                                    
be higher  than 6.95 and about  a 50 percent chance  that it                                                                    
could be  lower. He directed  members not to focus  too much                                                                    
on the  midpoint. He did not  want anyone to walk  away from                                                                    
his  presentation  thinking  that  the PF  would  earn  6.95                                                                    
percent every single year. There  was a reasonable amount of                                                                    
risk built into  the PF portfolio. However,  he could almost                                                                    
guarantee there  would not be a  year in which the  PF would                                                                    
earn exactly  6.95 percent.  Again, there  was a  50 percent                                                                    
chance  that the  return would  be higher  and a  50 percent                                                                    
chance that it would be lower.                                                                                                  
Co-Chair Seaton asked Mr. Allen  to clarify the total return                                                                    
and the statutory return and  the difference between the two                                                                    
columns on  the slide.  Mr. Allen  explained that  the total                                                                    
return was a  measure of the market value at  the end of the                                                                    
year relative  to the market  value at the beginning  of the                                                                    
year. It  had nothing to  do with whether anything  had been                                                                    
realized, or whether it was  income or capital appreciation.                                                                    
A  large portion  had to  do with  changing the  prices, the                                                                    
valuation. The  statutory return was  sort of a  PF concept.                                                                    
It was the  realized return. A statutory  return worked such                                                                    
that  if the  corporation received  a coupon  or a  dividend                                                                    
from a bond, it would  be considered income counting towards                                                                    
the statutory.  If the  corporation sold a  stock or  a bond                                                                    
and it realized  a gain or a loss, it  would count towards a                                                                    
statutory  return.  He  suggested thinking  of  a  statutory                                                                    
return as being the realized return in any given year.                                                                          
Mr. Allen  continued that,  typically, the  statutory return                                                                    
was lower than the total  return because the corporation did                                                                    
not realize  all its  gains every  year. The  Permanent Fund                                                                    
was  invested  in  several different  things  such  as  real                                                                    
estate  and  private  equity. He  suggested  that  even  the                                                                    
typical  turnover  (the  percentage of  the  portfolio  sold                                                                    
between the beginning  of the year and the end  of the year)                                                                    
of  the stock  market was  about  25 percent.  In any  given                                                                    
year, APFC would only realize  about 25 percent of its total                                                                    
capital appreciation. He continued  that in a private equity                                                                    
portfolio  none  might  be realized.  Statutory  return  was                                                                    
important because  it was  what drove the  size of  the ERA.                                                                    
The corporation  had to  realize a  return before  the money                                                                    
could get moved  into the earning reserve.  He would provide                                                                    
more  detail  later in  his  presentation  in a  section  on                                                                    
statutory return.                                                                                                               
Mr.   Allen   continued   to  slide   4:   "Capital   Market                                                                    
Projected Return and Standard Deviation:                                                                                        
   · Employed   Callan's   2016   10-year   capital   market                                                                    
     expectations for all models.                                                                                               
   · Expectations are developed annually and used for                                                                           
     strategic planning work for all client types.                                                                              
   · Represent long-term consensus expectations.                                                                                
   · Designed to work as a set-in optimization and                                                                              
     simulation analysis.                                                                                                       
   · Generally, these expectations evolve slowly with only                                                                      
     modest year-to-year changes.                                                                                               
Mr. Allen  indicated that  the table  on the  slide provided                                                                    
Callan's  outlook for  the following  10 years  for all  the                                                                    
different asset classes employed  by APFC. The asset classes                                                                    
included everything from equities  with an arithmetic return                                                                    
of  9 percent  down to  several other  asset categories.  He                                                                    
commented that  the APFC had  a very  diversified portfolio.                                                                    
Callan had to  come up with a projection  for each category.                                                                    
He relayed that he had been  hired at Callan in 1988 to work                                                                    
on the process,  which he had been involved  with every year                                                                    
since then.  The projection return  was a  long-term 10-year                                                                    
outlook. He  considered what  was going  on in  the economy,                                                                    
what was  going on  with interest  rates and  inflation, the                                                                    
previous year  projections, and  what other  participants in                                                                    
the  industry were  saying. He  suggested  that the  numbers                                                                    
could  be   viewed  as   "consensus"  numbers.   He  thought                                                                    
competitors would have similar numbers.                                                                                         
Mr. Allen Scrolled to slide  5: "Capital Market Assumptions:                                                                    
Projected   Correlation    Matrix."   He    explained   that                                                                    
correlations act  as a  measure of  the way  assets interact                                                                    
with each other. He suggested  that it was important to know                                                                    
when assets had low correlation  (when one item goes up, the                                                                    
other  item goes  down at  the same  time). He  provided the                                                                    
example of an ice factory and  a coal factory: coal was used                                                                    
in the winter and ice was used  in the summer - they had low                                                                    
correlation   with  each   other.   He   relayed  that   low                                                                    
correlation  was  good  because   when  putting  two  things                                                                    
together  it reduced  risk.  It was  important  to know  the                                                                    
correlations  between  asset  categories to  understand  the                                                                    
returns  and  the  variability of  returns  when  they  were                                                                    
Mr. Allen moved  to slide 6: "Assumed  Asset Allocation." He                                                                    
suggested that  the last thing  he needed  to know to  get a                                                                    
return  projection  and  a risk  projection  was  the  asset                                                                    
allocation of  the PF. He  pointed to the slide  showing the                                                                    
target asset  allocation adopted by  the board in  2016. The                                                                    
board went  through an  exercise of looking  at this  once a                                                                    
year. He  noted there was  a strategic asset  allocation and                                                                    
the  assumptions.  There  was an  expected  return  of  6.95                                                                    
percent with a standard deviation  of about 12.5 percent. It                                                                    
meant that  there was  a two-thirds  chance that  the return                                                                    
over  10 years  would  be between  6.95  percent plus  12.38                                                                    
percent and 6.95 percent minus 12.38 percent.                                                                                   
1:45:20 PM                                                                                                                    
Co-Chair  Seaton  acknowledged   Representative  Pruitt  had                                                                    
joined the meeting.                                                                                                             
Mr. Allen  proceeded to slide  7: "Statutory Net  Income and                                                                    
Permanent Fund Mechanics":                                                                                                      
   · Understanding the mechanics of the Permanent Fund can                                                                      
     lend some insight into the expectations for Statutory                                                                      
     Net Income which determines Statutory Net Return.                                                                          
   · Statutory Net Return is the total of realized income                                                                       
     and realized capital gains in each fiscal year.                                                                            
   · The asset allocation determines the Fund's exposure to                                                                     
     a number of factors which, in turn, will influence the                                                                     
     Statutory Net Return over time.                                                                                            
        · Ratio of income producing assets to capital gains                                                                     
          oriented assets                                                                                                       
        · Turnover                                                                                                              
        · Active versus passive management                                                                                      
        · The use of illiquid asset classes such as real                                                                        
          estate, private equity, infrastructure                                                                                
   · We review the mechanics of the Fund, and look at the                                                                       
     history of a number of important variables to help put                                                                     
     Statutory Net Income into context.                                                                                         
        · Fund Market Value                                                                                                     
        · Oil revenue                                                                                                           
        · Statutory Net Income (realized income)                                                                                
        · Earnings reserve balance                                                                                              
Mr. Allen  wanted to delve  into the topic of  statutory net                                                                    
income,  which   resulted  in  statutory  return,   and  the                                                                    
mechanics of the PF. He  relayed that statutory return was a                                                                    
measure  of  the return  generated  by  realized income  and                                                                    
realized capital  gains in  each fiscal  year which  was the                                                                    
amount  that counted  towards the  earnings reserve  and the                                                                    
amount  that could  be  spent. If  gains  were not  realized                                                                    
money  could  not  be spent.  He  continued  that  statutory                                                                    
return was  more complicated than  the total  return because                                                                    
it was dependent on some  accounting variables. For example,                                                                    
if returns were positive for a  number of years on the fund,                                                                    
the market  value would rise  well above the cost  basis due                                                                    
to prices  going up. However,  not all the gains  would have                                                                    
been realized and  the cost basis would have  stayed low. He                                                                    
furthered that when there was  a large spread between market                                                                    
and cost and  turnover was done it  supercharged the return.                                                                    
Conversely, if there were several  bad years in a row, there                                                                    
might be unrealized losses and  when there was turnover, the                                                                    
losses  would  be  realized  and  reduce  the  size  of  the                                                                    
earnings reserve.  One of  the metrics to  be aware  of when                                                                    
thinking about statutory return  was looking at the activity                                                                    
for the previous  5 years. It was important  to know whether                                                                    
the market  was an  up market  or a  down market.  A company                                                                    
would  generally realize  about  25 percent  of the  capital                                                                    
gains  or capital  losses in  any given  year in  the normal                                                                    
operation  of the  PF.  Although his  point  was subtle,  he                                                                    
thought  it  was  important  in  terms  of  forecasting  the                                                                    
statutory return.                                                                                                               
Mr. Allen  continued to  review slide  7. He  explained that                                                                    
turnover was  another factor  influencing the  statutory net                                                                    
return.  There   were  many  things  that   caused  turnover                                                                    
including managers  buying and selling stocks.  Other things                                                                    
also caused  turnover, such  as when the  APFC had  to raise                                                                    
cash  to  make  a  distribution to  the  government  or  the                                                                    
dividend.  The  corporation  had to  sell  securities  which                                                                    
would  realize  gains  and cause  the  statutory  return  to                                                                    
Mr.  Allen  noted  that  when  companies  rebalanced,  which                                                                    
entailed taking money  out of equities that had  gone up and                                                                    
putting  them into  bonds that  had stayed  flat, they  were                                                                    
selling equities.  He mentioned changing  asset allocations.                                                                    
If the  board came  in deciding  to do  something completely                                                                    
different, such  as having a  separate asset  allocation for                                                                    
the earnings reserve that was all  in cash, it would have to                                                                    
sell a  bunch of  stocks and  bonds and  realize a  bunch of                                                                    
gains to get  from point A to point B.  Realizing a bunch of                                                                    
gains would create turnover and raise the statutory return.                                                                     
Mr.  Allen  discussed   active  versus  passive  management.                                                                    
Active management  had more turnover and  passive management                                                                    
had  less  turnover.  He  also  brought  up  illiquid  asset                                                                    
classes   such  as   real   estate,   private  equity,   and                                                                    
infrastructure  that had  very  low  turnover. He  concluded                                                                    
that the more that APFC  invested in illiquid asset classes,                                                                    
the  less  turnover and  the  less  gains realization  as  a                                                                    
percent of  the total.  He thought  the points  he discussed                                                                    
were important  to understand because statutory  return was,                                                                    
in  some  ways,  more  important than  total  return  as  it                                                                    
related to the Permanent Fund.                                                                                                  
Mr. Allen continued  to the chart on slide  8: "Mechanics of                                                                    
the Permanent Fund."  He wanted to provide a  picture of the                                                                    
relationship between  statutory return  and the PF.  Slide 8                                                                    
showed a  historical market  value of the  PF over  time. He                                                                    
reported that  at the end  of FY 16  there was a  balance of                                                                    
about $53 billion.  There had been a steady  rise. There had                                                                    
been  a couple  of  dips in  2002 and  2008  periods, but  a                                                                    
relatively stable path that sloped upwards.                                                                                     
Mr.  Allen  reviewed slide  9:  "Statutory  Net Income."  He                                                                    
conveyed  that in  looking at  the statutory  return a  much                                                                    
more  volatile  pattern could  be  seen.  The statutory  net                                                                    
income had varied  much more with respect  to market crisis'                                                                    
than  the  fund itself.  He  highlighted  that in  2009  the                                                                    
statutory   net  income   was  significantly   negative.  He                                                                    
recalled  that in  2009 it  was a  positive return  year. He                                                                    
explained that the reason statutory  net income was low, and                                                                    
negative was  because it  was at  a time  when the  fund was                                                                    
realizing  the losses  that had  been incurred  in 2008.  He                                                                    
conveyed  that  the  statutory return  lagged  total  return                                                                    
because things had to be  realized and usually they were not                                                                    
realized  until the  next  year or  the  following year.  He                                                                    
thought it  was possible that  APFC could announce  that the                                                                    
total  return  for the  year  was  6 percent.  However,  the                                                                    
statutory  return  could  be -2  percent  depending  on  the                                                                    
events  of the  previous year.  He wanted  to point  out the                                                                    
potential disconnect between the two measures.                                                                                  
1:50:36 PM                                                                                                                    
Mr.  Allen   detailed  slide   10:  "Statutory   Net  Income                                                                    
Projection: Conclusions":                                                                                                       
   · Statutory Net Income is influenced by a number of                                                                          
     different dynamic factors besides the total return on                                                                      
     the portfolio.                                                                                                             
   · The ratio of income producing investments to capital                                                                       
     appreciation   focused   investments    will   have   a                                                                    
     significant impact.                                                                                                        
   · The amount of turnover in the capital appreciation                                                                         
     focused investments will also have an impact.                                                                              
   · Rebalancing frequency between asset classes will also                                                                      
     have a meaningful impact.                                                                                                  
   · Cash raised for distributions can accelerate the                                                                           
     realization of gains or losses in the portfolio and                                                                        
     will have an impact.                                                                                                       
   · Callan's projections for statutory net income are                                                                          
     probably  on the  high side  due to  the assumption  of                                                                    
     quarterly rebalancing. APFC  Investment Staff employs a                                                                    
     much more  efficient and sensible  rebalancing approach                                                                    
     in practice.                                                                                                               
Mr. Allen  was at the  end of his presentation  and believed                                                                    
he had  covered the points  listed on the slide.  He thought                                                                    
Callan and  Associates, Inc.'s projections  and expectations                                                                    
were reasonable.  The company  had reviewed  its performance                                                                    
in terms of projections. The  company had never been exactly                                                                    
correct,  but  was reasonably  close  in  terms of  a  total                                                                    
portfolio. He encouraged questions from members.                                                                                
Co-Chair  Seaton referred  to  slide  3 regarding  statutory                                                                    
returns. He  pointed to the 1-year  and 10-year projections.                                                                    
He  asked about  the period.  Mr. Allen  responded that  the                                                                    
period began July  1, 2016 through June 30,  2025, a 10-year                                                                    
period.  Co-Chair  Seaton  asked  if  the  1-year  statutory                                                                    
return would extend  through June 30th of  the current year.                                                                    
Mr. Allen responded, "correct."  Co-Chair Seaton wondered if                                                                    
the 50  percent probability had  a statutory return  of 5.43                                                                    
percent total. Mr. Allen responded positively.                                                                                  
Co-Chair  Seaton  asked  if 2.25  was  subtracted  from  the                                                                    
amount to determine  the real return. He wanted  to bring up                                                                    
2  different points  regarding  the  1-year projection.  Mr.                                                                    
Allen  suggested that  the year  was already  half way  over                                                                    
presently.  The figures  were done  as part  of the  revenue                                                                    
sources projection book  for the fall. Callan  only had data                                                                    
through June. Prior  to the election the  performance of the                                                                    
fund was not looking good.  He would have suggested that the                                                                    
5.43 percent might  not be reached. He  furthered that since                                                                    
the election, there  had been a rally in  equity markets and                                                                    
high yield  markets. Anything that  had risks  had performed                                                                    
well, even  emerging markets. He thought  that presently the                                                                    
state was  running ahead. He  opined that many  things could                                                                    
happen in any given year that  could make the number off. He                                                                    
mentioned  that inflation  was running  a  little less  than                                                                    
2.25 percent.  He thought it  would be about 1.5  percent at                                                                    
the end  of the fiscal year.  He conveyed that 2.25  was the                                                                    
long-term  projection. The  short-run was  affected by  just                                                                    
the 6 months that had already occurred.                                                                                         
Co-Chair  Seaton mentioned  having talked  about 90  percent                                                                    
realized  earnings. He  wondered  if it  meant, compared  to                                                                    
total return,  looking at  a 90  percent asset  turnover. He                                                                    
thought  Mr.  Allen  had reported  the  stock  turnover  was                                                                    
generally 25 percent. Mr.  Allen indicated that historically                                                                    
the statutory  return had averaged  about 90 percent  of the                                                                    
total return. He had heard  the number referenced before. He                                                                    
added that  in any  given year they  could vary  wildly from                                                                    
each  other depending  on what  happened  leading into  that                                                                    
year. He recommended thinking about  the statutory return as                                                                    
80 to 90 percent of the total return  in up years - it was a                                                                    
reasonable way of thinking  about it. Interestingly, though,                                                                    
in a really negative year,  not as many losses were realized                                                                    
in the statutory return in  up years. However, in a negative                                                                    
year the statutory return was  substantially better than the                                                                    
total return. They were related  but were lagged relative to                                                                    
one another.                                                                                                                    
1:55:01 PM                                                                                                                    
Co-Chair Seaton asked if it  had something to do with having                                                                    
a  loss  in an  asset  in  which  case  a company  might  be                                                                    
inclined  to hold  onto  it  to let  it  recover. Mr.  Allen                                                                    
responded that the fund generally  held onto assets. Many of                                                                    
them had paper  losses, but the fund did not  sell them as a                                                                    
matter  of course.  A person  could not  sell their  private                                                                    
equity portfolio.  Just because a stock  portfolio went down                                                                    
was not a reason  to sell it. In fact, it  might be a reason                                                                    
to  buy more  of it.  He  continued that  in the  day-to-day                                                                    
operation of the  fund a certain amount of  gains and losses                                                                    
would be realized every year.                                                                                                   
Mr. Allen informed the committee  that when the fund started                                                                    
it was invested entirely in  bonds. He thought that was were                                                                    
the statutory  return concept was  born. The  primary source                                                                    
of  bonds  was income.  They  paid  a coupon.  When  someone                                                                    
received  a coupon,  it  counted  towards statutory  return.                                                                    
Over the years, the fund has  moved away from bonds and into                                                                    
stocks, private  equity, real  estate, and  everything else.                                                                    
Income was a  much smaller component of  the return. Capital                                                                    
appreciation had  become a larger  component of  the return.                                                                    
He   reemphasized  that   the  only   way  to   get  capital                                                                    
appreciation to go into the  return was by selling the stock                                                                    
and realizing the gain.                                                                                                         
Vice-Chair Gara referred to the  bottom chart on slide 3. He                                                                    
commented that the difference between  the statutory and the                                                                    
total return at  the 50 percent likelihood  level was pretty                                                                    
close. At the 90 percent  likelihood level, the 1-year total                                                                    
return was 22.26 percent, but  the statutory return was only                                                                    
8.15 percent. He asked if  the numbers reflected not cashing                                                                    
in much in realized earnings, but keep the stocks.                                                                              
Mr. Allen  indicated Vice-Chair Gara was  exactly right. The                                                                    
stock market could  go up 20 percent in a  year. However, in                                                                    
a  normal year  an entity  would not  sell its  entire stock                                                                    
portfolio at  the end of the  year. It would be  more likely                                                                    
to sell about  20 to 25 percent of it.  He suggested that if                                                                    
the  return  all  happened  at  the end  of  the  year,  for                                                                    
example,  none of  the return  would be  captured. It  was a                                                                    
matter of  when a return  took place and when  purchases and                                                                    
sales occurred. In  the stock portfolio there  was a natural                                                                    
level  of turn  over which  ran at  about 20  percent to  25                                                                    
percent per  year. If a  person looked at  it back 10  to 15                                                                    
years, it  was very stable.  He projected that if  a company                                                                    
had a 22  percent year, going into the  following year there                                                                    
would be  a large  difference between the  paper value  of a                                                                    
portfolio and what was actually  realized. He suggested that                                                                    
even if  the next year  was negative, because  the portfolio                                                                    
was being turned  over and realizing the  embedded gains, it                                                                    
would be higher. He asked  if members understood what he was                                                                    
trying to explain.                                                                                                              
Vice-Chair Gara  was not  following Mr.  Allen, but  did not                                                                    
need him to  repeat himself. He noted  that many legislators                                                                    
were trying to eke out as  much for dividends in the current                                                                    
year and for  public services. In looking at  the 50 percent                                                                    
level,  the  statutory  return  was  predicted  to  be  5.43                                                                    
percent.  He  wondered  what   Mr.  Allen's  projection  was                                                                    
presently,  and  what the  projected  change  would mean  in                                                                    
terms of money in the ERA by the end of the fiscal year.                                                                        
Mr. Allen speculated that if  the market stayed where it was                                                                    
between the present  day and the end of the  fiscal year, it                                                                    
would  not  be unreasonable  to  expect  about a  6  percent                                                                    
statutory  return in  the current  year (as  opposed to  5.4                                                                    
percent). He  reviewed the  formula. He  took 6  percent and                                                                    
multiplied  it  by  about $53  billion.  The  total  equaled                                                                    
approximately  $3  billion  which  would  be  added  to  the                                                                    
earnings reserve relative to the prior year's figures.                                                                          
2:00:33 PM                                                                                                                    
Vice-Chair Gara asked Mr. Allen  to do the other calculation                                                                    
having to  do with another half  of a percent. He  wanted to                                                                    
know  the amount  of additional  funding  into the  earnings                                                                    
reserve.  Mr.  Allen  thought  it would  be  close  to  $250                                                                    
Representative Pruitt  asked for an estimate  of the returns                                                                    
rather than the statutory  returns. Mr. Allen responded that                                                                    
it depended on  what happened in the remainder  of the year.                                                                    
He had just  done the performance through  December 31st. He                                                                    
thought the funds went up  about 8.3 percent. He thought the                                                                    
amount was  somewhere in the  4's. He suggested that  if the                                                                    
APFC went  along at the exact  same pace and the  amount was                                                                    
up 4.5  percent through December  the state would  be closer                                                                    
to 5.5 percent. He thought  it was possible that with normal                                                                    
type returns  he could  expect the  percentage to  be higher                                                                    
than 6.7 percent. He did not  believe 6.7, 7.5, or 8 percent                                                                    
was out  of the question.  He commented that if  the markets                                                                    
reacted badly, the  percentage could drop by  10 percent. He                                                                    
remarked that having been in  the business for 28 years, the                                                                    
money managers were  the people who were  paid a significant                                                                    
amount  of  money.  Consultants  were  paid  much  less.  He                                                                    
thought it  was much  easier to do  a 10-year  return rather                                                                    
than a 1-year  return. He remarked that  1-year returns were                                                                    
crazy and were  impossible to get right.  He preferred doing                                                                    
10-year forecasts.                                                                                                              
Representative  Wilson asked  if Mr.  Allen would  recommend                                                                    
doing  a Percent  of  Market Value  (POMV)  for the  state's                                                                    
operating  budget  each  year  rather  than  putting  it  in                                                                    
statute and binding the state.                                                                                                  
2:04:08 PM                                                                                                                    
Mr. Allen responded  that from the standpoint  of the health                                                                    
of the fund, Callan and  Associates, Inc. favored knowing in                                                                    
advance about what  would come out of the fund  and the time                                                                    
of  the withdraws.  Having clarity  about those  items would                                                                    
make it much  easier to operate the fund. He  thought it was                                                                    
an important point  for members to take away.  He noted that                                                                    
the POMV  formulas under consideration and  as he understood                                                                    
them, had one  very important component which  was that they                                                                    
were a  percent of the  average market  value over 5  of the                                                                    
prior  6  years. They  excluded  the  most recent  year.  He                                                                    
thought a  POMV applied  to 5  out of  the previous  6 years                                                                    
could  be  applied,   it  would  be  much   better  for  the                                                                    
operations  of  the  PF.  It  would  allow  Callan  and  the                                                                    
government  to know  a year  in  advance how  much could  be                                                                    
pulled  from  the  fund. His  company  liked  the  certainty                                                                    
around  a  POMV  approach  rather than  an  ad  hoc  method.                                                                    
Planning  could  be  done;   investment  policies  could  be                                                                    
implemented;  and  long-term  decisions could  be  made.  In                                                                    
choosing the  right percentage it could  be very sustainable                                                                    
over the long run and  could affectively inflation proof the                                                                    
corpus.  He thought  one of  the hallmarks  of the  fund had                                                                    
been   to  protect   the   corpus   against  inflation.   He                                                                    
highlighted  the   importance  of  inflation   proofing  the                                                                    
corpus,  otherwise, it  would mean  there would  be less  to                                                                    
spend  for future  generations.  He reiterated  that with  a                                                                    
correct   percentage,  a   POMV   formula  would   naturally                                                                    
inflation  proof.  He  suggested a  percentage  between  4.5                                                                    
percent   to   5   percent   was   sustainable.   It   would                                                                    
automatically inflation  proof because  the state  would not                                                                    
be spending too  much. A percentage of 5.5 or  6.0 would eat                                                                    
into inflation proofing making it unsustainable.                                                                                
Representative  Wilson  was  talking about  a  formula.  She                                                                    
agreed with Mr. Allen that  the state should not just choose                                                                    
a  formula  that looked  good  for  the state.  She  thought                                                                    
everyone  recognized  the  need  for  containment.  She  was                                                                    
concerned about  putting something  into law  without having                                                                    
any experience  with it. She  was wondering how to  choose a                                                                    
number. She  thought Mr. Allen  was saying that even  if the                                                                    
state chose  a formula,  it also needed  to choose  a number                                                                    
even if  it turned  out to  be a  wrong number.  Knowing the                                                                    
number was better than not  knowing it every year. Mr. Allen                                                                    
agreed  that  it  was  important  to  choose  a  number.  He                                                                    
suggested that  the state could  always correct  its course.                                                                    
If the number was wrong for  long there would be pressure to                                                                    
change it.                                                                                                                      
2:08:05 PM                                                                                                                    
Representative Grenn  thanked Mr. Allen for  his explanation                                                                    
and Representative  Wilson for  her question. He  thought it                                                                    
was clear the importance of the issue.                                                                                          
Representative  Guttenberg referred  to the  history of  the                                                                    
fund  and remarked  that the  legislature had  indicated its                                                                    
expectations of  the fund and  provided some  directions. If                                                                    
the state  moved to  a POMV or  something else,  he wondered                                                                    
about setting  up a process  for shifting the  state's asset                                                                    
allocations and  investment style  to fit the  direction the                                                                    
state would  be headed  in. He wondered  if the  state would                                                                    
increase risk or provide more stability.                                                                                        
Mr.  Allen  responded  that  if  the  right  percentage  was                                                                    
chosen, the  asset allocation would  not have to  be changed                                                                    
at all. He elaborated that  Callan worked with several large                                                                    
pension  funds. Pension  funds  10-15  years previously  the                                                                    
expected returns  and the  actual returns  ran at  about 8.5                                                                    
percent.  In the  2000s  there had  been  2 large  financial                                                                    
crisis'  and the  returns were  disappointing.  Many of  the                                                                    
pensions had fallen behind in  terms of the assets that they                                                                    
had  to cover  their  liabilities. There  was a  significant                                                                    
amount of  pressure on decision  makers to make up  the gap.                                                                    
However, they  did not want  to go  after the tax  payers to                                                                    
stop fixing the roads to make  up the gap. A large amount of                                                                    
pressure had  been placed on  the investment staffs  to take                                                                    
on more  risk. Another  important take-a-way  was that  if a                                                                    
high percentage was chosen, it  would put pressure on the PF                                                                    
to take  additional risk.  He reported  that when  more risk                                                                    
was taken  there was  greater volatility,  for loss  and for                                                                    
not being able  to protect persons in power of  the fund. It                                                                    
would introduce volatility to the  payout as well. His sense                                                                    
was  that, from  the legislature's  standpoint, having  some                                                                    
consistency in  the payout from year-to-year  made budgeting                                                                    
much easier.  He added that by  forcing the PF to  take more                                                                    
risk,  by asking  for a  lot  of money,  it would  naturally                                                                    
introduce  more  volatility  into  the  payment  stream.  He                                                                    
thought  it would  be  aggravated  tremendously and  advised                                                                    
against  it. He  had not  previously discussed  the earnings                                                                    
reserve.  A three-fourths  vote was  required to  change the                                                                    
concept  of the  earnings  reserve in  the constitution.  He                                                                    
asked Ms.  Rodell to correct  him. He had always  been under                                                                    
the    impression   that    the    corpus   was    protected                                                                    
2:11:50 PM                                                                                                                    
ANGELA  RODELL, EXECUTIVE  DIRECTOR,  ALASKA PERMANENT  FUND                                                                    
CORPORATION, clarified  that the ERA was  created in statute                                                                    
and not  in the  constitution. A majority  vote of  the body                                                                    
was  required to  appropriate money.  It  was available  for                                                                    
appropriation at  any time  in its  entirety. While  all the                                                                    
things  Mr.   Allen  spoke  to   about  percent   and  asset                                                                    
allocation  were 100  percent correct  and which  she agreed                                                                    
with, she reminded  members that because of  the ability and                                                                    
right  to appropriate  and  not knowing  how  much might  be                                                                    
taken out  in the first  year if  it was different  than the                                                                    
percent, it  would influence how  the APFC thought  about it                                                                    
going forward.  Inflation proofing  of the corpus  only came                                                                    
with appropriations  from the earnings  reserve back  to the                                                                    
corpus. The  corpus did  not grow  its value  inherently and                                                                    
would get  to keep that  value. It  turned all its  gains to                                                                    
the ERA.                                                                                                                        
Mr. Allen thanked Ms. Rodell  for the correction. He thought                                                                    
of the ERA  as being the difference between  the corpus (the                                                                    
protected  piece  that  could   not  be  touched  without  a                                                                    
constitutional  change)  and  the   rest  of  the  fund.  He                                                                    
reported  that there  had been  times since  his involvement                                                                    
that the  ERA had a zero  balance at the start.  There was a                                                                    
time  where if  there was  a balance  in the  ERA after  the                                                                    
dividends were  paid out  it would  be appropriated  back to                                                                    
the corpus  to protect  and grow the  corpus. The  danger in                                                                    
doing that  was that  the year would  begin with  nothing in                                                                    
the ERA.  He reemphasized  that if  a percentage  was chosen                                                                    
that was too high, it  would drain down the earnings reserve                                                                    
over time,  making it  smaller and  smaller relative  to the                                                                    
corpus.  If there  was a  big  negative year  the ERA  could                                                                    
potentially go  to zero and  nothing could be spent.  He was                                                                    
providing  the  information  to   encourage  members  to  be                                                                    
prudent in  choosing the percentage  to maintain  the fund's                                                                    
purchasing power at a sustainable  level and to maintain the                                                                    
corpus.  Currently, the  state had  a very  healthy earnings                                                                    
reserve.  It was  as  large  as he  had  ever  seen it.  The                                                                    
state's ability  to spend in  the future would  be inhibited                                                                    
if the state were to  eat through its cushion in conjunction                                                                    
with experiencing a number of negative years in a row.                                                                          
2:14:59 PM                                                                                                                    
Representative Ortiz asked about  the variability in the 2.2                                                                    
percent  inflation  rate.  If it  was  highly  volatile,  he                                                                    
wondered how  it would impact  the rest of the  picture. Mr.                                                                    
Allen  thought   inflation  was  an   interesting  variable.                                                                    
Inflation from  one year to  the next  did not tend  to move                                                                    
around  very  much.  Inflation would  not  increase  from  1                                                                    
percent inflation to  9 percent inflation in  a single year.                                                                    
It  had  never  happened  before. In  terms  of  inflation's                                                                    
standard deviation volatility was  low, 2.25 with a standard                                                                    
deviation  of  about 1.5  percent.  It  had another  feature                                                                    
referred  to   as  autocorrelation,  which  meant   that  it                                                                    
trended.  The episodes  of trending  inflation, like  in the                                                                    
1970s, wiped out purchasing power  and wealth. The one thing                                                                    
that had  changed since  the 1970s  was the  central banking                                                                    
focus on  keeping inflation under  control. There  were much                                                                    
fewer checks and  balances on inflation when  the last large                                                                    
inflation episode occurred then  there were presently. There                                                                    
were things happening in the  economy that made it look like                                                                    
inflation would start  picking up. He did not  want to state                                                                    
that it would get out  of control However, the labor markets                                                                    
in the US  had never been as tight for  20 years. Alaska was                                                                    
a service-based  economy and labor  was a large part  of the                                                                    
inflation equation.                                                                                                             
Mr.   Allen   reported   that  inflation   had   been   kept                                                                    
artificially low in the US because  of 2 things: there was a                                                                    
huge decline in  energy prices and the  rising dollar. There                                                                    
had been  a tremendous  run where  the dollar  had increased                                                                    
relative  to  other  currencies, which  had  made  importing                                                                    
goods  cheap.  There  had  been  a  perfect  storm  to  keep                                                                    
inflation  low.  He  believed some  of  those  factors  were                                                                    
coming to an end. Although  2.25 percent was low relative to                                                                    
what he thought  he would see in the current  year, it was a                                                                    
reasonable  estimate   for  the   following  10   years.  He                                                                    
suggested  that it  could be  higher as  well. He  suggested                                                                    
that if  inflation was 2.25  and the fund was  not inflation                                                                    
proofed the  corpus would be  2.25 percent less than  it was                                                                    
2:18:16 PM                                                                                                                    
Co-Chair Seaton  asked about slide  10 and the  statement on                                                                    
the  bottom  having to  do  with  quarterly rebalancing.  He                                                                    
wondered  about  the  importance  of the  caveat  Mr.  Allen                                                                    
included. He wondered  by how much he was  estimating on the                                                                    
high side.  Mr. Allen did  not think  it would be  more than                                                                    
three-tenths of  a percent. He  added that APFC  was careful                                                                    
in the way it managed  money to reduce unnecessary turnover.                                                                    
He  continued that  when stocks  were sold  commissions were                                                                    
paid which costed  money. One way to minimize  the amount of                                                                    
transaction costs  over the course  of a year was  to reduce                                                                    
turnover. In  his model  he had to  assume that  when stocks                                                                    
went up  and bonds went  down he had  to sell the  stocks to                                                                    
stay at the target asset allocation.  In the case of the PF,                                                                    
the   corporation  might   sell   its  stock   to  pay   the                                                                    
distribution, rather than to buy  bonds. The corporation was                                                                    
crafty at  how it  managed the turnover  issue. It  ended up                                                                    
being  a little  bit lower  than what  he had  projected. It                                                                    
meant that the realized return  would be slightly lower than                                                                    
what he projected.                                                                                                              
Co-Chair Seaton  provided his  understanding which  was that                                                                    
the state had  not been structuring the draw  such that they                                                                    
would drive  his asset selling to  put money in the  ERA. He                                                                    
offered Ms. Rodell an opportunity  to clarify that point one                                                                    
way or  the other. He  asked Ms.  Rodell if she  was selling                                                                    
assets to  put money in the  ERA for allocations, or  if her                                                                    
investment   strategy  was   independent   of  the   state's                                                                    
potential  cash   needs.  Ms.  Rodell  confirmed   that  the                                                                    
investments were  not being driven by  a particular outcome.                                                                    
She   spoke  to   Mr.  Allen's   point.  For   example,  the                                                                    
corporation knew  what the  amount of  the transfer  for the                                                                    
dividend  would  be   because  it  had  the   4.5  years  of                                                                    
performance.  The corporation  made  an  estimate about  the                                                                    
final 6 months to know what  the cash transfer would be. She                                                                    
thought  Mr. Allen  was illustrating  the APFC,  in planning                                                                    
for a  cash transfer, might  decide to start  selling stocks                                                                    
to generate the  cash presently or perhaps a  month from the                                                                    
current  day to  reduce  the transaction  costs rather  than                                                                    
doing  it automatically  to have  a forced  rebalancing. His                                                                    
computer  model required  a forced  rebalancing  to hit  the                                                                    
number. She  appreciated the opportunity  to clarify  on the                                                                    
record what the corporation did on that front.                                                                                  
Co-Chair Seaton asked if  the corporation's basic investment                                                                    
strategy  would change  based on  the modeling  with a  POMV                                                                    
statutory  requirement  going forward  at  a  range of  4.75                                                                    
percent  to 5.25  percent.  Ms. Rodell  did  not believe  so                                                                    
because,  as Mr.  Allen testified  earlier, it  provided the                                                                    
corporation much more certainty as  to what the number would                                                                    
be.  It meant  that the  corporation would  be able  to take                                                                    
longer-term   positions  and   to  make   better  investment                                                                    
decisions  about   the  balance.  There  would   not  be  an                                                                    
expectation  or   an  unforeseen   transfer  in   which  the                                                                    
corporation would need to pull  more cash than necessary due                                                                    
to unpredictability.                                                                                                            
2:22:56 PM                                                                                                                    
Co-Chair Seaton  asked about the mechanism  in several bills                                                                    
that talked about  4 to 1 after the draw  and anything above                                                                    
the  amount  being   transferred  internally  for  inflation                                                                    
proofing. He  asked if it would  drive or change any  of the                                                                    
corporation's investment  strategies either way.  Ms. Rodell                                                                    
responded,  "No,  I  don't  believe   it  would  change  any                                                                    
investment strategies."                                                                                                         
Representative   Guttenberg   mentioned   using   the   term                                                                    
"investment  strategies." He  noted the  term "Mechanics  of                                                                    
the Permanent Fund"  used on slide 7. He asked  if the terms                                                                    
were  interchangeable. He  asked  if she  would describe  it                                                                    
differently  - between  what the  state was  currently doing                                                                    
and what  it would  do if  the state had  a POMV  model. Mr.                                                                    
Allen replied that  when he was talking  about the mechanics                                                                    
of the PF  in this context he was talking  about the current                                                                    
spending  policy:  the interaction  of  the  corpus and  the                                                                    
earnings  reserve   and  the  way  the   distributions  were                                                                    
determined.  He  looked  at  the   POMV  model  as  being  a                                                                    
different set of mechanics. Under  the current spending rule                                                                    
the  corporation  was  not spending  5.25  percent  or  4.75                                                                    
percent.  It  had  been  1.5 percent  to  2.0  percent.  The                                                                    
largest change that was being  contemplated was the amount -                                                                    
as long as  the rules were clear and well  known in advance.                                                                    
In  looking   at  the  way  the   current  distribution  was                                                                    
determined, it  was based on  5 years of  realized earnings.                                                                    
It was as if it had  a 5-year average built into it already.                                                                    
A five-year  POMV was not  a huge  shift and the  corpus was                                                                    
protected under  both paradigms. The  substantive difference                                                                    
was the percentage.                                                                                                             
Representative Guttenberg  asked if  the rules needed  to be                                                                    
recalibrated.  The   committee  had  heard  that   when  the                                                                    
legislature  changed   something  significant   very  strong                                                                    
structural  rules were  needed to  know the  effects of  the                                                                    
change and whether  the change was durable from  one year to                                                                    
the  next.  He asked  Mr.  Allen  what  rules needed  to  be                                                                    
recalibrated based on his looking  at what had been proposed                                                                    
in  the previous  year and  what  had been  proposed in  the                                                                    
current year.                                                                                                                   
Mr.  Allen  commented  that  there  had  been  a  spirit  of                                                                    
cooperation between the three  bills offered in the previous                                                                    
year.  He  noted  that  the legislation  put  forth  by  the                                                                    
governor  was the  most  different of  the  three bills.  He                                                                    
liked that all three pieces  of legislation had an averaging                                                                    
formula based on  the average of the first 5  out of 6 prior                                                                    
years. The Percent  of Market Value was then  applied to the                                                                    
average.  He  did  not  believe any  of  the  previous  POMV                                                                    
concepts  had contained  that formula.  It  provided 1  year                                                                    
where everyone was  aware of how much would come  out of the                                                                    
fund. Another important piece was  whether the fund would be                                                                    
explicitly  inflation  proofed.  He thought  the  issue  was                                                                    
controversial. He  did not  want to  take sides  but offered                                                                    
the  committee some  information. He  indicated that  if the                                                                    
fund was inflation proofed it  would require the legislature                                                                    
to  appropriate  a certain  percentage  back  to the  corpus                                                                    
every year. It  had the benefit of ensuring  that the corpus                                                                    
grew  with inflation  which would  make the  earnings larger                                                                    
for future generations or at  least the same on an inflation                                                                    
adjusted  basis -  a  noble goal.  The  risk with  inflation                                                                    
proofing  was  that it  reduced  the  size of  the  earnings                                                                    
reserve  and reducing  the size  of  spending. He  continued                                                                    
that  a  combination  of   high  spending,  high  inflation,                                                                    
negative  returns,  and   doing  inflation  proofing,  would                                                                    
reduce  the size  of the  earnings reserve.  The buffer,  in                                                                    
some sense,  would be eroded.  The nice thing would  be that                                                                    
the  corpus  would  be  larger  and  would  generate  future                                                                    
earnings. He  thought it  was important  to know  in advance                                                                    
whether inflation  proofing was  going to happen  every year                                                                    
or  every so  often.  He  suggested that  an  ad hoc  policy                                                                    
around  inflation  proofing would  muddy  up  the rules  and                                                                    
would create greater uncertainty.  Uncertainty was the worst                                                                    
circumstance for investment people.                                                                                             
2:29:01 PM                                                                                                                    
Vice-Chair Gara  mentioned that every  time Ms.  Rodell came                                                                    
before the committee, members asked  her if 5.25 percent was                                                                    
okay. He was glad it was  still okay because he thought that                                                                    
to get out  of the fiscal crisis, at least  for a few years,                                                                    
it would probably  be what the legislature would  have to do                                                                    
to possibly increase the dividends and  to have as much of a                                                                    
government payout  for services as possible.  He asked about                                                                    
her  caveats.  He  wondered about  the  idea  of  revisiting                                                                    
whether  the   market  was   responding  as   predicted.  He                                                                    
understood her to want a 3 or 4-year revisit.                                                                                   
Ms.  Rodell responded  that  it went  back  to the  question                                                                    
about whether  the corporation  got the  percentage correct.                                                                    
It gave the  corporation an opportunity to look  at what was                                                                    
happening to the  ERA in light of the size  of the draw that                                                                    
occurred,  what  was happening  in  the  state, and  whether                                                                    
there  was pressure  about taking  additional monies  out of                                                                    
the  ERA over  and above  the POMV  because of  revenues not                                                                    
being   replaced  or   generated.   It   gave  everyone   an                                                                    
opportunity  to push  the reset  button  if the  legislature                                                                    
wanted to.                                                                                                                      
Vice-Chair  Gara was  aware Director  Rodell  would like  to                                                                    
have as much inflation proofing  as possible. He thought she                                                                    
had been clear about that  point. He asked her opinion about                                                                    
any  excess  over the  amount  of  4  times the  draw  going                                                                    
straight into the principle. It would  be a way to deal with                                                                    
inflation proofing,  maybe not  in the  current year,  but a                                                                    
significant amount of inflation proofing later.                                                                                 
Ms. Rodell thought  it was good to  recognize the importance                                                                    
of inflation proofing. She was  concerned if it was repealed                                                                    
altogether that  the narrative  would become  that inflation                                                                    
proofing did  not have a  role or  was not important  to the                                                                    
corpus or to  future generations. She confirmed  that it was                                                                    
Vice-Chair  Gara thanked  Ms. Rodell.  He could  work around                                                                    
her response.                                                                                                                   
Co-Chair  Seaton drew  everyone's attention  to slide  6. He                                                                    
noted that one of the  things the committee had been looking                                                                    
at was volatility.  He pointed to the  standard deviation of                                                                    
plus or  minus 12.38  percent around  an expected  return of                                                                    
6.95  percent. He  noted having  requested LFD  to calculate                                                                    
the 9-year actuals  and applying the numbers  to the returns                                                                    
and applying them  in reverse as well.  He appreciated LFD's                                                                    
work.  He thought  the slide  emphasized  the importance  of                                                                    
thinking of a  single number and a smooth  curve. He thought                                                                    
it  was important  to do  what  was possible  to smooth  out                                                                    
things through mechanics. He wanted  to always remember this                                                                    
particular  slide  and  the slides  provided  by  LFD  about                                                                    
Co-Chair Seaton  indicated the committee would  be taking up                                                                    
subcommittee  reports for  the Office  of the  Governor, the                                                                    
Department of Revenue (DOR), and  the Department of Military                                                                    
and Veterans Affairs (DMVA). He  noted that all subcommittee                                                                    
actions  were  to  Section  1,   the  numbers  section.  The                                                                    
reported  subcommittee  recommended   amounts  might  be  an                                                                    
incomplete picture of a department's budget.                                                                                    
2:34:00 PM                                                                                                                    
AT EASE                                                                                                                         
2:35:36 PM                                                                                                                    
HOUSE BILL NO. 57                                                                                                             
     "An  Act making  appropriations for  the operating  and                                                                    
     loan  program  expenses  of state  government  and  for                                                                    
     certain   programs;    capitalizing   funds;   amending                                                                    
     appropriations;   repealing    appropriations;   making                                                                    
     supplemental  appropriations and  reappropriations, and                                                                    
     making  appropriations  under   art.  IX,  sec.  17(c),                                                                    
     Constitution  of   the  State   of  Alaska,   from  the                                                                    
     constitutional budget  reserve fund; and  providing for                                                                    
     an effective date."                                                                                                        
HOUSE BILL NO. 59                                                                                                             
     "An  Act making  appropriations for  the operating  and                                                                    
     capital    expenses   of    the   state's    integrated                                                                    
     comprehensive mental health  program; and providing for                                                                    
     an effective date."                                                                                                        
2:35:36 PM                                                                                                                    
Co-Chair Seaton noted that all  subcommittee actions were to                                                                    
Section 1, the  numbers section of the  budget. The reported                                                                    
subcommittee   recommended  budget   amounts  might   be  an                                                                    
incomplete picture  of the  department's budget.  He relayed                                                                    
that   after  the   committee  completed   the  subcommittee                                                                    
amendment process including the  language amendments that he                                                                    
would propose, a new committee  substitute work draft of the                                                                    
bill  along with  the reports  that would  include both  the                                                                    
numbers  and the  language appropriations  providing a  more                                                                    
complete  picture  of  each   agency's  budget  totals.  The                                                                    
subcommittee  reports   were  distributed  to   members  the                                                                    
previous  day and  were posted  on  the Legislative  Finance                                                                    
Division's website. Since he was  the subcommittee chair for                                                                    
the Office of the Governor  and the Department of Revenue he                                                                    
would begin with his reports.                                                                                                   
Co-Chair Seaton  reported that the finance  subcommittee for                                                                    
the Office  of the Governor  had no amendments  to consider,                                                                    
nor  did   the  governor.  As  the   subcommittee  chair  he                                                                    
recommended no  changes to the  Office of the  Governor's FY                                                                    
18 budget. He read the budget totals by fund source:                                                                            
     The budget totals:                                                                                                         
     Fund Source: (dollars are in thousands)                                                                                    
          Unrestricted General Funds (UGF) $23,135.8                                                                            
          Designated General Funds (DGF) -0-                                                                                    
          Other Funds 838.3                                                                                                     
          Federal Funds 205.0                                                                                                   
          Total $24,179.1                                                                                                       
     The  Unrestricted  General  Fund difference  from  FY15                                                                    
     Management  Plan to  the FYI  18 Governor  budget is  a                                                                    
     reduction of $8.9 million, a  decrease of 27.7 percent.                                                                    
     From FY17  Management Plan, the FYI  18 Governor budget                                                                    
     reflects  an  unrestricted  general  fund  increase  of                                                                    
     $279.7, an increase of 1 .2 percent.                                                                                       
2:38:06 PM                                                                                                                    
AT EASE                                                                                                                         
2:38:26 PM                                                                                                                    
Co-Chair Foster  asked Co-Chair Seaton  to provide  his next                                                                    
subcommittee report.                                                                                                            
Co-Chair  Seaton  recommended   two  budget  amendments  for                                                                    
consideration  by the  House Finance  Committee and  several                                                                    
recommendations to  various policy committees  for statutory                                                                    
changes. He read from the subcommittee report:                                                                                  
    The budget if theses amendments are adopted totals:                                                                         
     Fund Source: (dollars are in thousands)                                                                                    
          Unrestricted General Funds (UGF)   $25,646.4                                                                          
          Designated General Funds (DGF)     $2,587.5                                                                           
          Other Funds    $269,013.3                                                                                             
          Federal Funds $78,665.5                                                                                               
          Total     $375,958.7                                                                                                  
          Permanent Full-time 812                                                                                               
          Permanent Part-time 33                                                                                                
          Temporary 16                                                                                                          
          Total     861                                                                                                         
     If  these  amendments  are  adopted,  the  Unrestricted                                                                    
     General Fund  difference from FY 15  Management Plan to                                                                    
     the FY  18 House  Subcommittee Recommended Budget  is a                                                                    
     reduction of                                                                                                               
     $8.185 million, a decrease of 24.2 percent.                                                                                
     The  Unrestricted General  Fund difference  from FY  17                                                                    
     management   plan   to   FY   18   House   Subcommittee                                                                    
     Recommended Budget  is a reduction of  $455.2 thousand,                                                                    
     a decrease of 1.7%.                                                                                                        
2:40:35 PM                                                                                                                    
AT EASE                                                                                                                         
2:40:52 PM                                                                                                                    
Co-Chair Seaton read the recommendations for DOR:                                                                               
     The  following   statutory  recommendations   are  also                                                                    
     submitted to the House Finance Committee                                                                                   
     1.   A  recommendation  to   the  House  State  Affairs                                                                    
     Committee:  Amend AS  43.23.008  to consider  repealing                                                                    
     allowable absences for the  Permanent Fund Dividend. In                                                                    
     2016,  26,524 dividends  were paid  to  people with  an                                                                    
     allowable  absence  from  the  state.  According  to  a                                                                    
     study, many  of those  who claim allowable  absences do                                                                    
     not  return  to the  state.  64%  of students  did  not                                                                    
     return,  and 81%  of  those  accompanying someone  else                                                                    
     with an allowable absence did  not return to the state.                                                                    
     17% of all appeals  through the Permanent Fund Division                                                                    
     relate directly to  allowable absence claims. Repealing                                                                    
     allowable  absences would  increase  the  value of  the                                                                    
     Permanent  Fund  Dividend   for  those  residents  that                                                                    
     remain in the state.                                                                                                       
     2.   A  recommendation  for  the  House  State  Affairs                                                                    
     Committee:  Consider  amending   AS  43.23  to  include                                                                    
     directives or incentives to  transition to a completely                                                                    
     paperless  environment  for   Permanent  Fund  Dividend                                                                    
     Applications.   Incentivizing  paperless   applications                                                                    
     would reduce the current printing  and postage costs of                                                                    
     $120,705.57.  It  would  also   reduce  the  number  of                                                                    
     seasonal   employees   necessary   to   process   paper                                                                    
     applications,   with   a  corresponding   decrease   in                                                                    
     $239,000 in seasonal personal costs.                                                                                       
     3.   A   recommendation   for   the   House   Fisheries                                                                    
     Committee:  Amend  AS 43.75  to  change  the amount  of                                                                    
     fisheries  taxes distributed  to local  communities and                                                                    
     direct  that  revenue  to  fund  direct  management  of                                                                    
     fisheries. Currently  50% of fisheries  taxes collected                                                                    
     by the state are distributed to municipalities.                                                                            
     4.   A   recommendation   for   the   House   Fisheries                                                                    
     Committee:  Reconsider   AS  43.75.015(b)-(d)   and  AS                                                                    
     43.77.010(1) to  determine if the reduced  tax rate for                                                                    
     small  fish processers  and the  reduced  tax rate  for                                                                    
     developing fisheries  are effective  or if  the reduced                                                                    
     rates  should be  repealed  or  more narrowly  defined.                                                                    
     These  three indirect  expenditures currently  cost the                                                                    
     state an estimated $525,852 in foregone revenue.                                                                           
     5.   A   recommendation   for   the   House   Education                                                                    
     Committee:  Amend   AS  43.20.014,  AS   43.55.019,  AS                                                                    
     43.56.018, and  AS 43.77.045 to  remove the  100% level                                                                    
     of  the  education  tax  credit.  Currently  the  first                                                                    
     $100,000 of an eligible  contribution receives a credit                                                                    
     of  50%, the  next $200,000  is credited  at 100%,  and                                                                    
     contributions above  $300,000 is credited at  50%. This                                                                    
     credit  can   be  taken  across  multiple   tax  types.                                                                    
     Reducing the 100% level of  the credit would reduce the                                                                    
     more than $7.4 million in foregone revenue.                                                                                
     6.   A  recommendation  for  the  House  State  Affairs                                                                    
     Committee: Amend  AS 43.52.255 to remove  the deduction                                                                    
     of  local  levies   against  the  Commercial  Passenger                                                                    
     Vessel  Tax. This  deduction  results  in an  estimated                                                                    
     $13,559,5558   ($13.56   million)  in   forgone   state                                                                    
     7.   A  recommendation  for  the  House  Transportation                                                                    
     Committee:  Amend AS  43.40.010(c) and  AS 43.98.025(d)                                                                    
     to repeal  or amend  the motor  fuel tax  timely filing                                                                    
     discount and  the tire fee timely  filing credit, which                                                                    
     result   in  forgone   revenue  of   approximately  $66                                                                    
     thousand  each.  Further,   reconsider  the  commercial                                                                    
     passenger vessel tax 72-hour  voyage exemption under AS                                                                    
     43.52.295(4),  which has  likely  modified cruise  ship                                                                    
     voyage plans in order to avoid the tax.                                                                                    
     8.   A recommendation for the  House Labor and Commerce                                                                    
     Committee:  Amend  or  repeal  AS  43.60.010(c),  which                                                                    
     reduces the  beer and malt  beverages tax from  $1.07 a                                                                    
     gallon to 35                                                                                                               
    beer sold in the state from a brewery who meets the                                                                         
     U.S.  definition  of  a  small  brewery.  35%  of  this                                                                    
     reduced rate is claimed by  out of state breweries. The                                                                    
     estimated forgone revenue is $2.6 million.                                                                                 
     9.   A   recommendation   for   the   House   Resources                                                                    
     Committee:   As  27.30.030,   AS   43.20.044,  and   AS                                                                    
     43.62.010, relating  to mining license  tax exemptions,                                                                    
     credits, and  deductions, should  be re-examined  by an                                                                    
     interim  taskforce.   Some  of  these   deductions  and                                                                    
     credits  were  established  pre-statehood  and  may  no                                                                    
     longer  meet intent.  Estimated known  foregone revenue                                                                    
     exceeds $6 million, with more  foregone revenue that is                                                                    
     not tracked.                                                                                                               
     10.  A   recommendation   for   the   House   Resources                                                                    
     Committee: Sunset AS 43.20.053,  the in- state refinery                                                                    
     tax credit,  on December  31, 2017. The  current sunset                                                                    
     date  is  December  31, 2019.  If  all  three  in-state                                                                    
     refineries were  to claim this  credit each year  it is                                                                    
     available,  changing  the  sunset by  two  years  could                                                                    
     result in  savings of $60 million.  However, because of                                                                    
     the number of tax payers  involved it is impossible for                                                                    
     Revenue to report how much  has been claimed under this                                                                    
     11.  A recommendation for  the House Finance Committee:                                                                    
     Amend   or   repeal   various  corporate   income   tax                                                                    
     exemptions found  under AS 43.19 and  AS 43.20, several                                                                    
     of which were adopted to  conform with federal tax code                                                                    
     but are no  longer necessary or no  longer meet intent.                                                                    
     The  fiscal impact  of these  exemptions is  unknown at                                                                    
     this  time because  the potential  tax  revenue is  not                                                                    
     Other Information:                                                                                                         
     The Subcommittee  discussed a variety of  issues during                                                                    
     the meetings.                                                                                                              
     Several members expressed  interest in increasing state                                                                    
     investment  officers  or improving  investment  officer                                                                    
     recruitment   and   retention  tools.   More   in-house                                                                    
     investment  officers  could  result in  a  decrease  in                                                                    
     external  investment  management tools.  Ultimately  no                                                                    
     amendment   was   put  forward   during   subcommittee;                                                                    
     however,  this  remains  a point  of  interest  if  the                                                                    
     Department  can  demonstrate  a  plan  to  recruit  and                                                                    
     maintain these positions.                                                                                                  
     The subcommittee also discussed  a requested remodel of                                                                    
     the Alaska Permanent  Fund Corporation office building,                                                                    
     which is also related  to investment officer retention.                                                                    
     This request  was not  offered as  an amendment,  as it                                                                    
     was more properly viewed as a capital request.                                                                             
     Governor's Amendments:                                                                                                     
     The  Governor did  not submit  any amendments  for this                                                                    
2:48:38 PM                                                                                                                    
Co-Chair Seaton  MOVED to ADOPT  Amendment H DOR 1  (copy on                                                                    
     Taxation and Treasury                                                                                                      
     Tax Division                                                                                                               
     H DOR 1 - Add Corporate Income Tax Auditors                                                                                
     Offered by Representative Seaton                                                                                           
     Increase  the corporate  income tax  auditing staff  to                                                                    
     capture additional  revenue that is  currently foregone                                                                    
     due  to  lack of  staff  resources.  Currently the  tax                                                                    
     system  is identifying  audit leads  that the  division                                                                    
     lacks   the  staff   time  to   investigate.  Estimated                                                                    
     additional revenue of $500,000 per auditor.                                                                                
     1004 Gen Fund (UGF) 246.0                                                                                                  
Representative Wilson OBJECTED for discussion purposes.                                                                         
Co-Chair Seaton read from a prepared statement (see above).                                                                     
Representative  Wilson  asked why  the  money  would not  be                                                                    
program receipts.  She suggested  that the money  that could                                                                    
be found  could be used to  pay the amount. She  wondered if                                                                    
the state would be pursuing  people that owed more corporate                                                                    
tax than  what they  were paying now.  She wondered  how the                                                                    
state would be losing  approximately $1 million on corporate                                                                    
income tax. Co-Chair Seaton relayed  that the new accounting                                                                    
system identified  leads. There  were multiple leads  but no                                                                    
auditors  available to  work on  those  leads. The  revenues                                                                    
were  foregone which  the department  anticipated. He  noted                                                                    
that  two other  states  had hired  additional auditors  for                                                                    
corporate  income taxes.  Those states  recovered money  and                                                                    
encountered increased compliance  by corporations. The taxes                                                                    
came in as general funds  and were not program receipts. The                                                                    
funds came in as general taxes  from the auditing of the tax                                                                    
division. It was appropriate for  the monies that came in to                                                                    
the  unrestricted general  fund  to provide  the monies  for                                                                    
auditors. He had  no problem looking at it a  few years down                                                                    
the road  to see  about recovery  efforts. The  estimate was                                                                    
that  the auditors  would pay  for themselves  in the  first                                                                    
year and  bringing in $500,000 annually  per each additional                                                                    
Co-Chair Foster  let committee members  know Mr.  Spanos was                                                                    
available for questions.                                                                                                        
Representative  Wilson indicated  that even  if the  program                                                                    
receipts were  not used currently  the legislature  would be                                                                    
adding  two additional  positions in  anticipation that  the                                                                    
state would receive more money.  She thought it was great if                                                                    
the state received  additional funds. She wanted  to be able                                                                    
to find out  whether the auditors were able to  bring in the                                                                    
anticipated  revenue after  the  first year.  She wanted  to                                                                    
follow the  money similar to the  Alaska Gasline Development                                                                    
Corporation  (AGDC). She  did not  have a  problem with  the                                                                    
amendment if  it was  successful in  bringing in  the money.                                                                    
She would  have a  problem if she  could not  follow whether                                                                    
the  state received  what  the state  thought  it would  She                                                                    
asked if the committee could make its program receipts.                                                                         
Vice-Chair  Gara  relayed that  in  speaking  with DOR.  The                                                                    
department  was very  clear that  they did  not have  enough                                                                    
auditors.  They were  also  clear that  if  they had  enough                                                                    
auditors they  would be  able to raise  more money  than the                                                                    
auditors  would cost.  The  question  concerning whether  it                                                                    
would come  in in the  current year depended on  whether the                                                                    
state caught  someone who was  underpaid whether  they would                                                                    
take  it to  court  and whether  there  was litigation.  The                                                                    
state could not be guaranteed  that someone was not going to                                                                    
stall on  payments. He  thought it had  been clear  from the                                                                    
department that the state was  very short on auditors. If it                                                                    
had the auditors,  the state would make more  money than the                                                                    
cost of the auditors.                                                                                                           
2:53:47 PM                                                                                                                    
Co-Chair  Foster   also  informed   members  that   Mr.  Dan                                                                    
DeBartolo,  Director, Division  of Administrative  Services,                                                                    
Department  of Revenue,  was in  the audience  available for                                                                    
Co-Chair Seaton  mentioned the ease  of requesting  a report                                                                    
on general  tax receipts recovered through  corporate income                                                                    
tax.  He thought  it would  be more  difficult to  set up  a                                                                    
different account  from UGF. He  suggested it would  be easy                                                                    
to find out whether the  auditors that were hired brought in                                                                    
the anticipated receipts.                                                                                                       
DAN   DEBARTOLO,   DIRECTOR,  DIVISION   OF   ADMINISTRATIVE                                                                    
SERVICES, DEPARTMENT  OF REVENUE, spoke to  the question. He                                                                    
had discussed,  within the  department, the  issue following                                                                    
the subcommittee process.  It was agreed that  one thing the                                                                    
department should be  doing right away was to  create a more                                                                    
robust reporting mechanism  so that it could  report back in                                                                    
the following year during the  subcommittee process what the                                                                    
auditors   accomplished,  and   the   amount  collected   in                                                                    
corporate   income   taxes.   He  anticipated   having   the                                                                    
discussion  about the  effectiveness not  only in  the first                                                                    
year but in  years 2-5. To claim that  the mechanism worked,                                                                    
he suggested it might be  worthwhile to look beyond 5 years.                                                                    
He  would defer  further questions  on the  tax side  to Mr.                                                                    
Spanos on line.                                                                                                                 
2:56:19 PM                                                                                                                    
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT  OF REVENUE  (via teleconference),  clarified the                                                                    
Representative Wilson  wondered, if  the state were  to hire                                                                    
the auditors,  why they could  not be program  receipts. She                                                                    
understood that  it would  entail a code.  It would  make it                                                                    
easier to find out whether  the two additional hires brought                                                                    
in enough  to pay  for their  wages or  more. The  same idea                                                                    
could be applied in other  places as well. Mr. Spanos stated                                                                    
that it would  be very difficult to track  the payments from                                                                    
audits  of just  two auditors.  He suggested  it might  make                                                                    
more sense to put all  the corporate receipts into a special                                                                    
fund. It was  a policy call. It would be  difficult to track                                                                    
payment  receipts from  audits  done  by specific  auditors.                                                                    
While the department's system was  robust, it did not record                                                                    
payments  attached  to  audits   done  by  individuals.  The                                                                    
department  could do  it manually.  The department  would be                                                                    
tracking  the  new  auditors' revenues  manually  and  could                                                                    
report  that   information  back  to  the   legislature.  He                                                                    
provided the  caveat that the information  could be provided                                                                    
assuming it  was aggregated.  If one  auditor did  one audit                                                                    
and  a payment  came  in  for that  one  audit  it would  be                                                                    
questionable that the specific  number could be provided. He                                                                    
anticipated  within   one  year  several  audits   would  be                                                                    
completed. Assessments  could be provided in  a total dollar                                                                    
figure.  The  department  could also  provide  a  report  on                                                                    
payments, assuming they were paid.                                                                                              
Representative Pruitt asked what  the state was looking for.                                                                    
He wondered  if the  state was looking  for people  that did                                                                    
not  pay their  taxes or  people  that had  errors in  their                                                                    
calculations.  Mr.  Spanos  responded the  tax  payers  were                                                                    
sophisticated  corporations that  were doing  their best  to                                                                    
pay  Alaska  as little  tax  as  possible. The  corporations                                                                    
studied Alaska's  statutes and interpret them  in their best                                                                    
interest.   Often   when   the  division   looked   at   the                                                                    
corporations it disagreed with the  stance they were taking.                                                                    
Many  of the  audits were  not what  would be  called "slam-                                                                    
dunk" audits. An audit was not  an open and shut case, but a                                                                    
resource intensive audit.  An auditor might have  to be sent                                                                    
to  a  company's  corporate  headquarters  to  review  large                                                                    
amounts of  paperwork or to communicate  frequently back and                                                                    
forth to  get the needed  level of substantiation to  make a                                                                    
determination. Some of the issues  involved a unitary filing                                                                    
for corporations.  For example, a company  doing business in                                                                    
Alaska might be a member  of a much larger corporation. They                                                                    
might claim that  they were not unitary with  their parent -                                                                    
the business  they do  in Alaska  should be  looked at  as a                                                                    
separate entity. It  was hardly ever the case  in the modern                                                                    
world.  Giant  corporations  controlled  their  subsidiaries                                                                    
and, generally,  the income from  the parent  company should                                                                    
be part of  the tax pie. Alaska should be  receiving a slice                                                                    
of the  pie. If the income  from the parent company  was not                                                                    
in  that pie,  the  pie  was much  smaller  as  well as  the                                                                    
revenue  Alaska  received.  There  were  several  other  tax                                                                    
issues that  the department would consider  assigning to the                                                                    
new auditors.                                                                                                                   
Co-Chair Foster recognized Representative Lora Reinbold.                                                                        
3:01:23 PM                                                                                                                    
Representative  Pruitt  thought  Mr. Spanos  was  indicating                                                                    
that  the entities  the state  was  pursuing were  typically                                                                    
multinational or  multistate entities rather than  the small                                                                    
business corporations  within the state. They  were entities                                                                    
that  created different  limited  liability corporations  to                                                                    
create  different tax  shields. He  asked if  his assessment                                                                    
was fair. Mr. Spanos agreed.                                                                                                    
Representative Wilson MAINTAINED  her OBJECTION. She thought                                                                    
the information should be tracked.                                                                                              
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Grenn,   Guttenberg,   Kawasaki,  Ortiz,   Pruitt,                                                                    
Thompson, Seaton, Foster.                                                                                                       
OPPOSED: Tilton, Wilson.                                                                                                        
Representative Gara was absent from the vote.                                                                                   
The MOTION  PASSED (8/2). There being  NO further OBJECTION,                                                                    
Amendment H DOR 1 was ADOPTED.                                                                                                  
3:03:54 PM                                                                                                                    
AT EASE                                                                                                                         
3:04:36 PM                                                                                                                    
Co-Chair Foster repeated that Amendment  H DOR 1 passed on a                                                                    
vote of 8/2.                                                                                                                    
Co-Chair  Seaton  relayed  that  he was  in  charge  of  the                                                                    
language sections of the operating  budget bills. He had two                                                                    
other amendments to the Department  of Revenue's budget that                                                                    
were linked together.                                                                                                           
Co-Chair Seaton  MOVED to ADOPT  Amendment H DOR 2  (copy on                                                                    
     Child Support Services                                                                                                     
     Child Support Services Division                                                                                            
     H DOR 2 - Move Cost Recovery for Paternity Testing                                                                         
     from Language to Section 1 (Numbers)                                                                                       
     Offered by Representative Seaton                                                                                           
     This  amendment  adds  the funding  from  the  language                                                                    
     section (formerly sec.  15 in HB 57, version  J) to the                                                                    
     numbers  section and  increases the  amount of  program                                                                    
     receipt  authority from  an estimated  $46.0 to  $50.0.                                                                    
     The language section is deleted in another amendment.                                                                      
H DOR  2 and  H DOR  3 were  being offered  to clean  up and                                                                    
reduce the language sections of  the bill where possible and                                                                    
to put the information in the numbers section.                                                                                  
Representative Wilson OBJECTED for discussion.                                                                                  
Co-Chair Seaton read from a  prepared statement (see above).                                                                    
He noted  that the  item was being  moved from  the language                                                                    
section  (subcommittees could  not  address or  act on  this                                                                    
section) of  the bill to  the numbers  section. Subcommittee                                                                    
members  would be  able  to address  and  amend the  numbers                                                                    
section once the information was moved over.                                                                                    
Representative Wilson asked who  was paying for the program.                                                                    
Co-Chair  Seaton  responded  that  the money  was  from  the                                                                    
general  fund and  that currently  the numbers  were in  the                                                                    
language section.  Items in the  language section  could not                                                                    
be addressed or amended at  the subcommittee level. The idea                                                                    
was  to  take items  out  of  the language  sections,  where                                                                    
possible,  and place  them into  the numbers  section to  be                                                                    
available for subcommittee action in the future.                                                                                
Representative Wilson understood  the change Co-Chair Seaton                                                                    
was suggesting. She  was unclear where the  full $50,000 was                                                                    
coming from. Co-Chair Seaton deferred to Mr. DeBartolo.                                                                         
Mr. DeBartolo  did not have  the amendment in front  of him.                                                                    
Paternity testing  for Child Support  Services was  a budget                                                                    
item that was  added in every year and adjusted  back out at                                                                    
the end of  the year. The source of the  funds was a general                                                                    
fund match.  He apologized for not  having the documentation                                                                    
in front of him.                                                                                                                
Representative Wilson referred  to page 1 of  the backup. It                                                                    
appeared there was  an increment of $50,000  and a decrement                                                                    
of $46,000 that  was not used, leaving a  balance of $4,000.                                                                    
She was trying  to determine if the  legislature was putting                                                                    
in  $50,000  from  program   receipts.  She  indicated  that                                                                    
typically when money came from  program receipts someone was                                                                    
paying for  it. She assumed,  because the test  was paternal                                                                    
in nature, it would be paid for  by a man. She was trying to                                                                    
understand who would  be paying for the  increase of $4,000.                                                                    
She requested an "at ease."                                                                                                     
3:10:01 PM                                                                                                                    
AT EASE                                                                                                                         
3:11:31 PM                                                                                                                    
Mr.  DeBartolo addressed  Representative Wilson's  question.                                                                    
He  explained that  every year  the  Child Support  Services                                                                    
Division  had to  estimate what  would  be paid  for by  the                                                                    
custodial  fathers  for  paternity  testing.  Representative                                                                    
Wilson  was correct  that the  parent paid  for the  testing                                                                    
rather   than   the   state.    Last   year   the   division                                                                    
underestimated the  collection amount by about  $4,000 which                                                                    
was the reason for the change.                                                                                                  
Representative Wilson understood  the language portion being                                                                    
moved. She wanted to clarify  that money was not being added                                                                    
to the budget. Rather, it  was money the state was recouping                                                                    
from users  of the  program. Mr. DeBartolo  responded, "That                                                                    
is correct."                                                                                                                    
Representative Wilson WITHDREW her OBJECTION.                                                                                   
There  being NO  further OBJECTION,  Amendment H  DOR 2  was                                                                    
Co-Chair Seaton  MOVED to ADOPT  Amendment H DOR 3  (copy on                                                                    
     Child Support Services                                                                                                     
     Child Support Services Division                                                                                            
     H DOR 3 - Move Cost Recovery for Paternity Testing                                                                         
     from Language to Section 1 (Numbers)                                                                                       
     Offered by Representative Seaton                                                                                           
     See 30-GH1855J.7, Wallace, 1/31/17                                                                                         
     This amendment deletes section 15 in HB 57, version J.                                                                     
     The funding is added to the numbers section and                                                                            
     increased to $50.0 in another amendment.                                                                                   
Representative Wilson OBJECTED for discussion.                                                                                  
Co-Chair Seaton  explained that the amendment  reflected the                                                                    
other  half  of  the  change to  the  language  section.  It                                                                    
removed an  estimated amount  in the  language section  to a                                                                    
specific  dollar amount  receipt  authority  in the  numbers                                                                    
Representative Wilson  asked Co-Chair Seaton to  restate his                                                                    
position. Co-Chair Seaton repeated his explanation.                                                                             
Representative Wilson WITHDREW her OBJECTION.                                                                                   
There being NO further OBJECTION, H DOR 3 was ADPOTED.                                                                          
Co-Chair Seaton  MOVED to ADOPT  Amendment H DOR 4  (copy on                                                                    
     Alaska Mental Health Trust Authority                                                                                       
     Mental Health Trust Operations                                                                                             
     H  DOR 4  - Restore  Funding Level  to Trust  Requested                                                                    
     Amount or FASD Campaign                                                                                                    
     Offered by Representative Seaton                                                                                           
     This amendment  in the amount  of $150,000 is  to fully                                                                    
     fund  and maintain  the capacity  of the  Institute for                                                                    
     Circumpolar  Health  Studies  to continue  to  develop,                                                                    
     implement and evaluate  Fetal Alcohol Spectrum Disorder                                                                    
     (FASD) prevention  strategies and to continue  the FASD                                                                    
     media  campaign, which  has  been  instrumental in  the                                                                    
     dissemination of FASD  prevention messaging. Each child                                                                    
     diagnosed  with  FASD will  cost  the  State of  Alaska                                                                    
     $850,000 to $4.2 million from age 0-18.                                                                                    
Representative Wilson OBJECTED for discussion.                                                                                  
Co-Chair Seaton read from a prepared statement (see above).                                                                     
3:16:14 PM                                                                                                                    
Representative Wilson assumed that  the state already funded                                                                    
the program in  the amount of $250,000.  The amendment would                                                                    
add $150,000  to program funding. Co-Chair  Seaton responded                                                                    
that the  current funding  level was  $500,000. There  was a                                                                    
decrement of  $150,000 in the governor's  budget relating to                                                                    
the media  campaign which disseminated  the message  that no                                                                    
amount  of alcohol  was  appropriate  during pregnancy.  The                                                                    
other portion of funding would  be applied to pregnancy test                                                                    
kits. He  reported 2000 responses  to surveys by  women. The                                                                    
funding would provide money  for survey follow-ups regarding                                                                    
those  women that  stopped drinking  upon finding  out about                                                                    
their pregnancies. The  purpose of the project  was to lower                                                                    
FASD in Alaska.                                                                                                                 
Representative Wilson argued that  although the amount being                                                                    
requested  was  minimal,  she opposed  providing  additional                                                                    
funding.  She thought  the tests  were provided  at bars  to                                                                    
determine whether an individual  was pregnant or eligible to                                                                    
drink.  She was  unclear where  the survey  data would  come                                                                    
from. She  did not feel it  was the job of  state government                                                                    
to  provide   the  funding.  She   would  be   opposing  the                                                                    
Representative  Kawasaki agreed  with some  of the  comments                                                                    
made by Representative Wilson. He  reported that the program                                                                    
was being  funded for the  second year. Although  the survey                                                                    
provided some  results, it  was difficult  to tell  from the                                                                    
sample  whether   the  information  that  was   gleaned  was                                                                    
voluntary. He was  trying to understand the  efficacy of the                                                                    
specific program of putting pregnancy  tests in bars. If the                                                                    
program was  not working the  state should cease  paying for                                                                    
it. Conversely,  if the program  was working, he  thought it                                                                    
deserved  further  discussion.  If there  were  results,  he                                                                    
wanted to hear about them.  Co-Chair Seaton relayed that Mr.                                                                    
Jesse was available for questions.  He reminded members that                                                                    
the  amount  would  restore the  media  campaign  to  adults                                                                    
across the state.                                                                                                               
3:19:41 PM                                                                                                                    
JEFF JESSE, LEGISLATIVE LIAISON,  ALASKA MENTAL HEALTH TRUST                                                                    
AUTHORITY,    introduced    himself.   He    responded    to                                                                    
Representative Kawasaki that the  surveys were voluntary. He                                                                    
explained that  there was a  que code  on a poster  with the                                                                    
pregnancy  dispensers. He  believed there  was a  small gift                                                                    
certificate  that was  provided to  women who  completed the                                                                    
survey. It  was a  remarkable return of  the survey  for the                                                                    
type  of an  analysis.  He emphasized  that  the survey  was                                                                    
completely voluntary.                                                                                                           
Representative   Wilson   noted   that  the   $150,000   was                                                                    
designated general  funds. She wondered if  the amount could                                                                    
be  utilized  in another  part  of  the budget  for  another                                                                    
program.  She asked  if she  was  accurate. Co-Chair  Seaton                                                                    
answered that the amount was  for alcohol and drug treatment                                                                    
prevention  funds, 20  percent of  which was  to go  towards                                                                    
alcohol  and prevention  programs.  He thought  FASD was  an                                                                    
appropriate target  for reducing  the effects of  alcohol on                                                                    
the Alaska  population. The state  had a high rate  of FASD.                                                                    
He  invited Mr.  Jesse  to talk  about  the distribution  of                                                                    
Mr.  Jesse thought  Representative Wilson  was correct  that                                                                    
the state  did not  have dedicated funds.  The amount  was a                                                                    
designated fund which meant the  money could be used for any                                                                    
Representative  Wilson suggested  that  the  money could  be                                                                    
used  for more  services in  behavioral health  to get  more                                                                    
services to  people with drinking problems.  She pointed out                                                                    
that the money  could be spent towards  more services rather                                                                    
than a campaign. She thought  the gift cards given to survey                                                                    
participants  were likely  another  cost to  the state.  She                                                                    
thought  the  money  should be  utilized  for  a  behavioral                                                                    
service having  to do  with alcohol  or drug  addiction. She                                                                    
wanted the committee  members to understand that  it was not                                                                    
money the state would be giving  up, it was money that could                                                                    
go directly towards  services. She did not  need a response.                                                                    
She knew her statement to be true.                                                                                              
Representative Wilson MAINTAINED her OBJECTION.                                                                                 
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Guttenberg, Ortiz, Gara, Grenn, Foster, Seaton.                                                                       
OPPOSED: Kawasaki, Pruitt, Thompson, Tilton, Wilson.                                                                            
The MOTION  PASSED (6/5). There being  NO further OBJECTION,                                                                    
Amendment H DOR 4 was ADOPTED.                                                                                                  
3:23:28 PM                                                                                                                    
AT EASE                                                                                                                         
3:24:14 PM                                                                                                                    
Co-Chair  Seaton asked  Representative  Kawasaki to  present                                                                    
the subcommittee report for DMVA.                                                                                               
Representative Kawasaki read from his report:                                                                                   
     The Chair of the  House Finance Budget Subcommittee for                                                                    
     the  Department  of   Military  and  Veterans'  Affairs                                                                    
     recommends that the House  Finance Committee accept the                                                                    
     Governor's   FY18    Amended   Budget    with   further                                                                    
     The   FY18   budget   with   recommended   subcommittee                                                                    
     amendment totals:                                                                                                          
     Fund Source: (dollars are in thousands)                                                                                    
     Unrestricted General Funds (UGF) $16,349.4                                                                                 
     Designated General Funds (DGF) 28.4                                                                                        
     Other Funds 10,180.6                                                                                                       
     Federal Funds 30,995.1                                                                                                     
     Total $57,553.5                                                                                                            
Representative   Kawasaki  indicated   that  there   was  an                                                                    
increase of roughly $100,700 from  the FY 17 Management Plan                                                                    
with  an  unrestricted  general   fund  (UGF)  of  $16,248.7                                                                    
representing a  .6 percent increase.  He continued  that the                                                                    
subcommittee  met  several  times  over the  month  and  was                                                                    
forwarding  two budget  amendments which  he would  speak to                                                                    
Representative Kawasaki  read the  statutory recommendations                                                                    
by the finance subcommittee:                                                                                                    
     The following  statutory recommendations  are submitted                                                                    
     to the House Finance Committee:                                                                                            
     1.  Amend AS  26.27 to  provide statutory  authority to                                                                    
     the Alaska Aerospace Corporation  to issue dividends to                                                                    
     the State  of Alaska. This change  is necessary because                                                                    
     the corporation stated  intentions to provide dividends                                                                    
     to  the State  in the  future, but  does not  currently                                                                    
     have the statutory authority to do so.                                                                                     
     2.  Move Alaska  Aerospace Corporation  from Title  26,                                                                    
     the Department  of Military  and Veterans'  Affairs, to                                                                    
     Title  14, the  Department of  Commerce, Community  and                                                                    
     Economic Development. This  change is important because                                                                    
     several  public  corporations   are  housed  in  DCCED,                                                                    
     including  Alaska  Energy Authority,  Alaska  Railroad.                                                                    
     Alaska Gasline  Development Corporation and  the Alaska                                                                    
     Industrial Development  & Export Authority,  several of                                                                    
     which  have  bonding  authority, issue  dividends,  can                                                                    
     purchase  land  and  have   tangible  assets.  AAC  was                                                                    
     originally  housed in  DCCED until  2011 when  moved by                                                                    
     Executive Order 115.                                                                                                       
Representative Kawasaki reviewed  other information from his                                                                    
Other Information:                                                                                                              
     1. An  amendment proposal was  offered that  would have                                                                    
     reduced  $388.0  UGF  from  personal  services  in  the                                                                    
     Office of  the Commissioner, an approximate  20 percent                                                                    
     reduction   from  post-vacancy   amount.  The   sponsor                                                                    
     offered  the  proposal  as flexibility  to  reduce  UGF                                                                    
     spending in the Office of the Commissioner.                                                                                
     Subcommittee Discussion:                                                                                                   
     The Department  said the  $388.0 deletion  would impact                                                                    
     46 PCNs that specialize in human                                                                                           
     resources,  budget submissions,  equipment procurement,                                                                    
     internet technology and others that                                                                                        
     support  270  personnel  across  the  state,  including                                                                    
     those who oversee the development and                                                                                      
     submission  of  its   operating,  capital  and  federal                                                                    
     budget requests.                                                                                                           
     2. An  amendment proposal was  offered that  would have                                                                    
     reduced $273.0 UGF  from services in the  Office of the                                                                    
     Commissioner, a  15 percent reduction of  services from                                                                    
     the  Governor's   FY18  Amended  Budget.   The  sponsor                                                                    
     offered  the amendment  to scale  back on  recent years                                                                    
3:27:38 PM                                                                                                                    
Representative  Kawasaki MOVED  to ADOPT  Amendment H  MVA 1                                                                    
(copy on file):                                                                                                                 
     Military and Veterans' Affairs                                                                                             
     Office of the Commissioner                                                                                                 
     H MVA 1  - Eliminate Expansion of  Alaska State Defense                                                                    
     Force for Rural Engagement                                                                                                 
     Offered by Representative Kawasaki                                                                                         
     Due to  current budget  deficit, the  subcommittee does                                                                    
     not  wish to  expand  or create  new  programs at  this                                                                    
     1004 Gen Fund (UGF) -210.9                                                                                                 
Co-Chair Foster OBJECTED for discussion.                                                                                        
Representative Kawasaki  read the amendment (see  above). He                                                                    
noted  that  while  the  committee  agreed  that  the  rural                                                                    
engagement  component and  the  Alaska  State Defense  Force                                                                    
were very important, due to  budget restraints the committee                                                                    
denied the increment. He furthered  that the department came                                                                    
to the legislature  in FY 17 for a $1.3  million UGF request                                                                    
and a  $1 million capital  request which were denied  at the                                                                    
time for similar reasons.                                                                                                       
Co-Chair Foster WITHDREW his OBJECTION.                                                                                         
There  being NO  further OBJECTION,  Amendment H  DMV 1  was                                                                    
Representative  Kawasaki MOVED  to ADOPT  Amendment H  MVA 2                                                                    
(copy on file):                                                                                                                 
     Alaska Military Youth Academy                                                                                              
     H MVA 2  - Report on Alaska Military  Youth Academy UGF                                                                    
     Offered by Representative Kawasaki                                                                                         
     It  is   the  intent   of  the  Legislature   that  the                                                                    
     Department  of Military  and  Veteran's Affairs  (DMVA)                                                                    
     develops  a  report to  the  Co-Chairs  of the  Finance                                                                    
     committees   and   Legislative  Finance   Division   by                                                                    
     December 1, 2017, identifying funding                                                                                      
     options available to the  Alaska Military Youth Academy                                                                    
     to   generate  revenue.   The   report  shall   include                                                                    
     recommendations  and limitations  for  tuition and  fee                                                                    
     structures  based  on   income  levels  of  applicants'                                                                    
     households,    and    how    to    incorporate    those                                                                    
     recommendations into  Fiscal Year  2019 budget  for the                                                                    
     Department. The  report shall  also include  the impact                                                                    
     of  those recommendations  on federal  matching dollars                                                                    
     and the UGF budget.                                                                                                        
Co-Chair Foster OBJECTED for discussion.                                                                                        
Representative Kawasaki  read the amendment (see  above). He                                                                    
indicated  that, according  to  the  department, any  dollar                                                                    
recuperated  from tuition  or voluntary  contributions might                                                                    
reduce  the  federal pay-in  to  a  ratio  of 75  cents  per                                                                    
3:30:08 PM                                                                                                                    
Representative  Wilson  commented  that the  Military  Youth                                                                    
Academy  had   taken  less  money  for   BSA  [Base  Student                                                                    
Allocation]  than  any  academy.   The  academy  set  a  fee                                                                    
structure  a few  years prior.  She was  concerned with  the                                                                    
intent  language  and  whether   it  would  apply  to  Mount                                                                    
Edgecombe or  other public schools. She  thought the academy                                                                    
had made  great efforts. She  noted the entity  had accepted                                                                    
Alaska dropouts  and helped them  get back into  school. She                                                                    
did  not believe  there would  be  very few  parents of  the                                                                    
academy  that would  be able  to provide  funding for  their                                                                    
children.  She suggested  the intent  language be  adjusted.                                                                    
She also suggested some of  the schools giving up their BSA.                                                                    
She wanted additional information  prior to including intent                                                                    
language that could  result in the loss  of federal funding.                                                                    
She was concerned with entities being treated equitably.                                                                        
Co-Chair Seaton clarified that the  DMVA budget was the only                                                                    
one  before  the committee  presently.  He  also noted  that                                                                    
during  round  two  of   the  amendment  process  individual                                                                    
finance  members   could  offer  further  intent   or  other                                                                    
Representative   Pruitt  mentioned   the  75/25   ratio.  He                                                                    
suggested that the  state received $25 for  every dollar the                                                                    
state  brought in.  He wondered  if it  would make  sense to                                                                    
seek  the funds  from a  few available  people. His  friends                                                                    
that attended  the academy would  not have had the  means to                                                                    
pay for  it on their own.  He noted that in  the narrative a                                                                    
non-profit  was  mentioned.  He wondered  if  there  was  an                                                                    
opportunity  to utilize  monies  from  non-profits or  money                                                                    
from  outside state  government  to cover  the  25 cents  to                                                                    
avoid losing federal funding.                                                                                                   
Representative  Thompson was  concerned with  the amendment.                                                                    
He reported that  over the last 3 years  the legislature had                                                                    
reduced the Youth  Academy funding. The entity  had laid off                                                                    
several people and was operating  on a shoestring budget. He                                                                    
thought demanding  an additional  report that  would require                                                                    
research  was  unreasonable  because  of  the  reduction  in                                                                    
personnel.  He thought  the committee  would  be asking  the                                                                    
academy  to  do  more  with  less  people.  He  opposed  the                                                                    
Representative Kawasaki believed at  the time the department                                                                    
had  no objection  to  the  amendment. Subcommittee  members                                                                    
also had  no objection. The  committee did not want  to deny                                                                    
someone  the  ability to  attend  or  to create  a  chilling                                                                    
effect with a tuition. There  were cases in which there were                                                                    
kids whose families could pay  that had no avenue to capture                                                                    
the funds.  He relayed that  there was a  501(c)3 non-profit                                                                    
that was being  lined up, but the paperwork  was in process.                                                                    
The recommendation,  if passed by the  committee, would come                                                                    
before the  body again in  the following year at  which time                                                                    
options would  be presented. He  reiterated that  there were                                                                    
no  objections   in  the   subcommittee  to   the  amendment                                                                    
3:35:13 PM                                                                                                                    
Co-Chair Seaton asked  if it meant the 501(c)3  being set up                                                                    
to  receive  funds was  providing  a  mechanism for  receipt                                                                    
authority. He wondered if the  state of Alaska would be able                                                                    
to accept  donations from the  501(c)3 for  augmentations to                                                                    
the program.  Representative Kawasaki responded that  it was                                                                    
envisioned  that  the  501(c)3  would  allow  offsetting  of                                                                    
general  funds.  Research  was  still  needed  to  determine                                                                    
whether the offsetting  of funds would cause  a problem with                                                                    
federal receipts - the reason  the intent language was being                                                                    
Co-Chair  Seaton clarified  that it  was intent  language to                                                                    
allow   it.  However,   nothing  had   been  done   to-date.                                                                    
Representative Kawasaki responded affirmatively.                                                                                
Co-Chair Foster WITHDREW his OBJECTION.                                                                                         
Representative  Wilson  OBJECTED.  She  commented  that  the                                                                    
military academy had  done what she wished  all schools did.                                                                    
They dwindled their  budget and only charged  the state what                                                                    
it needed. She  wished all the districts would  do the same.                                                                    
The  academy  had a  very  successful  program and  attained                                                                    
federal dollars.  She thought  it was  terrible to  tell the                                                                    
academy it  needed to find  additional funds  somewhere else                                                                    
when  they  had been  a  model.  She  believed it  would  be                                                                    
sending  the  wrong message  to  a  successful program.  She                                                                    
invited members to imagine what  would happen if the academy                                                                    
got  caught up,  causing anguish  and  a lack  of desire  to                                                                    
participate.  The  academy  accepted  mostly  dropouts.  She                                                                    
concluded  that instead  of rewarding  the  academy for  its                                                                    
performance,  the  amendment  sent the  wrong  message.  She                                                                    
could not support it.                                                                                                           
Representative Kawasaki  addressed one of the  concerns that                                                                    
was mentioned. He thought the  Alaska Military Youth Academy                                                                    
had  done a  great job.  However, the  academy was  capacity                                                                    
driven  and was  up such  that  they needed  to match  every                                                                    
federal  dollar   available.  If  the  state   was  able  to                                                                    
contribute more  into the GF function,  it could potentially                                                                    
expand and grow  with another unit. He pointed  out that the                                                                    
problem  was that  the  state was  looking  for nickels  and                                                                    
dollars  everywhere.  If  the   state  wanted  a  successful                                                                    
program  within   the  Alaska  Military  Youth   Academy  to                                                                    
increase,  utilizing  a  501(c)3  or some  sort  of  tuition                                                                    
system provided an avenue to do so.                                                                                             
Representative Wilson MAINTAINED her OBJECTION.                                                                                 
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Guttenberg, Kawasaki, Ortiz, Seaton, Foster                                                                           
OPPOSED: Pruitt, Thompson, Wilson, Grenn                                                                                        
Vice-Chair Gara  and Representative Tilton were  absent from                                                                    
the vote.                                                                                                                       
The MOTION  PASSED (5/4). There being  NO further OBJECTION,                                                                    
Amendment H MDV 2 was ADOPTED.                                                                                                  
Co-Chair Seaton asked Representative  Kawasaki if there were                                                                    
any  other  amendments  for  DMVA.  Representative  Kawasaki                                                                    
responded in the negative.                                                                                                      
Representative    Pruitt    asked     if    the    statutory                                                                    
recommendations would  be discussed further. He  asked if it                                                                    
was currently  the time to discuss  the recommendations. Co-                                                                    
Chair  Seaton  relayed  that the  statutory  recommendations                                                                    
were  developed by  the subcommittees  and forwarded  to the                                                                    
policy  committee by  the subcommittees.  House finance  was                                                                    
not  taking any  action.  Every member  had  the ability  to                                                                    
forward   statutory    amendments   on   their    own.   The                                                                    
recommendations were for the  policy committees to consider.                                                                    
The   legislature   was   not  voting   on   the   statutory                                                                    
recommendations developed by the policy committee.                                                                              
Representative  Pruitt wondered  if  it  was an  appropriate                                                                    
time to  discuss the  subcommittee recommendations  prior to                                                                    
the  bill moving  out  of the  House  Finance Committee.  He                                                                    
restated his  question about discussing  the items  prior to                                                                    
them  moving out  of  committee.  Co-Chair Seaton  explained                                                                    
that one of the ideas  of having the policy committees serve                                                                    
as the  budget subcommittees was for  the recommendations to                                                                    
be discussed  within the subcommittee except  for those from                                                                    
the  Department  of  Revenue.  He  explained  that  DOR  was                                                                    
considering  tax items.  In  most  cases, the  subcommittees                                                                    
were policy  committees reviewing  proposed actions.  It was                                                                    
not the  finance committee telling the  policy committee but                                                                    
rather   the  policy   committee's  functioning   as  budget                                                                    
subcommittees.  The  budget subcommittees  were  responsible                                                                    
for  identifying statutory  actions  for consideration.  The                                                                    
recommendations  would   come  through  the   House  Finance                                                                    
Committee  in the  form of  a piece  of legislation  because                                                                    
they   would  most   likely  be   related  to   finance.  He                                                                    
anticipated  that  the  statutory recommendations  based  on                                                                    
change  in  the  budget  would come  to  the  committee.  If                                                                    
recommendations  did not  evolve  into bills  they could  be                                                                    
offered  by any  individual  member of  the subcommittee  or                                                                    
anyone  in the  House. The  committee would  not get  into a                                                                    
discussion  about  the  subcommittee  recommendations.  They                                                                    
were subcommittee recommendations to the policy committees.                                                                     
3:44:14 PM                                                                                                                    
Representative  Pruitt express  confusion  about the  policy                                                                    
committee  versus the  subcommittee. He  indicated that  the                                                                    
subcommittees  were chaired  by  House  Finance members.  He                                                                    
thought there  would be some statutory  recommendations that                                                                    
would come from the finance  subcommittee that he might have                                                                    
concerns  with.  He  felt  there  was  confusion  about  why                                                                    
statutory recommendations would be  generated from a finance                                                                    
subcommittee.  He thought  they should  have been  left with                                                                    
the policy  committee and left  out of the  finance reports.                                                                    
Co-Chair Seaton added  that he wanted the  full committee to                                                                    
have   the   information   about   the   findings   of   the                                                                    
subcommittees.  However, changes  could not  be accomplished                                                                    
through the  finance committee. They had  to be accomplished                                                                    
through statutory change.                                                                                                       
Representative   Wilson   noted   the  Alaska   Aero   Space                                                                    
Corporation and wondered  if it would take  a statute change                                                                    
to move the division into  commerce rather than to change it                                                                    
in  the  budget.  Co-Chair Seaton  responded  affirmatively.                                                                    
Representative Wilson wanted  clarification. She thanked Co-                                                                    
Chair Seaton.                                                                                                                   
HB  57  was   HEARD  and  HELD  in   committee  for  further                                                                    
HB  59  was   HEARD  and  HELD  in   committee  for  further                                                                    
Co-Chair Seaton reviewed the agenda for the following day.                                                                      
3:47:05 PM                                                                                                                    
The meeting was adjourned at 3:47 p.m.                                                                                          

Document Name Date/Time Subjects
Callan - APFC -H. Finance Committee Presentation.pdf HFIN 2/23/2017 1:30:00 PM
Callan Presentation HFIN
Return Projection Methodology APFC HFIN 01.17.17.pdf HFIN 2/23/2017 1:30:00 PM
Callan Presentation HFIN
DMVA-Subcommittee Packet HFIN.pdf HFIN 2/23/2017 1:30:00 PM
HB 57
GOV-Subcommittee PKT Packet HFIN.pdf HFIN 2/23/2017 1:30:00 PM
HB 57
DCCED-Subcommittee Packet HFIN.pdf HFIN 2/23/2017 1:30:00 PM
HB 57
DPS-Subcommittee Packet HFIN.pdf HFIN 2/23/2017 1:30:00 PM
HB 57
DEC-Subcommittee Packet HFIN.pdf HFIN 2/23/2017 1:30:00 PM
HB 57
DOR-Subcommittee Packet HFIN.pdf HFIN 2/23/2017 1:30:00 PM
HB 57
Operating Budget emails 1- 2.17.17.PDF HFIN 2/23/2017 1:30:00 PM
HB 57